League of Northern Democrats pick holes in the Tax bill

REVIEW OF TAX REFORMS BILLS BEFORE THE NATIONAL ASSEMBLYIntroductionThe Federal Government in continuation with its economic reforms has approached the National Assembly with four (4) bills bordering on tax reforms and fiscal policies: (a) the Joint Revenue Board Establishment Bill; (b) the Nigeria Revenue Service Bill; (c) the Nigeria Tax Bill; and (d) the Tax Administration Bill.As expected, the bills generated public interest and debate, particularly in the areas of conflicts with certain sections of the 1999 Constitution of Nigeria as altered, and as it affects the collection and redistribution of VAT to the federating units: federal, states and local governments, including religious sensitivities. The Government has advanced reasons for the reforms, while the public, aware of the hardships experienced following the twin policies of subsidy removal on energy and foreign exchange liberalization with social support coming too little too late, is suspicious and critical of further economic reforms, and therefore any of such reforms must be scrupulously examined. The League expects to see Tax Reforms as a component of a wider economic reform efforts necessary to broaden the narrow indirect tax bases, improve on the low tax collection efficiency, walk back on excessive tax exemptions (i.e. 4% of GDP lost in 2021), improve on tax compliance and public morale, amongst others. The Presidential Fiscal Policy and Tax Reforms Committee (PFPTRC) was constituted to look at these broader issues around tax administration efficiency and fiscal space. In retrospect, we observe that most of the top ten tax and excise duties presently contributing companies in Nigeria were established between 1992 and 2011 due to the Economic Development Programme embarked upon in that period. Such private sector investment promotion efforts are necessary not only for expansion of the tax base, but the creation of jobs and generally improving the livelihood of the people. Indeed, growth in public sector revenue is more about growing the taxbase than increasing the tax rate. Consequently, the LND has examined the tax bills and make recommendations only in areas requiring review, and reasons for such recommendations are provided accordingly.Examination of the Four Bills Before the National AssemblyThe League Northern Democrats examined the four bills before the National Assembly, and provide an overview of its opinion based on the following criteria:Promotion of National CohesionCompliance with Constitutional provisionsPromotion of National Development and GrowthPromoting Inclusiveness and Federal CharacterCorporate Governance of Institutions being proposed The Joint Revenue Board Establishment BillThe Joint Revenue Board Establishment Bill is intended to (a) provide for a legal and institutional framework for the harmonization and coordination of revenue administration in Nigeria; (b) provide a mechanism for efficient dispute resolution, and (c) promote the rights of the taxpayers. It also intends to establish three key institutional structures to achieve the objectives: the Joint Revenue Board, the Tax Appeal Tribunal, and the Office of the Tax Ombud.Observation and Recommendation: The League observed that the provisions of the Bill when passed into law and implemented can achieve the objective of harmonization and coordination of tax revenue administration in Nigeria. We are of the considered view that the Joint Revenue Board Establishment Bill may be considered for passage by the National Assembly.The Nigeria Revenue Service BillThe Nigeria Revenue Service Bill has the objective of providing the legal, institutional and regulatory framework for the administration of taxes and revenue, and to account for such taxes and revenue. The Bill intends to establish the Nigeria Revenue Service and repeal the existing Federal Inland Revenue Service Act. The Nigeria Revenue Service when established will undertake tax assessments, collection and accounting for all revenue accruing to the Government, including other actions to support collection and accounting of revenue.Observations and Recommendation: While the League is of the conviction that the Bill when passed and implemented, the objective of tax assessment, collection and accounting could be achieved, we have concerns on the effectiveness and appropriateness of the corporate governance of the Nigeria Revenue Service as an institution. Sections 6 & 7 provide for the corporate governance of the Nigeria Revenue Service. It provided for the office of the Executive Chairman who shall be the Chief Executive Officer (CEO) as well as the Chairman of the Governing Board.It is against the principles of transparency, accountability, and effective corporate governance to have one person serving as Chief Executive Officer (CEO) and Chairman of the Governing Board overseeing the performance of the same institution. We are consequently recommending the separation of the offices of the Chief Executive Officer and the Chairman of the Governing Board. The Chairman of the Governing Board when established should be occupied by a well-educated and highly experienced person in the areas of taxation, revenue generation and management, to provide for an effective oversight on the mandate and performance of the Revenue Service. The Chief Executive Officer of the Service will be a member and provide the Secretariat