Tax, as a subject of discussion, is not one of the easiest topics to read or write on. The natural inclination of the average Nigerian reader is to turn away from this subject with undisguised alacrity. However, this attitude itself is a part of the subject matter under discussion, and on the supposition that you are still reading this, we will commence with a postulation – or more accurately, a generic postulation that, quite simply, we can categorize the attitudinal nature of Nigerians to the existing tax regime under three headings: (i) those who are knowledgeable about taxes but use their knowledge to avoid or evade tax obligations; (ii) those that are ordinarily willing to pay their tax, but have insufficient understanding of the technicalities and the rationale underlying the system; and (iii) those who are enlightened about the tax system and are willing to meet their tax obligations. For the sake of argument, we might add a fourth category—that is, those who are neither knowledgeable about the tax system and are not willing to comply with its requirements; but this category is almost improbable, as a person, logically, cannot avoid a circumstance he is ignorant about.
These categories distinguished, we can then proceed on the premise that the effectiveness of the Nigerian—or in fact, any other—tax regime is predicated on the ability of the tax administration to detect and punish the people categorized under (i); educate and motivate the people in (ii); and justify and reward the people in (iii).
While our theory looks quite straightforward on paper, reality – historical and current – reveals that tax regimes are fraught with peril, and not a few rulers have lost their seats – and their heads – in the process of pursuing an unpopular tax policy.
And how does this work out in Nigeria? Today, a form of organized chaos seems prevalent within the tax system. Organized, because there are rules, agencies, and enforcement procedures. Chaos – because, well, none of it seems to work as efficiently as it should. The citizens in category (ii) above are the majority and, whether as a result of administrative inefficiency or inherent deficiency, the average Nigerian is no more interested in the intricacies of the Nigerian tax regime than he is in the cultural ceremonies of Byzantium.
So who then are the current taxpayers? An analysis of the tax administration would reveal that the revenue that comes into government coffers is mostly from either the automated tax deduction processes, such as the “withholding tax” method and the Pay-As-You-Earn (“PAYE”) method or from individuals and corporate entities too “big” to escape the scrutiny of the taxman. Beyond these two methods of collection, the rest is a topsy-turvy nondescript wasteland of indiscriminate assessments and arbitrary compliance.
And for those who do pay their taxes (whether because the process is automated or because they are within the public glare) the psychology is almost always inclined towards a treatment of the tax as some form of blackmail payoff to the government – an exaction without expectation of social reward, complied with merely to avoid the imposition of punishment and penalty.
And therefore, the current psychology of the majority of taxpaying Nigerians views tax, not as a contractual contribution to government expense, but as a tribute to be paid to avoid prosecution; a modern Danegeld, swiftly ignored in the absence of an effective process of detection, determination of culpability, and enforcement of compliance. Like a recalcitrant child, the Nigerian taxpayer complies with instructions only to avoid punishment, with little or no understanding of the underlying rationale.
But a self-generating and efficient tax system should proceed beyond a one-sided governmental imposition. In fact, in theory, it should involve an equitable social contract between the government and the governed. However, as long as tax is merely seen as a government tribute, then absent a dictatorial administration, citizens would continue to cavort in a swamp of tax ignorance and apathy.
And what do we mean by a self-generating and efficient tax system? A casual study of any text on the theory of taxation indicates that there are three manifest objectives of a proper tax system: the first, naturally, is to provide a source of income for the government; the second is to ensure social equity by balancing the spread of tax between the rich and the poor, and the third goal is to provide economic incentives or disincentives in specific sectors of the economy.
Within the Nigerian context, two further questions now arise: how committed is the Nigerian tax regime to the achievement of these functions? And how has the aspiration to these functions, if at all, impacted on the attitude of the three categories of taxpayers that we outlined earlier? We can answer the first question, hopefully, by examining the intentions of the Nigerian National Tax Policy (the “Policy”); and the second question by reviewing the practical application of the Policy.
A government’s tax policy is, essentially, a government’s taxation manifesto. And just like its political counterpart, a tax policy should, ordinarily, delineate the tax philosophy of the administration and its experiential basis, the obligations of the citizens, the administration’s duties to the citizens and the administrative, economic and social apparatus for concretizing the foregoing. While it is not usually a strict requirement that a government has to have such a policy, it is an advantageous credential that could be useful in promoting the tax regime and boosting public support for the government’s aims. The tax policy is a physical manifestation of the hypothetical social contract between the government and the governed.
But the positive results of a tax policy are not an automatic consequence: the policy should not merely exist qua policy, it should also be a conscious document. And by “conscious”, we mean that the citizenry should be aware of its existence and be involved in its growth. With this in view, to what extent has the Policy achieved both functional relevance and social integration?
