By Kriz David
The current crisis in the tax system in Nigeria is chiefly induced by inappropriate Tax Policy Mix and Design. The Nigeria tax system is antithetical to national prosperity, and it is the reason for the extreme poverty in Nigeria.
Not only is the economy weighed down by systemic corruption, the Tax System in Nigeria has also not been able to spur economic development and inclusive prosperity on account of the low tax revenue.
Tax is a derivative of the economic activity carried out in a nation. The Gross Domestic Product (GDP) of a nation comprises personal consumptions, business investments, government spending and exports less imports.
The highest annual amount of Value Added Tax (VAT) generated in Nigeria since 1994 is N1.53trillion, which was in 2020. Does the amount of VAT generated annually truly reflect the taxable consumption in Nigeria?
And does the total tax revenue of N7trillion in 2020 truly reflects the economic activities carried out in Nigeria? These are the germane questions that require sincere answers. This should be the immediate concern of State Governors.
The low tax-to-GDP ratio of 6% theoretically suggests that Nigerians are not paying adequate tax. In reality, Nigerians are overburdened with taxation. Paying taxes ought not to be a burden.
Paying taxes becomes a burden when the tax policy mix and design of a nation is inappropriate. Taxation is a strategic fiscal tool for economic development and prosperity; it is not just a tool for fundraising.
The two most expensive “commodities” in Nigeria today are education and healthcare. These are merit goods that should not be sold and bought by private individuals but should be provided by government from proceeds of taxation.
Nigerians pay for their children’s education right from nursery schools through tertiary schools as well as pay for healthcare. Besides, Nigerians pay for public goods such as security and construction of public roads in their place of abode.
Meanwhile, governments of developed countries provide free education and healthcare to citizens for having paid their taxes. Nigeria has failed embarrassingly in this regard because its tax policy mix and design is ill-advised.
The problem is not that Nigerians are not paying adequate tax; the real issue is that an ill-suited tax policy mix and design cannot capture the right people in the tax net and to pay the right tax.
While the wealthy get richer by not paying their fair share of taxes, the middleclass have struggled and become poorer by paying for education, healthcare, security and construction or repairs of roads, having paid their fair share of taxes.
With an appropriate tax policy mix and design, citizens will pay the right taxes without being unduly burdened and government will have enough revenue to provide merit goods and other social services.
One of the inappropriate tax policies and design in Nigeria today is the personal income tax. Globally, personal income tax provides the highest tax yield among all the tax types, but that is not true with Nigeria because the consolidated relief, income band, and tax rates are ill-designed.
For instance, the highest personal income tax rate in Nigeria is 24% for the income band above N3,200,000. This means that individuals earning N3,500,000, N35,000,000, N350,000,000 and N3,500,000,000 annually are all taxed at the same tax rate.
The graduated tax rates are unjust and inequitable. This is the reason for the low tax yield from personal income tax and the wide income inequality in Nigeria.
A comparison between Nigeria (the largest economy in Africa) and South Africa (the second largest economy) amplifies the flaw in the Nigeria’s Personal Income Tax Act. As of 2018, South Africa with 21 million registered taxpayers generates over N10.9 trillion from personal income tax from 6.4 million individuals, with the highest personal income tax rate of 45%.
The top 1% individuals pay more tax that the bottom 90% individuals in South Africa. This is possible because the tax reliefs, income band, and tax rates are just and equitable. As of 2018, the total tax revenue generated by State Governments in Nigeria is less than N1 trillion. With a well-designed personal income tax act, State Governments should generate over N15trillion from 10 million individuals in Nigeria.
The row on who should collect Value Added Tax is just a fragment of the issue. Instead of the South-versus-North-divide legal tussle on VAT, the Nigerian Governors’ Forum should pursue fiscal sustainability by rethinking Nigeria’s Tax Policy Mix and Design to consummate enduring prosperity for Nigerians.
Dr. Kriz David PhD, FCA, FCTI, is a futurist and a tax expert. He is the author of “Tax Strategy” and “The Tax Manual”. He can be contacted at [email protected] or 08034033979.