to the Governing Board. The Tax Administration BillThe Tax Administration Bill intends to provide for uniform procedures for a consistent and efficient administration of tax laws in order to facilitate tax compliance and optimise tax revenue collection. The League makes observations on the lack of clarity of Section 77, and express concerns on the effectiveness and appropriateness of the corporate governance of the State Inland Revenue Service as provided for by sections 82, 84, 87, and 90 of the Tax Administration Bill. Section 77 of the Tax Administration Bill states that “Notwithstanding any formula that may be prescribed by any other law, the net revenue accruing by virtue of the operation of chapter six of the Nigeria Tax Act shall be distributed as follows:10% to the Federal Government 55% to the State Governments and the Federal Capital Territory; and 35% to the Local Governments Provided that 60% of the amount standing to the credit of states and local governments shall be distributed among them on the basis of derivation”. In addition, following public debate and outcry on the application of the existing allocation formula, and reasons given by the Government in proposing Section 77, the League analysed the October 2024 allocation and is equally dismayed by the disproportionate nature of the application of the existing formula for the derivation portion of VAT proceeds. The distribution of the derivation allocation of October 2024 VAT collection to the 774 local governments in the country was used to undertake simple cluster analysis of the total share of all local governments in each state. Figure 1 shows the share of each state in the total allocation and share of each state within the zonal total. All the states seem to belong to a cluster apart from two, Rivers and Lagos states. This development is not unconnected with the interpretation of derivation by the tax authority. These two states host most of the head offices of companies that remit VAT centrally. Figures 2 -7 compared states within the same zones in their share of October 2024 derivation shared to local governments. Figures 6 and 7 stand out because of the effect of Lagos State and Rivers State. In the Southwest with 137 local governments, the 20 local governments in Lagos State collected 88.2% of the zonal total, while the remaining 11.8% was shared by the 117 local governments in the other five states in the zone. While in the Southsouth, Rivers State collected 82.1% and the remaining five states shared the balance of 17.9% of the allocation to the zone. Looking at the share of each zone in Figure 8, the Southwest received the most (this was about N31.27 billion) while the Southeast zone received the least (this about N903.28 million). Indeed, the allocation to all the 95 local governments in the Southeast was less than the share of only one local government in Lagos State that received about N915.08 million. Of all the states, Imo received the least allocation of N20.57 million for all of its 27 local governments.Observations on Section 77 Following this analysis, the League therefore agrees with the Government and other analysts that the application of the existing sharing formula on the derivation portion of the VAT has fallen short of the expectations of the revenue allocation principles as enshrined in the 1999 Constitution as altered, and in particular, Section 16 (2) (c) which states “that the economic system is not operated in such a manner as to permit the concentration of wealth or the means of production and exchange in the hands of few individuals or of a group”, thereby giving credit to the need to look at the existing allocation formula. The use of the statement “net revenue” is superfluous, and since a Federal Government institution collects the VAT, it should remit the total collection, while any cost incident to VAT collection shall be borne by the Federal Government from its share of the VAT allocation.The League of Northern Democrats also observed that in connection to Section 77, Section 143 of the Bill failed to provide the interpretation for “derivation” and there is nowhere else in the Bill where “derivation” was clarified. A clear definition of the key word “derivation” in the Bill is necessary to guide the implementation of this formula for the allocation of VAT collection between the federating units. Recommendation on Section 77 and Section 143: The League therefore recommends an amendment to Section 77 and Section 143 of the Tax Administration Bill as follows:Section 77: Notwithstanding any formula that may be prescribed by any other law, the total revenue accruing by virtue of the operation of chapter six of the Nigeria Tax Act shall be distributed as follows:10% to the Federal Government; 55% to the State Governments and the Federal Capital Territory; and35% to the Local Governments.Provided that 60% of the amount standing to the credit of states and local governments shall be distributed among them on the basis of derivation”. Section 143 insert interpretation of derivation as: “derivation” as far as VAT is concerned refers to the allocation of VAT revenue collected to the point of consumption, which bore the burden of paying the VAT.Section 82, 84, 87, 90 of the Tax Administration Bill. These sections intend to establish the State Inland Revenue Service and the Governing structure for the Service. The governing structure provides for an Executive Chairman