By
Prof. Kabiru Isa Dandago PhD, FCA, FCTI, FNIM, FNAA, FFAR, ACS, MNES, AQIF, MBEN-Africa
Department of Accounting, Bayero University, Kano-Nigeria
Kidandago.acc@buk.edu.ng, kidandago@gmail.com, +2348023360386
Introduction
The Tax Reforms Bills (TRBs) 2024 are supposedly aimed at capitalizing on the laudable purposes of Taxation to re-set the fiscal policy direction of the country towards achieving sustainable economic development in the country in a reasonable time. This calls for courageous and objective reform measures on the tax system of the country. The globally acceptable purposes of Taxation are: (i) generation of revenue to cover government expenditures; (ii) stabilization of the economy against inflation or deflation; (iii) controlling the productive and consumptive behaviors of producers and consumers of goods and services in the economy; and (vi) narrowing down the gap between the rich and the poor. Any tax system that is not achieving these purposes requires strong-minded leadership that would courageously take the bull by the horns to reform the system and ensure that the purposes of taxation are achieved in the best interest of all and sundry in the economy.
Purposes i and iv above are those that might not be too technical for the common man or woman to understand, as he/she would be happy to see a huge amount of tax revenue being generated through the power of Taxation for the execution of many legacy projects that would squarely improve his/her life, as the gap between him/her and the rich (the wealthy) becomes narrowed or closed! Achieving the two purposes and, of course, the other two purposes demands tax reforms that would heavily reduce (or eliminate) tax burden on the poor/commoner and roundly tax the wealth of the rich via (i) incomes, (ii) profits, (iii) gains, (iv) consumptions and (v) assets taxes.
As the rich (the wealthy) are taxed via the five (5) sources, they should take it as an involuntary sacrifice of some little parts of their wealth for providing social amenities for all and sundry in the economy to enjoy, thereby reducing the wide gap between them and the poor. Again, when tax payment is mainly by the rich, those in positions of authority would not dare misuse the money, knowing fully that, as the rich cry against them, the power they hold is bound to get lost as the rich will not tolerate abuse of the money they pay for use in providing good governance for all to enjoy.
The Practical Targets of the TRBs
For the poor and the very poor, the TRBs have made it clear as to how they are to be taxed with respect to their income, profit (if any) and consumption, in view of the fact that the taxes specified in the Bills emphasize on: (i) VAT and (ii) income tax. The fact that a lot of exemptions have been theoretically granted on some essential goods and services, when inflation catches up with the VATable goods and services, the non-VATable goods and services would also have their prices increased since they are bought and sold in the same market, and there is no price control mechanism in place. Again, the poor and the very poor are also, out of necessity, into heavy consumption of information and communication services, banking and other financial services and other services that are VATable. On the account of this theory and practice consideration, the poor and the very poor are, therefore, fully in the tax net! On income tax, most income earners, as per the minimum wage law, would not be spared the burden of making some payment of tax from their monthly income.
The highest band of the progressive personal income tax rates is proposed to have an increase of just 1% (from 24% to 25%) instead of increasing the highest band rate to 30%, 35% or even 40%, with the progression of income moving up from N50m to N100m at 25%; N100m to N200m at 30% and any amount above N200m at 35% or 40%, as is obtaining in some tax-based economies of the world. This is to make ‘rich individual income earners’ pay much income tax to compensate for the little amount that would have been collected from the numerous low-income earners. Almost all civil servants and staff (academic and non-academic) of public tertiary educational institutions are earners of income less than N9, 000, 000.00 per annum, with monthly before tax emolument of less than N600, 000. This makes all of them income taxpayers at the lowest band rate of 15%. But there are rich income earners that might be collecting monthly emolument of N10, 000, 000 or more! They should be caught up at the appropriate higher band rates of 30%, 35% or 40% as the case might be.
