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Ipaye: Why FG must enforce law to boost tax regime

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Ipaye: Why FG must enforce law to boost tax regime

He is an expert in tax law. Mr. Ade Ipaye, a former Lagos Justice Commissioner and Attorney-General, now Deputy Chief of Staff to President Muhammadu Buhari in this interview with MURTALA AYINLA, speaks on Federal Government’s effort to boost revenue and grow the economy through tax

 

What exactly do you mean by more than half of potentially taxable Nigerians are outside the tax net as presented in a lecture entitled “inevitable admixture of law and politics” in “Funding Governmental Services in a Federation?”

Well, it takes a lot of clear-headed administration and monitoring to increase the numbers. Number one, I think moral suasion and conviction are important. People need to know and agree with what government is doing.

Then the tax authorities have to make things easy. As I have said, it is still difficult for some to access the system and comply as required by law. Tax forms are complex and difficult to fill; people don’t often get the much-needs assistance.

In that case they won’t voluntarily come along. But if you make the assessment and payment processes easier, then you monitor and enforce, the reverse is the case. The tax system must be accessible; very easy to navigate and fair.

Clearly, a taxpayer who is called upon to surrender his money voluntarily would seize any opportunity to abandon the process if it proves too difficult. Thus, all the sensitisation and simplification effort must be made by government with ample support to encourage the taxpayer.

Translation of the procedures to local languages and offer of direct personal assistance may often be necessary. The same prescriptions go for all other sources of government revenues, including fines, fees and user charges.

But don’t you think government needs to elevate transparency to encourage people to willingly key into the tax regime?

That is indispensible because I also made the point that when people get the feeling that the money is not being spent in a prudent way or that it is being embezzled or that there is corruption in the system, even if the tax collectors came in contact with them, they won’t be happy paying; they will conceal as much as they can.

Thus, governments at all levels must ensure a high degree of transparency and accountability in tax administration. This is the only way to optimize the yield and boost taxpayers’ confidence.

Where collusion is possible, no taxpayer would wish to pay the full amount due and if he does, he is likely to go away still feeling cheated. This bothers on the integrity of the tax system itself.

While tax incentives are often used to attract investment, it appears that a settled and predictable system with a clear path to speedy dispute resolution will achieve far more.

An investor would rather pay due taxes and go through registration, licensing and other processes speedily than wait for months for his tax incentive application to be processed.

How would the government use technology to boost revenue and check corruption as identified in your address?

Federal Government is increasingly deploying technology to boost tax collection. It may not have gotten to the optimal level, but I am aware that technology use is improving remarkably.

For instance, the single window at the ports will ensure objective assessment and eliminate discretionary administration and lower cost of collection. It will make things so much easier, even for people paying. If we can also find means of ensuring that all payments are direct to government accounts, that even fines are paid into government by electronic transfer or POS direct, leakages will be plugged and revenues will improve.

Making full use of technology and dispensing with the discretion allows for objectivity and transparency. It also eliminates all sources of underhand dealings in the system.

Technology must of course be deployed with necessary safeguards to avoid fraudulent practices and the likelihood of corruption or collusion. Technology also offers an opportunity to formalise businesses as much as possible.

The International Monetary Fund (IMF) in 2017 valued the Nigeria’s informal sector at about 65 per cent of the GDP. This could be about $263billion of untaxed productivity. However, many in this group now have mobile phones and BVN numbers, so they can be uniquely identified and incorporated as recognised taxpayers.

Why has citizens’ living standards not improved despite huge revenues accruing to federal government through taxes?

The practical reality is that governments across the country are struggling to keep public services going, first by paying the staff salaries and then by meeting some modest annual aspirations in the health, education and other social services sectors. With the restoration of prudence and integrity in public procurement and spending, computerisation of personnel records and payroll, and the Treasury Single Account, among others, the Federal Government is trying hard to make available funds go as far as possible, even though revenue inflow is much less than we would wish for.