as the Chief Executive Officer and Chairman of the Governing Board of the State Inland Revenue Service. Observations: The League is of the view that it is against the principles of transparency, accountability, and effective corporate governance to have one person serving as Chief Executive Officer (CEO) and Chairman of the Governing Board overseeing the performance of the same institution. Section 82 also provides that the Executive Chairman is to be nominated for clearance by the State House of Assembly. This provision equates the Chairman of IRS to the Honourable Commissioner of Finance, who is usually the State Executive Council member supervising the activities of the SIRS, and presents Memos relevant to the SIRS to the SEC.Recommendations: The League is recommending the separation of the offices of the Chief Executive Officer and the Chairman of the Governing Board of the State Inland Revenue Service. The Chairman of the Governing Board when established should be occupied by a well-educated and highly experienced person in the areas of taxation, revenue generation and management, to provide for an effective oversight on the mandate and performance of the Revenue Service. The Chief Executive Officer of the Service will be a member and providing Secretariat to the Governing Board. Both offices the Chairman and CEO should require no confirmation by the House of Assembly in appointment.The League is also recommending that for State Inland Revenue Service, the three Senatorial Districts be reflected in the representation on the Governing Board the SIRS, and all members are to be nominated by the state governor.The Nigeria Tax BillThe objective of The Nigeria Tax Bill is to provide for a unified fiscal legislation governing taxation in Nigeria applicable throughout Nigeria to any person required to comply with the provisions. The League of Northern Democrats examined the Bill and is making observations on two key provisions: Section 4 (3 – 4) and Section 59.Section 4 (3 – 4): These subsections provide that: (3) Income of a family recognised under any law or custom in Nigeria as family income in which the several interests of individual members of the family cannot be separately determined. (4) Income arising to a trustee of any settlement or trust, or estate or to an executor of any estate of a deceased person, are both income or profits on which tax are chargeable.Observation: These were mentioned under income, profits or gains chargeable to tax. The League observed that the Capital Transfer Tax Decree of 1979 had been promulgated on the issue of inheritance but was subsequently repealed in 1994 “on account that the law was in conflict with the teachings of the two major religions in Nigeria”. Accordingly, Section 4 (3 – 4) in the Nigeria Tax Bill is a re-introduction of the repealed Capital Transfer Tax Decree which was seen to curtail the freedom to religion as guaranteed by the Constitution.Recommendation: The League is recommending that Section 4 (3) and 4 (4) be expunged from the Nigeria Tax Bill as it infringes on the rights to religious and certain cultural practices across the country with respect to inheritance.Section 59: This Section provides for the sunset dates for TETFund, NITDA, NASENI, and transfer of consolidated development levy of 2% to the NELFund subsequently. These institutions play key roles in the development of tertiary education and research (in science and technology), and expansion in digital literacy and skills. The League notes that the TETFund is a product of well researched effort to sustain the development of tertiary institutions in Nigeria in terms of physical infrastructure and research capacity. TETFund has been successful in its responsibilities with footprints in all tertiary institutions in the country. The Nigeria Tax Bill is providing for sunset of TETFund in 2029 or a transition to undefined funding.The National Information Technology Development Fund (NITDA) on the other hand is planned for a sunset in 2026. NITDA plays a key role in improving the level of digital literacy and skills in Nigeria. We indeed observed that the tax reform is fashioned along the South African tax system. South Africa’s informal sector is about 18.5% of the economy. With proper identification system and a digital infrastructure, South Africa could capture about 81.5% of its economic activities. On the other hand, the size of Nigeria’s informal sector is about 58% and one of the highest in the world. The League sees NITDA playing a leading role in the formalisation and digitisation of the Nigerian economy for these and any economic reforms to be effective. The NELFUND was established to improve access to tertiary education and life-supporting skills by youths. This institution is expected to be the sole beneficiary of a consolidated development levy of 2% as from 2030. Having commenced operations in 2024, the NELFUND is expected in the long-term to begin to receive loan repayments from borrowers. NELFund will also invest its undisbursed funds. Our Considered View: The League is unable to come into terms with the attempt to de-establish the TETFund and in its place sustain a fluid institution like the NELFund. Also, the sunset date set for NITDA, while the country’s digital literacy is still very low may be prematurely unhelpful. The League is recommending the sustenance of the TETFund as the sole benefactor of the consolidated development