Tax Reforms Aimed At Promoting Equity, Economic Devt –Oyedele

Taiwo Oyedele is the chairman of the Presidential Committee on Fiscal Policy and Tax Reforms. In this interview, he speaks on the controversies trailing the Tax Reform Bills before the National Assembly and why Nigerians should support the passage, among other issues, ANAYO EZUGWU writes

One of the things that we have been hearing about the Tax Reform Bills is that your committee arrived at the various proposals based on data. You have also been quoted as saying that 90 per cent of Nigerians support the reforms. Can you tell us how you arrived at the data and that this is about equity, fairness, and justice?

I think it’s always important to start with where we are today. And then the question would be: Is it broken? Because if it’s not broken, why are you trying to fix it?

And if I just narrow this conversation to the Value Added Tax (VAT), which is the question you’ve asked me. Today, VAT is shared amongst states and local governments based on 20 per cent derivation.

That is, where did we get the VAT that we’re sharing from? Then 50 per cent is equality of states, and 30 per cent is based on population.

As we speak, we have at least a case at the Supreme Court, where a state like Rivers, and also later on, joined by Lagos, are in court, asking the court to rule that VAT is a state tax.

And the laws governing VAT should be enacted by the House of Assembly of the states. And of course, the tax should be administered by a state.

So, I like to put it this way, the conversation we are having today is not between the 20 per cent derivation because, today, VAT amongst states and local governments, like I said, is shared 20 per cent derivation, 50 per cent equality, 30 per cent population.

Now, the states that believe they contribute significantly to VAT are finding it difficult to come to accept that they should only keep 20 per cent of the contributions they have made. And that’s why they have gone to court to say, let us administer this tax on our own. And they have won.

The only thing now is that this case is pending at the Supreme Court. There’s no judgement yet. But if the two judgements we’ve had in the recent past, one is very recent, a couple of weeks ago, another one about a couple of years ago.

About two weeks ago, there was a Supreme Court judgement that said that the regulation of lottery and gaming is within the purview of the states, and that the Federal Government has nothing to do with it.

Previously, we had the judgement of the Supreme Court in terms of regulation of tourism, and hospitality, and it says it’s for the states.

So, what is common to these two judgements is that they’re not specifically mentioned in the constitution, and therefore, it’s considered to be a residual matter. And because it’s a residual matter, it’s within the purview of the states.

That’s exactly the situation of VAT today in Nigeria. VAT is not specifically mentioned in the constitution, which means, most likely, if we get a judgement from the Supreme Court, you will say states should administer it.

When a state administers VAT, then it becomes 100 per cent derivation. So, we need to understand that our proposal to move derivation to 60 per cent is a middle ground because if we lose the opportunity of getting this 60 per cent derivation, we’re likely to end up with 100 per cent derivation.

To be honest, it is not bad but it’s going to create a lot of problems for businesses and economic growth. So, what is wrong with the current system, apart from what I’ve just explained, is that VAT revenue, in terms of generation is attributed to the states where the VAT is remitted, and that’s lopsided.

For 2023, the data we have shows that 80.26 per cent of VAT generated in Nigeria was attributed to Lagos State, even though Lagos State’s size of the economy, as a ratio, is just about 30 per cent, or a little bit less.

We said, let’s correct this attribution of VAT, so that it reflects where consumption takes place because VAT is a consumption tax.

Then two, let’s increase the amount that every state will keep out of what they have generated. So, one, reward them and recognise that this is their income by the way, and then secondly, encourage them to create economic activities and stimulate formalisation within their territory.

These are the two major driving factors. Therefore, we think that this is the only way to promote more equity in the sharing of that revenue and also to promote economic activities across Nigeria. So, that’s essentially what the proposals are all about.

This reform is seeking to say, let’s just do VAT and agree that’s our consumption tax and discontinue other forms of consumption taxes

The governors have said that the bills are wonderful but there are some areas they do not agree with and that they weren’t consulted. What do you have to say about that?

Indeed, we consulted, and we continue to consult. We think that consultation is healthy in a process like this, in a democracy, on matters that will not only affect us today but will continue to affect us for years to come.

So, when you say sub-national, for a technical matter as this, you would then think about the finance commissioners. We consulted with them. You would think about the heads of the Internal Revenue Service.

They are the guys who understand these tax matters the most. We had a series of engagements with them, about four sessions, some of these lasting almost a whole day. We also had engagement with the governors themselves.

But you would imagine that if you managed to get the airtime to speak to governors, either through the Governors Forum or the National Economic Council, they are unlikely to give you one hour or two hours. So, there was a particular meeting where we got 15 minutes.

