BY EMEKA EJERE
There are growing doubts about the viability of continuous granting of tax reliefs and concessions to large companies operating in Nigeria in the face of a debt-to-revenue ratio that is already raising sustainability concerns.
Although analysts are not unmindful of the role of tax incentives in encouraging investment and establishment of some pioneer businesses, they are worried that lack of transparency leaves the waivers open to abuse, thereby constituting a major drain on the nation’s resources.
The public concern over the indiscriminate granting of waivers may have turned to real anxiety last week when the minister of state for petroleum resources, Chief Timipre Silva, offered investors in the nation’s oil and gas sector, over N6 trillion in waivers and tax holidays as incentive to attract investment. He spoke in New York, U.S. on the sideline of the ongoing UNGA meeting attended by President Buhari.
Analysis of the tax expenditure statement (TES) reports in the Medium-Term Expenditure and Fiscal Strategy documents posted on the website of the Budget Office of the Federation last week showed the Federal Government had to forgo a total of N16.79tn in tax reliefs, Customs duty waivers and concessions between 2019 and 2021.
According to the TES report, as of the end of 2021, 46 companies had benefitted from various tax incentives and duty waiver schemes while the requests of 186 companies were still pending.
The TES report read, “The most significant conclusion is the large size of Nigeria’s revenue forgone from just two of the main taxes, i.e., CIT and VAT. Nigeria’s non-oil revenue potential is at least twice its current collections.
“The preliminary estimate of revenue forgone from CIT incentives and concessions in 2019 is N1.1tn; for contrast, 2019 CIT collections was N1.6tn. The preliminary estimate of revenue forgone from VAT policy choices and compliance gaps is estimated to be N3.1trn and could possibly be more.
“It is worth reiterating that revenue forgone from Customs Duty, Excises, Petroleum Production Tax, Personal Income Tax and concessions under the Oil and Gas Zones legislation is still to be computed.”
Speaking at the Nigerian International Economic Partnership Forum at the United Nations General Assembly (UNGA) in New York last week, the Minister of State, Petroleum, Chief Timipre Sylva, said when the Petroleum Industry Act (PIA) fully takes off, it would provide for a 10-year tax vacation for some oil and gas investors in the industry.
Sylva, who spoke on the theme: ”Scaling Up International Economic Partnerships for Nigeria in a Post-Covid World”, stressed that the PIA has provided for a smooth fiscal framework for operators in the sector.
“The PIA 2021 has established a legal, governance, regulatory, and fiscal framework for the petroleum industry, host community development, and associated matters”, he said.
“It provides fiscal certainty, improves regulations and incentives for investment, including up to 10-year tax vacations, while guaranteeing better take for both government and private investors, thereby balancing rewards with risk.”
Findings show that in 2021, the Nigerian Customs Service (NCS), alone granted N2.29 trillion as tax exemptions. This included Value Added Tax (VAT) relief granted on imports, waivers and concessions on import duties, ECOWAS Trade Liberalisation Scheme, surcharges, Comprehensive Import Supervision Scheme, as well as excise and levies.
However, its revenue collection for the year stood at N1.34 trillion suggesting, clearly, that the exemption was a huge amount of revenue lost.
Unarguably, granting waivers on tariffs and duties have been increasingly popular. But many see it also as a disturbing method of misappropriating government revenue in Nigeria.
Such people believe that because of the largesse from oil in the past, Nigeria could afford to grant such waivers, but the current realities demand a re-examination of the policy.
This perhaps informed the decision of the Senate, through its Committee on Finance, to kick against the proposed N6 trillion tax and import duties waivers proposed for the 2023 budget.
Chairman of Committee, Sen. Solomon Adeola had during an interactive session in Abuja recently said the Senate would reduce the N6 trillion proposed as import waiver for companies in the 2023-2025 Medium Term Expenditure Framework (MTEF) and Fiscal Strategy Paper (FSP) with revenue generating agencies by 50 percent.