It is proposed that companies income tax rate shall be reduced down from 30% to 25%, as per the provisions of the TRBs. Companies are artificial persons that are owned mainly by the rich and the very rich who enjoy a lot of benefits in the economy, including many tax incentives for them to continue to exist. But as companies play the expected key roles of producing high quality goods and services at reasonable prices and creating employment opportunities in the economy, they are also expected to serve as veritable sources of revenue for use by the government to execute developmental projects. Even as the proposed 4% Development Levy on assessable profit of companies is added, the total tax liability of companies is still less than the present companies income tax rate of 30%.
The Bills provide that VAT shall be progressively increasing from the present 7.5% to 10% (in 2025); to 12.5% (in 2026); and to 15% (in 2030). These increases are bound to be followed up with increases in the prices of the affected goods and services, which would ultimately kill the purchasing power of the consumers, mainly the poor who finally consume the goods and services no matter the economic situation and no matter their purchasing power. The rich and the very rich usually collect the VAT from the consumers and remit the amount to the tax authority. The burden of VAT usually ends on the poor.
On the capital gains, which is about the difference between the amount realized on the disposal of an asset/property and its net book value and the allowable deduction of administrative expenses incurred in the course of disposing the asset/property, available statistics would show that Capital Gains Tax is one of the weakest taxes in terms of revenue generation throughout the country. The transactions on disposal of assets/properties taxable under the provisions of the Capital Gains Tax Act are not being effectively and efficiently monitored, captured into the tax net for the heavy gains being realized to be appropriately determined and taxed. This is simply because the capital gainers are the rich, who have been enjoying high level protection or avoidance by the tax authorities when it comes to taxing their incomes, profits or gains.
Searching through the provisions of the TRBs, especially the NTB, one would expect some of the sections of Chapter 2, Part 8 (Ascertainment of Chargeable Gains) to be about taxation of assets or property of various dimensions, at reasonable rates. But all the sections of the Chapter (Sections 33-55) are about gains accruing to a person on disposal of the mentioned assets and property, without specific rates chargeable on ownership of the assets or property before disposal. All the provisions here are virtually about Capital Gains Tax. As you proceed to Chapter 5 (Taxation of Dutiable Instruments), which is another chapter expected to cover taxes on the rich, one would notice that Part 1 of the Chapter is about Imposition of Stamp Duties, emphasizing on the usual duties payable on various instruments like tax stamp, dye, electronic or digital tagging, electronic receipt, issuance of certificate, etc. Even the relevant tax authority has not been specified. Part 2 of the Chapter is about Chargeable Instruments like Bill of Change, Promissory Notes, Sale or Purchase of Options, Leases, Marketable Security, etc.
As you move round and around the TRBs, you are bound to come to the conclusion that there are no clear provisions in the Bills for the squeezing/taxing of the High Net-worth Individuals (HNI) and their businesses to pay appropriate taxes that would increase the Tax to GDP ratio of Nigeria and enrich the treasuries of all the three-tiers of government in the country for execution of developmental projects which would enhance the well-being of the masses. The TRBs should be courageous enough to carry provisions that would squarely put the rich and the very rich into the tax net and make adequate provisions as to how the amount to be generated from them would be judiciously utilized to execute projects that would ensure security of their faiths, lives, dignities, posterities, properties, as well as those of the downtrodden masses in the country for peace, tranquility and sustainable national development.
The Missing Taxes in the TRBs
Apart from the need to ensure that the rich are not protected or spared from tax assessment and tax revenue collection in respect of any income, profit or gain that they make, there is the need for some special taxes to be introduced into the Bills to further tax the rich as alternative to taxing the poor through VAT and other indirect taxes. The following taxes, which are used in some countries, should be introduced in Nigeria through the Bills as part of the revolutionary tax reforms Nigerians would be proud of:
(i) Luxury Tax: This is a form of indirect tax levied on goods and services deemed non-essential or unaffordable for the average consumer and, so, consumed by only a niche. Retailers, manufacturers or service providers may be responsible for collecting and remitting the tax to relevant tax authority. Luxury tax is a specialized form of taxation, typically imposed on specific products or services considered non-essential or affordable only to the super-wealthy. Unlike conventional sales taxes, or even VAT, luxury taxes aim to target a niche market. They can be levied as a percentage of the purchase price or as a percentage of the amount above a specified threshold. For example, luxury tax may apply to real estate transactions exceeding N100m or higher-end car purchases above N100m.
