The National Tax Policy seeks to provide a set of guidelines, rules and modus operand! that would regulate Nigeria’s tax system and provide a basis for tax legislation and tax administration in Nigeria.
The Policy is an initiative of the Federal Government of Nigeria which is being driven by the Federal Ministry of Finance on the basis of the report from a Study Group in July 2003.
The Study Group was inaugurated on 6th August, 2002 to examine the tax system and make appropriate recommendations towards entrenching a better tax policy and improved tax administration in the country.
In January 2004, a private sector-driven Working Group was constituted to review the recommendations of the Study Group. Both groups (The Study and Working) addressed macro and micro issues in tax policy and administration, Among the macro issues discussed were the drafting of a National Tax Policy, Taxation and Federalism, Tax Incentives and Tax Administration generally. Their recommendations were further reviewed and commented upon by various stakeholders.
The reasons for reform and the decision to develop a National Tax Policy could therefore be traced back to the structure of the existing tax system and some of its inherent problems such as: the increased demand to grow internally generated revenue, which has led to the exercise of the powers of taxation to the detriment of the taxpayers who suffer multiple taxation and bear a higher tax burden than anticipated; insufficient information available to taxpayers on tax compliance requirements, which created uncertainty and room for leakages in the tax system; multiple taxation by Government at all levels, which impacted negatively on the Investment climate in Nigeria.
Elimination of multiple taxation is therefore of major concern at all levels of Government; lack of accountability for tax revenue and its expenditure; lack of clarity on taxation powers of each level of Government / encroachment on the powers of one level / State by another; lack of skilled manpower and inadequate funding, which led to the delegation of powers of revenue officials to third parties, thereby creating uncertainty in the tax system and increasing the cost of tax compliance; use of aggressive and unorthodox methods for tax collection; the non refund of excess taxes to tax payers, due to the lack of an efficient system arid funds; the non-review of tax legislation, which had led to obsolete laws, that do not reflect Nigeria’s current realities; and the lack of a specific policy direction for tax matters in Nigeria and the absence of laid down procedural guidelines for the operation of the various tax authorities.
These and other problems plaguing Nigeria’s tax system have not been adequately tackled for many years. One of the reasons for this was Government’s heavy reliance on revenues derived from oil, as a result of which little or no attention had been given to revenue from other sources, such as taxation. However, there is now a renewed commitment by the Federal Government to diversify the economy by growing the non-oil tax revenue in order to develop a stable and sustainable revenue source to finance developmental projects.
Following from the above, it is evident that the tax system required reform. Although there had been several reforms in the past, these reforms were not pursued under any policy direction and, in some cases, were carried out in an uncoordinated manner.
This informed the decision of the Study and Working Groups (referred to above) that there should be a National Tax Policy that would provide a direction for Nigeria’s tax system and establish a framework that all stakeholders would subscribe to and to which they would be held accountable. It is in line with this, that the National Tax Policy is set out below.
Definition of Taxation and Revenue and the Importance of Taxation in Revenue Generation. The National Tax Policy is a document, which is essentially about taxation and other ancillary matters connected with taxation. It is therefore a proper premise to begin with a discussion on what constitutes taxation and distinguish it from revenue, while situating its role in the context of revenue generation.
Taxation is basically the process of collecting taxes within a particular location. In this regard, tax has been defined as “a monetary charge imposed by the Government on persons, entities, transactions or properties to yield revenue”. It has also been defined as ‘the enforced proportional contributions from persons and property, levied by the State by virtue of its sovereignty for the support of Government and for all public needs”.
Taxes may also be defined as a “pecuniary burden laid upon individuals or property to support government expenditure. A tax “is not a voluntary payment or donation, but an enforced/compulsory contribution, exacted pursuant to legislative authority” and is “any contribution imposed by government”, whether under the name of duty, custom excise, levy or other name.
Taxes are therefore a financial charge or levy imposed upon an individual or legal entity by a State or a component of the State. Atax is usually a monetary charge on a person’s or entity’s income, property or transaction and is usually collected by a defined authority at the Federal and State Level.
Taxes may be direct or indirect and may be imposed on individual basis, on entities, on assets and on transactional basis. In Nigeria, taxes are imposed on the following bases:
—Personal Income Tax – imposed on the income of all Nigeria citizens or residents who derive income in Nigeria and outside Nigeria
—Development Levy – a flat charge imposed on every taxable person typically within a State
On Companies (Corporate Entities)
* Companies Income Tax – imposed on the profits of all corporate entities who are registered in Nigeria or derive income from Nigeria, other than those engaged in petroleum operations
* Petroleum Profits Tax – imposed on the profits of all corporate entities registered in Nigeria or who derive income from oil and gas operations in Nigeria
* Education Tax – imposed on all corporate entities registered in Nigeria
* Technology Levy – imposed on selected corporate entities (telecommunication companies, internet service providers, pension managers, banks, insurance companies and other financial institutions within a specified turnover range) in Nigeria to support nationwide development of technology infrastructure and capacity
* Value Added Tax – imposed on the net sales value of non-exempt, qualifying goods and services in Nigeria
* Capital Gains Tax – imposed on capital gains derived from sale or disposal of chargeable assets.
