20 September 2017

Nigeria: Mainstreaming Good Governance Into Nigeria Tax Reform

analysis

This study seeks to shine the light on key governance issues in the Nigerian tax system and to isolate them for in-depth analysis. This, it is hoped, will provide a clearer evidence base for addressing them more concertedly within the broader tax reform efforts in the country. The fundamental purpose of taxation is to generate revenue effectively, efficiently and fairly to finance public services. Today, tax administrators in Nigeria are under intense pressure to collect every Naira of tax payable as governments (Federal and States) grapple with increasing social obligations coupled with dwindling oil revenues. Naturally, this process is easier for the tax administrations if taxpayers willingly and voluntarily comply with their obligations under Nigeria's tax laws. However, governance challenges in Nigeria that also find expression in weak tax administration structures, regulations and enforcement stand in the way of progress.

We examine the strategic steps to improve tax administration in Lagos State and Nigeria as part of the inter-related goals of revenue mobilization and good governance, which are both cornerstones of sustainable development. The study focuses on the nexus between taxation and good governance. It argues that even though tax reforms have been ongoing in Nigeria since 2004 (Lagos State since 1999), with tax revenues growing from N1,194.80 billion in 2004 to N3,741.80 billion in 2015, Nigeria still has a relatively low tax to gross domestic product (GDP) ratio, which lies considerably below average in sub-Saharan Africa.

The study, therefore, discusses the key governance challenges in tax administration in Lagos State and Nigeria and recommends strategies for improvement. This governance prism enables considers careful consideration of the interconnection between taxation and themes such as accountability, transparency, responsiveness and political economy. Taxation and good governance are therefore likened to "two sides of a coin". As imposition of tax can create pressure for democratic accountability, quality tax governance can similarly encourage a culture of voluntary compliance and increase revenue generation. In effect, taxation engenders good governance. In the same way, without good governance, effective taxation becomes onerous. A symbiotic relationship between effective taxation and good governance helps to maximize the benefits to society.

Key Findings of the Study

The survey specifically examined the following governance variables as they affect taxation: Strengthening the accountability of the (Federal/State) Government; Strengthening (Federal/State) Government responsiveness; Improving transparency in the budget process; Model for modernizing IT systems in other government agencies; Reducing corruption within and beyond the revenue agencies; Improving public-private dialogue on fiscal and economic issues; Improving National/State Assemblies' oversight of revenue performances; Strengthening the monitoring of revenue by Ministry of Finance; Overhauling audit of revenue collection; Strengthening the representation of civil society and business associations; Enhancing media coverage of revenue issues; and Improving the overall business environment.

The principal findings include:

The quality of the tax system (policy and administration) is itself a central pillar for good governance and nation-building. Addressing linkages between taxation and governance calls for an expanded focus on relevant stakeholders and state institutions beyond the revenue system. These include aspects of the National and State assemblies' legislative functions, the Judiciary, and the role of taxpayers and other relevant stakeholders.

Efforts to mobilize revenue and widen the tax net does not only depend on tax reforms, but also on broader governance-related reforms that can positively influence citizens' attitudes to tax compliance and their perception of value for tax paid.

There is a strong correlation between government accountability, tax administration, and transparency in the use of taxpayers' money.

Insufficient information available to taxpayers on tax compliance requirements creates uncertainty and room for leakages.

The objective of the tax system is not just to raise revenues but also to establish a tax system that is fair, equitable and efficient as well as judicious use of the tax revenue.

Institutional arrangements for the tax administration including staffing, remuneration, and capacity of the staff have direct effects on the performance of the tax administration.

The number of registered taxpayers have a direct correlation on the amount of personal income tax collection.

The Taxpayer Identification Number (TIN) registration process has been very slow and this negatively impacts tax collection, especially the Personal Income Tax (PIT).

Despite the tax reforms by the Nigerian and Lagos State governments since 2004 and 1999 respectively, there is still much room for improving taxation at both levels.

Key Recommendations of the Study

Among other recommendations, the study prescribes in the main stronger political leadership to give clear direction to ongoing institutional revamp and reform of the Nigerian tax system. This is key to drive greater efficiency in the existing tax system, especially with regards to forensic audit and oversight of revenue generating agencies. Also, a cultural shift is needed to encourage treatment of the taxpayer as a client, complete with meaningful education campaign and engagement with taxpayers on compliance requirements. Smart use of amnesty to lure non-compliant taxpayers into the tax net is also vital. Finally, adequate resourcing, staffing, and training for all tax-related administrative functions are essential, particularly for oversight functions such as those vested in the state and federal houses of assembly.

At a macro level, the Constitution of the Federal Republic of Nigeria should also be amended to promote fiscal federalism and properly define the taxing powers of the Federal, State and Local Governments. Only through the simplification of all tax laws as well as effective harmonization at all levels can the multiplicity of taxes be eradicated, incentives created for Internally Generated Revenue and the transparent use of such revenues to fund governance and promote sustainable and inclusive development throughout Nigeria. The Nigeria Customs Service (NCS) and Federal Inland Revenue Service (FIRS) should be merged to become a single Federal Revenue Authority (FRA) in order to enhance revenue collection, exchange of information and reduction of revenue leakages. On the broader international level, the government also needs to comprehensively implement the Organization for Economic Cooperation and Development (OECD) Base Erosion and Profit Shifting (BEPS) Action Plan to halt the erosion of the tax base by large profit-shifting companies. In complement, a framework should be developed for taxing micro, small and medium enterprises (MSMEs), which currently account for 48.47% of GDP, and the value-added tax (VAT) thresholds should be set such that not all companies will be required to register for VAT. This will help to reduce the cost of VAT administration. Finally, a data-driven and information technology-based tax system are essential, starting with the government's Tax Identification Number (TIN) project, which needs to be successfully implemented to grow the tax base and instill tax transparency and accountability.

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