How Personal Income Tax Can Solve Nigeria’s Revenue Challenge

Oluchi Chibuzor

Federal and state governments have been advised to pay more attention to Personal Income Tax (PIT) in order to boost the country’s low non-oil revenue.
A cursory comparative look at the performance of the South African Revenue Authority revealed that PIT accounted for 35 per cent of the total $107 billion (i.e. $37.45 or N15.54 trillion) the country collected last year, whereas, in Nigeria, all the 774 LGs and the 36 States and the FCT put together collected only a paltry sum of N1.23 trillion.

According to analysts, while hitherto it was fashionable to grant tax incentives, now, in a globalised and interwoven market economy, it was no longer attractive to grant tax incentives or waivers.

In 2021, FIRS collection was N6.405 trillion, Customs generated N2.240 trillion; DPR (Royalty) – N1.619 trillion; Joint Tax Board (36 states) – N1. 230 trillion; FCT – N132 billion and tax waivers as per TES – N5.844 trillion, totaling N17.470 trillion in 2021.
“It is imperative to state that it is laudable that the National Assembly and the Executive are sympathetic to encouraging investments in some sectors or resuscitating ailing companies through granting of tax incentives.

“However, it must be emphasised here that tax incentives do not necessarily improve business output as taxes are only applicable to profits made by companies; and where there is no profit, taxes generally do not apply,” a report obtained by THISDAY yesterday stated.
However, it emphasised that tax incentives do not necessarily improve business output as taxes are only applicable to profits made by companies; and where there is no profit, taxes generally do not apply.

Recently, there was a report claiming that the federal government granted tax waivers to Dangote Sinotruck Limited, Lafarge Africa Limited, Honeywell and 43 other companies between 2019 and 2021.
The report was based on the Tax Expenditure Statement (TES) contained in the Mid-term Expenditure and Strategy documents released by the Budget Office on its website.

The TES report quoted in the publication had stated that the federal government had forgone revenue of N4.2 trillion from two main sources, which it listed to include the Company Income Tax (CIT) and the Value Added Tax (VAT) in 2019.  According to the report, the estimated revenue forgone from CIT was put at N1.1 trillion while that of VAT was put at N3.1 trillion.

But the latest report explained: “In the first place, tax waivers have been used by governments globally as an instrument to stimulate economic growth, earn investors’ confidence, create jobs, grow businesses and generally create a conducive environment for the ease of doing business.

“These are some of the intended multiplier effects that the tax waivers would have on the economy in the long run. It is strange that the report failed to highlight these issues. Similarly, it also failed to see the publication of the TES document as a mark of transparency and a bold statement of the government’s intervention and support to qualified companies to enable them break even, increase production capacity and become big-time taxpayers.”

“The report failed to consider the contribution of other tax types to the country’s revenue purse, such as Customs’ Duties, Royalties, Personal Income Tax and all taxes collected by the 36 states and the Federal Capital Territory as well as the waivers, including taxes forgone in 2019 – 2021 as it is normally done by other countries while reporting revenue performance.”
The report equally forgot to mention that out of the 10 richest people in Africa, three are Nigerians from whom the states in which they are resident have been unable to collect taxes.

It explained: “Take the case of one country wherein a single individual paid PIT of over $500 million in a year; and that person is not the richest person in that country. Secondly, the fragmented tax system operated by Nigeria is a drag on its ability to fully harness its revenue potentials compared to other countries in Africa.
“Countries comparable with Nigeria in Africa are doing much better in harnessing tax revenue potentials because their tax system is harmonised i.e., they have single tax authority.”

“The harmonised tax system (Single Revenue Authority) of these countries enabled them to perform optimally and more proactively than in Nigeria where the tax authorities (for political reasons) are unable to agree on basic issues of common taxpayer registration system, Tax Identification Number, etc,” it added.
This, it noted further speaks to the need for the public to understand the workings of tax operations such as the granting of tax waivers and pioneer status as well as tax harmonisation.

“To be sure, what is termed the pioneer status is an incentive offered by the Federal Government to exempt companies partially or fully from paying income tax for a certain period. In many jurisdictions (including Nigeria), it is to support budding companies during start-up period so that they could invest the tax savings on necessary infrastructure and stabilise their operations.

“The companies having settled properly to business then pay taxes at higher scale  in later years. This way the government kills many birds with one stone; that is, achieves economic growth, collects bigger current taxes which enables it recoup waived taxes.

“In addition, the use of tax incentives to stimulate economic development is no longer fashionable due to the emerging global minimum tax rules. This new regime applies where income not taxed in a jurisdiction where it is earned, will be subject to tax in another jurisdiction where such income is consolidated. This then makes it inexpedient to grant further tax incentives or waivers.

“On tax harmonisation, the federal government on its part has been clamouring to heed the call for the holistic harmonisation of the tax system to allow for a broad-based tax process that yields greater revenue,” it explained.

“The focus on tax harmonisation demonstrates federal government’s determination to transform the nation’s tax system. However, the federal government is expected to follow up this idea with action. For instance, it could enact a law to harmonise the tax system to bring about a single tax authority that would administer all taxes payable in the country including PIT.

“This would lead to a more diligent and efficient approach to tax collection thereby ensuring that the government makes a great revenue haul. And so, the way to go for a greater revenue yield for the country is certainly the harmonisation of the tax system.

“As a country, we should stop paying lip service to the task of revenue generation. There are countries which have less revenue potentials than Nigeria but are doing very well in their revenue generation drive because they treat it in a business-like manner. The Nigerian government needs to adopt this business-like approach to taxation for it to realise its revenue potentials fully,” it added