Like the proverbial advice not to let the left hand know what the right hand is giving, the President Bola Tinubu-led Federal Government last week suspended some taxes that the real sector had complained was bleeding businesses to bankruptcy, but he sustained the ongoing tax reform in the informal sector.
In the face of the removal of fuel subsidy and the unification of foreign exchange channels – all of which have serious implications on the citizens, households and businesses because they induce high inflation rates – which has been applauded as “bold steps” by the current administration to reposition the economy and place the country on the path of sustainable growth, what is going on at the informal sector paints a truer picture of what to expect in the days ahead.
KILLING THE BABY SOFTLY
In the twilight of his administration, ex-President Muhammadu Buhari signed the Finance Bill 2023 into law, which increased the tax burden of businesses in the micro, small and medium enterprises (MSMEs), as well as big corporate bodies. While last week’s suspension of the regime of taxes by the President showed the government’s commitment to addressing complaints about multiple taxation and other related challenges facing business, according to presidential spokesman, Dele Alake, the speculations that the government planned to impose the Value Added Tax (VAT) on the informal sector has been confirmed.
Last week, the Federal Inland Revenue Service (FIRS) announced its plan to collect and remit Value Added Tax (VAT) from traders, especially those in the informal sector.
According to FIRS, this will be achieved in partnership with the Market Traders Association of Nigeria (MATAN) using a unified systems technology, the FIRS said in a statement on Monday, July 3. 2023.
According to Muhammad Nami, the FIRS chairman, a combined monitoring and evaluation team, comprising FIRS officers and MATAN members will be formed immediately. This, he said, would enable an adequate cover of all the essential areas of project operations, and ensure transparency and accountability.
“This team will also be saddled with the responsibility of ensuring that VAT remittance is promptly done under the agreed platform,” he said.
MATAN is the umbrella body for all trading associations in Nigeria and was founded in 1995. According to the statement, MATAN is the largest player in Nigeria’s market space with a membership of well over 40 million traders across the country.
The FIRS said its collaboration with MATAN will be known as the VAT Direct Initiative.
The initiative allows MATAN to promote awareness of VAT collection and remittance in the marketplace and informal sector, while also simplifying VAT payment and remittance using a purpose-built digital platform.
According to FIRS, MATAN has a digital platform that enumerates its members, gives them a digital ID, and tracks their turnover so that VAT accrued is collected and remitted to the FIRS.
The VAT Direct Initiative (VDI) is the first of its kind programme that will utilise technology to foster collaboration between FIRS and the marketplace for the collection and remittance of VAT, the agency said.
Through this initiative, the FIRS will help to tackle multiple taxations in the marketplace through a partnership with security agencies to curb the activities of touts, miscreants and self-imposed tax collectors involved in illegal tax collection in Nigeria’s market spaces.
The VAT Direct Initiative (VDI) will boost VAT revenue generation for the three tiers of government, which in turn means more money to fund infrastructure, provide social amenities and cater for the welfare of citizens.
Explaining the mode of operation, FIRS said MATAN members would each receive an Identity Card upon enumeration and this card contains their Tax Identification Number (TIN) and other personal details for tax purposes.
The VAT Direct Initiative (VDI) will have a monitoring and evaluation team comprising FIRS officers and MATAN members to ensure transparency, accountability, prompt VAT remittance, sustained commitment, and reporting which are vital to build public confidence in the initiative.
The Federal Inland Revenue Service (FIRS) is the agency of the Federal Government of Nigeria responsible for assessing, collecting and accounting for tax and other revenues accruable to the Federal Government and the Federation.
However, experts have criticised the move to charge VAT on the informal sector without fashioning out how they can also benefit from ‘VAT-In,’ which means netting off the VAT that is credited to them when they buy VAT-able goods or consume VAT-able services.
“Government workers were paid, refinery workers were paid as and when due from monies borrowed to build infrastructure. Refinery workers are still paid their emoluments when the facilities are refining nothing. People are now being taxed to replenish the empty treasury,” said Gregory Akpobeleimi, an oil and gas and financial expert.
”To boost the treasury and reinforce our dwindling reserves, the government is imposing taxes on the citizens and businesses in a manner that could cripple their growth and disable productivity, Akpobelemi added.
“These small businesses will be saddled with more taxes, making the cost of their goods and services higher and eating into their profit, which inhibits growth and job-creation.”
CHALLENGES AHEAD
The questions being asked include: How will the private sector, which accounts for majority of the nation’s employment and contribute hugely to tax revenue, survive the onslaught of high operating cost occasioned by the recent devaluation of the Naira, removal of fuel subsidy, introduction of VAT on diesel consumption and on the informal sector?
Is the country prepared for the mass job losses, worsening insecurity, high cost of living and business closures that are certain to result from these reforms being introduced by the Federal Government?
Can the government plug all loopholes and take steps to reduce wastage and high cost of governance?
Is the government ready to recover the trillions of Naira lost to oil theft, fraudulent subsidy implementation and opaque operation of the refineries?
Where is the infrastructure to help the businesses cushion the effects of the painful reforms?
The government is urging the citizens to endure the pains of the structural adjustment programme in order to enjoy a sustained, future benefit. However, the cost of the “endurance” appears overlooked, which has provoked concern among business operators.
AfDB’s SUGGESTION
The President of the African Development Bank, Akinwunmi Adesina, aptly provided answers to the questions above recently when he urged the Federal Government to improve governance and reform its tax system, saying Nigerians pay one of the highest implicit tax rates in the world.
Speaking at a Federal Inland Revenue Service Tax Dialogue, attended by our correspondent virtually, Adesina lamented that Nigerians pay the highest ‘implicit tax’ in the world.
He acknowledged that conventional tax rates are low in the country, but distinguished those from “implicit tax”, which are “borne but are not seen nor recorded.”
