Nigeria’s Tax Reform: Easing the Burden on the Taxpayer and Tax Collector

In an ever-evolving economic landscape, Nigeria stands at a critical juncture, poised to reform its tax system to address the longstanding challenges faced by both taxpayers and tax collectors. The burden of taxation has weighed heavily on individuals and businesses for years, often accompanied by inefficiencies in revenue collection that hinder the government’s ability to provide essential services. However, with a renewed commitment to tax reform exemplified by initiatives like the newly established Presidential Fiscal Policy and Tax Reform Committee, Nigeria is embarking on a transformative journey aimed at not only lightening the load on its taxpayers but also streamlining the processes for tax collection. This paradigm shift signifies an important moment in the nation’s fiscal history, promising improved equity, transparency, and efficiency in the tax system, ultimately fostering economic growth and development for the benefit of all stakeholders. Therefore, the objective of this article is to examine reforms that can alleviate the challenges faced by both tax collectors and taxpayers.

Based on the Financial Inland Revenue Service (FIRS) 2022 Tax statistics and report, there was a total tax collection of ₦10 trillion when compared to the ₦6 trillion generated in the year 2021. While the figure may appear substantial, particularly when compared to the previous year, it is important to note that the total taxes generated could potentially be much higher, given that most of the revenue collection primarily stemmed from Petroleum Profit Tax (PPT) and Company Income Tax (CIT), totaling ₦6 trillion. To throw more context on this, both CIT and PPT are taxes paid by companies, the latter being companies engaged in upstream petroleum operations.

However, to get a full picture of the total tax revenue generated in Nigeria, it is necessary to consider taxes generated at the state level, including those contributed by individuals through means such as PAYE (Pay As You Earn), which is part of the Personal Income Tax (PIT). Other taxes generated at the state level include: Direct Assessment, Road Taxes, Other Taxes, and revenue from Ministries, Departments, and Agencies (MDAs).

Based on the foregoing, most of the tax revenue generated in Nigeria is contributed by corporations. Additionally, many of the indirect taxes, such as stamp duty, Value Added Tax (VAT), and electronic money transfer levies, are collected by these corporations on behalf of tax agencies. However, it is notable that these corporations often bear the costs of establishing and managing the tax collection system without substantial incentives. This dynamic underscores the need for a more equitable and incentive-driven approach to ensure that both corporations and tax-collecting agencies can operate efficiently and effectively while sharing the responsibilities and benefits of the tax-collection process. Corporations such as banks and telecom companies are dependable collection mechanisms due to their significant capacity and ample resources. Moreover, tax agencies find it more efficient and convenient to target these corporations rather than individuals, leading to frequent annual tax audits for these entities, which in turn escalates their tax liabilities and operational expenses. It’s worth noting that tax collecting agencies themselves are not exempt from bearing increased cost burdens in this process.

Prospective investors encounter this tax burden, as many business ventures collapse shortly after starting operations. Hence, reform is necessary to avoid the multiplicity of taxes on individuals and corporations and to further enhance inclusivity, particularly for unregistered businesses and individuals earning income remotely or from other means who don’t feel obligated to remit their taxes.

Consequently, we will now proceed to outline some potential reforms..

• Upgrade of data management systems and use of data analytics & information management system

In 2017, the Federal Inland Revenue Service (FIRS) announced the introduction of six (6) new electronic tax services (e-services) for the convenience of taxpayers in Nigeria, namely (1) e-registration, (2) e-stamp Duty, (3) e-taxpay, (4) e-receipt, (5) e-filing, and (6) e-TCC. The FIRS taxpromax was introduced in 2021 for online convenient Tax Filing. Other State internal revenue services have followed the trend.

However, it is imperative that these platforms be upgraded to modern data management systems that should be able to integrate data from various sources, such as income records, property records, and business transactions. This integration will allow tax authorities to have a comprehensive view of taxpayers’ financial activities, making it easier to identify discrepancies and potential tax evasion. The integration of National Identification Number (NIN), Bank Verification Number(BVN), Taxpayer ID, and any other form of ID will go a long way in this regard. Furthermore, with advanced data systems, tax authorities can access real-time data on transactions and income, enabling them to respond promptly to changes in taxpayers’ financial situations. This can lead to more accurate and timely tax assessments.

Incorporating Data analytics tools will be of great help as these tools can analyze large volumes of tax data to identify patterns, anomalies, and potential tax fraud. Predictive analytics can also help tax authorities predict which taxpayers are more likely to underreport or evade taxes, allowing for targeted enforcement efforts. This can automate the audit process by flagging suspicious transactions and anomalies. This saves time and resources compared to traditional manual audits. However, it is crucial to address privacy and security concerns when implementing such systems to protect taxpayers’ data and ensure compliance with relevant laws and regulations. Additionally, effective communication and collaboration with taxpayers and tax professionals are essential to build trust and cooperation in the tax collection process.

• Refined Tax policies and Legislation

Eliminating ambiguity and Simplifying tax laws and regulations can make it easier for individuals and businesses to understand their tax obligations and comply with them easily. Tax legislation should avoid being drafted in a manner that is comprehensible only to legal professionals, as exemplified by stamp duty laws.

Moreover, the incorporation of reduced tax rates within tax policies, particularly aimed at lower-income individuals and small businesses, can serve to lighten the financial load on taxpayers. Simultaneously, it can ensure that the government continues to generate ample revenue.

Additionally, expanding deductions and tax credits for expenses such as education, healthcare, and energy-efficient home improvements also plays a pivotal role in enabling taxpayers to effectively manage and minimize their tax obligations. These policy adjustments not only promote fairness but also foster economic growth and stability by offering vital financial relief to those who need it most.

• Collaboration

Coordination with other government agencies, such as the National Identity Management Commission (NIMC), Corporate Affairs Commission (CAC), Security Exchange Commission, etc. can help identify tax discrepancies and improve overall compliance. Collaborating with other stakeholders to provide resources and education to taxpayers about their tax obligations can increase voluntary compliance and reduce the need for aggressive enforcement measures.

Collaborative efforts can result in the design of tax incentives that reward compliance, encouraging taxpayers to meet their obligations willingly. In summary, collaboration between tax authorities, taxpayers, and other relevant parties can lead to a more cooperative and efficient tax system. It can help reduce the burden on taxpayers by simplifying processes, promoting voluntary compliance, and ensuring that enforcement efforts are targeted and fair.

Conclusion

Tax reform plays an important role in not only easing the burden on the taxpayer but also improving the efficiency of tax collection processes. Through a thoughtful and balanced approach to reform, governments can create a fairer, more transparent, and less burdensome tax system for their citizens. Taxpayers will benefit from reduced complexities, lower compliance costs, and equitable distribution of the tax burden. Simultaneously, tax collectors will gain access to improved tools and methods, enhancing their ability to efficiently collect revenue for vital public services. It is evident that tax reform is not merely a fiscal matter; it is a means of fostering economic growth, social equity, and good governance. Lastly, as we continue to explore new avenues of reform, it is essential to prioritize public consultation and stakeholder engagement to ensure that our tax systems evolve to meet the evolving needs of our society.