The Taxman is Coming for You

If you felt intimidated by the public notice on “national enforcement on tax defaulters” issued last week by the Federal Inland Revenue Service (FIRS), let’s say that is just the introduction. By the time President Muhammadu Buhari signs the Nigeria Financial Bill 2019 into law — possibly before January 1, 2020 — your life will never be the same again. The bill has been passed by both chambers of the national assembly. All it needs to become active is the green pen of the president. The bill amends seven tax laws in the country: petroleum profit tax, customs and excise, company income tax, personal income tax, value added tax (VAT), stamp duties and capital gains.

Perhaps the highlight of the bill — “highlight” in the sense that it is the aspect hugging the headlines — is the increase in VAT from 5 percent, set by Gen Sani Abacha in 1994, to 7.5 percent. In contrast, VAT is 20 percent in the UK and 12.5 percent in nearby Ghana. Before now, the Nigerian government had made only one attempt to increase it. That was in 2007 when President Olusegun Obasanjo topped it up to 10 percent in his last days in office, but it was reversed by President Umaru Musa Yar’Adua under pressure from the labour unions. Any increase in VAT is easily felt by consumers, so it was not difficult for organised labour to mobilise Nigerians against the hike.

Already, Nigerian manufacturers are nervous over the new VAT rate. I heared that Guinness, one of the biggest producers of consumer products, is considering increasing its prices, although Mr Baker Magunda, the MD/CEO, gave nothing away when he spoke recently. “We do not arbitrarily increase prices,” he said. “In fact, we have maintained price stability even in the most challenging times. Our recommended retail prices remained same despite inflation, and in the face of major infrastructural challenges. We kept our products’ prices stable by stretching production efficiencies, ensuring we do not pass on the additional cost to consumers.” He appeared to be saying “we have tried enough”.

Other companies are also weighing their options, particularly because the 7.5 percent tax is applicable to almost all goods and services (including your phone calls and internet data). That means everybody, whether rich or poor, will feel the pinch. I have heard side comments that the benefits of the increase in national minimum wage from N18,000 to N30,000 have already been wiped off in advance by the increase in VAT. Many states have even said they cannot pay the new wage because of revenue challenges. That would make it double jeopardy for the unfortunate workers — collecting old wage and paying for goods and services at new VAT rate.

Many tax experts and economists will argue that instead of increasing VAT rate, government should focus on bringing more people into the net through a more efficient administration and a more incentivised voluntary compliance. Increasing VAT rate by 50 percent — as we are about to do — will inevitably raise costs, reduce overall consumption especially in these hard times, and consequently impact negatively on production. That means government may not be able to harvest a commensurate 50 percent increase in VAT revenue. That is why bringing more taxpayers into the tax net seems to stand a better chance of producing positive outcomes than increasing the rates.

However, it seems government strategy is to increase both the rate and the take at the same time. In truth, a lot of work has been done in the last three years to increase the tax base (under Mr Tunde Fowler as FIRS chairman, we moved from 10 million tax payers to over 20 million) but how far can we stretch collection in an economy that is walking on thin ice? That is the challenge for Mr Mohammed Nami, the new FIRS boss. People and businesses must make money first before you can tax them well. Economic prosperity will make it easier. In the meantime, states and councils will argue that the new VAT rate will help them as per paying the new wage. After all, they take 85 percent of the revenue while the federal government gets just 15 per cent.

Let me now detonate the real bomb. An aspect of the finance bill that Nigerians are yet to wake up to is the requirement to attach tax identification number (TIN) to personal bank accounts. In fact, the provision says you cannot open or operate a bank account without your TIN. If this is implemented, it means the taxman (or woman) may just use your TIN (like BVN) to print out all your bank statements and begin to calculate your tax liabilities based on the gross total of deposits. So if N10 million passed through your bank accounts in a year, your personal income tax could be calculated based on that amount. Are you not in trouble?

I get where you are going — that is, not all the deposits in your account are yours. I know. Your uncle transferred N5 million into your account and asked you to help him buy a car. I believe you. Your company sent N500,000 to you to help buy Christmas hampers for some clients. I understand. Unfortunately, I am not the one you will have to explain to, otherwise I will help you. It is the taxman. I can only tell you that you will be at his mercy. He will give you a tax bill of N3 million based on the deposits in your account and you will start crying and begging for mercy. You will definitely be extorted. You will say I told you. Please accept the assurances of my best wishes.

