By Nasir Ahmad El-Rufai
The Federal Government earned N2.2trillion as opposed to N1.9trillion it targeted in 2009; N2.9trillion as against N2.5trillion in 2010; N4.7trillion in 2011 as opposed to N3.6trillion and N5trillion generated in 2012 as opposed to N3.6trillion. No, these are not foreign exchange earnings or even the Jonathan administration’s spurious borrowings. These are the sums generated by the Federal Inland Revenue Service (FIRS) in the last five years.
With these figures, borrowing to fund our budget deficits which grew from N161.1billion in the third quarter of 2011 to N459.1 billion in the third quarter 2012 are unjustifiable. Despite claims of deficit reduction by the Finance Minister, the projected deficit for 2013 is N1.039trillion. When we consider that these deficits further compound our national debt which is around N6.9trillion ($44billion) we begin to see where the transformation agenda of this administration is taking Nigeria - long-term sovereign insolvency!
The FIRS has undergone quiet and true transformation since Mrs. Ifueko Omoigui-Okauru was hired by the Obasanjo administration from the private sector to lead it. Not only has the FIRS been able to draft an updated legal framework for taxation, it was able to expand our existing tax brackets, introduce re-organization policies and saw to the passage of about 4 Acts, including ones for FIRS Establishment, Value Added Tax Amendment, Companies Income Tax Amendment, and the Petroleum Profit Tax Amendment. Yet, the N5trillion record achievement is only a scratch on the surface of Nigeria’s tax generation potentials. Nigeria can easily generate taxes equivalent to just the global average of 25% of GDP (which will be in excess of least N10trillion) if we can get our act together.
Oil taxes revenue contributed N3.2 trillion; representing 64% of the entire 2012 collections as against the 2011 figures of N3 trillion. Interestingly, another major feat of the FIRS has been its ability to bring a significant swathe of the non-oil sector into the tax bracket. The contribution of non-oil taxes increased from N1.5 trillion or 33.65% in 2011 to N1.8 trillion or 36% in 2012, from much lower numbers in 2003.
Why has taxation, which is potentially Nigeria’s largest source of revenues, still been neglected in favor of ‘cheap’ oil money? Is it because of the fear that a tax paying citizenry would not allow their taxes to be looted as happens with oil revenues which are sometimes diverted by officials and spent even before reaching our shores? What is the story of taxation in Nigeria?
In 1943, the Nigerian Federal Inland Revenue Service was carved out of the former Inland Revenue Department (IRD) that covered what was then the Anglophone West Africa (including Ghana, Gambia and Sierra Leone) during the colonial era. In 1958 the Federal Board of Inland Revenue (FBIR) was established under the Income Tax Ordinance of 1958. After various transformations in 1961 and 1993, on 16th April 2007, the FIRS (Establishment) Act 13 of 2007 was passed, and the operational arm of the FBIR, the Federal Inland Revenue Service (FIRS) secured its autonomy.
State Assemblies were also expected to pass laws facilitating the autonomy of their Internal Revenue Services. Now 6 years later, only Lagos and Adamawa States have granted their IRS autonomy, while Ogun, Ekiti and Bauchi states are in the process of doing so. A look at how Lagos state utilizes its taxpayer’s money underscores the importance of autonomy for state IRS.
The FIRS is charged primarily with the responsibility of accessing, collecting and accounting for the various taxes to the governments of the federation. However, many Nigerians have seen this as a big loophole to the Establishment Act, leaving some to wonder why this body that collects public funds is responsible to the government, and not to the people. After the funds are remitted to the federal government, what accountability measures are put in place? How does the average Nigerian who pays his taxes diligently know that his taxes are not just moved into offshore and local accounts that benefit only the corrupt few?
In Price Water House Cooper’s (PwC) 2012 ease of paying taxes ranking, Nigeria was ranked 138 out of 183 economies. According to the same report, the average tax compliance time in Nigeria is 936 hours as opposed to a 318 hour benchmark for Sub-Saharan Africa and 186 hours for the Organization for Economic Cooperation and Development (OECD) countries. During 2010/2011 period covered by the 2012 study, 33 economies were said to have improved in the ease of tax payments. A common feature amongst these 33 economies was the introduction of electronic systems that make tax compliance easier.
