Tax Policy In Nigeria

This paper examined tax policy in Nigeria. It traced the history of tax in Nigeria and the implementation of tax policy in Nigeria. The paper argued that tax policy has been ineffective over the years. It found that the Federal Government has been working towards tax reforms. The paper highlighted the flaws in the tax reforms and made recommendations for effective tax system in Nigeria.INTRODUCTION

A tax policies represent key resource allocator between the public and private sectors in a country. It is usually imposed on individuals and entity that make up a country. The funds provided by tax are used by the states to support certain state obligations such as education systems, health care systems, pensions for the elderly, unemployment benefits, and public transportation. A nation’s tax system is often a reflection of its communal values or the values of those in power. To create a system of taxation, a nation must make choices regarding the distribution of the tax burden-who will pay taxes and how much they will pay-and how the taxes collected will be spent.

In Nigeria, the taxation system dates back to 1904 when the personal income tax was introduced in northern Nigeria before the unification of the country by the colonial masters. It was later implemented through the Native Revenue Ordinances to the western and eastern regions in 1917 and 1928, respectively. Among other amendments in the 1930s, it was later incorporated into Direct Taxation Ordinance No. 4 of 1940. Since then different governments have continued to try to improve on Nigeria’s taxation system. The general opinion among scholars is that Nigeria’s fiscal regime is characterized by unnecessary complex, distortionary and largely inequitable taxation laws that have limited application in the formal sector that dominates the economy.

Given the foregoing, it is important that Nigeria adopt a taxation policy that would enhance national development. I am aware of the draft national tax policy that has been submitted for enactment by the National Assembly of Nigeria. My intention is to examine the Draft National Tax Policy with a view to correcting perceived flaws inherent in the document. To enhance the understanding of this paper, I begin with making a review Nigeria’s tax system and the current Draft National Tax Policy. I will attempt to identify the challenges inherent in the current reform and proffer strategies for an efficient tax regime in Nigeria.

OVERVIEW OF TAXATION SYSTEM IN NIGERIA
The Nigerian tax system is basically structured as a tool for revenue collection. This is a legacy from the pre-independence government. Based on 1948 British tax laws and have been mainly static since enactment. The need to tax personal incomes throughout the country prompted the Income Tax Management Act (ITMA) of 1961. In Nigeria, personal income tax (PIT) for salaried employment is based on a ‘pay as you earn’ (PAYE) system, and several amendments have been made to the 1961 ITMA Act. For instance, in 1985 PIT was increased from N 600 or 10 per cent of earned income to N 2,000 plus 12.5 per cent of income exceeding N 6,000. In 1989, a 15 per cent withholding tax was applied to savings deposits valued at N 50,000 or more while tax on rental income was extended to cover chartered vessels, ships or aircraft. In addition, tax on the fees of directors was fixed at 15 per cent. These policies were geared to achieving effective protection for local industries, greater use of local raw materials, generating increased government revenue among others.

Since the implementation of the structural adjustment programme (SAP), however, taxes have been used to enhance the productivity and competitiveness of business enterprises. Consequently, attention has been focused on promoting exports of manufactures and reducing the tax burden of individuals and companies. In line with this change in policy focus, many measures were undertaken. These involved, among others, reviewing custom and excise duties, continuing with the reduction of company and income taxes, expanding the range of tax exemptions and rebates, introducing capital allowance, expanding the duty drawback scheme and manufacturing-in-bond scheme, abolishing excise duty, implementing VAT, monetizing fringe benefits and increasing tax relief to low-income earners.

CURRENT TAXATION REFORMS IN NIGERIA
In 2002, a Study Group (the SG) was inaugurated to review the entire tax system in Nigeria. The terms of reference included:
• Review all aspects of the Nigerian Tax System and recommend improvements therein.
• Review the entire tax administration and recommend improvements in the structure for the whole country.
• Consider measures to bring international developments in tax administration to bear in Nigeria.