We understand that they have a very busy schedule. We also recognize that they may not be the best place to deal with the technicalities of what we are dealing with.

That’s why we spent more time with their finance commissioners and with the Revenue Service chairpersons across Nigeria. In addition to that, we were also allowed to speak to NEC.

We did that twice. We also wrote through the Governors’ Forum, requesting the opportunity to meet at least six governors across the six geopolitical zones in their states.

The intention was go and sit down with them, so that we can also have the benefit of their cabinet members, we were not very successful with that, trying to get the schedules agreed. We have a couple of the governors who were able to do that.

Particularly, I will commend the governor of Lagos State. After we had that meeting, he then requested that we set up a joint committee between our committee and his cabinet. We’ve been working on those issues for over six months. But we’re always very happy to engage more.

We think that what’s happening now is healthy and good for development because there’s more attention now to these issues, which also means that maybe now it will be easier for us to get the opportunity to further engage. But in a nutshell, I would say that we are engaged. We are also very open to more engagements going forward.

Just for clarity, did you engage with the finance commissioners from the 36 states of the federation?

That’s another very tricky one because if you say you want to speak to the finance commissioners, you go through their forum.

You’re unlikely to find any meeting, whether of the Governors’ Forum or NEC or finance commissioners, where everybody will attend. And I cannot recall because I don’t know all of them one-on-one.

So, I can’t tell specifically whether the finance commissioner for Borno State was in attendance, but I would imagine because we had more engagement with the Internal Revenue Service, at least four sessions. So, he must have attended at least one of those sessions.

So I would say yes. And even by the way, on our committee, the committee that has worked on these bills for over one year, we have six heads of Internal Revenue Service from the six geopolitical zones that are members of the committee, including our discussions where we simulated what this was supposed to mean, along with the other proposals where people needed to build consensus.

So, for us, because of the data we’re working with and the inequity we thought we were going to correct, we had not envisaged that this was going to be a pushback from the other states.

We thought that the pushback was going to come from Lagos State mostly and maybe a little bit from River State, because that’s what the data we had was saying to us. It’s almost like we ended up with the people we are fighting for are now fighting us.

We would have insisted on speaking to maybe governors from states, where they don’t have a lot of derivation today, but we are trying to push their derivation up. In a VAT derivation, I think that word is just very sensitive, because if you think about the oil and gas derivation, it’s based on production.

So, if you’re not producing crude oil, you don’t get any part of that derivation whereas for VAT, every state consumes. So, when you share anything based on derivation, everybody will share out of it.

In the constitution, as we speak today, concerning stamp duties, it says under section 163 that stamp duty should be shared 100 per cent based on derivation. So, what we are proposing is not strange to even our constitution.

When it comes to matters of tax generation, you must recognize where those things are being generated. Otherwise, we end up with a situation where one state will get a Supreme Court judgement like we had for, I gave you two examples before.

And then there’s also the local government who have no opportunity to discuss, negotiate, or agree on anything. It will happen, you know, like today and tomorrow, VAT is gone. Everybody has to administer it and keep their revenue 100 per cent.

Can you take us through other parts of this bill because all the attention has been on the VAT; the area around the free trade zones. What’s going to happen to them and the third-party involvement in the revenue collection?

Today we have VAT across Nigeria and we still have a good number of states where they also collect another form of consumption tax, calling it different names, entertainment tax, hotel and event centre tax and consumption tax. They have different names for it.

What that means is the businesses and the individuals who have to consume those items are having to now deal with multiple taxation, paying consumption taxes in different forms and then increasing the burden on those people. So, this reform is seeking to say, let’s just do VAT and agree that’s our consumption tax and discontinue other forms of consumption taxes.

This is one of the reasons why we tried to convince the Federal Government and we were lucky, which is why I will give credit to Mr. President. And it’s not just this VAT alone. There are quite several areas where the Federal Government has ceded ground to the sub-national. Another one is the electronic money transfer levy. And the list continues like that.

So, it was one of the reasons why we said, dear Federal Government, can you please give one-third of what you get today, which is 15 per cent, reduce it to 10 per cent, and give five per cent to the state and the Federal Government agreed.

So, that amount of five per cent, it’s multiple times the amount all the states are collecting from their consumption taxes, because of the level of efficiency in collecting consumption tax, you can’t compare it at the centre with the sub-national, because consumption is a function of sales.

And no state has the full view of the sales number of any business. So, a company can play one state against the other, and not pay the consumption tax.

Whereas, if you pay centrally, you cannot play the FIRS, because they’ll have your full financial statement, and they’ll make you pay the taxes. By the way, those who are collecting consumption taxes today are not doing very well, based on the data we have.

