By Professor Mike Ozekhome
Introduction
In my book “Zoning to Unzone: the Politics of Power and the Power of Politics in Nigeria”, (2014); Mikzek Law Publications Ltd, pages XIX – XX), I decried the primitive sharing of National resources by political elites who only share from the national cake, but never cared about how it is baked. I wrote as follows: “from the forgotten oil wells of Oloibiri, (first discovered in 1956, down to the rocky (Olumo Rock) terrain of Abeokuta; the serenity and temperateness of the Mambilla Plateau; the steep hills and deep caves of Abakaliki, the fish-laden River Niger of Agenebode; the serene and occasionally uproarious and tempestuous Lagoon of Lagos; the hot desert and scenic undulating sand dunes of Sokoto, Katsina, Bauchi, Birni Kebbi and Potiskum; from the delicate swamps and now ecologically devastated mangroves of Amasoma and Gelegele, and the dense rubber and timber jungles of Sapele and Benin, the story is the same: share the national cake. Who bakes this cake, no one answers. No one cares. No one wants to care. No one cares to know. The sleazily corrupt political elite and their collaborators both in the military and civil populace grandstand about their God-given right to pillage our national treasury and loot our common wealth. They swear it is their inalienable right to roughen it over the down-trodden, the Frantz Fanon’s “wretched of the Earth”. They beat drums of war, chant expletives of hate and sloganeer religious bigotry, cultural diversity, status segregation and gender inequality”.
The national ruckus and furore that has so far heralded the tax reform agenda of the Tinubu Administration, epitomised principally by two, out of the four tax reform bills – the Joint Revenue Board Bill, the Nigerian Revenue Service Bill, the Nigerian Tax Bill and the Nigerian Tax Administration Bill – which he recently presented for passage before the National Assembly, continues to rage unabated. It merely recaps my above worries expressed over a decade ago in my book. Our Nationalists and first Republic regional leaders, Dr Nnamdi Azikiwe, Dr Michael Okpala, Chief Obafemi Awolowo, Sir Ahmadu Bello, Sir Tafawa Balewa, et al – will be rolling in their cold graves to see what nonsense has been made of the true fiscal federalism they enjoyed with their regional products which made them excel in governance. The usually sleeping magma which the thin regional cohesion represents is threatening to blossom into a full-blown volcanic eruption of hate and threats between the North and South. Those two problematic bills, the Nigerian Tax Bill and the Nigerian Tax Administration Bill (particularly, but not exclusively, their provisions dealing with Value Added Tax), have irked mostly Northern State Governments, their legislators and not a few of their high-heeled political elites. It throws up once more the pseudo federalism we tout which is actually unitarism in practice. Are these lachrymal effusions and trumpeted concerns justified? Are the proposals ill-timed, coming so soon after the removal of fuel and electricity subsidies as well as the floating of the Naira (all of which have haemorraged the purchasing power of the average Nigerian as to virtually make nonsense of the recent upward review of the minimum wage)? Are there any other unknown legitimate or valid grounds for opposing the bills? We may attempt a few answers starting, as is usual with me, the law- my primary turf.
Who Can Regulate Taxes?
By virtue of Item 59 of the Exclusive Legislative List and Paragraphs 7-11 of the Concurrent Legislative List of the 1999 Constitution, both the National and State Houses of Assembly share the responsibility of enacting tax legislation – although admittedly, the former possesses by far the lion share of those powers. That provision of the Constitution (Item 59 of the Exclusive List as aforesaid, empowers the National Assembly to enact legislation in respect of the “taxation of incomes, profits and capital gains.” Of course, under the “doctrine of covering the field”, any clash between federal and state legislations will see the former triumph. See AG Lagos Vs. Eko Hotels (2017) LPELR – 43713, SC; AGF Vs. AG of Lagos (2013) 16 NWLR pt 1380, pg. 249, SC; and INEC Vs. Musa (2003) LPELR-24927(SC).
The silence of Item 59 of the Exclusive Legislative List (and that of the related provisions of Paragraphs 7-11 of the Concurrent Legislative List which are basically aimed at avoiding double taxation) on Value Added Tax, have propelled the legal challenges to that head of tax, culminating in its invalidation by at least one Federal High Court sitting in Port Harcourt. The matter is concurrently on appeal. To that extent, it is hard to disagree with the likes of Hon. Benjamin Kalu, the Deputy Speaker of the House of Representatives, who opined that the Tax Reforms Bills (or, at least, their VAT component) might not go far without a corresponding amendment of the Constitution using section 9 of the 1999 Constitution. Time will tell. At this juncture however, before going further into a detailed critique of the bills, it is pertinent to first review their key provisions.
