![[OPINION] Much ado about tax reform: Issues and perspectives - Mohammed Bello Adoke](/media/k2/items/cache/fd1697a86a76a511a6bea1791802b7fa_XL.jpg)
Taxation is an indispensable tool for governments worldwide to raise revenue and promote economic development, as domestic revenue mobilisation is key to sustainable development globally. Generally, the productivity of the Nigerian tax system has not been encouraging, mainly due to the low level of voluntary tax compliance. Consequently, the government has, over time, embarked on various tax reforms to ensure maximum performance of the tax system for better economic outcomes. Over the past decade and a half, the government has attempted major tax reforms informed by the realisation of the glaring inequalities and inefficiencies that have resulted from imposing high rates on constricted tax bases under complex legislation in the face of weak tax administration. Under such circumstances, the tax policy’s redistributive, developmental and revenue goals became largely unrealisable.
The present administration, to reform the tax system, proposed Revenue Reform Bills, 2024 to the National Assembly to amend/enact four laws, namely: (i) the Nigeria Tax Administration Bill, (ii) the Nigeria Revenue Service Establishment Bill, (iii) the Nigeria Tax Bill, and (iv) the Joint Revenue Board Establishment Bill. The stated objectives of these bills are to expand Nigeria’s tax base, improve compliance, and establish sustainable revenue streams for the nation’s development. On the one hand, the Bills can potentially increase government revenue, which would have a trickle-down effect on the economy through increased funding for public goods and services, such as infrastructure, education and healthcare; on the other hand, some of its provisions may have negative impacts on businesses and individual consumers if not adequately considered and redrafted.
This analysis aims to highlight some salient provisions of the proposed Bills, discussing the salutary nature of the provisions and implications on the economy.
Salient Provisions of the Bills
Review the formula for sharing the value-added tax (VAT): Clause 77 of the Nigeria Tax Administration Bill provides for a reduction of VAT distribution to the Federal Government from 15 per cent to 10 per cent and concedes 55 per cent and 35 per cent to state governments and local government councils, respectively. It also provides under Clause 22 (12) that a 60 per cent derivation shall be reflected in the sharing formula of VAT standing to the credit of states and local governments in the spirit of fairness and justice.
Tax Incentives. Clause 22 (5-9) of the Nigeria Tax Administration Bill provides tax incentives for defined beneficiaries or entities that will either be exempted from the taxable community or be incentivised to spur economic growth and guarantee collective prosperity. It provides for Zero VAT on exports and essential consumption by low-income earners and exempts food and related items from VAT with the prospect of reducing the rising food prices and increasing the purchasing power of the people. Also exempted from VAT are rents, public transportation, renewable energy, etc.
Tax waiver for low-income groups from Personal Income Tax. Chapter 2 of the Nigeria Tax Bill completely takes the tax burden off the low-income bracket of the society. To qualify for the tax waiver, the employee must be earning N800,000 and below annually. The threshold covers all minimum wage earners or all low-income households within the threshold, ostensibly to reduce their tax burden and boost their purchasing power.
Exemption of small businesses from payment of taxes. The Bill raises the threshold for the grant of tax exemption from the present N25 Million annual turnover to N50 Million to benefit small businesses. Small businesses with total assets of N250 million are also exempted. It is posited that since small businesses constitute about 48 per cent of GDP and provide employment all over the country, the exemption of such businesses from tax burden will positively impact their operations and encourage the growth of the entrepreneur class in the country.
Streamlining of multiple taxations. To address the perennial concerns of the business community about multiple taxation, Clause 56 of the Bill provides for a significant reduction in company income tax, which will be effected in two stages. The Bill proposes a reduction from the current 30 per cent to 27.5 per cent in 2025 and 25 per cent in 2026. It also imposes a development levy of 4 per cent to harmonise the multiplicity of taxes and levies companies pay. The levy will be reduced at intervals to 2 per cent in 2030 and devoted to funding the Nigerian Education Loan Fund (NELFUND), thereby phasing out the 2.5 per cent education tax, the 0.25 per cent National Agency for Science and Engineering Infrastructure tax and the 1 per cent National Information Technology Development Levy. Thus, in place of all these taxes and levies, companies will only pay a 4 per cent development levy from 2025 to 2029 and 2 per cent after that to fund the student loan scheme. Given the millions of indigent Nigerians expected to benefit from the NELFUND scheme, the provision is commendable as it will bring succour to the low-income bracket of the population.
