Nigerian resident companies are liable to CIT on their global income while non-resident (foreign) companies are required to pay CIT on their Nigeria-source incomes.
The breakdown of the tax earnings for the period shows that N4.08 trillion (an equivalent of 52 per cent) was received from local companies while N3.05 trillion (or 39 per cent) was the contribution of non-resident companies.
The balance, N692.2 billion, or nine per cent of the bulk, came from other sources such as e-Transact and the Government Integrated Financial Management Information System (GIFMIS). On average, the country earned N1.3 trillion per annum from CIT in the past six-year period.
In the first three quarters of 2020, the country generated approximately N1.1 trillion as against N1.3 trillion generated in the corresponding period of 2020. This year’s first nine-month CTI revenue is about N200 billion short of the amount generated in the corresponding period in 2019.
The third-quarter report released by the National Bureau of Statistics last Thursday showed that the country generated 416.01 in the last quarters (Q3 2020) compared to N402.03 billion recorded in the previous quarter (Q2 2020). The Q3 figure contracted by 20.13 per cent compared to N520.89 billion recorded in the corresponding quarter (Q3) of 2019.
Out of the N4.08 trillion CIT realised from local companies , The Guardian’s analysis showed that a whopping 18 per cent, translating to N741.3 billion, was realised from banks and other financial institutions, a sector that contributes less than three per cent to the country’s Gross Domestic Product (GDP).
With N933.5 billion, professional services (including telecommunications) contributed the lion’s share to the total local CIT generated in the period. Telecommunication, the major component of the professional service category, controls 11.2 per cent of the country’s GDP.
Professional services, financial institutions and breweries add less than 20 per cent to the GDP. Yet, their revenue contribution is huge. They generated over 50 per cent of total CIT paid by resident companies from 2015 till date.
On the flip side, about N28.4 billion, which was less than one per cent of the local CIT revenue, came from agriculture. Interestingly, the sector sits on 30.8 per cent of the country’s GDP.
Reacting to the imbalances resulting from the official figures, Head of Tax (West Africa), Ernst & Young, Akinbiyi Abudu, said agriculture and manufacturing, especially those involved in exports, get some incentives. Hence, they have a light tax burden. He said the authority might not be able to do much to make agriculture and manufacturing pay higher, as the incentive was vital to developing the much-needed productive sector.
Critical areas of the non-oil sector, like agriculture and manufacturing, are entitled to fiscal incentives – a reason their inputs to tax revenue are negligible. Yet, some stakeholders have argued that the reign of informal operators in the industries is a major revenue leakage.
But Abudu said, “there is little the country can gain in terms of revenue, even if all the operators are added” to the formal space. His argument was that the operators are smallholders who would still not pay significant amounts when they are officially recognised as business entities.
“The only people that pay taxes are salary earners in the former sector and businesses. The larger percentage of the population is not paying taxes – small business owners, especially. There is a limit to how much juice you can squeeze from an orange. The government should visit transactions where taxes are not paid. Otherwise, we would not make significant progress,” he said.
But Bala Zakka, a chartered tax adviser and public analyst, said government has many options to review in its efforts to boost tax revenue. He faulted the blanket classification of businesses into the industry for the purpose of administering incentives and tax assessments. He said some businesses impose extortionist charges while they use special services to deny government accruable tax revenues.
“We must begin to think around how the business operators could be fairly and equitably re-classified. A hospital operating at certain level of financial scale could be removed from the health service category. Some schools charge several millions of naira as tuition per session while they continue to hide under the cloak of education service. We must begin to look at this going forward,” he said.
According to Zakka, a classification system that is strictly based on turnover is more equitable. He also faulted profit-based assessment, saying smart business executives would continue to exploit the weakness to rob government.
CIT is paid according to size, scale and industry. Analysts said government has a responsibility to use fiscal incentives and policies to nurture but that it cannot with the same breadth expose any sector to harsh operational climate.
The discordance between the weight of GDP of key sectors and their contributions to the country’s revenue drive is as old as the country’s modern economy. The challenge, which many experts said is entrenched and structural, is widespread, manifesting in tax revenue, foreign exchange earnings and others.
Zakka, described the challenge as a sign of an economy lacking in breadth and depth. And until the issues are addressed, he said, the economy would continue to face major distortion at the slightest panic in the non-productive sectors like oil.
MEANWHILE, President of the Chartered Institute of Taxation of Nigeria (CITN), Dame Gladys Simplice, said the economy contracted (as in the previous experiences) because the government did not invest past earnings, including tax proceeds, in critical infrastructure that would have supported the growth of the real sector. She said the economic downturn has nothing to do with tax evasion.
“If we invested the money we earned into areas that would support sustainable economic growth, we would not be going into recession each time there is a problem in the oil market. But the government failed to do the basic things, making the cost of production unbearable. This is the same reason companies are closing. This is the real cause of the recession,” she said.
Recall that Secretary to Government of the Federation (SGF), Boss Mustapha, had at a workshop in Abuja, blamed failure of citizens to fulfill their tax obligations as major reason for the current downturn.
But Simplice argued the tax deficit in the country is fuelled by “trust issue”, adding that every Nigerian pays forms of indirect taxes daily because the government has not lived up to expectations in providing power, quality education, roads and healthcare.
She, however, said a tax reform that is more consumption-based and lenient with producers is required without prejudice to the call on the authority to proceed to where it matters.
A cut in CIT and increase in value added tax (VAT) to 10 per cent, according to her, would reduce the cost of production, make the locally- produced goods more competitive and increase productive capacity.
The tax expert objected that a further hike in VAT, less than a year after a similar action, would have an adverse impact on the poor, stressing that “essential commodities and services” are not ‘VATed’.
Her proposal, she said, was a necessary step the government must take to redistribute incomes in favour of the poor, as “luxury items that are included on VAT list” are mostly consumed by the rich. She also urged the government to reform the system to enable tax inheritance and upscale property to reduce the huge income gap.
“Imagine the difference it would make if the unrented property in Ikoyi and other rich neighbourhoods are taxed? How many states have inheritance taxes? We must begin to look at these areas instead of taxing production to death. We can also increase the VAT base. This is a way to think outside the box,” the CITN noted.
Notwithstanding the concern about plummeting tax revenues, Nigeria has recorded improvement in recent times. Despite the impact on COVID-19 on businesses and transactions, for instance, the country realised N1.08 trillion from VAT in the first three quarters of the year as against N876.1 billion realised in the corresponding period last year. The significant improvement, experts suggested, was from VAT increase infective from last February.
The domestic economy had relied on oil and gas, a sector with a weighted contribution of less than 9 per cent to the value of the country’s production, for survival. Hence, growth retreats each time there is a crisis in the market, throwing manufacturing and service industries into panicky cost optimisation gambits that often lead to job losses.
