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The Need For Tax Reform To Promote Good Governance By Tajudeen Audu

October 24, 2012

Tax plays a key role in sustainable development and governance all over the world. The funds provided by taxation are used by the state to support obligations like education, healthcare, public transportation and other social benefits. In Nigeria, Taxation is unfortunately relegated to the background and considered only as an extra source of revenue to oil as the three tiers of government depend basically on revenue from this depleting natural source while paying lip service to boosting tax revenue.

Tax plays a key role in sustainable development and governance all over the world. The funds provided by taxation are used by the state to support obligations like education, healthcare, public transportation and other social benefits. In Nigeria, Taxation is unfortunately relegated to the background and considered only as an extra source of revenue to oil as the three tiers of government depend basically on revenue from this depleting natural source while paying lip service to boosting tax revenue.

In recent times, Nigeria has been awakened to the reality that over dependence on oil revenue is no longer a thing of vogue. It is also a widely acknowledged fact that over dependence on natural resource is accompanied by a ‘curse’ and if Nigeria is to attain the level of development envisioned by 2020, there is the need to improve on tax collections, which remains the only sustainable alternative.

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A good tax system has also being shown to have linear relationship with good governance. Good governance describes the conduct of public affairs and management of public resources by public institutions and individuals. The term good governance presupposes the existence of ‘bad governance’ and a logical question is “what kind of Governance do we have in Nigeria?”
 

Various international organizations like the World Bank, the IMF and the United Nations has recognized certain standards and characteristics that promote good governance and a common thread in all criteria of good governance are; rule of law, a participatory and all inclusive democracy, equity, transparency, accountability and a responsible leadership that recognizes citizens right and encourages civil society in exposing ‘bad governance’. It is an acknowledged fact that successive Nigeria governments have recognized the importance of these good governance criteria and has created institutions in this regard but not much seems to have been achieved beyond sloganizing and tokenism. It is time we took advantages inherent in a good tax system in other to entrench good governance.

‘Death and taxes are the two certainties in life’ is a popular aphorism but how true is this in our country, how certain is payment of taxes beyond the PAYE deductions in some employment income. The aphorism is probably given taxation its due prominence but it is certainly not true in Nigeria where the tax net is very narrow and tax evasion is the order of the day. Taxation is a strong economic and political tool of governance and a good tax system can be effectively used for fiscal management and redistribution of wealth to reduce inequality in the society. Our leaders also need to understand the nexus between a good tax system and good governance. Studies have shown that a good tax system engenders good governance and vice versa because of the congruence between good governance indicators and the characteristics of a good tax system.

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A good tax system is characterized by certainty, efficiency, full compliance with the rule of law,   Equity and fairness to all, all-inclusivenessand reciprocity in the use of tax revenue. The principle of inclusivism ensures none is left out of the tax bracket while reciprocity connotes transparency, accountability and judicious use of tax revenue. This is very important if tax is not to be perceived as an unwanted imposition on the citizens by the leadership but rather seen as a civic responsibility of citizenship for the common good of all. The citizens should be able to voluntarily pay taxes in anticipation of the “goodies” from the State.

Unfortunately, the Nigerian tax system is by no means equitable or all inclusive in practice, the poor pay a greater proportion of income as tax than the rich due to the lack of political will to implement the tax laws, poor tax administration and the endemic monster called corruption. A lot of persons and transactions in the informal sector are outside the tax bracket.

There is therefore the need for a complete revolution in the Nigeria tax system in line with the basic tenets of taxation so as to boost revenue and increase citizen interest in tax matters. This will enhance transparency, accountability, and also reduce conflicts that results from dependence on natural resources as witnessed in the Niger Delta.

A state that depends on taxes depends on the prosperity and the enterprising spirit of her citizens and the government that depends on this for the delivery of public goods and services will be more responsive to the growth and development of business enterprises-the golden egg laying geese and the economy in general. The citizens that pay tax will in turn hold the government to account in the use of tax revenue and thus ensuring good governance.

The Nigerian tax system suffers from malaise of inefficiency, ineffectiveness and lack of data base. The low rate of tax education on the part of both the tax payers and the political class, lack of political will and the disconnect between government and the governed has also largely contributed to the week tax system and this has resulted in Nigeria having one of the lowest tax to GDP ratio among ECOWAS countries.

In most developed countries of the world, the ratio of tax to GDP is in the region of 40% - 50% while in developing economies to like Nigeria, the standard is about 20%. It is disheartening to note that that Nigeria has one of the lowest tax-to-GDP ratios among the countries in the Economic Community of West African states (ECOWAS) as reported by the ECOWAS commission. While countries like Ghana and Cape Verde recorded higher than 20%, Nigeria is still battling to achieve 10% of non-oil tax-to-GDP ratio, a fact attested to by the Acting Chairman of FIRS in his recent address at the inauguration of FIRS field operations group regional management meeting in Asaba.

The frightening aspect is that, while tax revenue continues to rise in actual terms (due largely to increase in oil revenue and corresponding increase in PPT and royalties) the percentage of Nigeria’s tax revenue to GDP continuously declined since 2001 as observed in a survey carried out by ECOWAS. In Africa, Nigeria is also rated No. 42 of 47 countries surveyed by the heritage foundation for tax revenue to GDP ratio in 2011.

This situation needs to be urgently addressed by a concerted effort at revolutionizing our tax practice. What then is the strategy for improved revenue performance and cure of the “curse” or so called “Dutch Disease” that result from over dependence on oil revenue?

The strategy is to strengthen the weak tax system but not by imposition of more taxes or higher tax rates as most people are quick to postulate especially when Nigerian tax rates are compared with that of advance economies, what is needed is better taxes by adhering to the principles of equity, fairness, inclusivity, reciprocity, and tackling the ineffective tax administration for quick wins while addressing the other challenges in a concerted effort with other relevant agencies for longer term changes in the tax culture and practice.

Some of the specific strategies suggested are:

1.     Enforcement of tax laws with appropriate steps to ensure penalties and sanctions on tax offenders.

2.     A drive for a wider tax base to ensure that all taxable entities and transactions are covered.

3.     New enforcement and compliance initiatives e.g. Bank transactions provides window for effective compliance and enforcement and this should be vigorously exploited in a concerted effort with other government agencies.

4.     Improved and more up-to-date IT solutions for data gathering, revenue collection and access to tax information.

5.     Media sensitization campaigns to enhance voluntary compliance and improve tax literacy.

6.     Aggressive recovery of all outstanding tax debts.

Implementation of the above mentioned strategies along with several others while adhering to the basic tenets of taxation will not only engender good governance but also in no time astronomically boost tax revenue far above the target of N5.12trillion budgeted for 2012.
It must be warned that taxation is a hard sell anywhere in the world and the tax system is a product of political and economic equation which needs to be well balanced by the Government and that is why a strong political will is needed by the leadership if good governance must be achieved through taxation.
 
Tajudeen Audu, MBA, ACA, ACIT is a Chartered Accountant and Tax practitioner based in Abuja

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