In 2004, a Working Group (the WG) was inaugurated to review the report and recommendations of the SG. – The WG agreed with the SG’s recommendations for a National Tax Policy and recommended the creation of an autonomous National Customs & Revenue Authority to assimilate all tax administration powers and duties with funding from retained tax revenues. The WG also reviewed each SG proposed modification to existing tax laws and provided comments thereon. They include, strengthening of Tax Administration, proposed prioritized strategies for implementing the proposed reform and passage of new tax Bills. Subsequent to the report of the WG in 2004, the government has presented the following tax legislation to the National Assembly:
• The Federal Inland Revenue Service Act to establish the agency as an autonomous body and guarantee its funding from a percentage of retained tax collections.
• Amendments to the Personal Income Tax Act, Companies Income Tax Act and the VAT Act.
• For the most part, the amendment Bills reflect the recommendations of the SG and WG.7
It is expected that the new tax legislation will be passed into law by 2006, however, today, 4 out of the 8 Tax Bills, namely; Bill for an Act to establish the FIRS as an autonomous Service, Bill for an Act to amend the Companies Income Tax Act, Bill for an Act to amend the Petroleum Profit Tax and Bill for an Act to amend the National Automotive Council Act have been passed by the National Assembly and signed into laws by President, Olusegun Obasanjo, on April 16, 2007, while the remaining four Tax Bills are still at the fiscal debate stage of the parliament.

CHALLENGES OF THE DRAFT NATIONAL TAX POLICY
A thorough examination of the current national taxation policy reveal that it is comprehensive when compared with earlier attempts at designing a policy. However, there are some perceived challenges that this draft is likely going to face because of the experiences of past taxation laws. These challenges are as follows:
• Administrative Challenge. Experience has shown that the institutional capacity to administer taxes effectively is woefully lacking in this country. Procedures, reinforced by third party audits, appear to ensure that taxes are paid and received albeit with potentially serious and costly internal lags. However, Nigeria lacks capacity to assess the reasonableness of the returns submitted by taxpayers, including costs and staffing, skills, pay scales, and other funding, and computer and Information Technology (IT) infrastructure. Meanwhile the current draft has not put in place an administrative strategy.

• Compliance Challenges. A recurring problem with PIT Nigeria is the non-compliance of employers to register their employees and to remit such taxes to relevant authorities. To address this, in 2002 the government amended the 1993 PIT Act to make non-compliant employers liable to penalties up to N 25,000, as well as liable for the payment of all tax arrears. Employers failing to keep proper records would also face a penalty of N 5,000. A fine this small tends to encourage tax evasion since the penalty for being caught is lower than the cost for non-compliance. The issues of unremitted funds from the PAYE system and withholding taxes particularly among government ministries and agencies as well as lax adherence by all three levels of government to the approved list for (tax) collection, as stipulated by the 1998 Taxes and Levies Act 21, have over the past five years attracted the attention of Joint Tax Board (JTB). This same issue of compliance was not properly addressed in the draft national tax policy.

• Lack of Equality. Tax in Nigeria especially (PIT) personal income tax always fails in Nigeria for lack of equitability. Even the present draft sent to the National Assembly could not provide solution to this challenge. In spite of the fact that the self-employed outnumber paid workers and that they earn as much as four times that of the formal sector employees, the bulk of PIT today is paid by employees whose salaries are deducted at source.
• Challenge of Multiplicity of Taxes. There is the challenge of multiplicity of taxes which is a major problem with the draft document. Already Nigeria is known for having problems with compliance. How does would the Federal Ministry of Finance grapple with this problem because it is not contained in the strategy document. It must be noted that a good tax policy set out the fundamental objectives of a country's tax system and prescribe some guidelines that would shape government policy actions.
• Poor Taxation Drive from Tiers of Government. The political economy of revenue allocation in Nigeria even with the current draft document does not prioritize tax efforts. It is, instead, anchored on such factors as equality of states (40 per cent), population (30 per cent), landmass and terrain (10 per cent), social development needs (10 per cent), and internal revenue efforts (10 per cent). The approach, discourages a proactive revenue drive, particularly for internally generated revenue, makes all government tiers heavily reliant on unstable oil revenues which are affected by the volatility of the international oil markets. Aside from the national syndrome of ‘cake sharing’, the instability and volatility of oil revenue should have created an opportunity for improved tax efforts within the provisions on taxation ratified in the 1999 Constitution. Although some state governments have initiated measures to enhance their tax generation attempts, the outcome has not reflected any level of serious effort.