Adeola said the reduction became necessary, given the projected deficit of N12.4 trillion in the N19.76trillion 2023 budget estimates and the current dwindling revenue profile of the nation.
“About N6 trillion was provided as waiver for companies in the 2023 proposal, but we should reduce it by 50 per cent. I don’t think we can accommodate that, we need to reduce the six trillion waiver by 50 percent,” Adeola said.
However, the Chairman Federal Inland Revenue Services (FIRS) Muhammad Nami, told the committee that tax credit was an important innovation of government that has yielded positive results from September 2019, when it was introduced through Executive order 007 by President Muhamnadu Buhari. He urged the committee not to legislate against it as it was only given to companies with evidence of projects execution.
The Director-General of Debt Management Office (DMO), Mrs. Patience Oniha, had asked the National Assembly to reduce the debt profile of the country by taking steps to control the deficit in the annual appropriation acts.
Speaking at the public hearing on the MTEF by the House of Representatives Committee on Finance, Oniha said budget deficit has been the main contributing factor to Nigeria’s debt profile, stressing that the debt profile would continue to grow as long as lawmakers continue to pass deficit budgets.
However, the Minister of Finance, Budget and National Planning, Mrs Zainab Ahmed had revealed that the Federal Government may not be able to fund capital projects in the 2023 fiscal year unless it borrows more than N11 trillion.
Nigeria’s total public debt stock increased to N41.60tn in the first quarter of 2022 from N39.56tn as of December 2021, an increase of N2.04tn within a period of three months, according to the DMO. With the new borrowing for 2023, the total debt will stand at about N52 trillion by the time the present administration will hand over to the next government on May 29, 2023.
However, on issuing tax credit to some companies and waivers, she said, ”Tax credit are issued only when companies construct projects and the projects are certified and certificate issued by the Federal Ministry of Works.”
Ahmed said some of the waivers are backed by laws enacted by the legislature, adding that a review of the waivers would require an amendment to such laws.
Profitable without discrimination
An economist, Mr. Johnson Chukwu, does not see what was forgone in waivers as revenue leakages, but a delayed gratification which would enable the Federal Government to achieve long-term higher revenues.
“Tax is a fiscal tool and fiscal tools are used to stimulate economic activities or discourage certain harmful or inappropriate economic activities. I won’t call the amount as losses unless those tax concessions were not granted with an objective motive and national interest.”
For the Chief Executive Officer, Centre for the Promotion of Private Enterprise, Dr. Muda Yusuf, there is nothing wrong with waivers if they are in line with tax policies.
Yusuf said tax incentives are necessary to encourage investment and the establishment of some pioneer businesses, provided the process is transparent and seen as an effort by the government to grow the economy.“
The whole idea of incentives is to grow the economy. When you are growing the economy, you are not only looking at revenue, you are looking at employment and multiplier effects. In the medium to long term, you will get this revenue by the time you are able to grow these investments. It is inappropriate to see it as revenue loss unless the incentive policy itself is discriminatory.”
Fiscal Policy Partner and Africa Tax Leader at PricewaterhouseCoopers, Mr. Taiwo Oyedele, noted that tax incentives were crucial in driving investments when properly targeted.
“Tax incentives are not necessarily bad. They can be applied in a manner that benefits the overall economy by encouraging investments in critical areas”, he said.
“However, incentives must be properly designed and targeted to be meaningful while the government must periodically review incentive schemes to ensure they are still relevant and provide value for money”.
Nigeria is not in the right fiscal shape going by its poor tax revenues. The country earned N6.4tn ($15.433bn) in taxes in 2021, with non-oil sector contributing 69 percent and oil sector contributing 31 percent of the total collection, according to FIRS.
However, this figure was dwarfed by the revenues that accrued to Africa’s second-largest economy in the same year. South Africa collected $107bn (R1.56tn) in tax revenues in 2021, which was a 25 percent increase in tax revenues from the 2020 figure, according to the South African Revenue Services.