* Stamp Duty – imposed on instruments executed by individuals and corporate entities in Nigeria
* Excise Duty – imposed on the manufacture of specified goods within the Government territory collected by the Nigeria Customs Service
* Import Duty – imposed on the import of goods into the Government territory collected by the Nigeria Customs Service
* Export Duty – imposed on the export of goods outside the Government territory collected by the Nigeria Customs Service.
This includes taxes, such as property tax and other such taxes imposed on land or landed property.
The above list illustrates the different bases upon which taxes may be imposed, as discussed above.
Having provided a working definition of taxation, there is a need to differentiate taxation from revenue for a proper understanding of the role of taxation in the development of the Nigerian economy. This is particularly necessary, as there is usually the misconception that every form of revenue obtained from the public is a tax.
Revenue is defined as income received from all activities engaged in by the receiving entity. In Governmental terms, revenue is the entire amount received by the Government from sources within and outside the Government territory.
In Nigeria, Government revenue includes proceeds from sale of crude oil .taxes (including import and excise duties), penalties, interests, fines, charges and other earnings received from Government investments (bonds, dividends e.t.c.), and the like. Revenue therefore encompasses the entire gamut of Government income, which is realised and available for expenditure by Government within a particular fiscal year or period.
Taxes are therefore, a sub-component of Government revenue, but they are not the only revenue item, which is internally generated by Government. Other sources of internal revenue include fees, rates, levies, fines, tolls, penalties and charges. Taxes are however a major contributor to Government revenue and ideally should be a major source of revenue.
In discussing taxation, there are usually four (4) “R”s linked with taxation and its purposes, namely:
* Revenue – it is generally believed, that the main purpose of taxes is to raise revenue for use by Government; * Redistribution – taxes may be used to transfer wealth from one section of the society to another;
*Repricing -taxes may be used to address externalities i.e. fiscal policies may be used to affect some area of the economy, which cannot otherwise be done; and
* Representation – this is historical and implies that taxes are imposed to assure citizens of representation in the Governance of the society.
In this regard, rulers impose taxes and citizens demand accountability in return. Of the above, revenue generation is viewed as the primary and most important role of taxation. Taxation is however not only a means of revenue generation for Government, it can also be used to stimulate other sources of Government revenue and develop other areas of the economy from which Government can realise revenue.
Distinction between Taxation and other components of Revenue
A further but brief discussion may be necessary on the distinction between taxes and other internal revenue items such as charges, levies and penalties.
Such other revenue items are not usually income or transaction based, but may be imposed for the use of utilities or infrastructure, or the right of way or simply imposed on certain category of persons, activities or persons within a particular area. As a definition of taxation has been provided above, a working definition of similar items is provided below;
* Charge – a charge is an amount paid for the use of goods, services or infrastructure provided by the Government;
* Fee – a fee is a payment for the labour or services provided by a public body, such as a Government entity or agency. Examples of fees include payments for use of utilities and for obtaining Government documents such as passports and visas.
* Fines – these are sums of money imposed by the Government as penalties for an offence or indiscretion by a person within the jurisdiction of the Government. Examples of fines include Court fines, fines imposed for traffic violations, unauthorised usage of Government property e.t.c.
* Penalty – this is similar to a fine and is usually an amount paid or forfeited for not meeting a particular condition or fulfilling an undertaking. Examples of penalties include payments for late filing of returns, or the late or non-provision of information at the time required to Government agencies.
* Rates – these are usually imposed on property or other assets and are usually determined with reference to the value of the property or in relation to some other thing. Examples of rates include tenement rates and rates on shops and kiosks.
The above is not intended as an exhaustive definition of the above concepts, but merely a working guide to enable a proper distinction between taxes and these other components of Government revenue. In practice, there may be little distinction between what constitutes a tax or charge or fine, as these concepts can sometimes be interchangeable, however, it is still necessary to keep in mind the distinction as set out above.
It has also been noted, that under the current structure of Government in Nigeria, taxes at the Federal and State level are usually more efficiently collected and utilised than most of the other revenue sources highlighted above. However, unlike other revenue items, tax officials do not exercise custody or control over taxes, which they collect and are not involved in the allocation or expenditure of the taxes.
This distinction between those who collect and those who utilise is important for control purposes and also because the manner of utilisation of revenues collected impacts directly on the ease with which such revenues are collected.
Sustainable Development and Healthy Competition as the overriding Philosophy of the National Tax Policy
Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs.
In this context sustainable development refers to the pattern of revenue generation, which is able to meet the needs of the present generation of Nigerians, without negatively impacting the ability of future generations to meet their own needs. Generally, taxation is looked upon as a sustainable source of Government revenue due to the stability and certainty of the tax system.
Unlike other sources of revenue, taxes are constantly available in so far as economic activity is carried on in the society. Recent developments in the global and local economy which have significantly impacted Government revenue has directed focus on taxation as a sustainable source of income.
