The recent privatisation of former Power Holding Company of Nigeria (PHCN) holds high hope for the provision of uninterrupted power supply which would give a boost to operations of many businesses in the country. However, Business Editor, ANDY NSSIEN, reports that an equally formidable challenge for the businesses in Nigeria is the issue of multiple taxation which has attracted both local and international concern.
Nigerian businesses groan under multiple tax
Olusegun Aganga, Minister for Trade and Investment
Multiple taxation which entails the levying of tax by two or more authorities on the same declared income, asset, or financial transaction, has kept Nigerian businesses at serious disadvantage of serving as a springboard for achieving economic growth and development.
The World Bank in a detailed survey gives an insight of what Nigerian businesses have had to contend with in the past 10 years in its 2011 report.
The study demonstrates the degree to which multiple taxation burdens businesses and traders, reducing their ability to compete domestically with imported products and to compete successfully in export markets.
The report which noted the existence of three tiers of government in the Nigerian federation; the federal government, 36 state governments and the Federal Capital Territory, and 774 Local
Government Areas said the exact number of 'taxes' levied on businesses seems to vary significantly between various states and local governments throughout Nigeria. Also, "businesses may be subject to as many as 100 different taxes, charges, fees and levies and in some cases taxed for the same event or asset that are levied by the three tiers of government".
In an environment where trade taxes, surcharges and a plethora of other levies add to the operational and transaction costs of businesses, their arbitrary implementation heightens the uncertainty to Nigerian enterprises and further increases the cost of doing business.
The impact of multiple taxation on competitiveness, and therefore external integration, can be profound, the survey said.
In addition, the multitude of taxes on the transportation of producer and consumer goods in particular impairs the integration of internal markets and the establishment of a fully integrated economic space within Nigeria, implying much broader economic and social impacts, including on poverty levels.
By impairing the integration of the national market, these mobile levies also reduce competition between companies located in different states in Nigeria.
According to the report, the direct tax burden is comparable to their Sub-Saharan African (SSA) counterparts, but variation is high across states.
It said, on average, firms paid about 31per cent of their pre-tax profits on taxes which is comparable to other Sub-Saharan African countries, but the burden varies strongly by state.
The World Bank cited firms in Ogun, and Lagos which paid around 17 and 23 per cent respectively, while firms paid as much as 51 per cent of pre-tax profit in taxes in Enugu. This is partly a composition effect as traders in Lagos are relatively larger in terms of turnover.
The report explained that being subjected to a relatively higher number of tax events, traders in Lagos were also more knowledgeable of the tax system and better able to challenge any policy perceived to be offensive and injurious to their interests.
This report is comparable to the World Bank's Doing Business survey which revealed that Nigerian businesses on the average paid around 32 per cent in pre-tax on profits, compared to 41 per cent in Ghana, 49 per cent in Kenya, 31 per cent in Rwanda and 30 per cent in South Africa.
The survey also captured the presence of high 'nuisance taxes'. In the aggregate, firms pay the overwhelming share of taxes to the federal government (about 87 per cent of the total tax burden),
and only a relatively small share of taxes are collected at the state, local and ministries, departments and agencies ( MDA) levels in the form of numerous smaller taxes that, at less than one per cent of total tax revenues, are tantamount to "nuisance taxes". The administrative burden of collecting nuisance taxes by different jurisdictions and classifications often tends to outweigh any benefit both to the private sector and to tax authorities, especially when the tax system is plagued with weaknesses in assessment including lack of understanding of the tax payers' rights and by the government appointed agents as well as private assessors appointed on their behalf.
Small traders are not spared, according to the survey, as they are penalised even more: Sector analysis suggests that the agriculture sector comprises relatively smaller firms within the sample, but they paid relatively higher incidence of pre-tax profits around 54 per cent, which is indicative of the regressive impact of taxes. Manufacturing enterprises paid around 43 per cent.
Firms active in the services sector were exposed to only limited imports of goods and had to pay few import taxes. This created a lower overall burden of around 34 per cent as immobile factors and assets make up the majority of such firms' operations; and those tend to escape the portion of the tax net penalising cross border (and internal) movements, such as transport and vehicle tax, radio tax, road tax and haulage fees.
Also, taxes on mobility are particularly high. According to the survey, traders with mobile factors (inputs or outputs) are subject to road related taxes/or levies which account for approximately 10 per cent of their pre-tax profits on average, and as much as 24 per cent of the pre-tax profits of some firms.
Most traders incurred road taxes through the transportation of inputs or finished goods from and to the main entry or exit points in Nigeria (Lagos primarily) to factory or outlet, implying additional costs to exporting, reducing margins of locally produced goods and making them less competitive in world markets.
However, these mobile fees are levied indiscriminately on goods transported within Nigeria and therefore also substantially affect domestic trade. These mobile fees include mobile advertising fees for marked vehicles, radio levies, and other (in)formal payments at road blocks along main and secondary roads.
