What you need to know about the impact of Presumptive tax on small business In Nigeria
Taxes: are paying, should pay more
Whatever was proposed or not proposed at the meeting of senior officials with a Senate commission last week on the 2019-2021 Medium-Term Expenditure Framework, we all know that revenue generation is inadequate even for the modest aspirations of the FGN. Any progress is off a low base: federally collected revenue reached 7.4 per cent of GDP in 2018 according to provisional data from the CBN. The vice-president told an investor gathering in London in December that the next step would be 8 per cent. The Federal Inland Revenue Service (FIRS) has reported total collection of N5.3trn for 2018, below its budget but a record nonetheless.
For a peer comparison for 2018, we see that the ratio was 25.3 per cent in South Africa. We can explain away the underperformance in many ways: South Africa has a larger formal sector, and more large multinationals within its jurisdiction; its South African Revenue Service is well funded and began to raise its game on compliance in the 1990s; its counterpart, the FIRS, ‘saw the light’ rather more recently; and Nigeria is an oil producer, which should have greatly reduced the differential with its rival for the slot of Africa’s largest economy.
We support a several-pronged approach as the FGN moves towards a tax/GDP ratio closer to South Africa’s. On the oil side, its battle is institutional, namely the sorry fate of the petroleum industry bill in the National Assembly for more than 10 years. If the executive is able to establish a good working relationship with the Senate president and other core officeholders in the next assembly, then we could see movement on the fiscal and non-fiscal elements of the bill. The inability of the authorities to review the industry’s production sharing contracts (PSCs) has been a missed opportunity, and a painful one as production under such contracts is now greater than the output of the oil joint-ventures.
On the non-oil side, the challenge for the executive is to enhance compliance, reinforce the culture of paying tax and, we would argue, hike tax rates. The filing of tax returns saves time for all and funds for the collection agency, and is a boost to transparency. Electronic or not, however, taxpayers still have to want to submit accurate returns.
They are more likely to do their patriotic bit if they can see improvements to their lives, such as new/improved schools and roads that have been funded with taxpayers’ money. This is a very long-term solution, and it ducks the question of how the FGN generates the funding to make the investment to persuade reluctant taxpayers to open their wallets. One answer is responsible government borrowing for capital items. This has been the sensible policy of the current administration. However, it also requires patience because of the size of Nigeria’s infrastructure deficit.
The authorities have to move more quickly in our view. The new national minimum wage has to be funded. More generally, Nigeria has a low government spending/GDP ratio because it has a low tax/GDP ratio in both the oil and non-oil economies. Government could accomplish so much more with additional revenue. We do not know what the FIRS executive chairman said to the Senate about the way to increase collection but we advocate a hike in tax rates, starting with VAT and including some domestic excise levies.
A doubling of the standard rate to 10 per cent would generate close to N1trn gross for the three tiers of government, having made an allowance for non-compliance. It would be particularly welcome with the state governments as funding outside the monthly FAAC payout. Official resistance to a rate increase is misplaced, we feel: low-income (and all) Nigerians would surely benefit from a hike in public investment in the infrastructure. A higher VAT rate for luxury goods would amount to the application of sticking plaster to the wound.
This FGN proposal, however, brings us to a common view that high-income Nigerians and companies are not always pulling their full weight in terms of tax payments. Wealthy citizens already account for the vast majority of tax receipts in developed and developing countries, although for different reasons. That said, in Nigeria’s case the vast majority could be higher still through the reinforcement of existing policies such as the large taxpayers’ office, and a more selective approach to the granting of waivers and exemptions.
While the impact on revenue is far smaller, there is scope to pursue the 67 million members of the labour force of 77 million who are not registered taxpayers. Most have no tax to pay but the SMEs that are liable are generally escaping the net because they cannot meet the documentary requirements of the authorities. It is worth noting that presumptive tax on small business has been a success in Kenya and Tanzania.
Tax revenue, and therefore government spending is very low, while the infrastructure gap is very large. The official response should be dramatic in our view: a sizeable rise in the rate of VAT alongside tighter monitoring of large taxpayers, innovation in the taxation of SMEs and spreading the culture of paying taxes.
Head, Macroeconomic & Fixed Income Research