Our proposal to move derivation to 60 per cent is a middle ground because if we lose the opportunity of getting this 60 per cent derivation, we’re likely to end up with 100 per cent derivation

So, that’s one issue we are trying to address. Let’s get rid of all these other taxes and just focus on one, and do it efficiently. So the other point you raise is around the development levy.

So we have the company’s income tax in Nigeria today is 30 per cent, the tax rate. Then you have education tax, which is three per cent.

But I need to tell you, without sounding too technical, that that three per cent is on a base that is twice the size of the base for a company’s income tax.

Even though, legally speaking, the rate for education tax is three per cent, the impact is about six per cent on businesses. And you can do a simple cross-checking of what I just told you now, by looking at the amount that the FIRS collected as education tax, versus what they collected as the company’s income tax, over the past few years.

If company income tax is 30 per cent, and education tax is three per cent, as we are on the same basis, our education tax collection should be 10 per cent of company income tax collection.

I hope that my math is not confusing anyone. But that’s not the case. Just to affirm that the three per cent feels like six per cent.

In addition to that, you have NASENI, that’s Engineering and Science. You also have the NITDA, Information Technology Development. You have a Police Trust Fund. So a business will pay their corporate income tax, and then they have to deal with several other income taxes on their profits.

When they are done, whatever is left of that profit, before they give it to their shareholders, they also have to take out a withholding tax of 10 per cent.

By the time you aggregate all of these taxes, it’s very close to 50 per cent and the question is, at 50 per cent effective tax rates on company profits, are you competitive?

The answer is no. This places us as one of the top 10 in the world for the highest boarding on businesses for corporate tax purposes. When you do that in a country, what you do is discourage investment.

The developed countries discovered the secret a long time ago, and they were cutting corporate income tax rates. They were cutting it so fast that it became a concern, and we’re calling it the race to the bottom, who is going to get to zero per cent first? Because they realized that once you cut corporate income tax rates, businesses are attracted.

When they come, they hire people who pay personal income tax, they hire people who consume and pay VAT, and so on. So, it’s logical, and it makes a lot of sense to cut corporate tax boarding.

This is the reason why we said, let’s take all these special taxes, we call them earmarked taxes, and consolidate them into one.

And then progressively reduce that rate over time, and then whatever we collect from that, let’s share it to the agencies that should benefit, including TETFund, that’s the Tertiary Education Trust Fund, including NASENI, including NITDA, and then we said, let’s give some of that money to the Student Loan Fund. So what’s the thinking behind this?

We said between when the law is passed and 2030, these agencies would collect some share of the money from this development levy. By 2030, they will no longer receive money from that development levy.

So what they will do is they’ll get funding through budgetary allocation. By the way, we have more than 500 government agencies.

Why don’t they all have special taxes for them? NASENI for example, was established in the 70s, and there was a tax to be collected that nobody collected until a few years ago during the Buhari regime, when they just realized that, oh, we have not been collecting the tax. But guess what? NASENI has been in operation since then.

So, we’re saying, one, those agencies should get budgetary allocation so that there’s a process of scrutinizing the expenses to ensure that there’s efficiency. And number two, a very important reason for this is that we can reduce the burden on businesses.

And if you take TETFund, for example, by 2030, all the money we collect from this special development levy will go only to the Student Loan Fund.

And what you give to students to fund their education ends up in the university. S,o the money is still going to education. And in addition to that, we think that it presents an opportunity.

Once you’ve catered for students who cannot afford their tuition, then the rest of us who can afford the tuition for our wards and children will then pay a little bit more so that university lecturers will not be paid N400,000. I think they should be paid like N5 million a month. We see what happens in other countries.

That’s how you can attract the best, where they can do the work with the heart, body, soul, and mind, and be able to provide solutions to not only the problems for the economy but even for themselves.

We want to have universities generating power, doing agriculture and all of that. So essentially, that’s the one around the development levy.

What is the role of a third party?

This was a very intensive debate during our committee work. We said we don’t want consultants. And I’m very surprised that people said we asked a third party to do it, but they haven’t mentioned the section of the law.

So, what I plan to do after this session today is to put something out there that shows the section that we have in the bills that says we should not use consultants. We say that you cannot use consultants for assessment. You cannot use them to do collection.

The only thing you can use consultants for is to tell them to come and teach you how to use SAP, and how to use artificial intelligence. Let them come and lecture you, but they should never collect taxes.

That is in the bill. This third-party collection, I can tell you 100 per cent, is not in those bills. People just made them up.