Benjamin Franklin, a US scientist and statesman (1706-90), in a letter to a colleague, Jean-Baptiste Leroy on the 13th of November 1789, wrote: “In this world nothing is certain but death and taxes.” And Adam Smith (1723 – 90), the great economist, in his publication, The Wealth of Nations, also put it this way: “There is no art which one government sooner learns of another than that of draining money from the pockets of the people.”
These are not compliments; they are testimonies to the ambivalence surrounding taxation and the general apathy towards it. It is obvious that taxation is a popular brand with all governments the world over, but it is one brand that is least appealing to the people.
Payment of tax by citizens, both individual and corporate, has never been easy, especially in a country like Nigeria, where corruption and impunity hold sway. Even in developed countries, where tax compliance is the norm, issues involving taxation are hotly contested. People have been voted out of office because of tax. In 2013 some French citizens decided to renounce their citizenships and move to other countries as a result of sharp increase in tax rate, especially for the affluent.
No nation can survive without taxation; many of the great civilizations could not have been possible without direct and indirect “extortion” of money from humans through one form or the other, willingly or unwillingly. And despite all the reservations and sarcasms, payment of tax is seen as a mandatory civic responsibility that elicits voluntary compliance in advanced economies of Europe and North America. However, the story is not the same for Nigeria and most parts of Africa, where the level of tax compliance is abysmally low. In the face of dwindling fortunes from oil, Nigeria has come to realize that the issue of tax compliance is vital to the survival of the nation now and in the future.
The Voluntary Assets and Income Declaration Scheme (VAIDS)
Nigeria is reputed to be among the countries in the world with the lowest tax compliance rate (current estimate puts it at 6%). It was in response to this that the government, on June 29, 2017, launched what it calls, Voluntary Assets and Income Declaration Scheme (VAIDS). According to its promoters, VAIDS is “a time-limited opportunity for taxpayers to regularize their tax status relating to previous tax periods and pay any taxes due. In exchange for fully and honestly declaring previously undisclosed assets and income, taxpayers will benefit from forgiveness of overdue interest and penalties, and the assurance they do not face criminal persecutions for the tax offences or tax investigations.” The VAIDS window will remain open from 1st July 2017 to 31st March 2018.
VAIDS is designed to cover the following categories of tax:
- Company Income Tax
- Personal Income Tax
- Petroleum Profit Tax
- Capital Gains Tax
- Stamp Duties
- Tertiary Education Tax
VAIDS has also made provision for taxpayers’ education. However, the central theme of this education is on the rationale for paying tax as a patriotic duty, and the penalties for non-compliance. That, to me, is a flawed message, which is not likely to generate enough momentum to sustain voluntary tax compliance.
Governments love legislation, perhaps, because it is the easiest part of governance, besides being the insignia of authority. Spending huge sums of money to enforce the legislations is another fad the government enjoys, as it provides the legal grounds for the government to deploy and exercise its enormous powers. But the law can never make everybody righteous or scared enough to comply voluntarily with payment of tax. Show me a country with the stiffest tax law and I will show you a country with the smartest tax defaulters.
VAIDS is an ad hoc carrot and stick arrangement meant to enforce voluntary declaration of assets and income for taxation within the stipulated period. But the drive towards voluntary tax compliance is something that must be sustained beyond the current silhouette cast by VAIDS, until it is permanently ingrained in our national psyche. This cannot be achieved overnight through any form of legislation.
Our path to voluntary tax compliance must be forged with a well-defined strategy, which must include the following:
- Government’s willingness to lead by example through being accountable and transparent in the handling of public finances
- Taxpayers’ education, with emphasis on partnering with the government on key and verifiable projects
- Provision of special incentives/supports to small businesses to help them manage and grow their business in exchange for tax compliance
Government Readiness to Lead by Example
Lack of accountability and transparency in the management and reporting of public finances has created a high level of apathy among Nigerians who see the government as being corrupt and not deserving of their taxes. Many people see taxation as legalized robbery of innocent citizens who are already impoverished as a result of bad governance and corruption.
It is over 3 years now since Nigeria officially adopted the International Public Sector Accounting Standards (IPSAS). What is the result so far? Almost zero! The government seems to have forgotten that IPSAS is designed for the “benefit of the people.” If the government seems to lack the capacity and willingness to enforce its own policies on itself how can the same government be morally justified in punishing those who refuse to comply with its policies? IPSAS is just one of the numerous cases of government’s non-compliance with its own policies.
Let us understand that taxation goes beyond the raising of money from individuals and organisations by the state to pay for the services it provides; collection and payment of tax establish a binding term for contract and reciprocal obligations between the government and the people. When the government honours its own part of the contract in a transparent and honest way, payment of tax by the citizens becomes more compelling and intuitive. Until we institute and inculcate the culture of accountability in our public sectors and thereby renewing people’s faith in the government, voluntary tax compliance will continue to be a mirage.
