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Summary: With the current global challenges, there is a need for the adjustment of fiscal policy initiatives to reduce the impact of the recession on the economy. As recommended by the United Nations Development Programme, this would be achieved through designing tax policies to increase revenue while minimizing its negative impact on investments and also reduce the impact when a downturn happens. This will positively influence the growth of businesses.
THE International Monetary Fund’s recent warning to the Federal Government to avoid undue aggression in tax collection amid what is predicted as the country’s worst ever recession is timely. Nigeria’s governments – federal and state – often lunge hastily to heap additional burdens on the narrow tax net at the first sign of revenue shortfalls. The times however call for ingenious policies to stimulate production, save jobs and keep businesses afloat.
Nigeria’s situation is precarious. Even before the COVID-19 pandemic crashed the global economy, which is projected to lose $8.5 trillion in two years, the country’s economy, described as fragile by the Brookings Institution, had been experiencing weak recovery from the 2014 oil price shock, huge revenue shortfalls and rising debt that hit N28.62 trillion by March. Measures to bolster aggregate demand through higher public spending incentives for businesses were however derailed by the COVID-19 fallout.
For tax authorities, the challenge is immense. While the government had sought to reboot production by exempting small businesses from some taxes, revising the tax rate downwards for medium-sized companies from 30 to 20 percent, at the same time, it had begun an aggressive drive to collect tax backlog from defaulters. The dilemma is how to keep taxes flowing in an economy with a very narrow tax base, high rate of default and at the same time, ease the tax burden to give businesses a breather and enable them to maintain jobs, and keep the economy going.
The pressure to reverse the country’s poor tax-to-GDP ratio is enormous. At just below six percent, compared to the African average of 17.2 percent, and 34.3 percent in the OECD countries, it is compounded by a low compliance rate and lack of institutional capacity to enforce, especially among the elite. Only 914 persons paid N10 million and above, 214 of them N20 million or more, the government said in 2017; this, in a country of 200 million persons and many billionaires, is scandalous. An initiative, Voluntary Assets and Income Declaration Scheme, barely managed to raise N70 billion and the number of taxpayers from 14 million to 19 million.
The usual succour provided by the ability of the government to accumulate deficits and implement fiscal stimulus, to spend and counter-balance the fall in consumer spending, is severely constrained by Nigeria’s reliance on oil revenues whose prices have not rebounded to pre-2014 levels, leading to spending cutbacks. Alarmingly, the government admitted that 90 per cent of revenue in the first quarter of 2020 went into debt servicing.
During recessions, experts recommend tax and payroll relief measures coupled with direct interventions by the state to maintain consumer demand, jobs and business operations. The United Nations Development Programme recommends that countries raise fiscal capacity to finance larger fiscal deficits “without jeopardising macroeconomic stability.” Like many countries, the federal and some state governments have rolled out policies to reduce the impact of the recession and restart the economy. Extensions for payment, cuts in rates, waiver of penalties and reductions on duties for food, health and pharmaceutical industries and duties for medicines are among policies the government has introduced.
The Central Bank of Nigeria has put together a package that includes N1 trillion for the manufacturing sector, N100 billion for the SMEs and N50 billion for households. In addition, it has slashed interest rates on previous intervention funds from nine to five per cent and suspended interest payment on some loans. This is in addition to cash payouts to the very poor by the central government and similar palliative measures by several state governments. Like the Federal Inland Revenue Service, Lagos, Ekiti and Ogun are some of the states that have also adopted tax relief measures such as extension of time for filing, waivers of interest and penalties for late remittance and slashing of right of way fees for telecommunications facilities among others.
However, despite these and other incentives, aggressive recovery efforts by the FIRS and state counterparts on defaulters need to proceed with caution. An ongoing Voluntary Offshore Assets Regulatory Scheme by the Federal Government targets back taxes from companies and individuals that own assets abroad.
As the organised private sector vigorously argued, the government should consider returning the Value Added Tax rate to five per cent from the new 7.5 per cent rate that it started implementing in February. This will give relief to businesses and consumers. Similarly, the land use charges should be relaxed, including the stamp duty that the FIRS said would now be charged on all property transactions.
The UNDP suggests “tax policies designed to raise revenue while minimising their negative impact on investment” and can lessen the impact of downturns on both revenue losses, help businesses to grow and workers to earn more once the crisis subsides. It adds that “businesses that incur losses during a recession should be eligible for tax rebates when they firms recover.” KPMG, a global audit firm, tracked such tax relief measures adopted in many countries to cope with the pandemic.
Nigeria needs to follow suit. Lacking strong buffers like Norway, Saudi Arabia or Kuwait that can deploy part of their hefty Sovereign Wealth Funds for interventions, Nigeria must like others, be creative. The United Kingdom extended deferrals on tax payments; there, the SMEs will not pay taxes until 2021 while 80 per cent of loans to them is guaranteed by the government. The Danish government underwrote 75 per cent of private sector salaries threatened with job losses. South Africa is providing tax relief for low-income workers for four months and rebates for tax-complaint companies.
There should be a shift in fiscal policy initiatives. Measures, including extending deadlines for tax filing, the deferral of tax payments, the provision of faster tax refunds, more generous loss offset provisions, and some tax exemptions, including from social security contributions, payroll taxes or property taxes will boost business cash flow. The government should widen its tax net, recover dues from those able but unwilling to pay. This is the time to tax luxuries and impose prohibitive tariffs on textiles, non-essentials and goods that can be produced locally. Companies that have been diligent in tax payment, remittance of employee pensions and income taxes should benefit from rebates.
There is a need to deepen collaboration with SMEs that will combine low interest credit with management support, payroll subsidy and duty exemptions for essential machinery imports. Boosting support for manufacturing and harmonising the multiple rates, levies and charges imposed by state and LGs is also crucial to keep productive activities going.
• There is a need for extensions of tax filing deadlines, provision of quick tax refunds, deferral of tax payments, tax exemption under some circumstances, and provisions for generous loss offset.
• Non-essential goods and services that can be manufactured locally must also be subjected to prohibitive tariffs.
• Small and medium-sized businesses should have access to low-interest loans as well as management assistance if cooperation with them is to be improved.
Keywords: Tax Policies, Recession, COVID-19, International Monetary Fund, SMEs, Central Bank of Nigeria