The best practices are also being transferred to the state governments by mutual conviction and as a condition for the budget support they currently enjoy from the Federal Government.

In this regard, it is interesting to note that the Buhari government has given more support to state governments than any other government since 1999. As of September 2017, the total support (excess crude account loan and Budget support facility) excluding Paris Club refunds, is in the region of N876. 3billion.

If we add the Paris club refunds, Federal Government has disbursed N1.91trillion to states, outside of their regular monthly allocations. Be that as it may, closely related to government’s responsibility for quality service delivery is the need to ensure a steady source of revenue to offset the huge cost of providing quality public services. That is why we say the revenue collection process must be well structured.

What role has tax regime of the President Muhammadu Buhari-led administration played in the recovery of Nigeria’s economy?

I think we can take it for granted that the more revenue a government has access to, the greater the development potential of the relevant country. In fact, available statistics show a correlation between tax and development, often designated as the Tax to GDP Ratio.

This is supported by evidence from the Organisation for Economic Cooperation and Development (OECD). Most OECD members, including Canada, United States of America, United Kingdom, Australia, Germany, France, Japan and South Korea, are high-income economies with very high Human Development Index (HDI). Members are either in the world’s most advanced countries category or can be regarded as top emerging economies. According to the statistics of Tax Revenue Trends in the OECD, in 2015, Denmark had the highest tax-to-GDP ratio (45.9 per cent), followed by France (45.2 per cent), Belgium (44.8 per cent), Finland (43.9 per cent) and Sweden (43.3 per cent).

Mexico had the lowest ratio at 16.2 per cent followed by Chile at 20.5 per cent. Seven countries – Austria, Belgium, Denmark, Finland, France, Italy and Sweden – had tax-to- GDP ratios of above 40 per cent.

In contrast, nine countries – Australia, Chile, Ireland, Korea, Latvia, Mexico, Switzerland, Turkey and the United States – had tax-to-GDP ratios of below 30 per cent.

The tax-to-GDP ratio in the OECD area as a whole (un-weighted average) was 34.0 per cent in 2015. All of these demonstrate a close correlation between tax performance and applirate of development. On the African continent, Nigeria’s tax to GDP ratio is a mere 6 per cent, significantly lower than that of South Africa (26.9 per cent), Ghana (20.8 per cent), Egypt (15.8 per cent), Ethiopia (11.6 per cent) and Gabon (10.3 per cent).

This may in fact be a reflection of how public services have been funded in Nigeria over the years, simply by mining and selling crude oil. Not much attention had been paid to the tax culture over the years.

Incidentally, oil exports also account for our import dependency as much as our foreign exchange earnings are spent on consumer goods produced outside Nigeria. In examining the effect of taxation on the growth of the Nigerian economy, it has been found that non-oil tax revenue has a positive and significant, though relatively weak, impact on economic growth in Nigeria.

It has also been found that a positive and significant relationship exists between income tax revenue and the growth of the Nigerian economy. Currently, Nigeria’s Tax to GDP Ratio is one of the lowest in the world, and many would readily accept this as a predictor of our level of development.

The Minister of Budget and National Planning, Senator Udoma Udo Udoma, at a public presentation of the 2018 Appropriation Bill on 14 November 2017, stated that the government was determined to increase its revenue target; including raising tax revenue from the current 6 per cent of Gross Domestic Product (GDP) to about 15 per cent.

However, government is well aware that legislating tax increment may present challenges, hence the emphasis on the reach and efficiency of the tax system.

How can the citizens benefit from the tax regime of the Federal Government?

Just as many would argue that the key to Nigeria’s greatness lies in achieving a significant increase in the revenue generation effort at all levels, counter arguments are equally strong. It is often suggested that to get the desired industrial development, diversification of income sources, and even cash flow enhancement to sustain the markets, lower tax rates, tax incentives, tax waivers, etc., are very necessary.

At the extremity are the tax haven advocates and zero corporate tax proponents. The latter asserts that the ideal society should not even bother to tax companies at all and should focus instead on the income of the investors and employees.