Adesina said: “Truth be told, Nigerians pay one of the highest implicit tax rates in the world — way higher than developed countries.
“Think of it: they provide electricity for themselves via generators; they repair roads to their neighbourhoods, if they can afford to; there are no social security systems; they provide security for their own safety; and they provide boreholes for drinking water with their own monies. That is incredulous in itself. Boreholes are not the way to provide water in the 21st century. Every household should have pipe borne water!”
Speaking further, Adesina said that small and medium-sized enterprises should be further encouraged and supported, as they are the lifelines of earnings and the creators of jobs. Tax exemptions or tax deferments can be used to support their growth.
Nigeria’s bubbling youth are creative, he observed, adding that while their businesses may be small, they should be incentivized to grow.
“Over time, they will become bigger businesses that can provide much higher taxes. There is an urgent need for a fiscal policy regime that strongly supports businesses of young people in Nigeria.
“Given Nigeria’s high level of poverty and huge income inequality, taxes should not be regressive, where taxes paid on goods or services are the same regardless of income,” he said.
He said that one thing that must always be remembered in this mix is good governance.
He said that good governance is the “speed dial” for greater tax payments.
“The role of the government is not just to collect taxes; its role is to ensure that the taxes are collected transparently, used transparently and responsibly; that citizens see what their taxes are being used for.
“While there should be tax obligations for citizens, there must also be tax accountability to citizens from governments. Participatory tax-based financing systems demand participatory governance.
“While tax rates are low in Nigeria compared to a number of African and non-African countries, that is not a justification to keep increasing taxes,” he added.
WORLD BANK STUDY
Corroborating Adesina’s suggestion for inclusive governance as long term solution to challenges to impactful development in the country, a recent World Bank Group study found that since a large percentage of workers and firms operate outside the line of sight of governments in emerging markets and developing economies, EMDEs, governments should adopt a comprehensive set of policies to address the drawbacks of the informal sector.
According to the report, Nigeria employs 80.4 per cent in the informal sector, compared to 10 per cent in the formal sector and 9.6 per cent in households.
A total of 78.8 percent of men were in the informal sector; 12.9 percent of men were in the formal sector and 8.3 per cent in households.
Workers in the informal sector include casual day labourers, domestic workers, industrial outworkers, undeclared workers, and part-time or temporary workers without secure contracts, worker benefits or social protection.
COST OF GOVERNANCE
Another aspect that is calling for attention is the clamour on government to drastically reduce the cost of governance. As at April 2023, Nigeria has spent 96.3 percent of its revenue on debt servicing. That is up from 83.2 percent in 2021. Again, the World Bank has raised a timely warning on how the fiscal deficit has worsened the nation’s public debt stock. But that is just part of the scary figures of Nigeria’s worsening economic shift.
In the same vein, the percentage of GDP that political leaders spend on running governments rose from 12.8 per cent in 2018 to 12.5 per cent in 2019; slowed down to 12.08 per cent in 2020 but rose to 13.34 per cent in 2021. It went to 14.27 per cent in 2022 and is currently estimated at 14.24 per cent in 2023, according to Statista.com.
According to the UNDP Human Development Index (HDI) ranking Nigeria has over 70 percent of the hapless citizens living below the poverty line, with infant/child and maternal mortality still one of the highest in the world. Apart from unemployment rate put at over 40 percent, life expectancy has reduced such that it stands at 52 years!
What this means is that the government spends over 70 percent of the budget on recurrent expenditure and less than 30 per cent on capital expenditure that is supposed to drive economic growth.
PAIN RELIEF
The Tinubu-led administration has taken steps to lessen the tax burden on businesses as a way of boosting the economy. It has done this by revisiting some of the ‘wee-hours’ bills that his predecessor, Buhari, signed into law a couple of hours to his exit from office, through Executive Orders suspending the taxes.
The organised private sector (OPS) which has welcomed the move observed that the Executive Orders only suspended the taxes but did not cancel them. This implies that the taxes are still in place.
The Manufacturers Association of Nigeria, Lagos Chamber of Commerce and Industry, Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture, were among the OPS operators that commended the Executive Order.
The Special Adviser to the President on Special Duties, Communications and Strategy, Dele Alake, who disclosed this at a media briefing, explained that the orders were meant to reduce the negative impacts of the tax adjustments on businesses and households across the affected sectors.
However, he reiterated the President’s commitment to addressing complaints about multiple taxation and other related challenges facing business.
He noted that the Tinubu administration would continue to give requisite stimulus through friendly policies to allow businesses to flourish nationwide.
According to Alake, the President has assured Nigerians that there would not be further tax raise without robust and broad consultations within a coherent fiscal policy framework.
He said, “The President wishes to reiterate his commitment to reviewing complaints about multiple taxation, local and anti-business inhibitions.
“The Federal Government sees business owners, local and foreign investors as critical engines in its focus on achieving higher GDP growth and an appreciable reduction in the unemployment rate through job creation.
“The government will, therefore, continue to give requisite stimulus by way of friendly policies to allow businesses to flourish in the country.”
LONG TUNNEL
Experts believe that the benefits of these “palliative” cannot manifest in the next three years because the challenges are deep and wide. During the period, the people will grapple with high inflation while businesses manage to cope with high finance costs, multiple taxes, insecurity and spike in operation costs.
“Businesses must find a way to cope with the severe macroeconomic headwinds. This could lead to job losses, business closures and pay cuts, leading to a drop in standard of living,” said Dr Ken Ugwuoke, an economist and consultant.
Sam Diala is a Bloomberg Certified Financial Journalist with over a decade of experience in reporting Business and Economy. He is Business Editor at THEWILL Newspaper, and believes that work, not wishes, creates wealth.