It is in line with this that the National Tax Policy intends to create awareness on the importance of the role, which taxation can play in securing a stable flow of revenue for the Government. Nigeria is currently viewed as a mono-product economy with significant reliance on oil revenue due to historical developments in the Nigerian economy.
However, taxation has been identified as an alternative to oil revenue and a more reliable source of revenue. The tax policy shall therefore promote and encourage a shift in focus from non-tax revenue to tax revenue by Governments at all levels of the Nigerian economy.
Following from the above, the tax policy shall also promote and encourage healthy competition amongst tax and revenue authorities in Nigeria at the Federal and State level to facilitate rapid development of the tax sector in Nigeria.
The focus of the competition shall be to maximise tax revenue within the jurisdiction of each Government in line with Constitutional and statutory provisions. It is expected that there would be increased collaboration as a result of the need to grow tax revenues by each level of Government and that improved collaboration would enhance tax yield – between and amongst Federal, State and Local Government authorities.
The concept of sustainable development and healthy competition shall be upheld as underlying philosophies in the development of Nigeria’s tax system. It is however important to note that even as healthy competition is encouraged, this should be balanced with the need to have an effective and efficient tax system.
Several jurisdictions have different ways of striking that balance. In Nigeria, that balance will be achieved by ensuring that those ratios that drive allocation of revenue collected from any source has built in mechanisms for rewarding and recognising arms of government that demonstrate effective utilisation of revenues, investment promotion, infrastructural development and economic activity amongst others.
The role of Fiscal Federalism
Fiscal Federalism is expected to play a major role in Nigerian tax policy and administration. In this regard, it is intended that the concept of Fiscal Federalism would be the common thread holding the National Tax Policy together. Nigerian tax policy would therefore uphold the application of fiscal federalism in the generation and expenditure of revenue by Government at all levels in accordance with the tenets of the Nigerian Constitution.
There should be strict adherence to the tenets of fiscal federalism, which will include the basic understanding of which revenue functions and agencies are best centralised, which should run concurrently and which are better placed under the sphere of decentralised levels of Government.
In this regard, it is expected that the Tax Policy and other tax legislation, would resolve the issue, of who collects what, how it is collected, who controls what is collected, how is what is collected shared, who is responsible for spending what is collected and who is ultimately responsible and accountable to the tax payers for the revenue collected and its expenditure.
The Tax Policy would provide a workable and acceptable platform which should be adopted by all tiers of Government for the proper application of the doctrine of separation of powers in relation to taxation. It is believed that adherence to these principles which would be discussed in the National Tax Policy would bring an end to disputes on the limits and powers of the tiers of Government in our Federation on fiscal matters. It will also bring clarity and certainty to tax administration and the entire Nigerian tax system.
In putting together a National Tax Policy, it was paramount to uphold the concept of Federalism, as practiced under the Nigerian Constitution. The present structure of taxation as stipulated by the Constitution of the Federal Republic of Nigeria reflects the three-tier system of Government at the Federal, State and Local Government levels. Under the Constitution, each tier of Government has been granted powers and responsibilities in respect of the imposition and collection of taxes.
The 1999 Constitution of the Federal Republic of Nigeria places the responsibility for legislating on taxation of Incomes, Capital Gains and Stamp duty on the Federal Government. It also places collection of taxes on the concurrent legislative list, enabling the Federal Government to delegate administration or collection of taxes as it pertains to taxation or duty on (a) capital gains, incomes or profits of persons other than companies; and (b) documents or transactions by way of stamp duties, to the State Government.
At the same time, the constitution places the responsibility for legislating on the collection of taxes, fees and charges that can be collected by the Local Government on the State Governments. Other than those specifically stated in the exclusive legislative list, activities that would ordinarily attract taxes, fees and charges (forms of levies) are placed squarely as part of the responsibilities of the Local Government Council – in the 4th schedule.
To check on the possibility of multiple taxation, the constitution is clear on giving responsibility to the Federal Government in the case of State Governments, and to the State Government in the case of Local Governments. Extracts from Part D of the Second Schedule of the Constitution is presented below-
In the exercise of its powers to impose any tax or duty on-
(a) capital gains, incomes or profits or persons other than companies; and
(b) documents ortransactions byway of stamp duties.
the National Assembly may, subject to such conditions as it may prescribe, provide that the collection of any such tax or duty or the administration of the law imposing it shall be carried out by the Government of a State or other authority of a State.
8. Where an Act of the National Assembly provides for the collection of tax or duty on capital gains, incomes or profit or the administration of any law by an authority of a State in accordance with paragraph 7 hereof, it shall regulate the liability of persons to such tax or duty in such manner as to ensure that such tax or duty is not levied on the same person by more than one State.
9. A House of Assembly may, subject to such conditions as it may prescribe, make provisions for the collection of any tax, fee or rate or for the administration of the Law providing for such collection by a local government council.
10. Where a Law of a House of Assembly provides for the collection of tax, fee or rate or for the administration of such Law by a local government council in accordance with the provisions hereof, it shall regulate the liability of persons to the tax, fee or rate in such manner as to ensure that such tax, fee or rate is not levied on the same person in respect of the same liability by more than one local government council.