Another aspect is high compliance cost which consists of costs of filing and complying with taxes, resources spent on external tax consultants, and "gifts and unofficial payments" to government appointed "tax consultants and other officials". Compliance costs account for an average 11 per cent of an enterprise's pre-tax profits, implying that the total tax and related administrative burden is around 42 per cent on average for medium sized firms.
This relatively high cost of tax compliance places Nigerian firms at a distinct disadvantage compared to other countries. "Gifts and unofficial payments" to the authorities and tax consultants account for around six per cent of pre-tax profits, half of which are incurred when complying with high trade-related taxes (customs duty and obtaining duty drawback). The plethora of taxes and documentary requirements along transport corridors and at the border leaves substantial room for arbitrariness, creates opportunities for rent-seeking, and increases
direct costs to companies.
The report added that while duties and VAT are refundable, traders face long delays in receiving refunds from the federal government, exacting additional costs on firms in the short-run.
Expectedly, there have been avalanche of resentments from the business community in Nigeria who have had to express disappointments on the way the matter has degenerated to in the last 10 years.
MAN cries out
Erstwhile Minister of Industries and National President, Manufacturers Association of Nigeria (MAN), Kola Jamodu, has called on federal, state and local governments to address the problem of multiple taxation and provide infrastructure to aid growth of industries.
Jamodu made the call during a familiarisation visit of MAN's national executive members to industries in Kwara State, including KAM Industries, United Foam, RAJRAB Pharmaceutical Company and Forgo Battery Industries, among others.
He said the growth of industries would bring about a solution to the worsening employment problem and drastically improve economy of the country.
Last year, MAN had expressed concern over the effects of multiple taxation on businesses by governments in the South East zone.
Mr. Nwabueze Anyanwu, the Vice-Chairman of the association and Coordinator of Imo/Abia chapters, told newsmen in Aba that the multiple taxation had adversely affected the growth of business in Nigeria.
He said that the association had carried out a research, with the Washington based-Centre for International Private Enterprise (CIPE), on the burden of multiple taxation.
Anyanwu said one of the objectives of the programme was to enlighten the citizens and the political class as well as bureaucrats in the zone on the effects of multiple taxes on businesses.
"The growth of Nigerian economy has over the years, remained stunted as a result of many negative factors, one of which is the challenge faced by businesses from uncoordinated tax administration.
"This issue, among other factors, is responsible for the decline of the manufacturing sector," Anyanwu said.
According to him, the sector's contribution to the nation's GDP declined significantly from 9.5 per cent in 1975 to 6. 65 per cent in1995.
"It further declined to 3.42 per cent in 2005 with a marginal increase to 4.21 per cent in 2010.
"Similarly, manufacturing capacity utilisation declined rapidly from 70.1 per cent in 1980 to 29.29 per cent in1995, while 52.78 per cent was recorded in 2005, but the figure declined to 46.44 per cent in 2010."
He observed that the incidence of multiple taxes was on the increase adding, "the exact number of taxes and levies collected from enterprises in Nigeria are not clearly defined by the various tiers of government.
"Studies, however, estimated the number to be over 500 different taxes, with states and local governments responsible for a greater part of the taxes and levies."
Farmers' burden
Nigerian farmers are also reeling under yoke of multiple taxation.
According to reports, multiple taxes and levies by state and local governments are taking a toll on cashew and cocoa farmers, making it difficult for them to meet the cost of farm inputs.
At the end of a meeting in Lagos to review the transformation agenda of President Goodluck Jonathan, top officials of Cocoa Association of Nigeria (CAN), National Cashew Association of Nigeria (NCAN), Cocoa Exporters Nigeria Group, among others demanded that the suspension of Negotiable Duty Credit Certificate (NDCC) by the Customs be lifted and multiple taxes and levies by state and local governments be abolished.
Banks and stock markets also cry
Bankers also cried out for help.
Deposit money banks in the country have raised concerns about the negative effect multiple taxation is having on their financial performance.
According to the banks, the issue is becoming worrisome as it has drastically reduced their profits as well as shareholders' funds.
The chief financial officers (CFO) of banks in Nigeria who spoke at the KPMG CFO Forum last year in Lagos called on all the relevant authorities and other stakeholders to take the issue seriously, adding that there was need to address the issue in time before it got out of hand.
Arguing that the increasing tax burden on the banks was worrisome, they urged the government to set up a committee to engage the government on the need to find a solution to the problem.
And in the stock market, shareholders are clamoring for the abolition of withholding tax which they claim amounts to double taxation.
Although, this problem has reared its ugly head in more than 10 years ago, the present administration has not been playing the ostrich on the issue.
Government intervention
Apart from attacking the issue of power supply headlong which has been a major disincentive to businesses, the government has rolled up its sleeves to address the challenges of multiple taxation.
The Joint Tax Board (JTB), the umbrella body for revenue agencies in the country has recently admitted that multiple taxation was adversely affecting Nigeria's level of competitiveness and making the tax system inefficient.
