Funmilayo Odude, Legal Practitioner, Damod Law Practice
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Nigeria needs comprehensive tax reform 18 Nov 2019
Nigerian Minister of Finance, Budget and National Planning, Zainab Ahmed
In just about six months into the second term of President Muhammadu Buhari’s administration, the government has introduced several new taxes and levies. Along with the 2020 Appropriation Bill, which the president forwarded to the National Assembly last month, he also sent a Finance Bill in which the Federal Government (FG) proposed an increment of Value Added Tax (VAT) rate from 5 percent to 7.5 percent.
In his budget presentation speech, Buhari also referred to a proposed amendment of the Deep Offshore and Inland Basin Production Sharing Contract Act of 2004. The proposed amendment, which was passed with unprecedented speed by the Senate on October 15th, 2019, aims to increase the royalty payable by oil companies to the government.
The implementation of both the VAT (or its alternative) and the law governing the fiscal terms for deep offshore oil production might not take effect until the first or second quarter of 2020. However, there are other charges that have been recently extended or implemented, resulting in more dissatisfaction among Nigerians.
On June 24th, 2019, the president signed the Nigeria Police Trust Fund (Establishment) Bill into law. The Act imposes a 0.005 percent tax on the net profits of all companies operating in Nigeria. The law will be in force for a period of six years, subject to an extension.
Also, last month, the Senate advanced on the Communication Tax Bill 2019 sponsored by Senator Ali Ndume. The bill seeks to impose and collect a tax on electronic communication services paid for by consumers. Electronic communication services that would be subject to a 9 percent tax rate include voice calls, SMS, MMS, data services, pay per view TV stations, among others.
It appears the raft of taxes are part of efforts to generate revenue from alternative sources in an environment of faltering oil revenue. This was made abundantly clear from the president’s speech during his presentation of the 2020 budget. According to him, the revenue performance based on the 2018 budget target, was at 58 percent as at June 2019, denoting considerable underperformance. The performance of oil revenues as of half-year was only 49 percent of the budget benchmark.
Under these circumstances, it accords with logic for the government to lay more emphasis on generating more non-oil revenues. However, the big question is whether the quick-fixes and band-aid tax policies emanating from the government due to the urgent need to tackle dwindling oil revenues would have the desired effect of raising enough revenue for government.
The question also has to be asked if the government’s drive to increase tax revenue could have an unintended negative effect on the economy and the citizenry. In my article in the May issue of Financial Nigeria, I argued that increasing VAT rate under the current economic climate would have a regressive effect.
There is no question that the country needs tax policy reforms. There has, however, never been a holistic and deep reform of our tax structure and administration since Nigeria returned to civilian rule in 1999. Successive administrations have mostly operated ad hoc arrangements whereby amendments are made in line with the exigencies of annual budget revenue targets and to promote the macroeconomic policy at that given time.
In order to entrench taxation as a major fiscal policy to not only drive non-oil revenue collection but also inform a broad macroeconomic policy for the country, there is a need for deeper reforms. These must go beyond the Finance Bill and the Deep Offshore & Inland Basin Production Sharing Contract Bill 2019. One of the major fiscal policy challenges the government has is that the current tax system and administration are not effective. In fact, the system constitutes an albatross on the economy. This is why the government persistently complains about Nigeria’s low tax-to-GDP ratio. Without proper reforms, all parties in the tax spectrum – the payers and the government – would continue to lose.
One of the areas the much-needed tax reforms must look into holistically is fixing the country’s fiscal federalism. Another area that needs to be addressed through legislation is double taxation. The Nigerian fiscal situation is made worse by the number of different laws, which govern taxation in the country and the manner in which most of them were drafted leaves a lot to be desired.