Financial Education for Increased Tax Revenue
There are obvious flaws with taxpayer education that relies solely on moral suasion and threats of punishment. In the midst of numerous challenges facing small businesses and individuals in the country today, tax education campaign that is based solely on appeal to patriotic sentiment and the threat of imprisonment will only succeed in portraying the government as being insensitive, exploitative and draconian. Government needs to understand that the greatest challenge facing tax compliance in Nigeria today is not absence of patriotism; it is lack of accountability and transparency in financial reporting at both the public and private sectors.
The starting point for taxpayers’ education should be financial record keeping. Small business owners and individuals should be made to understand how good financial record keeping will help their business grow and positions them adequately to benefit from banks and government-sponsored facilities. This will be mutually beneficial to both the government and small businesses. If the government can help small businesses understand and achieve this, then paying tax becomes a secondary issue that can be carried out voluntarily. After all, company income tax is based on profit, and how can an entity that is unable to determine its profit accurately be expected to pay accurate tax?
When Nigeria adopted the International Financial Reporting Standards (IFRS) in 2010, Small and Medium Enterprises (SMEs) were expected to adopt the Standards effective January 2014, based in the IFRS implementation roadmap. However, the initial euphoria and frenzy that accompanied IFRS adoption in Nigeria ended after the listed companies adopted the Standards in 2012. Up till now, the SME sector has no idea of what IFRS is all about, and nobody cares about it.
Special Incentives for Small Businesses
We have been told repeatedly that Small and Medium Enterprises (SMEs) are the engine of economic growth. How well has the government taken care of this engine? During the previous administration, monies were doled out to individuals under several acronyms in the name of poverty alleviation and promotion of MSMEs (Micro, Small and Medium Enterprises). However, the beneficiaries were not equipped with any from of capacity or tool to manage and account for these monies. This resulted in a situation where most of the businesses could not even take off, as some people saw the money as their own share of largesse from the federation account. The present administration must take note of this flaw and correct it immediately. The government will reap huge benefits from helping small businesses solve their financial management problems through the provision of financial education and simple tools in exchange for goodwill and tax compliance.
The UK’s government had successfully adopted this approach: In 1997, the British Inland Revenue undertook the supply of Electronic Version Return (EVR) program, free of charge to taxpayers. The program which was supplied in a set of disks allowed the users to fill in, edit and save tax returns onscreen and thereafter print, sign and send it to designated Inland Revenue offices. The Inland Revenue also authorized software houses to replicate both the EVR form and the computation in their software packages. In 1999, Microsoft released TaxSaver99, purposely built to compute tax and file returns based on the Inland Revenue specifications. The Inland Revenue readily adopted the software as TaxSaver2000 Lite and made it available to taxpayers free. One interesting thing about this software is that, it does not only compute and file tax returns, but also contains informative articles about tax, history of tax, tax statistics and tax basics for beginners.
All these were government’s efforts in helping the citizens and small businesses overcome their basic handicaps in the computation and filing of tax returns. It worked, and can also work here if we diligently apply it.
The current sensitization efforts by the Federal Inland Revenue (FIRS) are commendable, but the government needs to step up its tax compliance drive by incorporating a programme that provides special incentives customized for small businesses.
In a survey I conducted in 2013, I discovered that the major reasons most SMEs (about 80%) do not charge or remit Value-Added Tax (VAT) were as follows:
- Lack of adequate information and knowledge of the system works—let us just call it ignorance
- Lack of proper accounting system for easy computation and reporting of VAT
There has been growing speculations about the government’s plan to increase Value-Added Tax (VAT) from its present 5%. What the government does not seem to know is that the problem with Value-Added Tax is not the rate; it is low level of compliance, especially among small businesses. The government is losing close to one Trillion Naira annually from the small business sector alone through billable and unremitted VAT.
Government’s intervention in the provision of SMEs with financial education and basic tools is highly essential. This can be undertaken as an independent project by the Federal Inland Revenue Service (FIRS) in partnership with business solution providers. The imperative for government support goes beyond tax revenue, it is also a drive to create and promote the culture of accounting among small businesses in Nigeria. Good accounting will result in a healthy and sustainable growth of the SMEs sector, and make the computation and reporting of tax easy and transparent.
Without creating a conducive environment—through enlightenment, education and incentives—for small businesses to voluntarily comply with tax legislations, the cost of trying to force this all important but disorganized sector to comply with tax legislation may not be worth the returns.
As part of our contributions towards the health of SMEs sector, we are committed to providing financial management education and tools for the sector under Project ABC (Accounting By Choice). You can visit our Home Page for information on our products and services.