Economic Confidential, May, 2009

FEATURES

Boosting Government Revenue through Non-Oil Taxes

By Remi Babalola

 The global financial and economic environments have changed drastically. The world economy has been witnessing global financial sector upheavals and economic meltdown of immense proportion and Nigeria in the last ten months is feeling the consequential impacts. The primary channel through which the global economic recession is impacting on our economy is via reduced demand for oil exports, leading to downward trends in commodity prices, with associated negative impact on government revenue. The secondary channels include reduced capital inflows into the Nigeria economy, reduction in the availability of trade finance, emanating from global credit crunch; and decrease in remittances from Nigerians in the Diaspora, arising from worsening employment prospects. At times such as this, we need far-sightedness and courage. We also need to be strategic and innovative in our thinking and creative in our approach, so as to reduce as much as possible the knock-on effects of the global crisis.

Public finance is an important subject at any time, but it becomes more apparent when we consider the country’s population and the magnitude of government expenditures.  Our estimated population of 150 million people and a poverty incidence rate of about 54.4% (about 76.2 million people) have serious developmental challenges which can only worsen as long as population growth remains unchecked or as long as the revenue base to support the population growth does not sufficiently support such growth.  The need to diversify the economy away from wasting asset (oil), deepen and expand our non-oil tax base is therefore imperative if meaningful progress is to be made in our growth and transformation efforts. We must leverage the opportunities provided by the current meltdown to plan and initiate fundamental changes in the management of the economy for sustained growth and advancement.  Our mindset, our perspectives need to change fundamentally.

The provision of public schools, public health and public infrastructure all require increase in government spending, especially in these modern times. Also, government must incur expenditure for the provision of adequate security; fulfill its commercial functions and run itself.  Therefore, the need for adequacy of revenue at all levels of government has become imperative, given the expenditure profile of government aimed at reducing poverty, generating employment, boosting growth and creating wealth.

Despite plans over the years to diversify government’s revenue base, Nigeria’s fiscal and budget landscape have been dominated by oil income, which accounts for about four-fifths of total government revenues. But swings in production and the international oil price have continued to create enormous volatility in government revenue, thereby truncating development plans and projects.  The negative impact of ‘boom - burst cycle’ of oil prices can only be addressed by enhancing the internal revenue profile of governments in order to sustain and deepen our development process. Currently, all tiers of government spend far more than they earn. Unfortunately, the chunk of the earnings goes for overheads and personnel costs, with very little left for capital projects, especially infrastructural development.

No doubt, oil revenue, as it is today in Nigeria, cannot meet the numerous needs of the nation.  Therefore, other sources of revenues should be exploited and employed. But those sources of revenues must be legitimate, legal, and investment-friendly. As you are aware, the size of revenue that government generates at any point in time is influenced by its resource endowment, level of economic activities and the efficiency of its revenue collection machinery. The stability and growth of revenue is therefore a function of the ability of government to stimulate and sustain a high level of economic activity and an optimal mix of revenue generating instruments. Available information shows that, although revenue accruing to the various levels of government over time has increased in absolute terms, their revenue profile is still dependent largely on statutory allocations, while the performance of internally-generated revenue has remained grossly unsatisfactory – until very recently. Indeed, at this challenging time, any State that relies substantially on the allocations from the Federation Accounts will find it difficult to meet the needs of its people.   It goes without saying therefore, that the country must develop strategies to increase its revenue generation in the face of the challenging time and ever increasing expenditure needs.

There are a number of sources for funding government expenditure.  Of these sources, however, oil and its adjuncts have remained our mainstay. Unfortunately, as recent events around the globe have shown, oil and oil-related sources expose us to shocks, and except we find enduring answers, reliance on these sources may truncate our growth and development agenda. Indeed, records have indicated that the country recorded a shortfall in oil revenue from an average of $2.2 billion monthly recorded in 2008 to about $1 billion in January 2009, a 50 percent reduction. This drastic drop is attributable to the fall in the price of crude in the international market occasioned by the global economic crisis, restiveness in the Niger Delta region, and drastic reduction in Organisation of the Petroleum Exporting Countries (OPEC) quotas.  OPEC forecasts have also indicated that crude oil demand worldwide would continue to be soft for the rest of 2009 due to the global economic crisis, a clear indication that reliance on oil revenue cannot sustain the development needs of the Nation.