A good example to illustrate these points is the dispute between the Hotel Owners and Managers Association of Lagos and the Lagos State Government (LSG) over the Hotel Occupancy and Restaurant Consumption (HORC) (Fiscalisation) Regulations issued by the Lagos State Internal Revenue Service (LIRS) under the HORC Law of Lagos State. After fulfilling its obligation to charge and collect VAT on goods and services provided by the hotels, the hotel owners challenged the right of the LSG to impose consumption tax. In a judgment delivered on October 3rd, 2019, the Federal High Court sitting in Lagos upheld the statutory power of Lagos State to impose consumption tax on hotels and restaurants in line with the Taxes and Levies (Approved List for Collection) Act.
This isn’t the first of such disputes. In 2004, Eko Hotels Limited’s operations were being threatened by the LSG for failure to remit sales tax under the Sales Tax Law of Lagos State. The hotel was already remitting VAT to the Federal Inland Revenue Service (FIRS). It then approached the courts for a determination of whether it was bound to charge the same tax twice for the purpose of remitting to two different bodies.
All the courts that presided over the matter (the Federal High Court, Court of Appeal and finally the Supreme Court) upheld the superiority of the VAT Act over the Sales Tax Law of Lagos State under the doctrine of covering the field. The Supreme Court found that “it would amount to double taxation for the same tax to be levied on the same goods and services, payable by the same consumers under two different legislations.” The apex court then suspended the operations of the Sales Tax Law while the VAT Act was in operation.
A 2015 amendment to the Taxes and Levies (Approved List for Collection) Act has subsequently provided ingenious ways for the LSG to charge businesses and ultimately the consumers of goods and services multiple taxes by creating additional taxes to be collected by the state. These taxes include Hotel, Restaurant or Event Centre Consumption Tax, Entertainment Tax, Animal Trade Tax, Produce Sales Tax, Property Tax and Economic Development Levy. Ordinarily, these new taxes can be subsumed under VAT, Education Tax, the Industrial Training Levy and the Land Use Charge.
The overlapping taxes are the fallout from Nigeria’s current tax structure, which strongly favours the FG and leaves little room for states to generate revenue through taxation. The FG controls most of the buoyant tax sources and industries, including oil and gas, mines, customs and excise. Where it shares concurrent powers with the states, the FG still possesses the superior powers to legislate as any law passed by a state – as long as it is inconsistent with the laws made by the National Assembly – is void.
Where the provisions are similar, the state’s law (referred to as the subordinate legislation by the Supreme Court in the case of Attorney General of Lagos State vs. Eko Hotels Limited referred to earlier) is put in abeyance and is inoperative, while the federal legislation is in force. This is the doctrine of covering the field entrenched in Section 4(5) of the Constitution, which provides that “If any law enacted by the House of Assembly of a State is inconsistent with any law validly made by the National Assembly, the law made by the National Assembly shall prevail, and that other Law shall to the extent of the inconsistency be void.”
Another example that illustrates this issue is the dispute in relation to the appropriate organ of government to issue licenses on lotteries and other gaming activities. The Federal High Court has repeatedly ruled in favour of the FG in view of the National Lottery Act.
There is thus a need to restructure our fiscal federalism to give additional earning powers as it relates to taxation to the states and local governments. The failure to do this has only resulted in the exposure of businesses, particularly small and medium scale enterprises (SMEs), which do not have the resources to challenge all the charges and levies imposed on them by state and local authorities.
Indeed, there is a need for harmonization of all taxes due and payable to create a degree of certainty for businesses. The Taxes and Levies (Approved List for Collection) Act and the Joint Tax Board have not been very successful at this much-needed harmony.
The federal and state governments would also need to work on their tax collection systems and the apathy of Nigerians towards taxation. To instill trust among Nigerians, governments at all levels need to reduce corruption and inefficiencies in the tax administration. They also need to reduce recurrent expenditure, capture the informal economy, and provide better education, communication and awareness.
While there is the urgent need to raise revenues through taxation for immediate needs, Nigeria needs proper reforms that would make taxation a sustainable revenue source for all tiers of government.