THE WAY FORWARD

PASS THE DRAFT NATIONAL TAX POLICY INTO LAW
The way forward from is for the government to implement the tax policy. A lot of resources and time has been invested in the current draft national tax policy. Even though there are obvious flaws in some areas, there is the urgent need for the National Assembly to pass it into law. A tax regime that lacks the policy hub cannot achieve the desire objectives.

IMPROVE COMPLIANCE STRATEGY
Compliance has always been a problem in Nigeria’s tax system. Even the current draft national tax document did not spell out clearly the compliance strategy. During the military era, the Tax Force Unit was used to enforce tax compliance. However, with democratic rule, this is not allowed and the use of the traditional court system is not only too cumbersome but also time consuming. To this effect, a bill for a tax court has been prepared by the state to replace the Tax Force. The bill has been discussed at the cabinet level, and is currently being amended by the Ministry of Justice after which it will be presented to the National Assembly. When this bill becomes operational, it is hoped that compliance will be improved.

IMPROVE ADMINISTRATION OF TAX
One of the major challenges of tax in Nigeria is the administration of tax. Even the current draft national tax policy suggested the use of tax consultants to collect revenues from government ministries and agencies. This is a major flaw as PAYE does not give a true picture of performance. This is revenue that is collected at source with minimal effort and could easily be collected by government tax or revenue officials. Thus, the practice of including certain taxes (PAYE and other revenue deducted at source) within the government machinery as components of a revenue benchmark for tax consultants will not be a solution.

STAKEHOLDERS’ CONSULTATION
It is also imperative for government to consider taxpayers’ and other key stakeholders’ interests in fiscal policy formulation and implementation in order to achieve improved tax compliance rate in the country. In other words, since taxes are statute-derived, government should encourage far-reaching consultation across the broad spectrum of the economy in tax law formulation.

CONCLUSION
This paper examined the various steps so far taken by Nigerian government and relevant stakeholder in the Nigeria’s tax system. The paper further reviewed tax regime in Nigeria from the since 1904 to the ongoing tax reforms. It reviewed the tax reforms and concluded that the meets the requirement for a national tax policy. The paper however identified a number of flaws that could affect the efficient workability of the draft policy. It highlighted these flaws and proffered the way forward for Nigeria.

RECOMMENDATIONS
On the basis of the foregoing, the following are recommended:
• The current draft national tax policy should be passed into law by the National Assembly so as to make it a working document.
• Government should consider taxpayers’ and other key stakeholders’ interests in fiscal policy formulation and implementation in order to achieve improved tax compliance rate in the country.
• Government needs to improve the revenue allocation system so as to boost the taxation drive by the different tiers of government.

NOTES
Adekanola, O. ‘Efficient Tax Collection and Effective Tax Administration in Nigeria’. (A Paper presented at a seminar organized by the University of Lagos Consultancy Services Otta, 15 May 1997).

Ajakaiye, D. O., and A. F. Odusola ‘Price Effects of Value Added Tax in Nigeria’. NCEMA Policy Analysis Series, 2 (2): 48-68. Ibadan: National Centre for Economic Management and Administration, 1996.

Odusola, A. F. ‘Internally Generated Revenue at the Local Government: Issues and Challenges’. (A Paper presented at the Workshop on Revenue Generation at the State Government Level, Ibadan: University of Ibadan, October 2003).

Draft Document on the National Tax Policy, updated as at 7 June 2008. (Presentation by the Presidential Committee on National Tax Policy). By abubakar yusuf mamud