It is no longer news that the President of the Federal Republic of Nigeria, President Buhari, has mandated the State Governors in Nigeria to source for funding from the States’ Internally Generated Revenues (IGR) as opposed to the hitherto over reliance on allocations from the Federation and Value Added Tax Accounts respectively. This shift in focus from oil revenue to IGR is a laudable development especially at this time, since it is hoped that a positive and consistent implementation of this mandate will have the long-term effect of bringing about rapid economic development in each State of the Federation. There is also the possibility that it will elicit greater resourcefulness and entrepreneurial capabilities on the part of the State Governments as they seek avenues to generate more revenue through both tax and non-tax sources.
Given that taxation is currently the main source of IGR, the intention or idea behind the IGR mandate should not be for the State Governments to begin harassing taxpayers unnecessarily, neither should it suggest imposition of additional taxes and levies to overburden the taxpayer. A more legitimate and effective approach would be to develop initiatives to revamp and restructure the tax administration processes within the States. This exercise should be directed mostly towards automation of the existing and potential taxpayer database, automation of tax payment and remittance systems, enlargement of taxpayer database to bring in every taxable person (if possible) into the tax net, setting up strong internal controls around the tax collection process and overall revision of all Board of Internal Revenue processes. Further; training and empowering the tax officials technically, setting up teams of technical advisers consisting of well-bred tax professionals, creation of greater transparency and accountability in tax collection are all measures that would enhanced revenue generation and close tax leakages substantially.
A recent World Bank report argues that obvious reforms such as improvement of tax agencies could lead to much higher tax collections. Kieran Holmes of the Britain’s Department for International Development helped Rwanda to increase its tax revenue by six and half times after automation of the tax collection process. Lagos State of Nigeria made N276.1bn in 2014 tax year (2013: N384.2bn) in taxes, mostly due to automation and reforms of its tax systems. Tax experts in developed countries also believe that the more tax revenue a country generates the greater developmental growth it attains. A quick analogy to confirm the veracity of this assertion would be to compare the tax to GDP ratios in developed countries to those of the developing countries. On the average, developed countries collect an average of 34% while developing countries average 13%. Nigeria’s tax to GDP ratio (applying the N4.5trillion average taxes collected in 2014) is roughly 4.5% of the rebased GDP.
It will suffice to point out that taxation is not the only source of internally generated revenue. State Governments should also explore other revenue generation avenues inherent in the economic and social make up of their States. They should look at resuscitating dwindling but otherwise buoyant economic sectors, creation of opportunities for foreign direct investments, Public-Private Partnerships (PPP), concessions, investments, job creation to guarantee the multiplier effect of income and consumption and other legitimate money yielding initiatives. All these initiatives, whilst benefiting the citizenry and guaranteeing rapid economic development, would also have that multiplier effect of increasing tax revenues.
What then should the taxpayers, the single most important group of stakeholders in the IGR loop, do in order to remain on the compliant side of the law in the heat of the revenue drive?
The first is to familiarize oneself with the taxes, which the State Governments are eligible to collect. The Taxes and Levies (Approved list for collection) Act of 1998 (as amended), prescribes the taxes collectible by the Federal, State and Local Governments respectively, based mostly on the income derivation principle. The taxes specified in the Act as collectible by the State Governments are as follows:
- Personal income tax- PAYE and direct assessment
- Withholding tax, capital gains tax (for individuals only)
- Stamp duties on instruments executed by individuals only
- Business premises registration fee
- Development levy (individuals only)
- Right of Occupancy fees on lands owned by the State Government in urban areas of the State
- Road taxes
- Naming of street registration fees in the State Capital
- Pools betting and lotteries, gaming and casino taxes
- Market taxes and levies where State finance is involved
Recently, the taxes and levies (approved list for collection) Act was amended to include the following in the taxes /levies to be collected by the State Government:
- Land use charge
- Hotel, Restaurant or Event Centre Consumption Tax, where applicable;
- Entertainment Tax
- Environmental (Ecological) Fee or Levy
- Mining, Milling and Quarrying Fee
- Animal Trade Tax
- Produce Sales Tax
- Slaughter or Abattoir Fees, where State Finance is involved;
- Infrastructure Maintenance Charge or Levy
- Fire Service Charge
- Property Tax
- Economic Development Levy
- Social Services Contribution Levy
- Signages and Mobile Advertisement; Jointly collected by States and Local Governments.