This school of thought argues that by slashing corporate tax rates, the country could boost investment, productivity and, crucially, real wages. In this way, government can save the costs of company tax administration, increase the individual income of workers and investors, boost productivity and output and encourage further investment, employment opportunities, etc.

In the particular case of Nigeria, it has also been argued that increasing taxation when the country is just coming out of recession will have an overwhelmingly negative impact on the GDP and probably pull the economy back into recession.

The argument points to infrastructure deficits and relative cost of production in Nigeria, which may easily be higher than in other countries. However, this presents a classical chicken and egg dilemma. For the infrastructure and administrative or regulatory deficits to be remedied, there can be no doubt that government requires more revenue.

How is it to get there if its tax incomes are stagnant or declining? Fortunately, this debate is not quite necessary for Nigeria just yet. This is because virtually all our taxes and levies are underperforming.

The logical next step is indeed to increase the efficiency and integrity of the tax system at all levels. If taxpayers are assessed and processed for payment more efficiently and more defaulters are brought into the net, which is in fact the equitable thing to do, then the tax revenues can be significantly improved, even with the rates and laws as they are. Also, there is obvious room for the elimination of corruption in the tax system, which can very easily engender a significant increase in the revenue yield.

How would the federal government maintain balance between inadequate revenue, the need to fund governmental services and the huge infrastructural gap in the country?

It is quite clear, that, even in the most advanced economies, revenues are never enough for all the services a government would like to offer its citizenry. In the quest to fund governmental services, countries incur huge debts, always with the hope of increasing revenue generation and someday reducing the deficit.

In developing economies, like Nigeria, the gap between available infrastructure and services, as compared to the ideal, is far too wide, hence the need to diversify and grow all available revenue sources.

In a recovering economy such as ours, tax increases may be counterproductive and even more challenging to collect, hence the focus should be on enforcing the existing laws and growing the list of compliant taxpayers.

In the same vein, harmonisation of existing taxes i s e s – sential across tiers of government. I have made the point elsewhere that the Constitution empowers the State Legislatures to determine what local councils charge by way of taxes and levies, hence, it is quite easy for this harmonisation and regularisation to be achieved at state’s level.

Any effort to do it at federal level is bound to fail as local governments are not subject to Federal Government’s jurisdiction. We have also made the point that in a Federation, the struggle for tax jurisdiction is inevitable.

This is ordinarily to be moderated by the Constitution and other laws, but as we observed earlier, mere application of law is never enough. Socio-political and economic considerations are equally important as moderating factors.

This is applicable not just among the tiers of governments but between a government and its citizens. For instance, the strategy of showcasing taxpayers’ money in action worked in Lagos State, especially at a time when government was aggressively trying to increase tax compliance. It is a proven fact that when the people know what public funds are being spent on and how, they would be happier to comply voluntarily. Conversely, the higher the rate of corruption in society, the more cynical and evasive the citizens becomes in matters of taxation.

To start with, much of the money or “income” in circulation would have escaped taxation. Then the rampant reports of corruption, as we have it today in Nigeria can only serve to ensure that most people would not voluntarily pay due taxes. The community feeling that promotes voluntary compliance diminishes when public perception of corruption, especially among public officials, is high.

Then the tax system must be accessible, very easy to navigate and fair as earlier said. This is also an opportunity to formalise businesses as much as possible. An important point that must be made is that the so-called governmental services must be paid for directly, whether partly or wholly, if we are to attain premium grade in education, health and other sectors. This is why, for instance, health insurance must be made to work well in Nigeria.

It appears to be the only way we can reasonably fund public health institutions. Similarly, our universities can only attain world– class standards, if government devotes a very high proportion of revenue to them (which appears quite impossible for now) or finds a way to get reasonable contributions as fees from the students.

Even modest fees payable can be supplemented by government subsidies, bursaries and scholarships, private endowments, etc. What is important, in my view, is for us to determine how much we really have to devote to the education of each student and find consensus around a combination of ways to fund it.

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