It should also interest you that the N50 stamp duty that started as a squatter on your bank account in 2016 has now become a landlord. Basically, all bank transfers from N10,000 will now be charged stamp duty, even when you are transferring the money to yourself in another bank. The only exemption is if you are transferring money to yourself in the same bank. I don’t know how many people will open two individual accounts in the same bank, except, of course, you have the savings and current variants. But we may be forced to ask you why you are busy transferring funds back and forth to yourself in the same bank. Are you sure you are okay, dear?
Stamp duties will now cover “electronic documents”, a coded phrase covering online transactions. Those of you who like to shop online think you can escape paying stamp duty. No way. It is now your duty to pay N50 on each transaction. Some fuel stations are already charging N50 when you pay with your card. You’d better go with cash, dear. A country that wants to encourage cashless transactions is taxing electronic purchases. It is called dissonance. Also, if you get a compensation pay-off of N10 million and above after being relieved of your job, you will not go home in peace. You will now pay tax — for your loss. Sorry for your loss, but the taxman has a job to do.

But smile — the finance bill is not all bad news. There are plenty things to cheer. Certain things are now VAT-exempt to address concerns about impact on the poor. For one, women and young ladies will no longer pay “period tax”. All locally manufactured sanitary pads and tampons will be VAT-exempt. The campaign against “period tax” started a couple of years ago in Australia and is going global. Nigeria has keyed in so early in the day. This is something to celebrate. Hopefully, this will change the lives of many students across the country who are unable to go to school at that time of the month. However, ladies who prefer foreign sanitary products will pay the VAT. Period.

Perhaps most heart-warming is the mercy that the law will have on small and medium scale businesses. I always advocate for SMEs so I have a duty to rejoice. Companies with annual turnover of less than N25 million will no longer be required to file VAT returns. They will also not be required to pay the mandatory “minimum tax” on turnover. Medium-sized companies, defined as those with annual turnover of between N25 million and N100 million, will now pay a lower company income tax rate of 20 percent. Minimum tax will now be 0.5 percent of the turnover for companies that are required to pay in the absence of profits. These provisions are not bad at all.

Overall, it is a good thing that Nigeria is working hard to become more of a tax economy after being stuck with oil dependency since 1973. Circumstances have forced us into this and the transition will take decades to bed it, but we have to keep walking. We often abandoned fiscal reforms in the past because of the episodic oil booms. As soon as oil prices went high, we retreated. When I was still interested in pursuing a PhD some 12 years ago, my proposed research was to try and understand the nexus between tax reforms and the cyclic revenue crisis in resource-dependent countries. My inkling then was that reforms would be inversely related to the boom-bust cycle.

Finally, I would say it is not enough for the Buhari administration to be doing tax reforms just because we are pressed for revenue. Taxation must create a consensual relationship between the state and the society. Stakeholders must be carried along. Multiple taxations issues must be resolved. Taxation is more sellable when you have accountability and prudence. People’s confidence needs to be boosted so that they can trust government that the money will be well spent. In a country where we will be spending N37 billion to renovate the national assembly complex, it will be difficult to convince Nigerians that the tax payers’ money is being spent judiciously.

AND FOUR OTHER THINGS…

THE N37BN DAMAGE
For a country that is going to borrow to finance most of its capital expenditure, I am unable to understand why the national assembly would want to spend a whopping N37 billion to renovate its complex. Sure, the complex is a national asset which must not be allowed to rot away, particularly as we have a very poor maintenance culture in this part of the world. If we do not renovate it today, the condition will only get worse tomorrow. I certainly do not have any objections to that at all. What has kept my mouth agape is the cost: the whole of thirty-seven billion naira! I am not a quantity surveyor but something in my brain is saying this is obscene. Damaging.

FAKE NEWS AGAIN
You must have heard the story of Gold Kolawole, the one-year-old boy declared missing in Akure, Ondo state. You must have also heard that his body was found buried under the altar of Sotitobire Miracle Church. On Wednesday, an irate mob attacked the church and set it on fire. The real story, though, is that no dead body was buried or found in the church. A TV station broadcast the fake news and the rule of the mob set in. Imagine if the mobsters had found the pastor or any church official on site, they would definitely have burnt them alive. Only God knows how many innocent people have been killed by mobs over fake alarms in this country. Scary.

THE BORDERLINE
The statistics are still coming in. According to Alhaji Ibrahim Ciroma, Adamawa state operations controller of the Department of Petroleum Resources (DPR), fuel consumption has dropped by 70% in the state as a result of the border closure by President Buhari. Before now, 100 trucks used to “head” to Adamawa every day. You will be lucky to count up to 30 these days. We knew all along that subsidised fuel was being smuggled freely to neighbouring countries because of the opportunity for arbitrage, but we are now getting the picture in raw figures. They all sound lovely to me, but I will keep asking: what happens when we eventually reopen the borders? Interesting.

TRUMP CARD
Since Donald Trump became US president, he has tested the system to the limit, doing and saying things that we would never expect from the most powerful office in the world. Although he has now been impeached, it is almost certain that the senate would not convict and remove him, no matter the evidence before them. Partisan politics has triumphed above everything else as the voting pattern during the impeachment clearly showed. Trump can afford to say and do things anyway he likes because he holds the aces: with his Republican party firmly in charge of the senate, he believes he cannot be moved. So much for the almighty American democracy! Comical.