ADEOSUN’S TAX REVOLUTION: ‘every income must be taxed’

OKEY ONYENWEAKU |

As far as revolutions go the Federal government’s recent onslaught on tax evasion and tax avoidance is as gentle as a puppy. The Minister of Finance (MoF), Kemi Adeosun’s, admonition on the need for voluntary payment of tax by Nigerians has been more plaintive and appealing than aggressive and combative. But the clock is ticking as the fiscal warlords (including Chairman of the Federal Inland Revenue Service (FIRS), Mr Tunde Fowler) have given Nigerians up to the end of the first quarter of 2018, before legal sledgehammers start flying. The Voluntary Asset and Income Declaration Scheme (VAIDS) announced by the government is expected to raise Nigeria’s non-oil tax to GDP ratio from a current 6 per cent to 15 per cent by the year 2020.

This is brave indeed; the government expects to earn forecast revenue of $1 billion (N365bn) from the new initiative.
Interestingly, the objective of the new VAIDS initiative is to achieve what has hitherto been virtually impossible; encourage voluntary declaration of undisclosed income and assets with payment of applicable taxes over the relevant periods.
According to government’s concept, all taxes collectible by States and the Federal Government are to be covered by VAIDS. This includes Companies Income Tax, Personal Income Tax, Petroleum Profits Tax, Capital Gains Tax, Stamp Duties, Tertiary Education Tax, and Information Technology Levy.
Indeed, those who have evaded paying tax including multinational companies will have from July 1, 2017 to March 2018 to regularize their tax status in exchange for immunity from prosecution.
The new tax initiative is a major break from the past and builds into a revolutionary rethinking of the country’s fiscal management. Unlike in the past when the fiscal authorities depended almost exclusively on revenues from the Oil and Gas sectors to fund annual fiscal outlays, the business model of government intends to put greater emphasis on domestic taxes as a means of meeting its annual budget bills. Analysts believe that this is a proper move by the Adeosun-led fiscal authorities but they doubt the capacity of the government to capture the tax leakages in the system as the economy is dominated by a shadowy informal sector that is difficult to track.
Tax analysts believe that the government needs to invest heavily in big data management support structures to enable the monitoring of individuals and their businesses or incomes, besides they point out that many people have to provide themselves with services that would normally be expected of government and that puling them into the tax net could impair their ability to meet regular private expenses on water, power and even security, said one landlord interviewed but who declined to have his name mentioned in print,’ if we have to construct boreholes to provide regular water, pay private security agencies to guard our estates and power our homes by using private generating sets and in some cases repair our own roads by community contributions, what in heaven’s name is government taxing us for?’ he asked. He further noted that, ‘tax revenues go into fostering the lavish lifestyles of public officers who live in palatial houses, have their children school in choice institutions across the globe and feed off the hard earned income of others’. This is a position several Nigerians have noted and is gradually creating a groundswell of anger against both the government and its officials.
However Nigeria’s tax revenue has over the years sluggishly remained among the lowest in the world at about 6 per cent of Gross Domestic Product (GDP). The low tax to GDP ratio explains the fiscal challenge faced by the government at a time of crippling recession. Using a tax handle to stimulate growth has proven difficult as room for a tax cut does not exist given the low base rate effect of non tax payment by a swathe of local economic agents. In data published by WIKIPEDIA in 2015 Countries like Belgium, Argentina and Canada could boast of 47, 37 and 32.2 per cent tax revenues to GDP.
Other countries with higher tax revenue to GDP include Austria 43 per cent, Cote d’Ivoire 15 per cent, Ghana 20.8 per cent, Kenya 18.4 per cent, Namibia 28.8 per cent, Congo 13.2 per cent and Brazil 34.4 per cent. It is noteworthy that only 14 million out of the country’s over 70 million economically active people pay taxes this translates to about 20 per cent of the working population.
According to data of the MoF, only 214 Nigerians pay taxes of N20 million and above per annum and that all of them are based in Lagos State. This suggests massive revenue loss from the well- to- do and well-heeled members of society. Nigeria’s rich are amongst the most chronic and notorious of tax offenders. Adeosun, however, has noted that the MoF has designed a life-style based assessment criteria for tax assessment and would use this in establishing how much tax an individual should pay. For example, an individual living in a half a billion naira house on Banana Island in Lagos would be expected to pay an annual tax of not less than a million naira per annum. This is less than one per cent of the property value. The ability of wealthy Nigerians to conveniently evade tax has resulted in a flamboyant life style that has poisoned social values and eroded traditional work ethics.
Worried by this ugly trend, the Vice President, Yemi Osinbajo warned that tax evasion was not just a civil offence but criminal.
”Nigeria has 69.9 million economically-active individuals, but only 14 million of them are tax payers. Our Tax-to-GDP ratio is 6%, one of the lowest in the world. We are faced with a situation where, if people do not pay taxes, we will not be able to sustain our economy to benefit our growing population”, Minister of Finance, Adeosun said at a recent public sensitization meeting.
“We are doing two things today: we are sending a clear signal to tax evaders in our country that the party is over,”