The FIRS has generated substantial revenue in the last four years but not sufficient for development.  Experience has however shown that the most reliable source of revenue is taxation. It has a correlation with the level of Gross Domestic Production (GDP). Thus, with increase in the GDP, it is almost automatic that the revenue from taxes will increase.  Apart from its revenue generating objective, taxes could be used to stimulate economic development as well as for income distribution and redistribution. It could also be used to stabilise the economy in periods of economic challenges, such as the current situation we are in. It is therefore imperative for our country to have in place a robust tax system with little or no opportunities for evasion, avoidance and non-compliance.    

Revenues generated by Government to date are insufficient to meet our development needs. While our revenues have in the aggregate declined, reports have indicated that we need about 50,000 MW of electricity from our present 4,000 MW. Roughly estimating the need to immediately overhaul the power situation to achieve about 25,000 – 30,000 MW for our present level of development, and based on the estimates of about $1.75m per MW for new infrastructure – combined with transmission and generation, the Nation would require about $36.75bn - $45.5bn (N4.4 – N5.46 trillion) to fund infrastructure development. This amount averages at about 50% of the amount of monies allocated to the States and Local Government over an 8 year period.

Also, an estimated 12- 16 million units of housing deficit by the recent reports of the United Nations Centre for Human Settlement (Habitat) will cost the Nation over between N42 – N56 trillion Naira to fund, based on an estimated average cost of N3.5 million per housing unit. Besides, provision of educational infrastructure at primary, secondary and tertiary levels will require no less than N20 trillion per annum.  In all of these, we have not considered the cost of health care, provision of incentives to encourage individual and communal development, provision of social amenities for the young and old, as well as the sheer running of the public service.

Meanwhile, total monies allocated from Federation and VAT pool accounts (including excess crude allocations) for the period from June 1999 to May 2007 to the three tiers of Government, amounted to N16.5 trillion, with over 85% derived from crude oil and crude oil related revenue.  Therefore, we are dependent on a revenue source that is neither sustainable nor enlists the collective will and accountability of the people of Nigeria.  Indeed, a close examination of the Nigerian tax system today will reveal that the three tiers of government will find it extremely difficult to survive without oil revenues which accrue to them by way of allocation from the Federation Account.  In 2008, about 76% of the income budgeted by the Federal Government came from oil and gas. Much of the other 24% came from the revenue sources such as VAT and customs and excise duties. Despite the wide prevalence and massive turnover of incorporated companies in Nigeria, they only contributed a paltry 6.3%.  With the dwindling fortunes in the international oil market coupled with the disruptions in the Niger Delta, this signifies that States with low Internally Generated Revenues (IGRs) will find it difficult to survive the current precarious situation.  Any State that does not generate 15% of its total revenue internally may need to adjust or realign its policies and strategies in view of current realities. 

These issues need to be addressed urgently to avoid overdependence on petroleum which has been our dominant revenue source for national development over the years. The danger signals observed both within and outside the country underscore the need to move away from total reliance on petroleum related revenues. One of the danger signals is the crisis in the Niger Delta which has interrupted petroleum operations in the past few years.  Another looming threat is the global search for alternative sources of energy. The United States of America, the highest buyer of Nigerian crude oil, Brazil and several other countries are seriously engaged in research in this area. Some of these research projects have recorded positive results. Sugar cane, ethanol, and other forms of biofuel are very imminent substitutes for petroleum products as energy sources. What this means is that Nigeria and other oil producers may be holding on to a product that few would need in the future. The economic consequences of this will be very devastating.  The diversification of the economy and the increase in non-oil taxes must therefore move at a much faster and on sustainable bases.

The need to reposition non-oil tax revenues as the number one source of sustainable revenue for national development cannot be over emphasised. This underscores the need to continue with the ongoing tax reform initiatives at all tiers of government.  For effective tax reform, collaboration within the Federal Government and State Governments, between States, between the Federal and the State Governments is critical. Central to effective tax reform is having effective access to the right information, having the right skills in sufficient numbers, and working within the right systems which should be automated with minimal human interference, especially in determining tax assessments and collecting tax dues.