levy of 2%, while activities of NITDA and NELFund transit to become special projects of the TETFund. In the long run, the NELFund will become a revolving fund requiring no additional inflow from the development levy. Section 146: This Section intends to provide for the progressive increments in VAT rate by 2.5% every five years starting with 2020 as the base period and reaching 15% in 2035. Records indicate that VAT was introduced at the rate of 5% in 1993, and was revised to 7.5% in 2020, a 2.5% increase after 27 years. The proposal to increase VAT rate to 10% after only Four years appears too quick and hasty. This has the potentials to exacerbate the current burden on households through direct increases in prices in a period of sustained high inflation. This long-term plan for periodic increment in VAT rate is clearly unscientific apart from being technically unpredictable. Appropriate VAT rate should be determined by the economic situation in that period.We recommend the halting of any increases in VAT rate pending the substantial progress in taming inflation, digitization and formalization of the economy, and the substantial reduction in incidences of multidimensional poverty.3.0 General Remarks on the Tax Reform Bills and Public ConsultationThe major reason for this tax reform is Nigeria’s very poor record of revenue mobilization (at 7.3% revenue to GDP ratio – is one of the lowest in the world). While companies that topped tax and excise duty payments emerged between 1992 and 2011 because of economic development policies, large amounts of tax exemptions, holidays and generous allowances were also awarded and revenue foregone. In 2021 for instance, revenue lost from tax exemptions amounted to 4% of the GDP or N6.8 trillion. Economic policies must complement each other for effectiveness.Tax reforms must be accompanied by private sector investment promotion to expand the tax base of the country, while the current tax base is efficiently harnessed. Nigeria’s C-efficiency ratio, the ratio of actual VAT revenues to potential revenue is about 20%, being the lowest in Africa. One reason for this poor performance is the size of the informal sector estimated at 58.2% of the economy, also the highest in the world. This contrasts with South African where the informal sector is only 29% of its economy. Complemented by its digital infrastructure and proper identification system, tax systems are more efficient. The Tax Administration Bill is an attempt to adequately address the problem of compliance. The Bill can even be said to exceed expectations. In fact, the Government may have to stagger its implementation to ensure public buy-in. Successful implementation of the provisions in this Bill will surely increase our C-efficiency ratio. We are also glad that the Bills have addressed the problem of excessive tax waivers and exemptions, by requiring that any such exemptions or waivers approved by the President must be gazetted. Even though, we recommend that the Tax Administration Bill be passed with the suggested amendments, we further recommend the exemption of private citizens and SMEs from immediate applications. Nigeria’s Informal Sector constitute 58.20% of our GDP. We have the third largest informal sector in the world. Our immediate concern should be to formalise this sector and reduce it significantly to make implementation feasible. To formalize economic activities of a largely unskilled participants, free or subsidized training in business skills, digital literacy, and financial management must be offered with improved access to finance.We must also improve our landed property address system. Apart from Abuja and some part of Lagos, most small businesses and private homes do not have addresses that can be traced easily. This will make formalization and tax administration more effective. Looking at the bills, there is the need to strike a balance between law and administrative regulation and monitoring procedures. Several issues are best addressed by legal provisions, however, many more are better treated through regulatory guidelines and policies. There are several provisions in these laws that are best left to regulatory Agencies to handle via administrative regulations, guidelines and penalties. Issues such as: specification of revenue allocation formular, details of penalties for offences, matters that will involve collaboration with other government agencies, and matters that depend on circumstances, which might change with time, etc. are best left outside the tax laws. This is to avoid the need to go for amendments each time a change is required. Their exclusion may also make the bills elegantly drafted as it were.Lastly, the League sees adequate consultations and public education as important ingredients of development and policy implementation. Rushing these bills will not help and time must be taken to get the buy-in of all stakeholders. Public perception is important in shaping and implementing these critical policies. By demonstrating that the reforms are designed to uplift all citizens and not to disproportionately burden or benefit any group, the government can help reduce opposition and foster a sense of shared responsibility. This approach encourages dialogue and appeals to the values of fairness and inclusivity, which are critical to addressing public scepticism.Senator Ibrahim Shekarau, CON, PENSardaunan KanoChairman, League of Northern Democrats