Luxury taxes are often referred to as “sin taxes” or “mansion taxes”, as they serve two primary purposes: (i) they are imposed on items like cigarettes, alcohol and other products and services that might be harmful to the wellbeing of the users (but not illegalized) across all income brackets. The taxes here discourage the use/consumption of such products/services, while generating revenue for the government. (ii) Luxury taxes are also targeted at items that can only be afforded by the wealthy consumers. Examples are: taxes on ownership of yacht, private jet, fur coat, luxury real estate, jewelry, gold, diamond, plush car, plush toy and other exclusive goods/assets that are considered non-essential.
Luxury taxes have the advantages of: (i) ensuring generation of huge revenue from a small, wealthy segment of the population; (ii) discouraging excessive consumption/ownership of non-essential luxurious goods and services just to show wealth or extravagance; and (iii) provision of alternative revenue source without increasing taxes for the masses (like the VAT that is being proposed to increase from 7.5% to 15% by year 2030)! Even though luxury taxes may affect consumer behavior and the industries associated with the luxury goods or services, the luxurious consumption/ownership could be taxed on progressive rates with respect to the value of what is consumed/owned, as follows: may be 10% if value is between N10m to N100m; 20% if the value is between N100m to N500m; 30% if the value is between N500m to N1b; 40% if the value is between N1b to N10b; 50% if the value is between N10b to N100b; and 60% if the value is above N100b.
Can you imagine how much each state of the Federation would be generating monthly from these taxes, if the power to tax luxurious consumption/ownership of goods and services is vested in the States Government? Can VAT revenue come any close to the revenue that would be monthly generated by the states government through luxury taxes, considering the consumption behavior of the rich Nigerians? Let’s have these taxes in the TRBs as alternative to VAT!
(ii) Transaction Tax: This is a tax one pays when he/she buys or sells something (good or service), especially financial instrument or financial service. Transaction Tax can be raised on the sale of specific financial assets such as stock, bonds or futures. Transaction Tax can also be applied to currency exchange transactions, or levied against a mix of different transactions. Transaction Tax greatly aids government reform measures aimed at dealing with inflation and speculations in the economy.
Transaction Tax (TT) could be on all sales or purchases of securities: shares/stock, bonds, futures, etc. making both the buyer and the seller to pay a certain percentage of the value in the transaction (may be 0.5%, 1% or 2 % or 3% of the value involved). This is called Securities Transaction Tax (STT). The TT could be on currency exchanges, where a local currency would be exchanged for foreign currencies. The buyer and the seller are also to pay something in the form of TT. The rate at which the tax is to be paid is to be determined by the law or to be allowed to the relevant tax authority to fix. This is called Currency Transaction Tax (CTT). There is also Tobin Transaction Tax (TTT), which is charged against round-tripping (converting one currency to another without doing the agreed investment). If a prospective investor is given foreign currency for investment activity and he/she invests it in foreign exchange business rather than in the industrial activity, the investor is to be charged TTT for breach of agreement, and the rate here should be higher than those of STT and CTT. Bank Transaction Tax (BTT) is still a productive source of revenue in economies where withdrawals from bank accounts are made by customers through cheque facilities.