Promotion of synergy: The Nigerian Revenue Service Bill seeks to promote synergy between and among the three tiers of government. This includes- discretionary power to delegate tax collection functions, harmonise revenue administration, reduce the cost of revenue collection and remove all forms of bottlenecks inhibiting revenue remittances to the federation by government agencies.
Implications of the Tax Reform Bills
A critical analysis of these proposed amendments will reveal implications for individuals, corporate entities and national and sub-national governments. These include:
Increased Tax Burden: The VAT tax rate increase is not in the interest of Nigerian consumers and small businesses. The proposed increase in VAT from 7.5 per cent to 10 per cent is potentially an increase in the prices of products. For a tax system to be used as an instrument to uplift the welfare and living standard of the people, put smiles on their faces and direct the course of the economy towards growth and development without losing its traditional grip of revenue generation, it must strive to balance the need for revenue generation against the desire to preserve the taxpayer. In other words, the Nigerian taxpayer must not be taxed to death. VAT rate increase is ill-timed, coming in the heat of the effects of the withdrawal of subsidy on petrol. The redistribution of income argument, where higher taxes are imposed on the rich to provide social services in favour of the poor, is not even obtainable under a regime of a general increase in VAT rate as proposed. VAT as a consumption tax can only be imposed in favour of the poor, where the increase is aimed at taxing the rich at a higher rate and not a flat rate as proposed.
Increased Administrative burden: The proposed reforms could also lead to an increased administrative burden on both tax authorities and businesses and impact negatively on the economy in the following ways. Clause 8(2) of the Nigeria Tax Administration Bill 2024 makes the provision of a Tax ID a mandatory requirement or precondition for opening a new bank account or operating an existing account. This provision, though, has the advantage of identifying taxpayers in the country; it may discourage banking habits, particularly for those employed in the non-formal sector. A lot of money may circulate outside the banking system. Clauses 20, 23 and 24 of the Nigeria Tax Administration Bill 2024 have proposed to make filing of monthly returns mandatory for specific categories of businesses, including Air Transport and Mining. This can increase the operational cost of businesses, which will be transferred to customers.
Clause 75(1) of the proposed Tax Administration Bill gives the President the unlimited powers to exempt from income tax any company or class of companies and any profits of any company or class of companies from any source on any ground which appears to be sufficient. By Clause 75(2), the President may, by order, amend, add or repeal any tax exemption. These unlimited powers are susceptible to abuse in a political environment where there are limited checks on the use of presidential powers. Clause 25 of the Joint Revenue Board of Nigeria (Establishment) Bill 2024 provides requisite qualifications for appointment as a Commissioner of the Tax Appeal Tribunal, including a retired public servant with at least 10 years’ experience in tax administration. Clause 27 of the same Bill provides that a person shall cease to be a Tax Appeal Commissioner where that person, among others, attains the age of 70 years. With the retirement age of 65 years from public service, the above provisions regarding appointment and pleasure to be a commissioner can disqualify experienced manpower from serving as Commissioners on the tribunal.
VAT Distribution Formula
Clause 77 of the Nigeria Tax Administration Bill deals with the distribution of VAT revenue. According to the clause, 10 per cent, 55 per cent, and 35 per cent shall be distributed to the federal, state governments/the federal capital territory, and the local governments, respectively. The proviso, however, is that, of the percentage accruing to the State and Local Governments, 60 per cent of it shall be based on the principle of derivation. This proviso has generated mixed reactions from stakeholders from different segments of the country who have expressed their fears that it could lead to an unfair revenue allocation to their states.
What needs to be made clear is that in the context of VAT-generated revenue, two mutually inclusive actions are indispensable: production and consumption. Production cannot be complete without consumption, so VAT is also known as consumption tax. Revenue sharing based on the formula of derivation can be aimed at encouraging and promoting increased industrial activities, which are central to a thriving economy and an attempt to reward the same. This can be a potential incentive to trigger industrialisation in other states. On the other hand, its consumption side is also germane. It creates the difference between the states with neither production nor consumption on the one hand, production and consumption on the other hand or production and consumption per se. VAT can be used to either encourage or discourage consumption patterns. Therefore, the consumption side to the derivation formula would be a deliberate effort to recognise and reward where the actual consumption is taking place.