The duty of administration and collection of these taxes within the States lie with the State Boards of Internal Revenue.Personal income tax (PIT) is administered either through the Pay-As-You-Earn (PAYE) scheme for employees- both expatriates and indigenes, or by direct assessment for other individual taxpayers and unincorporated entities. PIT is levied on income of individuals, communities and families, and on income arising or due to a trustee or estate. The PIT charge is based on a graduated table of tax rates, designed to impose greater tax charge on higher income earners. After taking cognizance of consolidated tax relief of N200,000 or 1% of gross emolument, personal allowance of 20% and pension deductions at 8%, the effective tax rate for income earners below N5m varies between 1-10%, while that of income earners between N5m and N15m falls between 10-15%. Income earners above this income band naturally pay tax at a higher rate, between 15% and 20%.
PAYE deductions from employees’ salaries are required to be remitted by the employer on behalf of the employees on or before the 10th of every month, while direct assessment remittances should be made annually, on taxable profits. The general rule (though there are circumstantial exceptions) is that tax remittances are to be made to the State Tax Authority where the taxpayer resides.
Withholding Tax (WHT) is an advance payment of tax by taxpayers. It is deducted from payments made on suppliers’ (or beneficiary’s) tax invoices at source and at specified rates. WHT is not deductible where the supply consists of sale of goods in the ordinary course of business. The rates of WHT alternate between 5% and 10%, depending on the nature of transaction giving rise to the payment. WHT deducted from payments made to individuals or unincorporated entities resident in Nigeria, are required to be remitted to the beneficiary’s State of residence. Such remittances are to be made on or before the 21 of every month.
Capital gains tax (CGT) is the tax on capital gains accruing to any company, enterprise or individual when a disposal of chargeable asset (mostly capital items) is made. The rate of CGT in Nigeria is 10% of the gains derived from disposal of such chargeable assets. A deferment of the tax payable on such gains can however be made when such gains are re-invested, or intended to be, in assets of similar class within two years of disposal of the original asset. CGT accruing to individual taxpayers are payable to their States of residence.
Stamp duties are charged on legally stamped, written instruments of a contractual nature and which can be admissible in any judicial or quasi-judicial proceeding. The State Governments collect the stamp duties on instruments executed by individuals. Stamp duties are charged ad valorem, that is, in proportion to the estimated value of the goods or transaction concerned. Land documentations are specifically charged at 75kobo for every N50 of the value of the land.
Business premises registration fee is levied on every business premises in the State. The charge varies from State to State but the maximum amount to be levied is, for urban areas; N10,000 for initial registration and N5,000 for subsequent annual renewals. For rural areas; N2,000 for initial registration and N1,000 for annual renewals. Development levy is payable by every taxable individual at N100 per annum. For employees, their employers are expected to deduct and remit this tax on their behalf.
Right of occupancy fees are payable on transfer of title by the State Governors on landed property to individuals and business organizations acquiring lands in any State. The State Governor, at his discretion, determines the amount of this fee or rent. In Lagos State, perfection of title fee was recently placed at 3% of the fair value of the property.
Other taxes types listed in the Act as collectible by the State Governments do not currently have weighty impacts on business organizations in Nigeria. Although some State Governments have captured taxable persons’ information at the point of vehicle registration. For companies operating within the transportation sector, road taxes (fees on licenses required to drive a vehicle in public places) can have significant impact on their business cash flows. Traders in the open markets pay uniform presumptive taxes annually, as determined by the respective States.
The Nigerian taxpayer should also be aware that many State Boards of Internal Revenue have begun the process of reforming and fully automating their tax processes in order to bring in as many taxpayers as possible into the tax net to reduce tax leakages considerably. These States, as well as the Federal Government are collaborating with banks, Joint Tax Board (JTB), ministries, agencies and unions within their States to exchange information on taxable persons. The impending presumptive income tax assessment regime (for self-employed people and sole traders whose incomes do not exceed N6 million per year) is also geared towards generating tax revenue, no matter how small, from even the lowest income earners in the informal sector. Many business organizations have hitherto relied on tax evasion and settlement of corrupt tax officials but a probing question would be; would this approach continue to thrive when the IGR budgets are looming? It all culminates in the awareness that effective implementation of the IGR mandate simply spells out the fact that there may be little or no hiding place for tax evaders.
It will be a worthwhile exercise therefore, for taxpayers to revisit their internal tax compliance processes in order to ensure that what ought to be done is done. Taxpayers should also equip themselves with the knowledge of the taxes that legitimately apply to their businesses. Lack of proper awareness in this regard can lead to either non-compliance with the tax laws, tax leakages through preventable means or payments of excess taxes to revenue driving tax officials. Taxpayers may also make themselves vulnerable to payment of taxes not listed in the approved list for collection. Where in doubt, the help of professional tax advisors should always be sought.