The Nigerian tax system has undergone several reforms geared at enhancing tax collection and administration with minimal enforcement cost. The recent reforms include the introduction of TIN, (unique Taxpayer’s Identification Number), automated tax system that facilitates tracking of tax positions and issues by individual taxpayers, e-payment system which enhances smooth payment procedure and reduces the incidence of tax touts.
The tax authority now has autonomy to assess, collect and record tax.This enabling environment which came into being on the strength of the Act has led to an improvement in tax administration in the country.
However, there are still subsisting challenges in the Nigerian taxation system, which this brief article seeks to highlight and recommend possible solutions.
Meaning of Tax
According to business dictionary, taxation is the means by which governments finance their expenditure by imposing charges on citizens and corporate entities. Taxation is also the legal demand made by the Federal government or State government for its citizens to pay money on income, goods and services.
Challenges Facing Taxation and Possible Solutions
There are so many challenges facing the Nigerian taxation system, but this paper will be restricted to few of those challenges.
1. Multiplicity of taxes: This means paying similar taxes on the same or substantially similar tax base. Examples of multiple taxes include Companies Income Tax, Information Technology Tax, Education Tax, Nigerian Content Development Levy, all of which are based on income or profits. Also, Value Added Tax, Sales Tax and Hotel Consumption Tax all based on sales. Multiple taxes should be distinguished from numerous taxes which mean many but different taxes on different tax bases. To address multiple and numerous taxation, approved list of taxes should be streamlined and adhered to by all tiers of government.
2. Separate source of income: Section 25(1) of Companies Income Tax Act (CITA) states that the profits of any company for each year of assessment from such sources of profits shall be the profits of the year immediately preceding the year of assessment from each such source.
Section 27(2) of the same Act goes further to restrict the losses that may be relieved in any year to the assessable profits from the trade or business in which the loss was incurred. The combined effect of these sections could be interpreted to mean ring fencing of different sources of income to the effect that losses from one line of business cannot be used to offset profits from other lines of business by the same company.
This practice is not equitable and it seems to punish genuine businesses for incurring real losses. The separate taxation of income should be abolished in line with global best practice as many countries have even gone beyond this level to permit group consolidated tax returns.
3. Tax refunds: Although there are specific provisions in the tax laws especially under the FIRS Establishment Act, 2007 for tax refunds this is yet to be fully functional. There should be appropriate funds allocated or retained out of tax collection to cater for tax refunds both at the federal and state levels.
The FIRS Act requires the tax authorities to pay a tax payer's refund claim within 90 days of the application subject to appropriate audit. These audits are usually slow and time consuming sometimes running into several years. Fairness and equity requires that cash refunds be made promptly to deserving tax payers. Failure to pay refund within the stipulated timeframe should attract commercial interest.
4. Tax clearance certificate: Taxpayers are required to obtain a tax clearance certificate (TCC) annually which is often needed to conduct many business transactions. Tax officials often use this as a tool to harass taxpayers by bringing up issues outside the period covered or contrary to the provisions of the law regarding TCC. For instance, the CITA requires that TCC must be issued within 2 weeks of application otherwise the tax authority must explain. TCC should be issued automatically within 2 weeks of every new calendar year provided a taxpayer has no outstanding undisputed tax liability on the last day of the previous year of assessment.
Taxation affects investment decisions but the risk is not whether tax would be paid, it is the uncertainty of what, when, how and how much. Ironically, what businesses and investors need, as a matter of priority, is not tax incentives; it is the removal of tax disincentives.
Although Nigeria has made some improvements to the tax system in the recent past, there is still a long way to go and the status quo is not an option. If taxes are to be collected effectively and fairly, both in monetary and equitable terms, for the benefit of all Nigerians, our desired development will appear achievable; especially with good leaders.
Lagos based legal practitioner