The body explained that collection of taxes by all the tiers or any tier of government does not constitute multiple taxation. However, if the tax being collected is not in the approved list of taxes or not backed by any other law at the state or local government levels respectively, it is regarded as multiple taxations either for individuals or companies.
The Board said the Tax Identification Number (TIN) introduced by the JTB, was one of the strategic pillars aimed at bringing to an end the issue of multiple taxation in Nigeria, and also bringing as many Nigerians as possible into the tax bracket.
"There is a list of approved taxes and levies, containing 39 different taxes and levies applicable to all sections of the Nigerian economy. Out of these, eight are reserved for the federal government to collect, 11 for states and 20 for local governments. Unfortunately, the federal, states and local governments have all gone out of this list resulting to multiplicity of taxes," the JTB explained in a statement.
According to the body, revenues collected as taxes by states and local governments are not sufficient for them to run the states, forcing them to seek alternative sources of revenues in the form of Internally Generated Revenue (IGR) and multiplicity of taxes.
It regretted that in most cases, "a tier of government looks into the approved list, selects one of the taxes it is supposed to collect and creates additional taxes and levies under the same heading. These different new taxes are subsequently put on the taxpayers."
For an individual who pays personal income tax on either his salaries or wages, if he is in a state or local government where he has to pay other taxes that are imposed or collected by the states or local governments, these other taxes, apart from his income tax, are multiple taxations on the part of that individual.
Furthermore, it said, where a local government subjects individual taxpayers to different kinds of levies like radio levy, wagon levy, generator levy, among others; all these levies that are imposed on individuals can be termed as multiple taxations.
Bad day for tax consultants, MDAs
The federal government said it is now a crime for any state in the country to engage anybody or an organisation other than the Board of Internal Revenue Service (BIRS) to collect approved taxes.
These taxes are to be published soon by the Joint Tax Board (JTB), an umbrella body of all tax jurisdictions of the three tiers of government in the country.
The new policy, which is with immediate effect, will henceforth attract serious penalties for any state that contravenes it. Accordingly, the JTB has been instructed to "immediately monitor compliance or otherwise by all tax authorities and report cases of infraction to the National Economic Council (NEC) for action."
Stakeholders, comprising federal government's representatives led by the Co-ordinating Minister for the Economy and Minister of Finance, Dr. Ngozi Okonjo-Iweala and state finance commissioners as well as representatives of local councils in Nigeria, met recently to adopt the tax policy in Abuja.
The policy stated in part: "Tax authorities should desist from engaging the services of consultants, and agents to assess and collect taxes and levies listed in the Taxes and Levies Act as this is in contravention of Section 2(1) of the Act. States should be strongly advised to discontinue this action immediately."
Another major outcome of the new tax road-map is the resolution banning Federal Ministries, Department and Agencies (MDAs) from collection of taxes and levies because this is a violation of the Taxes and Levies Act.
The resolution said: "Mr. President is to issue an Executive Order to all federal MDAs to stop collection of taxes and levies in violation of the Taxes and Levies Act and also directing the Inspector-General of Police to dismantle all road-blocks across the federation for tax collection. Commissioners of Police will be required to ensure compliance within states."
This action, under the road-map is a short-term measure and is expected to be concluded by the end of 2013. To enforce this, the NEC Secretariat is mandated to work with the Head of Service and the Office of the Accountant-General to prepare the draft Executive Order and a memo for the Vice President to convey the decision of NEC to the President.
Okonjo-Iweala had, earlier while disclosing the discussion of the review resolution, appealed for the understanding and co-operation of the states in the final adoption of the resolution, saying that the scourge of multiple taxation was harmful to the nation.
She gave a background to the committee's task and the expected outcome of its assignment: "As we all know, the issue of multiple taxation is one, which has been on the front-burner for many years now in Nigeria. Despite several attempts by the government to tackle this issue, it has remained unabated – affecting both big and small businesses and the movement of goods and services in the country.
A tax consultant, Ayo Olude was of the opinion that the government has taken appropriate decision which could sanitise our tax system, but said the beneficiaries of the status quo would now pay the price.
He said the contractors and their cronies in government would now realise that they cannot continue to feed fat on the indiscriminate charges levied on businesses.
Olude said in most of the states, the contractors made life unbearable for the businesses and use threats and other means to extort money from the public, even when there was no where to verify that such funds were remitted to government.
He said within a state, movement from one local government to the other at times, is cumbersome as some of these people in the guise of collecting taxes erect road blocks which lead to unnecessary delays and at times results into scuffle with other road users.
He criticised the situation in some states whereby in addition to VAT which is tax on consumption, various other forms of taxes such as hotel consumption tax, restaurant tax, wine tax, eating tax, food tax or levies are collected, adding that all these were under consumption and they amount to multiple taxation.
However, Olude admitted that the whole issue stems from corruption, adding that if those in positions of authority play by the rules, there would be no loopholes for the disgruntled elements to cash in and exploit the system.