Various reform efforts to strengthen tax administration in the country, and this has culminated in 2007, the enactments of FIRS (Establishment) Act, Companies Income Tax (Amendment) Act, Value Added Tax (Amendment) Act and the National Automotive Council (Amendment) Act. However, four bills remain outstanding and they are; the Personal Income Tax (Amendment) Bill – to reduce personal income tax; the Petroleum Profits Tax (Amendment) Bill – to improve overall tax administration; the National Sugar Development Council Act (Amendment) Bill – to remove sugar levy; and the Customs and Excise Tariffs Act (Amendment) Bill – to remove sugar levy. I would like to use this opportunity to urge the National Assembly to speedily consider these Bills with a view to ensuring their passage in the interest of the country.

Since tax must be collected in a professional manner, the FIRS and other tax collection authorities owe the taxpayers the required education and support services. Efforts must be made to improve on this area.  There is also the realization that improvement in revenue generation is not so much about overtaxing citizens (more tax is actually a disincentive to investment) but rather realizing that revenues can be generated from an increase in services provided and generated through the deepening and expansion of the tax base, in addition to effective monitoring and close surveillance of all revenues that accrue to government.   

Investigations have revealed that many individuals (especially the self-employed) and organizations are either not in the tax net or under taxed.  The government is currently collecting far less in income tax (individuals and corporate, including withholding taxes) than it should. The self-employed persons outnumber those in paid employment by ten to one ratio at least. In terms of earnings, on average the self-employed earn about four times more than others in paid employment. Yet the tax yield from personal income tax by direct assessment is on the whole less than 10% of the yield from PAYE system. Other taxes like Capital Gain Tax (CGT) and Stamp Duty are only paid by those who have an urgent need to perfect their property transactions.  Government, therefore, intends to continuously revamp tax collection machinery through restructuring and strengthening for more effective collection. We expect improved collaboration rather than friction between and amongst Federal, State and Local Government authorities to enhance tax revenues. Hence it is imperative that the Joint Tax Board must operate effectively in its task of harmonizing the regulations and management of taxes among all tiers of government.

The current decline in oil revenue provides us, as a country, a unique opportunity to reposition our tax system and increase the non-oil revenue.  However, the expected increase in non-oil revenue should not come in form of higher tax rates, but improvements in the efficiency of collection of non-oil revenue and expansion of the tax net by the major revenue generating agencies.

However, an observable disturbing trend is the delay in the remittance of revenue collected by some banks to the appropriate authorities. There is also alarming volume of tax debts owned by companies, institutions and MDAs to government, raising question of whether the current penalty for defaulters is adequate.  Indeed, it has been revealed that debts on Withholding Tax (WHT), Pay As You Earn Tax (PAYE)  and Value Added Tax (VAT) are put at over N260 billion and over US$260m owned by companies, institutions and MDAs to government. This is unacceptable and must be stopped. Government is currently studying the situation and will soon review the penalty for defaulters.  

 The Federal Government has put in place appropriate measures to eliminate inefficiencies, corruption, leakages and all other imperfections in the system to enhance the revenue of the government.  Additionally, steps are being taken to make revenue generating MDAs to accurately disclose earnings, payments and remittances to the Federation Account. Indeed, the process of commissioning a process audit of all revenue-generating agencies has commenced.  Besides, as a measure of improving the nation’s investment climate, the Government has rolled back excise duties on selected products as part of efforts to encourage the manufacturing sector.  More importantly, the Government is determined to ensure that taxes are certain, fair, easy to understand, straight forward to pay and economical to collect.  

The current Administration is determined to make a difference in terms of revenue generation and management of the nation’s resources through effective tax administration policies and reforms. Government is aware of the need to enhance revenue through broadening and deepening the tax base, effective surveillance efforts and aggressive monitoring by the relevant government agencies. In this regard, efforts are on to reform the current tax system in order to enhance revenue. The proposed tax reform is aimed at addressing multiple taxations and the need to strike a balance between governments’ lawful need for revenue and the desire to encourage investors. Over the years, there have been several policies aimed at tax compliance by individuals as well as corporate organizations. The bottom-line of such policies is the desire by all tiers of government to derive high revenue from tax. Our charge is to be proactive and look beyond the challenges of the moment to reposition the economy to effectively meet its present and future growth needs, which all Nigerians will be proud of.  No doubt, we all appreciate the challenges before us and would therefore be willing to collaborate and cooperate with the Government to move the Nation to an enviable height.   

* Remi Babalola, Finance Minister of State, delivered this speech at the 11th Annual Tax Conference of the Chartered Institute of Taxation of Nigeria held in Abuja