Sometime in April 2012, Nigeria’s Federal Government adopted the Policy to, self-professedly, provide a set of guidelines, rules and modus operandi that would regulate Nigeria’s tax system and provide a basis for tax legislation and tax administration in Nigeria. The Policy seems eager to meet these lofty expectations for it includes socio-philosophical topics such as: Overriding Philosophy; Guiding Principles for Stakeholders; Taxation as a Tool for Wealth Creation and Employment; Institutionalizing Tax Culture in Nigeria, among others.
In discussing the Overriding Philosophy, the Policy defines taxes as a “pecuniary burden laid upon individuals or property to support government expenditure” clearly indicating the primacy of the revenue function of the tax regime. However, this seemingly one-sided perspective is ameliorated when, later on, the objectives of the tax system are described to include: “to facilitate economic growth and development”, “to address inequalities in income distribution”, “to correct market failures or imperfections” and other goals of a similarly exalted tone.
The Policy describes the existing taxes (on individuals, companies, transactions and assets) and their components. To avoid confusing the ordinary citizen, the Policy also attempts to distinguish between taxation and other components of government revenue (such as charges paid for the use of goods, services or infrastructure provided by the Government; fees paid for the labour or services provided by a public body, such as a Government entity or agency; fines imposed as punishment for an offence; penalties paid for not meeting a particular; and rates imposed on assets determined via the value of the asset).
Section 3 of the Policy (“Guiding Principles for Stakeholders”) details the administrative apparatus of various stakeholders in the Nigerian tax system. These include the Presidency, Ministry of Finance, the National Economic Council, State and Local Governments, the legislative houses, the Judiciary, tax authorities, professional bodies and tax consultants, and of course, the taxpayers. The Tax Administration section deals with information and intelligence gathering, registration of taxable persons, processing of filings and returns, enforcement of tax laws, audit and investigation tax administration across the three tiers of government.
There may be little or no statistics for an accurate comparison of tax revenue and the responsible factors for any increment or decrease since the publication of the Policy, however, common sense suggests that little impact has been felt in the socio-economic context either through increased awareness of the tax system or increased discussion on the tax regime. In the absence of this awareness or discussions, the Policy is doomed to a shelf existence, without practical relevance, serving merely as reference text for students, tax consultants – and, of course, taxation article writers.
But what remedy do we have for this communal ignorance and apathy? There is an obvious psychological disconnect between the tax aspirations of the government (as defined in the Policy) and the expectant participation of the citizenry. As we stated earlier, even those Nigerians that comply with their tax obligations merely do so as part of an involuntary process. But can this attitude be changed? To answer our question, let us take a quick trip to the American jurisdiction.
America’s love-hate relationship with taxation is hardly news. The country was birthed in a tax induced revolution. The selection of its governments, and the propulsion of its two major political parties, has consistently revolved around tax issues. This situation is, essentially, a concomitant ramification of the peculiar philosophy of the American state. The average American is groomed to value the right to “life, liberty and the pursuit of happiness” and accordingly, any attempt to negate these values has to be resisted with force.
With that psychology underlying the system, the American tax system has evolved to balance – in general – the rights of the citizens with the requirements of the government, and the modern American, today, is taught to treat his tax “obligations” with seriousness – just for the benefit of the government, but for the benefit of the society. And when an obligated taxpayer fails to perform as required, the punishment meted out is a punishment against the person by all of society, and not just by the government. The psychological balance is fully evolved.
The lesson to be learnt from the above excursion is evident; the attitude of a citizen to their taxes is a reflection of their attitude to their society and their government. The tax policy of the government, like its political system, has to be grounded in the reality of the social construct. However, the Nigerian tax system is an importation of foreign philosophies into the Nigerian context. Accordingly, a number of expectations on which the tax obligations of Nigerians are premised, fail to take off. This borrowed tax-system is fundamentally elite, more appropriate to a literate and enlightened citizenry with easy access to record-keeping and data management facilities but not to a typical African society, such as we have in Nigeria.
And so because the tax regime itself is not developed from a realistic social philosophy, the Nigerian citizen lacks both governmental expectation and a sense of obligation. It then becomes necessary for the Nigerian government to remodel the Policy through a consultative process that would mirror the realities of Nigerian life.
For example, the income tax can be abolished, except for individuals in paid employment and for defined corporate entities. Also, the federal government tax could be limited to the Petroleum Profits Tax – or a variation of it, while the states are left to pursue Value Added Tax and other taxes whether for individuals or corporate entities. These examples are simply offhand suggestions – and would, of course, require serious discussion for proper implementation. But the point is clear: merely transcribing taxes from economic textbooks and transcribing them – along with the borrowed psychology – local law will not work; the Nigerian tax regime has to be developed from within the society, and targeted at the peculiar needs of the government. A new tax policy has to be written by the people – and for the people. Only then would a sense of participation and expectation be truly generated, and the tax system manifestly effective.
By Ayo Sogunro