Thursday, August 28, 2008

Joint Tax Board and the National Tax Policy

THE Joint Tax Board recently conducted regional sensitisation workshops on the proposed national tax policy and invited memoranda from the public. The draft document proclaims that "the overriding objective of the Nigerian tax system is to achieve economic growth and development. For Nigeria to pursue an active development agenda or to even carry out the basic functions of government, its tax system should be able to generate resources for government to provide basic public goods and services".

And citing the all- round poor infrastructure which makes investment projects costly, the JTB seeks to try and compensate for poor infrastructure by proposing a new tax system that allows companies higher post-tax profits as a means of ensuring higher domestic investment that will lead to higher economic growth.

The document is essentially an admission of the poor administration of the existing tax system because direct taxes, as JTB explains, are difficult to collect. Nonetheless, even at the low level of tax administration over the years, the apparent contribution of roughly 80 per cent of annual budget expenditure by oil receipts since 1974 (with four consecutive years to date purportedly posting excess crude earnings) and the sizeable amounts of non-oil revenue are proof that the tax system has successfully provided government with ample resources. In view of the purported current excess revenue, does government still require further increases in non-oil tax revenue before settling to play its part as the JTB advocates?

Several aspects of the draft document are contradictory and inconsistent with the stated overriding objective. For instance, one, the JTB proposes wholesale subsidy of firms "by using revenues from Nigeria's oil wealth to alleviate the tax burden on companies in order to diversify the economy". Such a policy will on the contrary render firms inefficient and uncompetitive and dependent on government thereby defeating the set goal of boosting non-oil revenue for government use. Interestingly, except for complaints against multiple taxation which is a symptom of the inequitable sharing of collected revenue, the current level of company income tax has not attracted any protests since it is comparable to relevant tax levels in serious economies.

As a matter of fact, any reduction in any tax with respect to foreign investors will transfer tax revenue forgone to the investor's home government under subsisting double taxation avoidance arrangements. Also the related plan to reduce personal income tax will institute a less progressive tax regime which has adverse implications for aggregate consumption thereby stifling production and economic growth contrary to JTB's advertised goal.

Two, whereas JTB's insistence on reserving tax collection for career civil service tax collectors is well-founded, its call at the same time for tax authorities to retain 10 per cent of total revenue collection at once is selfish and evinces lack of full appreciation of the extent of government responsibilities.

The plan will create a class of overpaid civil service tax officers in place of the rightly rejected private tax consultants, a development that will lead to a restive civil service with different professional cadres spoiling for inflated and matching salaries. Will such turmoil and ensuing inflation promote the promised rapid economic growth?

Three, the planned deliberate shift from direct to indirect taxation for the sole reason of ease of collection betrays reprehensible indolence. The proposal will considerably reduce the workload of tax agencies and result in cuts in the work force, an undesirable spin-off. As if to give the lie to JTB's proposals, the steadily improving administration of the existing tax system by Lagos State has, in the words of JTB Chairman, Ifueko Omoigui-Okauru, "now culminated in making Lagos State the only State in Nigeria where revenues from taxes surpass incomes coming from the Federation Account on a monthly basis". That achievement was in spite of the fact that huge revenues generated by the various ports, and the many industrial and commercial establishments based in the State accrue directly to the Federation Account.

Four, JTB proposes to make VAT the major source of non-oil revenue by in the first instance tripling the current VAT rate of 5 per cent. To raise VAT is inflationary, which dampens demand thereby stifling industrial production. The plan contradicts the set goal of the proposed new tax system. And given the country's healthy revenue position coupled with the established fact that a high VAT rate works against the national interest, it becomes untenable for JTB to push the argument about some overarching national commitment to match the high VAT rates in ECOWAS countries that happen to lack other major sources of revenue.

Five, purportedly to increase tax collection efficiency, the draft policy seeks to make the Ministry of Finance the sole authority on tax policy formulation and also to convert JTB into a policy making body for those taxes whose administration is split across states by the 1999 Constitution. The long and short of this prescription is to centralise the collection of non-oil revenue just like oil revenue. But true to the ingrained character of a cheating federation, the proposal will merely reinforce Abuja as centre for sharing revenue booty literally forcibly taken by federal might from a few states, which are dispossessed and left pauperised to drift into violence, while states that contribute little or nothing to the Federation Account gorge themselves with the lion's share of the public income.

Nigeria has come to rue such purportedly good-intentioned centralisation - it was the vogue in the 1970s - in all spheres of our national life because political and economic progress has eluded the country these past three decades. Militancy in the Niger Delta can be traced to the centralisation and unfair disbursement of oil revenue. We should therefore not wait for centralised collection of non-oil revenue to begin to breed urban guerrillas in states stripped bare of their plentiful non-oil revenue before casting away JTB's wrong-headed and retrogressive national tax policy.

What is needed is a national tax policy that focuses on the efficient implementation of the revenue prescriptions of Section 163 of the Constitution. In addition to the planned unique taxpayer identification number system, the JTB should oversee the development of guidelines for the various tax authorities to collect all taxes levied under national and state laws without any attempt at imposing uniform tax rates throughout the federation. It is proper and desirable for citizens and businesses to freely move and locate in any part of the country to exploit any differences in benefits offered by various state tax laws.

While Item D of Part II of the Second Schedule of the Constitution enjoins the tax authorities to avoid double taxation among states, the vexed problem of multiple taxation in a state (which the unacceptable centralised tax collection was also meant to eliminate) will hardly arise if fair and appropriate levels of derivation principle give back to entitled states from the Federation Account adequate funds for tackling the peculiar problems that face high revenue-yielding areas. The absence of a federal legislation on this issue almost one decade into the democratic dispensation is unfortunate indeed. It should also be noted that proposing centralised tax collection to resolve multiple taxation problem is unwarranted because in a democratic setting, genuinely elected state and local government representatives, who are closer to the people than federal agencies, cannot but be responsive and amenable to the preferences of the tax-paying public regarding what specific taxes and tax rates to levy and apply.

Amidst our vast resource endowment, it is extremely painful to observe that the Federal Government and its agencies would rather dither endlessly, side-track obvious solutions and contrive untested policies which have kept our dear country down for so long. Government should have a rethink.