The mistrust in the system is one of the reasons why the country has not been able to harness the full benefit of taxes compared to other countries. Many people, who pay taxes, do it reluctantly because infrastructure that should be maintained by tax funds suffer neglect; public utilities do not function, educational and health facilities decrepit, and roads are now considered by most as death traps.
In most countries, tax legislation is used to bridge the gap between the rich and the poor, and in 2011, Nigeria assented to the Personal Income Tax (Amendment) Act, 2011 (PITAM 2011) in a bid to move in this direction. The PITAM 2011 consolidated all personal income tax reliefs and allowances into a single Consolidated Tax Relief Allowance (CTRA) of N200,000 (Two Hundred Thousand Naira) or a minimum of 1% of a person’s annual gross income, whichever is higher of the two, plus 20% of the individual’s annual gross income as CTRA.
The remainder of income was liable to Personal Income Tax at an average graduating rate of between 7% to 24% of the individual’s annual income; thus, a higher PIT Tax rate is reserved for people earning above N1.6Million and N3.2Million per annum after making provision for CTRA. Ordinarily, this should fulfill the tax objective of income redistribution. The problem was and is that tax evasion or avoidance is done mostly at the top levels of government and amongst the richest in society, year in year out, we hear of tax evasions by government agencies. Furthermore, our informal is estimated to be at least three times the formal economy, and these incomes are hardly ever captured for taxation.
Tax evasion in the formal sector occurs due to weak enforcement, corruption and impunity. For instance, in the period of 2004 to 2012 alone, the FIRS stated that 100 organizations including MDA’s owed N169billion in tax arrears. This is quite apart from the corruption inherent in normal tax administration and collection. Most tax collectors and officials conspire with tax payers; negotiate some sort of bribe with individuals or companies for a reduction or total avoidance of their tax burdens. The various structures which are required to work together to make tax evasions difficult are not properly coordinated. Enforcement of tax compliance should be given adequate attention and various government agencies should collaborate to share information to reduce tax evasion or avoidance.
Even for diligent Nigerians who voluntarily go to make tax remittances, they are often met with bureaucracy that leads to time wastage and sharp practices. For instance, you need a Tax Identification Number (TIN) for tax payments, these TIN numbers cannot be generated online, an individual has to go to a tax office, fill a form and wait for paper work before the TIN is generated which would typically take between a day or two. It is also tedious that whenever taxes are paid, the individual has to go to the tax office to collect his tax payment receipts after making payment in banks. A more simplified system needs to be put in place.
Perhaps the biggest problem to Nigeria’s tax administration is the absence of a comprehensive tax payer’s database. The absence or inefficiency in this area undermines tax systems. The accelerated completion of the National ID project with biometric capture incorporating TINs will go a long way in enhancing tax administration, collection and accountability.
For the FIRS to go beyond its present capacities, it must be free of the present internal conflicts plaguing the system, it must win public confidence by creating an accountability framework, and it must adopt a technology-driven approach as opposed to the largely bureaucratic manual tax administration system currently in place throughout most of the country.
If online accounts, where filing, tax payment, tax records, receipt printing and certificate generation can be done are created for individual tax payers and tied to their TIN numbers for login, would this reduce compliance time and the associated costs? Would this encourage voluntary tax compliance? What about abolition all income taxes and introducing sales taxes at state and LG levels, while raising the VAT rate from 5% to a higher number? These are all policy and fiscal choices that need to be debated and considered going forward.
While our tax fortunes may appear to continue to increase, the reality on ground is that with appropriate policies, technological and operational reforms, collections, expanding the tax bracket and monitoring made more effective, we can raise more revenues than we currently earn from non-renewable natural resources like oil and gas.
The danger of course, is that like the huge oil revenues and consistent domestic and foreign borrowing by this government, more revenues may only add to the pool of funds from which money is stolen or wasted on non-viable projects that neither create jobs for the millions that are jobless, nor improve the quality of life for Nigerians. We must refocus our energies on citizens' taxation so that accountability demands on our leaders will also intensify.