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Thursday, January 7, 2016
Nigerians’ poor tax compliance and solutions
With the dwindling income from sale of crude oil, it has become imperative for government at all levels to scout for alternative sources of income to fund development projects and programmes as well as oil the wheel of governance. There have been several suggestions on how to boost the internally generated revenue of government. These include right investments and policies in agriculture, solid minerals and sports. Cross-cutting benefits will accrue to government from all private and public investments in the identified areas in form of tax. An online source defines tax as “a compulsory contribution to state revenue, levied by the government on workers’ income and business profits, or added to the cost of some goods, services, and transactions.”
According to the Federal Inland Revenue Service, which is the Federal Government agency in charge of tax administration in Nigeria, some of the taxes operational in the country are: Personal Income Tax; Companies Income Tax; Petroleum Profit Tax; Value Added Tax; Withholding Tax; Education Tax; Stamp Duties; Capital Gains Tax and National Information Technology Development Fund Levy.
There are several advantages accruing to both government and citizens from payment of taxes. According to the FIRS, “The benefits derivable include but are not limited to: Providing sustainable finance and funding for governance, public and social services and economic development; Promoting civic responsibility, patriotism by citizens and social responsibility by corporate citizens; and Stimulating priority social and economic activities and sectors while discouraging less preferred ones.”
Others include, “bringing about the redistribution of wealth and bridging sharp disparities in living standards; Giving taxpayers the moral and legal right to demand (thereby engendering) a culture of accountability; Serving as a gauge for measuring the level, growth and health of economic units and economic activities; Individuals and corporate organisations are conferred with definite benefits, rights and privileges in the system based on their tax compliance status; and Tax compliance enables law abiding citizens to avoid the consequences, penalties and sanctions of non-compliance.”
In spite of the aforementioned benefits and importance, Nigerians are one of the world’s worst dodgers of tax. Tax evasion, though a global phenomenon, however is very rampant in this clime and is committed with impunity. Even when not totally avoided, many Nigerians do not pay the right taxes. Some Nigerians are also in the habit of procuring fake Tax Clearance Certificates when it is demanded of them.
This newspaper in a December 7, 2015 editorial quoted PricewaterhouseCoopers as saying that Nigeria has one of the world’s lowest tax revenues to GDP ratios. “Estimates vary; while PwC this year (2015) estimates Nigeria’s tax revenues at eight per cent of GDP, the World Bank put it at 1.6 per cent in 2012 and the Heritage Foundation at 6.1 per cent in 2013. But in Norway, which manages its oil wealth far more sensibly, tax revenues were 26.8 per cent (World Bank), South Africa 25.6 per cent and Mozambique 26 per cent.”
The PUNCH editorial under reference also made more startling revelations. It says 80 per cent of taxable adults never pay tax, as revealed at a recent Chartered Institute of Taxation of Nigeria forum. Seventy five per cent of companies are not registered with the FIRS for the mandatory Companies Income Tax and 65 per cent of those registered are not up to date with tax filings. The newspaper also quoted the acting chairman of the FIRS, Mr. Babatunde Fowler, as saying that 200 registered oil and gas firms were not paying tax and that 35,650 corporate bodies had similarly failed to pay taxes. Not only that, the editorial also quoted a former FIRS chief, Sunday Ogungbesan, as having said in August 2015 that of the 450,000 registered companies once surveyed in Nigeria, only 125 were found to be paying tax.
What are the factors responsible for this high level of tax evasion or non-compliance? They are many. One of them is the multiple taxation of the companies operating in Nigeria. Private companies in the country complain that they are subjected to too many taxes by the three tiers of government namely; federal, state and local government. For instance, they pay huge customs duties on importation of their equipment and raw materials after which they still have to pay Company Income Tax, Education Tax and several other sundry levies. Meanwhile, due to lack of or shortage of infrastructure, they have to provide their own roads, electricity, water, and security.
With the exception of government workers whose Personal Income Tax is deducted from source under the Pay As You Earn scheme, it is practically impossible to assess the tax liabilities of many traders or those in the informal private sector. They deliberately underestimate their business value in order to ensure that they pay less tax. In many instances, private companies use the services of tax consultants some of whom assist these companies to under-declare their income and that of their workers to enable them avoid paying the right amount of taxes.
Besides, people do not want to pay tax because they have not seen or felt the positive impact of government in their lives. They see the wasteful spending and ostentatious lifestyles of political office holders. They read in the papers and hear on news how a few individuals holding sensitive government positions use their influential positions to corner huge resources for their personal aggrandisement. Thus, with high level of corruption in government, ordinary people feel that paying tax will be like “emptying their stream into government’s ocean of corruption”. So, it is obvious that lack of transparency and accountability in government are indeed a disincentive to voluntary tax compliance.
Moreover, unemployment and staff retrenchment also combine to rob government of tax revenue. It is impossible to tax someone who is unemployed. I quite agree with this newspaper in the aforementioned editorial when it observed that: “The critical missing links in our tax administration are efficiency, enforcement and punishment.” It is also on point with its suggestion that the government should be ruthless with tax offenders and roll out a more robust tax on luxury goods instead of a blanket increase in VAT. It cannot be overstated that there is a need for a strong synergy between the Finance Ministry, the FIRS and other revenue collecting agencies to raise revenues to the minimum 25 per cent of GDP recommended by the World Bank and that tax reforms will also ultimately require very strong backing and political will from President Muhammadu Buhari as well as stronger tax laws.
Aside from these however, government should make our money to work for us. Nigerians need to feel impact of government and see corrupt officials being severely punished for their act of greed and sabotage. Government should also not overtax companies operating in Nigeria.