“We’re also calling on these evaders to do the right thing and rapidly come clean for the good of their country or face the full consequences of the law. This window of opportunity will never be offered again.”
The Minister noted that the rising sensitivity towards tax revenue would not be an attempt at inequitable income transfer from the poor to the rich, according to her, “the proceeds of this scheme will not disappear. They will be invested in key infrastructure projects and for clearance of pension arrears”.
Whatever the case may be, the federal government must find ways out the fiscal quagmire of low taxes and rising fiscal demands. Sadly, the economy has so far been struggling painfully having depended for so long on crude oil for her survival. The tax revolution shows the beginnings of a fiscal rethink with the federal government keen on diversifying its revenue base. However, this is coming at a time Nigeria’s economy has slipped into a recession, the first in twenty five years.  GDP plunged by -0.36 per cent in the first quarter of 2016 and dipped further in the second quarter by -2.4 per cent; GDP fell again by -2.6 per cent in the third quarter of 2016. At the end of 2016 GDP dropped by 0.52 per cent.
Since the beginning of the recession in 2015 the Nigerian government has found it difficult to keep the economy on track for non-inflationary growth. The price of crude which accounts for about 80 per cent of Nigeria’s revenue plunged from $114 barrels per day on June 2014 to about $30 before climbing back to between $45 and $50 currently.
To tackle the consequent fiscal challenges of lower revenues the federal government has said that it was not increasing tax rates but expanding the tax net to accommodate those it had over looked and are qualified to pay taxes. But analyst have noted that the governments tax drive is coming at a time the economy is weak, personal incomes have shrunk and profit margins are thinning out.
While there seems to be strong aversion to tax payment in Nigeria given low economic growth, the country plans to increase spending by 21 percent to 7.4 trillion naira ($22.8 billion), according to the budget signed into law for 2017. The 7.4 trillion Naira budget is expected to enable the government fund it’s recurrent and capital expenditure plans.
Unfortunately, there is a funding gap of N2.5 trillion (budget deficit) given the weak economy and low tax base. In a desperate effort to fund the 2017 budget, the government has realised that it has to adopt frantic measures if it must fashion a way forward. The effort which began with the articulation of an Economic Recovery and Growth Plan (ERGP) target GDP growth of 4.62% per annum would gradually rise to 7% per annum by 2020.
Unfortunately, the revenue target of the country in 2016 was N3.954trillion, but N3.110 trillion was realised as the target was missed by N843.8billion. While the FIR has set tax revenue target for 2017 based on the Federal Government’s 2016-2018 medium term revenue framework at 4.89 trillion naira, it has already generated 1.78 trillion naira in tax revenue between January and July 2017.
There is a consensus that Nigeria needs to increase its tax revenue to GDP to be competitive and be able to fund its infrastructural gap.
Economic analysts have advised that during recessions, the government should offer tax cuts to stimulate the economy; they have noted that during economic recessions it would be unwise to hand down a heavy tax regime on the private sector .”The government… [should] try to use expansionary fiscal policy. This involves cutting taxes and increasing government spending. It will cause higher government borrowing (higher budget deficit) Expansionary fiscal policy may not work in the long run due to crowding out. In the US the authorities are trying both lower interest rates and lower taxes”, Tejvan Pettinger noted in his book ‘Economics Help’.
While some experts have urged the authorities to streamline taxes and avoid multiple taxation, others believe that if taxes collected are used efficiently both the government and tax payers will benefit.
Commenting on the issue, Dr. Afolabi Olowokere of Financial Derivatives Company limited, told Business Hallmark in a telephone interview that if revenues from taxes are efficiently utilised a situation called balanced budget multiplier would arise in the interest of the country in general. This is a situation where both the government and tax payers benefit.
However, Mr Chinedu Ezomike, Senior Manager, Tax Division, KPMG Nigeria extolled the initiative explaining that it would address tax evasion and  illicit  financial flows. He added  that such  schemes  have  been   successfully implemented in other countries like India, so it is in line with global best practice.
“It provides a very good opportunity for eligible taxpayers to regularize their tax compliance status. The Government should be commended for instituting such a wide ranging scheme to expand the tax net and improve the country’s tax to GDP ratio. All eligible taxpayers are encouraged to take the advantage and participate in the Scheme,” he stated.
According to him, it was debatable if the $1 billion the Federal Government is targeting from the Scheme would be realized. “A similar tax amnesty program initiated by the FIRS in October 2016 for corporate tax  payers raised about US$89million.
“A lot of us are not doing our civic duties by paying our taxes and those who pay, how sincere are they in the amount they declare. Some of us have houses all over the place; we collect rents from them and don’t declare them as part of our income. We are not paying taxes on them”, said former Chairman, West Africa Union of Tax Institute, Ms. Gladys Olajumoke Simplice
The government’s tax revolution may appear tepid, but these are still early days, the threat of a sledgehammer may yet see tax to GDP ratio rise by several percentage points. Not all revolution start with a bugle but many end in a change.