The role of taxation
Government should not be fixated on introducing new taxes and increasing tax rates on the already over-burdened businesses and taxpayers rather than helping them grow and thereby increasing the tax base and tax revenue.
The World Economic Forum in its 2011-2012 global competitiveness report ranked Nigeria 127 out of 142 countries surveyed worldwide. With this ranking Nigeria is only ahead of 15 countries in the world covered by the survey.
To put this in proper perspective, Nigeria trails behind a number of countries in Africa including Ghana, Kenya, Algeria, Egypt, Morocco, Rwanda, Mauritius, South Africa and Tunisia. With respect to comparable countries with similar growth prospects such as the Next Eleven (N-11) economies identified by Goldman Sachs, Nigeria did not perform any better. Out of the N-11 countries, Nigeria has a lower ranking than Pakistan, Bangladesh, Egypt, Philippines, Vietnam, Iran, Turkey, Mexico, Indonesia and South Korea.
In the Paying Taxes 2012 study conducted by PwC, the World Bank and IFC (International Finance Corporation), Nigeria ranks 138 overall out of 183 economies on the ease of paying taxes. The study covers a range of aspects of tax administration. On these Nigeria ranks 123 on number of tax payments, 180 on time required to comply and 56 on total tax rate.
Clearly the worst sub-indicator for Nigeria is the number of hours required to comply with tax obligations. Going by this indicator, Nigeria ranks lowest in Africa and only ahead of three countries in the world: Vietnam, Bolivia and Brazil. The enormous time required for tax compliance in Nigeria is a reflection of the bureaucracy, complexities and cumbersome manual tax administration system in the country.
As a result, Nigeria continues to slip back on the ease of paying taxes index because of slow and uncoordinated approach to tax reform while most countries have improved their tax systems aggressively to become more competitive.
Role of taxation
Tax has a significant role to play in making Nigeria competitive but the solution is not to simply throw tax incentives at investors. The most important incentive is to develop an efficient tax administration system and robust tax legislation. Investors are looking for certainty of tax treatment which is consistently applied and stable to enable long-term planning.
With large budget deficits in the economy in recent years and volatility in oil prices there is a clear expectation that governments at various levels in Nigeria need to generate more tax revenue. But the solution is not to increase tax rates or introduce new taxes.
This includes the sales tax in Lagos, the hotel consumption tax in Lagos and Edo states, the Social Services Levy in Rivers State, and at the federal level the recent Local Content Development Levy and Employee Compensation Contribution, to mention a few.
The real solution to more tax revenue is through widening the tax net through enforcement of compliance and growing the tax base through economic development. This can be achieved by combating tax evasion, integrating the informal sector and helping taxpayers by simplifying the compliance process.
Businesses have a key role to play in economic development. Government should not be fixated on introducing new taxes and increasing tax rates on already over-burdened businesses and taxpayers rather than helping them grow and thereby increasing the tax base and tax revenue.
The Nigerian tax system has undergone significant recent changes to reduce obsolete provisions and simplify main ones. Investment incentives also have been introduced to stimulate private sector investment from within and outside the country.
The Companies Income Tax Act, for example, has been amended to encourage potential and existing investors and entrepreneurs. The current rate in all sectors, except petroleum, is 30%.
A five-year tax holiday is now given to industries so they can make a reasonable profit within their formative years. Industries in economically disadvantaged local government areas enjoy a seven-year tax holiday and an additional 5% capital depreciation allowance over and above the initial capital depreciation allowance.
Industries can also deduct up to 120% of research and development expenses provided that these activities are carried out in Nigeria and are connected with the business from which income or profits is derived.
Industries that have in-plant training facilities enjoy a 2% tax concession for a period of five years, while industries that provide infrastructure – such as roads, water and electricity – that ordinarily should have been provided by the government can deduct 20% of the cost of providing those facilities.
Tax concessions are also given to industries with high laborto- capital ratios. Industries that use some finished imported products as inputs also get a tax concession to encourage local fabrication. Other incentives include a reinvestment allowance and tax credits for using local raw materials.