There are about forty (40) countries of the world that have made use of this Transaction Tax to raise huge sums of money as revenue for executing various developmental projects, among whom are Australia, USA, Argentina, Belgium, Colombia, Peru, Poland, Singapore, India, Italy, Finland, France, Spain, Greece, Japan, and Sweden. Some of the countries used the tax system for some time and stopped using it after achieving some aims and some of them are still using it to achieve a number of purposes. They use different rates for different TT, ranging from 0.5% to 1.6%, depending on the TT type.
Transaction Tax could be extended to all forms of luxurious transactions occurring in the marketplace (open commodity markets or super stores), events/ceremonies (where wealthy individuals spray money on celebrants), and other transactions showcasing extravagance of the rich as buyers or sellers of valuables. They are to be considered luxurious transactions because they are not necessary, but just a mere display of excessive wealth. The threshold of the transactions could be the same as for the Luxurious taxes, or a single rate of 30% or 40% could be charged on any identified luxurious transaction.
Transaction taxes have the benefits of: (i) curving volatility of financial market; (ii) curving speculation without discouraging hedging; (iii) more fair and equitable tax revenue collection; and (iv) potentials to foster equity and bridging of the gap between the rich and the poor.
(iii) Property Tax: The existing property taxes in the form of land use charge: ground rent, tenement rate, right of way, and other types of taxes on landed property ownership are to be made more effective and more productive for revenue generation mainly at the states and local government levels. Throughout the TRBs, there is no Chapter in which reference has been made to the need for the integration of these taxes/levies/rates, as per the land use charge laws of various states of the Federation. This would show commitment to the reforms measures to be taken to ensure that States Governments, and local governments under them, live up to their responsibility of ensuring massive revenue generation and collection from these identified sources. The TRBs should have made provisions for a uniform use of those charges/levies/taxes across the 36 states and the FCT, so that states that are lagging behind are made to catch up with those states that are doing well in taxing the rich property owners across the country.
For now, there are just a very few states in the country that are optimally generating revenue from these important revenue sources. It is a well-established fact that if states governments would make good use of the opportunities provided by the property taxes, insisting that all property owners must pay appropriate amount on the specific properties that they own or utilize, as per the provisions of the Land Use Charge Laws in almost all the states of the Federation, the amount to be generated would far outweigh the amount states and local governments expect monthly from their VAT share of the general pool! Land Use Charge and other property tax payments are benefit-driven and they will further enable the State Governments to provide more social amenities and economic infrastructures to the populace.
Conclusion
This article buttresses the argument that Value Added Tax (VAT), which disproportionately burdens low-income earners (the poor), is not to be subjected to gradual increases for it to be doubled in a matter of six (6) years, from 7.5% in 2024 to 15% by the year 2030. Rather, VAT is to be decreased from 7.5% down to 2%, 3% or at most 5%, in view of the fact that there are many big sources of revenue that could provide much more revenue for the three-tiers of government than VAT and got the masses relieved of the burden of VAT payment and the accompanying inflation that the masses would suffer from. These big tax revenue sources, which have the potential of raising the Tax to GDP ratio of Nigeria from the present 9.4% to the African average of 19% or even the OECD average of 34.2%, might have been forgotten, overlooked, or under-rated by the drafters of the TRBs.
As Nigeria faces significant fiscal challenges and economic disparities, Luxury taxes, Transaction taxes and Property taxes offer powerful tools to address inequality and fund essential public services. It is time for policy makers (or TRBs drafters) to prioritize equity in taxation and ensure that the wealthy contribute meaningfully to Nigeria’s development goals. The three (3) categories of taxes would not only align Nigeria with global best practices but also foster a more inclusive and equitable society. The three (3) rich-inclined taxes have the capacity to generate much more revenue than VAT, in view of the fact that about 90% of the wealth in the country is owned by a very small percentage of people! If the 3 categories of taxes are administered properly, huge revenue generation for executing developmental projects by government would be very possible; the gap between the rich and the poor would be better narrowed or closed down in the country; fair re-distribution of wealth would be more effective; economic stabilization would be much better; and the goal of sustainable development would be better achieved.
