Introduction

One of the best legacies of this administration is the implementation of the framework for annual review of Nigeria's tax laws to keep up with changing global economic landscape. This has been an initiative adopted in most advanced economies where tax is effectively used as a major driver of economic growth. It also enables the government to tailor its expenditure to fiscal revenue and engender balanced budgeting that will not funnel inflation.

The current regime broke the jinx of timely budgeting and planning to run with calendar year. This is very commendable despite all challenges. The discipline engendered in the process to ensure that all that are required are in place for take-off of the budget at the start of each calendar year is not an easy task. There is no doubt that those involved would be working extra hours sometimes late into the night during each budget cycle to achieve this laudable objective.

Since this exercise commenced about three years ago, many obviously outdated provisions of the law have either been completely repealed or amended. For example, the erstwhile redundant provisions of the companies income tax law in respect of commencement and cessation of business. Other notable changes include the amendment of the provision relating to matching of income and expenditure for tax purpose and incorporation of Significant Economic Presence (SEP) to address the wide gap created by the business model of players in digital economy. One must also not overlook the clarification provided to the definition of some terms such as "exported services", "goods and services" and "supply" for VAT purpose.

It however appears that the policy makers have reached their wits end. Even if one is to base this on the number of individual amendments introduced by the most recent Finance Act, it appears that the policy makers may need a break. Some of the amendments introduced by the Finance Act 2021 run counter not only to the canons of taxation enunciated by Adams Smith more than a century ago, but also breach basic principles of macroeconomics. Indeed, given the unbridled budget deficit in the face of dwindling fiscal revenue, Government may need to remove the word 'Responsibility' from the "Fiscal Responsibility Act". Another provision of concern is the taxation of educational institutions, which invariably aims to discourage private investment in a sector that is the near-sole responsibility of the government in leading economies in the world. Further, some may argue that the policy makers, in this instance, passed up an opportunity to provide certainty in the taxation of non-resident companies operating in Nigeria.

We have discussed some of the issues noted in the recent Finance Act below:

Carbonated drinks levy

A new sub-section was added to Section 21 of the Nigeria Customs Excise and Management Act. The new provision provides that "Excise duty on non-alcoholic, carbonated and sweetened beverages shall be charged at a specific rate of ₦10 per litre". If we assume that Nigeria Customs Service (NCS) will follow the laid down procedure in monitoring and collecting this levy, each bottling company will be required to set up an administrative office and provide accommodation in each of its plant for an NCS official. The official would be required to manually collate and verify data for the purpose of assessing the levy.

In defending the levy, the Honourable Minister of Finance, Budget and National Planning, Mrs. (Dr.) Zainab Shamsuna Ahmed, explained that it is expected that the levy will prevent the ravaging effect of diabetes and obesities arising from excessive consumption of sugar through carbonated drinks. The intention is laudable, but the approach is wrong-headed. It failed the principle of economics in tax administration and makes one seriously doubt the intention of the government in respect of the tax.

The bulk of sugar consumed in Nigeria today is imported. If policy makers were to be sincere and honest, at what point is it easiest to collect the tax? Moreso, is taking of carbonated drinks the only way by which sugar consumption is causing health related issues? If government had considered retail pricing system in Nigeria, it would have established that imposition of ₦5.00 on a 50-centiliter bottle of carbonated drink will not create a linear price increase. The current price will surely move from the current average of ₦150 to ₦200. Thus, the expected multiplier effect will be 10 times the mere 3% change in tax-induced cost. Nevertheless, since the levy was introduced, retail prices have remained constant. It is obvious that the objective of the levy has been flatly defeated!

The major impact of this levy is to create avenue for more fiscal revenue leakage in the economy. It has unduly increased the cost of distribution, thereby increasing the cost of operations of the players within the distribution network and possibly the bottling companies.

The major reason for higher consumption of carbonated drinks is simply due to poverty especially at the urban centres. Majority of Nigerians currently live on less than one US dollar per day and one of the meals that most of the hapless citizens can afford is carbonated drink plus sausage for which the bundle is about ₦250.00 (about fifty cents). The solution to the problem is therefore not in imposing a levy on carbonated drinks, but providing an enabling environment for aggressive, sustainable and rapid economic growth.

Taxing private educational institutions

In an unpublished survey carried out on members of the national assembly, it was observed that virtually all legislators attended public schools from primary to tertiary level. As at today, none of these legislators' children especially those representing southern Nigeria attend public primary and secondary schools. This is pervasive all over the country where the bourgeois including the author have literally abandoned public schools for the low-income earners.