Under the new regime as proposed in the tax reform, clause 145 (1) of the Nigeria Tax Bill provides that a taxable supply shall be deemed to take place at the time the supplier issues an invoice or receipt, or where goods are delivered or made available for use, or payment is due to or received by the supplier in respect of that supply, whichever occurs first. Clause 145 is particularly to be construed within the context of imposition of VAT. The provision carefully examined would convey the meaning that VAT revenue would be deemed to have been generated where they were supplied for use of consumption. This stance therefore aligns with our postulation above.
Addressing the Challenges
A cursory reading of the Tax Reform Bills will reveal a commendable effort by the government to revolutionise the national economy, bring to an end the era of liquidity crises, and promote a genuinely competitive environment for businesses, irrespective of the sizes or structures, to seamlessly thrive. However, despite the laudable objectives of the Reform Bills, it has not been received with the requisite enthusiasm from the sub-national governments. The Bills have been criticised as ill-timed, regressive and antithetical to the aspirations of the people, as well as detrimental to the interests of other segments of the federation. The Nigeria Economic Council (NEC), a constitutional body established by section 153 of the Constitution, has called on the president to withdraw the bills before the National Assembly for further consultations. The Governors Forum and the Northern Governors Forum have all asked for a stand down of the Bills for further consultation. Despite these calls, the Executive branch is in favour of a process that allows for public engagement with the National Assembly presently considering the Bills.
It should be appreciated that Nigeria is operating a democracy, and no matter how beneficial the tax reform bills are, they still require the buy-in of all parts of the federation. This can only be achieved through the process of consultation and enlightenment that engenders confidence in the people. Best practice suggests that the Executive Branch should have publicly engaged all relevant stakeholders, such as the Governors, Organized Private Sector and Labour Unions. Town Hall Meetings should have been organised to sensitise the populace on the objectives of the Bill before sending the Bills to the National Assembly for passage into law. It may not be too late in the day to allow for further consultation and public awareness on the provisions of the Bill, which can only ensure its acceptance and provide the legislature with the opportunity to thinker with the provisions likely to occasion hardship or dissent.
The National Assembly should also take its job of representing the collective wishes and aspirations of the people more seriously to engender confidence in the people. The hurry with which the legislative process is undertaken by the National Assembly leaves many questions unanswered regarding whose interests they are serving. For instance, the haste with which the National Anthem was passed (arguably within 24 hours) created doubts about the integrity and sanctity of the legislative process in Nigeria. Amid these calls, the Presidency has responded to the effect that those concerned about the Bills should engage the National Assembly. While this ordinarily should have been a good option, it would appear that Nigerians do not have much faith in the capacity of the National Assembly to engender a robust consideration of the Bills in the interest of all segments of the population. For instance, the Bills passed the Second Reading amidst rancorous deliberations in the Senate, with Senator Ali Ndume, representing Borno South, frowning at the rushed passage of the Tax Reform Bills for the Second Reading. According to him, the hurry with which the Presidency and some lawmakers want to pass the bills is suspicious. The House of Representatives perhaps took a cue from what had transpired in the Senate, suspended debate on the Bills and urged members to take the opportunity to consult widely with their constituents. This is the recommended procedure as the buy-in of all stakeholders is required for effective implementation of the Tax Bills when passed into law.
Finally, data is required to demonstrate the Tax Bill’s utility and its capacity to ensure fairness in the distribution of the accruals from VAT, which appears to be one of the most contentious areas of the reform Bills. There is a need to show through credible data that the derivation principle proposed to be used to distribute the VAT accruals will benefit all parts of the federation. Therefore, the Tax Reform Committee and the Executive branch must do more in this regard to convince the people. Only when the people’s confidence is restored in the process will a smooth passage of the Tax Reform Bills be guaranteed.
Mohammed Bello Adoke, was Attorney-General of the Federation and Minister of Justice from 2010 to 2015.