The Nigerian Governors were reported to have recently made some recommendations to the Federal Government on measures to instill fiscal discipline and prevent the nation from economic collapse.
1 – Abolish State Income Tax and introduce State Sales Tax at a flat rate of 10%.
Comment: Personal Income Tax (PIT) has the potential to generate the highest tax revenue for the government. South Africa generated over N14 trillion equivalent from PIT alone in the last fiscal year which is more than all the taxes collected by all levels of government in Nigeria. In addition, the data and intelligence provided through PIT filing is useful for economic planning and fighting financial crimes. On the other hand, Sales Tax has cascading effect that will make goods and services more expensive in addition to being regressive as it imposes a disproportionately higher burden on the poor.
2 – Introduce a 3% Federal Personal Income Tax on persons earning more than N30,000 per month.
Comment: This proposal will increase the revenue accruing to the federal government at the expense of the state which is closer to the people paying the tax. It also seems contradictory to the historical agitation for more tax revenues to be allocated to the states away from the federal government. Perhaps it is the carrot intended to stimulate FG’s interest in the governors’ proposals. If adopted, an amendment to the Constitution may be required given that PIT is currently within the jurisdiction of states except for PIT of the officers of the Nigerian forces, Nigerian foreign service, and nonresident individuals. From a fiscal policy viewpoint, a flat income tax rate is also regressive hence the reason many countries graduate their PIT rates to ensure it is progressive and fair, the higher you earn, the higher your tax.
3 – Individuals earning less than N30,000 per month to pay a flat Personal Income Tax of N100 monthly whether employed or not, including farmers and traders. The tax should be deducted from the phone credit of the individuals.
Comment: This is effectively a capitation or poll tax imposed on each person regardless of income or resources. No matter how small, income tax should not be imposed on individuals who have no income or earning below the poverty line as this would amount to taxing poverty. Individuals earning N30,000 per month or less are currently exempted from PIT. It is very likely that the tax will be perceived as a telecom tax given the proposed method of collection which may hinder financial inclusion and internet penetration as many people who spend just over N100 or less per month especially in rural areas may boycott telecom services to avoid the tax.
4 – Increase VAT from 7.5% to 10% with a timeline to raise it further to between 15% and 20%.
Comment: Any increase in VAT rate should be accompanied with a reform of the VAT law to enable full input VAT claim for all goods, assets, and services except where the buyer is the final consumer. In terms of impact, increasing VAT to 20% in addition to the 10% proposed State Sales Tax, as well as the recently introduced excise duties on certain items will increase total consumption tax rate significantly to a minimum of 30%, which would be one of the highest in the world, further elevate inflation and poverty.
5 – Ensure re-introduction and passage of VAT into the Exclusive Legislative List under the 1999 Constitution of the Federal Republic of Nigeria.
Comment: The National Assembly recently made an unsuccessful attempt to introduce VAT as an item under the Exclusive Legislative List, which will make it a tax exclusively collectible by the federal government. There is an ongoing legal tussle over the right to collect VAT between the federal government and the states. Regardless of whether VAT collection is centralised or not, the revenue should accrue to states based on activities connected to or falling within their territory to reflect the point of consumption.
6 – Centralise the collection of all federal taxes in one agency – the FIRS, while Customs, NPA, etc assess and issue demands.
Comment: This is a critical recommendation which aligns with the position of the 2017 National Tax Policy and the recent National Tax Dialogue on harmonisation. All taxes, levies, charges and fees payable to the federal government should be collected by the FIRS. The governors can show example by implementing the same recommendation at the state level where there is a lot of multiplicity of revenue agencies and use of various consultants for tax collection. In addition, multiplicity of taxes should be harmonised.
7 – Reduce the deduction from Federation Account for the National Agency for Science and Engineering Infrastructure (NASENI) from 1% to 0.2%.
Comment: There is a decision of the Court to the effect that no deduction can be made from the federation account other than as provided for in the constitution. Hence, even a reduction from 1% to 0.2% will still be deemed unconstitutional. We have recently seen the introduction of new agencies by the National Assembly and a myriad of taxes on businesses in addition to deductions from the federation account. This trend portends a grave danger to the tax system and by extension government’s ability to mobilise tax revenue. Earmarked taxes are a menace that must be stopped sooner rather than later.
Overall, the proposals need some refinement to align fully with the National Tax Policy and the cannons of taxation while being fit for purpose within the context of the Nigerian structure and the economic realities of its people. A broader conversation around the social contract and policy reforms to promote economic prosperity will be more effective in mobilising sustainable revenue for the government.