Nigerians have described the federal government’s decision to widen the tax net to cover the informal sector as ill timed, retrogressive and counter-productive and that it may not serve effectively, its aim of growing revenues as expected.
The criticisms followed the Federal Inland Revenue Service’s plan — revealed recently — to collect & remit value added tax (VAT) in the informal sector in partnership with the Market Traders Association of Nigeria (MATAN) which has a membership of over 40 million traders across the country.
According to the World Economics, informal economy also known as a shadow economy is the part of any economy that is neither taxed nor monitored by any form of government even though taxes are one of the financial obligations of citizens and businesses to the government.
Over the years, experts have pointed to the numerous activities in the informal, pointing to its massive size and potential to contribute significantly to the country’s revenue in form of tax payment.
However, for a long time, Nigeria’s tax net covered majorly the formal sector with over 50 different tax obligations.
While the move to widen the tax net has received some commendation, it has been largely criticised because of the timing and other issues around poor structure and record keeping in the informal economy. Many are also wary about issues around privacy invasion, lack of trust in government, the country’s subpar tax system among other issues. All of these and more have been flagged by experts who believe that the policy may not be efficient.
Muhammad Sadiq, lawyer and consumer protection expert said the VAT Direct Initiative, like many preceding initiatives, will still result in little or no result because Nigeria has a vague taxation system with its legislative & regulatory instruments scattered all over and not easily accessible. He rather advised the need to overhaul the country’s tax system.
“FG in most federations across the globe relatively depend less on tax, the more concerned tiers are the state governments and especially the LG councils who need to be empowered to independently prescribe, collect and utilize certain taxes as may be set out by a law and byelaw, with the necessary amendments to the Constitution,” he said.
Although the FIRS said this partnership will eliminate multiple taxation in the market place by tackling the activities of touts, miscreants and self-imposed tax collectors, it is believed that this may not save the traders from being bullied and coerced into remitting payment to multiple pockets
James Aboluwade, an economic expert who has advocated for a wider tax net instead of new taxes said the policy is ill timed as Nigerians currently grapple with accelerating prices of products and fuel subsidy removal which has increased the cost of living amid high poverty rates.
“Traders are not new to tax payments because they are forced to part away with some amount daily, weekly and monthly to their market regulators and the local government/ council, this means they will pay more taxes despite struggling to break even, eventually they will increase the prices of products,” he said.
The tax regulator stated that the VDI will have a monitoring and evaluation team to ensure transparency, accountability, prompt VAT remittance, sustained commitment among other things, adding that to provide infrastructure, social amenities, and cater to the welfare of citizens, the efficiency of this has been question by people who flagged issues of low tax morale and lack of trust in government to effectively utilize the taxes for the benefit of citizens.
“The reality in Nigeria is that the state has failed woefully in discharging its duties under the social contract but expects the citizen to keep discharging the duties. Until the state discharges its duties, citizens will keep viewing tax payments as a form of robbery,” Uduak Akpan, Director of Research at Sustainability, Policy, and Innovative Development Research Solutions said.
Similarly, Christopher Ogbonna, a lawyer and human rights activist said taxing the informal sector is not inherently wrong but problems arise when the government refuses to be transparent or accountable.
“Any increase in the tax pool also inadvertently creates a direct and often disproportional increase in public expectation of accountable governance, when that expectation is not met, a precipitous demand with often dire socioeconomic consequences is often made for it,” he said
Kalu Aja, a finance expert said the operational mode of tracking the turnover of these businesses to achieve full remittance is illegal especially as tracking methods are not been explicitly stated.
“In my view it’s illegal. A union will track my turnover and collect my revenue, I will submit my annual or monthly turnover to this union, under which powers? FIRS already says they have the responsibility for VAT in Nigeria, this has gone beyond ‘collection’ agency,” he tweeted.
Some others however believe the move is positive for the economy but requires some form of review in terms of operations and public sensitization.
Andrew Alli, CEO, SouthBridge Group lauded and supported the decision stating that it will improve the accountability of government activities.
Highlighting some operational issues, he noted that it will affect prices and affordability of goods especially at a time people are dealing with fuel and fx movements.
“Implementing it in a way that does not propagate ‘agbero’ culture nationwide; avoiding connected people collecting huge percentages as collection fees; avoiding huge collection fees altogether; data use and privacy issues, also the narrowness of the tax base is something that needs to be tackled too,” he said.
Similarly, Taiwo Oyedele, fiscal policy partner and West Africa tax leader at PwC, while commending the initiative said there is need for proper education to ensure that the traders are not exploited by tax officers as well as non-state actors.
“The VAT should not apply to over 90 percent of traders and for those who need to charge the VAT the impact should be about 1to 2 percent of the sales value if not less; In fact, the traders should pay less tax overall if government can stop the illegal taxes the traders currently pay,” he said.
In its global informal economy size ranking, the World Economics graded Nigeria an E (Extremely poor quality) with an informal economy estimated to be 57.7 percent of GDP yet Data from the National Bureau of Statistics (NBS) shows that as at 2021, Nigeria has a tax to GDP ratio of 10.86 percent.
With oil income dwindling and Nigeria unable to benefit from higher oil prices, the urgency to improve tax income by incorporating the informal sector should take a new dimension, according to Muda Yusuf, CEO of the Centre for the Promotion of Private Enterprise.
“The government must, however, convince the people that it can utilise tax revenues efficiently and not burn it on subsidies for instance,” he said.
President Bola Tinubu in his renewed hope manifesto promised to deploy technology and effective policies to better rationalise the tax system, with the aim of creating a progressive tax regime, plugging harmful loopholes, enhancing the efficiency of collection and give people a greater sense of responsibility in relation to their taxes.