This was however not intentional. The failure of government to adequately fund education in the country is largely responsible. This created an opportunity for the private sector to divert investment that should have been used in real sector of the economy to the educational institutions. Most ecclesiastic institutions also make huge funds available for this purpose, all in the bid to complement the efforts of the government.

However, rather than reciprocate the gesture and make part of the 2.5% Tertiary Education Tax Fund available to these noble investors, policy makers decided to amend section 23(c) of the Companies Income Tax Act by removing 'educational activities' from the list of activities whose profits are exempt from taxation. The subsection had previously provided that "the profits of any company engaged in ecclesiastical, charitable or educational activities of a public character in so far as such profits are not derived from a trade or business carried on by such company".

Is this not simply robbing Peter to pay Paul? Is it not expected that this would further discourage investment in one of the major critical sectors in Nigeria? If government lives up to its responsibility, no investor except those with large free funds, will venture into provision of social services, an area that should be the core focus of the government. It is therefore unfair to penalize the investors by robbing them of their returns from investment. In my opinion, it is also counterproductive!

On 4 March 2022, whilst working on this article, the Registrar General/ Chief Executive Officer of Corporate Affairs Commission (CAC), Alhaji Garba Abubakar, approved a publication titled "Registration of Schools and Academies", which was addressed to "Approving Officers (Name Availability and Business Names)". The publication stated that "henceforth Schools, Academies and such other institutions of learning should not be approved or registered as business names. This is because an institution is essentially a body corporate with perpetual succession, capable of contracting and (subject to such restrictions as may be imposed by other laws) issuing certificates in its own name, which attributes are absent in a business name."

It is however questionable why educational institutions would be singled out for this purpose. Does it mean that other business or non-profit oriented pursuits which meet similar standards viz body corporate, capable of contracting and issuing certificates in its own name can continue to be registered as business name? For instance, an auto-mechanic workshop run by a group of engineers for car repairs and trainings can continue to be registered as a business name? Does the Registrar General understand that the ability of missionaries to set up schools with ease contributed in no small measure to the level of educational development in Southern Nigeria, a major source of social capital that has prevented the kind of insurrection witnessed in the other part of Nigeria? Does it really matter to the government the tremendous contribution of ecclesiastical societies to expansion of educational facilities that meet international standards in circumstances where government has failed to do the same despite the petrol-dollar earned by successive governments? What exactly is the intention of government to raise the bar in respect of access to education, a major ingredient to economic emancipation and development of modern economies?

Still on the directive from the CAC, are state governments bound to comply given the Federal system of governance when education is on the concurrent list and each state government has power to legislate in this regard? Does this directive not run counter to the agitation for more devolution of power in circumstances where the Federal Government has failed in its responsibility, leading to agitation for restructuring? Does the directive from the Registrar have a force of law? If the answer is yes, does it mean that schools that have been registered under a business name will lose their identity or how would a simple directive create disparity between the old and the new in respect of such an important matter? It is definite that either this policy would be challenged, or the willing state governments will simply ignore it and continue to support an arrangement that makes access to education more affordable and inexpensive. "If a law is unjust, a man is not only right to disobey it, he is obligated to do so", paraphrase of Thomas Jefferson's statement in the Declaration of Independence.

Fiscal Responsibility Act

On commencement of the fourth republic in 1999, Nigeria's debt burden began to choke the system. Nigeria became one of the Highly Indebted Countries in the world around this time. Under the leadership of the then Minister of Finance, Dr. (Mrs.) Ngozi Okonjo-Iweala, the current Director General of the World Trade Organization, the creditors including those of Paris Club wrote off the bulk of the debt and the country was set free. In order to prevent reoccurrence, the executive passed a Fiscal Responsibility Act that pegged how much debt the country can contract vis-à-vis its level of economic development. The leadership of the country was required to behave 'responsibly' in budgeting with particular reference to expenditure. The expectation was that the country will cut its coat according to its cloth and not its size! This is what happens in decent economies including placing a peg on expenditure of sovereign member states of European Union. Such responsible behaviour moderates inflation and protects the exchange rate so that more money will not be chasing fewer goods.

Unfortunately, Nigeria has simply ignored this basic principle of economic management. In order to justify the continued profligacy, government posited again that the issue is not about expenditure, but low revenue? How does one justify a situation where 92% of the budgeted revenue is to be spent on debt servicing without creating hyperinflation in the system?

