Tax avoidance and evasion have become the culture of some individuals and businesses operating in Nigeria.One of the latest indexes, “Paying Taxes 2015”, which compares tax systems across the world, ranked Nigeria the 3rd worst globally in tax compliance. The assessment is based on three major indicators; total tax rate, number of payments and compliance time.
The survey reveals that it takes the Nigerian taxpayer an average of 908 hours to comply, followed by Bolivia about 1,025 hours, and the worst being Brazil- about 2,600 hours. Out of the 189 economies, Nigeria –Africa’s largest economy by GDP size, ranks low at 179 with total tax rate at 32.7 percent.
With the decline of oil revenues and the uproar for alternative sources of revenue and poor global ranking of Nigeria’s tax compliance, The Federal Inland Revenue Service (“FIRS”) must embrace the Presumptive Income Tax Assessment (“PITA”) into the Nigerian tax system.
What is the Presumptive Income Tax Assessment?
Presumptive tax can be traced to Milan, as early as the 17th century when the value of land was used to estimate tax instead of the actual production from that land. This stimulated increased production on the land because taxpayers wanted to maximise production so as to beat the system.
Presumptive income taxation is primarily used in economies where 'hard-to-tax' taxpayers comprise the majority of the population and administrative resources are scarce. In these societies, most taxpayers lack integrity or financial transparency that allows for effective taxation by the relevant tax authority. The result is that governments estimate or presume the appropriate income on which taxes should be levied.
In Ehtisham Ahmad& Nicholas Stern‘s “The theory & practice of Tax reforms in developing countries” 276 (1991) defines Presumption Tax system as the use of indirect means to ascertain tax liability which differs from the usual rules based on the taxpayers account.
The tax payer captured under this regime are the ones who are hard to assess because they earn low incomes; they sell their goods and offer services largely for cash which makes it impossible to apply withholding tax; they are compelled by non-tax reasons to keep books of accounts and their number is too great which renders it impossible to intensively scrutinize a reasonable fraction of them, they could be mostly classified in the informal sector. This makes it easy for such a tax-payer to conceal their incomes.
Presumptive tax system must conform with the five major canons of a good tax system. These include; certainty, Economy, convenience, fairness/equity and simplicity.
Many scholars try to derive the legality of presumptive tax system from the provisions of Section 65 of the Companies Income Tax Act which empowers the Tax Authority to use the best of its judgment to assess a company but there is no expressly stated provisions for the system in any tax regulation or Act in Nigeria.
What do we stand to gain?
· It simplifies tax administration and improves compliance by small scale taxpayers.
· It minimises tax evasion and avoidance.
· It improves tax assessment.
· It minimises the adverse effects of progressive taxation.
· Potential Taxpayers might not be willing to pay presumptive tax because they think they pay many more other taxes and levies such as toll gate fees, and other.
· Potential taxpayers “associations” need to be involved in the process of coming up with tax levels for purpose than if the tax rates are imposed on them.
· The usual taxpayers may result to presumptive tax because the costs of maintaining proper books of accounts from which to base normal income tax would be very high and so presumptive taxation is a cheaper option.
Presumptive taxation is undoubtedly a way of curbing widespread tax avoidance without employing excessive government resources because it addresses the concerns of both the taxpayer and the tax authority. The chances of the system working in Nigeria depends on how the relevant tax authorities apply it.