Analysis of the Bills
Some of the major innovations introduced by the bills are the following:
1. The rich pay more tax while the poor will stop paying tax.
2. Removal of all taxes on small businesses which are defined as those with a turnover of not more than N50,000,000.00 (fifty million naira);
3. Over 90% of workers in the public and private sectors will no longer pay income tax.
4. Stoppage of Pay As You Earn Tax (PAYE) on those earning the national minimum wage of N70,000 and, an overall reduction of the tax burden on as much as 90% of workers in both public and private sectors;
5. Complete removal of between 82% and 100% of VAT on the average on items consumed by low income persons, such as house-hold expenditure (consumption) on items such as food, education, health-care, rent, public transport and fuel products/renewable energy;
6. Gradual reduction of corporate income tax from 30% to 25% over 2 years, as well as replacement of earmarked taxes on companies, with a reduced single harmonised levy;
7. Consumption tax collected by States will be eliminated completely.
8. Introduction of new (supposedly equitable VAT sharing formula which provides that VAT will no longer be calculated based on where companies have their headquarters, but where their goods are consumed. This is aimed at ensuring that States with fewer company headquarters are not worse off than those with more;
9. Repeal of over fifty (50) so-called nuisance taxes and levies and harmonisation of the rest into a single-digit.
10. Those earning less than N1.7m monthly will now pay less income tax.
11. Customs, NUPRC and other government agencies will no longer collect tax as only one Agency will be responsible for collection of all taxes in Nigeria.
12. Those receiving less than N9 million per annum could have their income tax cut by half.
13. The bill could lead to abolition of other multiple tax laws such as stamp duties.
14. Gradual increase in VAT from 10% in 2025 to 15% in 2020, with almost every good consumed by low income earners exempted from VAT
15. Over 90% of small businesses would no longer pay profit tax.
16. The bill seeks to put an end to multiple taxation of over 60 types of taxes which kills many Nigerian companies.
There are more salutary provisions, but the above are the major innovations. However, the VAT aspects have over-shadowed virtually all the other provisions in the aforementioned two tax reform bills.
Critique
The most stringent criticism of the bills has been directed at their VAT provisions. So, what is VAT? VAT means Value-Added-Tax. It is simply a Consumption Tax that is levied on the value added to goods and services at each stage of production and distribution. VAT being an indirect tax, is levied on the consumption rather than the business itself. VAT is charged on sale prices of goods and is paid to the government. In Nigeria, it was introduced by the military Government of late Gen. Sani Abacha, and is currently based on the location of the headquarters of the producers of goods and services, rather than where such goods and services are actually consumed. Even though undefined under the existing VAT Act or any other law, this is how the term ‘derivation’ has, all along been understood, resulting in awarding as much as 20% of such revenue to the ‘lucky few’ States where such companies (or producers) are headquartered.
This is provided for in Section 40 of the VAT Act of 2007, under which the Federal Governments gets 15% of such revenue; State Governments and FCT, 50%; and Local Governments, 35% – with the said 20% derivation formulated being applied to the share of States and Local Governments as discussed above. The States and Local Government share is allotted on the following basis: 50% on equality 30% on population and 20% on derivation (after deducting 4% and 2% as cost of collection, by FIRS and Nigerian Customs Service, respectively). The actual VAT rate itself is 7.5%.
Chapter VI of the new Nigeria Tax Bill seeks to alter this legal regime by providing (specifically, in Section 146) a new graduated VAT rate, as follows:
1. 2025 year of assessment: 10%
2. 2026, 2027, 2028 and 2029 years of assessment: 12.5%
3. 2030 year of assessment and beyond: 15%
Furthermore, Section77 of the Nigerian Tax Administration Bill 2024, stipulates that 60% of the amount standing to the credit of States and Local Governments is to be distributed on the basis of derivation. Unfortunately (just as in the existing VAT Act), neither the Nigerian Tax Bill 2024 nor the Tax Administration Bill, 2024, defines “derivation”. So, we may have to fall back on the status quo which favours States where the headquarters of the companies which produce the vast majority of the goods and services in the country are located, i.e., Lagos, Rivers and Ogun. Accordingly, these 3 states will take the lion share of the “derivation” components of VAT revenue.
Thought for the week
“All ambitions are lawful except those which climb upward on the miseries or credulities of mankind”. (Joseph Conrad).