Well, whilst the government may continue to live in its fantasy world, the creditors pulled the plug by suspending further credit facilities to the country. It was becoming too risky to lend money to a debtor that has not only deemed it unnecessary to cut down on its expenditure as expected under Fiscal Responsibility Act but continues to expend significant borrowings on consumption by sharing the money directly to citizens. Government also turned around to define recurrent expenditure as a form of 'social capital project' which is as important as infrastructural development. More, in circumstance where 'stomach infrastructure' expenditure is made under a system that is everything other than being transparent. Or how does one account for a system of dolling out cash on the street to undocumented beneficiaries?

It is one's submission that with the continued budget management system of the government, 'Responsibility' should also be deleted from the name of this Act. This is because the main purpose of the Act has been defeated and it makes no sense to continue to ascribe responsibility to a legislation that permits spending borrowed funds that may take several generations thereafter to repay.

Concluding remarks

There is no doubt that the country is passing through an unprecedented financial crisis. It is also very unfortunate that the country has not positioned itself to take advantage of opportunities that are available in situations such as this. The country also failed to institute appropriate legislative framework in good time that would have attracted financial investment into the oil and gas industry from which the country would have benefited from the increase in crude oil price occasioned by the current Russia-Ukraine war. The state of the national infrastructure, which should act as driver for economic growth, is very worrisome. It has become pertinent that urgent decisions must be made to steer the economy onto the right part of recovery that must be felt by all Nigerians.

Therefore, the remaining part of this write up provides practical recommendations that should address Nigeria's revenue-shortage:

  1. Taxation of underground economy - Nigeria has one of the lowest tax-to-GDP-ratio in the world. This is simply because most people especially leading Nigeria business class do not lead by example in payment of appropriate taxes. The political will to drag these people into the tax net is simply absent. Despite the high incidence of tax evasion, it should be noted that no one has been convicted in the country for flagrantly failing to pay tax. In a country that has one of the highest assemblies of private jets, the political class should please save this country from bankruptcy by making scape goat of some people.
  2. Restructuring - The prevailing situation of sharing federally-collectible tax revenue based on factors other than economics needs to be revisited. The approach has not encouraged most state governments to make every effort to bring the majority of people within the tax net. The citizens have also not been able to see the direct linkage between tax payment as a civic responsibility and provision of social amenities. One should consider where tax generated in a particular locality is used to provide a social amenity such as a world-class hospital. It is expected that such development should encourage not only people in the affected area but others outside the locality to make all concerted efforts to become civilly responsible.
  3. Reduction of consumption expenditure - It is high time the Federal government stopped the act of sharing funds to people under the guise of social infrastructure. This is simply because such habit, apart from the high propensity to corruption due to lack of appropriate machinery for accountability and transparency, distributing money for consumption is bound to funnel inflation. Most importantly, the government cannot afford it. How does one justify going to borrow money only to turn around and share it among people! This is profligacy at its highest.
    Indeed, it does not seem that the country has learnt anything from history. In 1973, similar action was taken when federal government decided to increase the salary of workers, code named Udoji Awards, because "Nigeria's Problem Is Not Money, but How to Spend It". The resulting effect was an unprecedented hyperinflation and economic mismanagement from which the country does not seem to have recovered, more than one-half century later.
  4. Tax incentives - It is high time that government abolish all forms of tax incentives because of the wide usage for reasons other than economics. Most business leaders have come to take advantage of weak administrative system to fester their nets. It is also high time that government firms up the process of economic policies in transparent manner and in a form that is not tilted to the benefits of the few. The economy can only come out of the woods when policies are designed strictly for economic reasons for the benefit of the majority.
  5. Removal of oil subsidy - It is not our intention at this point to re-open the issue of subsidy and its benefits or otherwise to Nigeria's economy. Rather, since it is expected that Dangote Refinery should commence operation very soon, one would expect government to provide the maximum support to ensure that the commencement date is no longer shifted. The necessary infrastructure that will ensure smooth evacuation and distribution of the refined product should also be in place before the refinery becomes fully operational. Once these are achieved, the product should be made available to the citizens at no subsidy. There is no better time to get rid of this subsidy than when Alhaji Aliko Dangote has bailed the country out of this commonsense logjam. Anything short of this will be recipe for disaster and we should make every effort to avoid it.

In conclusion, one commends the efforts of the policy makers in introducing and maintaining the act of periodic review of fiscal laws in an open and transparent manner. It is now high time that the process should be finetuned and refined to ensure that adequate thought process based on sound economic principles are engendered therein.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.