While many Nigerians may not be comfortable with the President administration’s economic reform policies, global financial institutions such as the World Bank think otherwise. In this report, FESTUS OKOROMADU, reviews one fiscal reform policy that may stand the test of time in favour of the administration if executed according to current proposals.
Although the concept of taxation dates back to the early civilization in Mesopotamia and in Egypt, of 3,500 BC and further authenticated by its practices in Athens and Rome by taxing sales of land and slaves and enforcing import duties, it remains a knotty issue in society.
While the poor in society see taxation as a tool of oppression, the rich think it takes undue advantage of the creative contribution to society through economic value creation which makes them rich and, in most cases, pay more in taxation.
However, whatever perception one has in a civilized society, payment of tax is regarded as a civic responsibility of citizens towards nation building.
As perfectly defined by experts, the main purpose of taxation is to raise resources to finance government expenditure in a way that is administratively feasible, equitable and efficient. Taxation also provides one of the principal lenses for measuring state capacity, state formation and power relations in a society.
Economists equally believe that taxation is used to encourage or discourage certain types of behaviour, to correct market imperfections, and to modify the distribution of income or wealth.
World Bank approves Tinubu’s reform initiatives
Since assuming office on May 29, 2023 President Bola Tinubu seems to have committed himself to initiate economic reforms he believes are critical to the turnaround of the country’s economic fortunes.
“I will remind you that the problems that are being tackled today in the Nigerian economy first surfaced more than 40 years ago, when oil prices began collapsing in the early 1980s after the big boom of the 1970s”
While these reforms appear to have some serious rebuff from the home front especially the masses that now see President Tinubu’s economic policies as painful, the World Bank Group thinks otherwise.
This position was confirmed by the bank’s Chief Economist, Indermit Gill, recently in Abuja when he stated that Nigeria, is at a critical crossroads, hence the need for reforms.
Speaking to the importance of the various reforms being carried out by the Tinubu’s administration, Gill who represented the World Bank President, Ajay Banga, at the just concluded 30th Nigerian Economic Summit Group forum in Abuja, he noted that given its size and significance of Nigeria, the success of the reforms will give a big boost to countries across the continent.
“Because the whole world has a stake in Africa’s future, the whole world needs to pay attention to what Nigeria is trying to do,” he added.
While Gill did not focus on the tax reform initiatives of President Tinubu in his presentation, he was unequivocal on why the country must embark on a reformation.
On why Nigeria got its economic trajectory wrong, he said, “I will remind you that the problems that are being tackled today in the Nigerian economy first surfaced more than 40 years ago, when oil prices began collapsing in the early 1980s after the big boom of the 1970s. I will make a brief detour into history, because it is important to do so. The wise say that those who ignore the lessons of history eventually relearn them—in much more painful ways.”
Gill obviously is in agreement with those who believe that Nigeria’s discovery of oil was a doom rather than a boom, due primarily to institutional mismanagement of resources; hence the need for reforms even when it hurts especially the poor as failure could be catastrophic.
Addressing his audience, on the magnitude of the crisis at hand, Gill said, “As we gather here, there is suffering in all sections of Nigerian society, but especially among the poor and the young. They want good schools and colleges, affordable healthcare, decent jobs, and safe conditions which allow them to make full use of their potential. High inflation is hurting everyone, but it is hurting the poorest people the most.”
In what could be interpreted as an encouragement for the poor in society to embrace President Tinubu’s reform initiatives, he said, “Oil wealth that ought to be used for the welfare of all Nigerians has for too long been used to benefit the elites. The elites are also being hurt by the reforms that started last year, but they did well in the past and they have buffers. Ordinary Nigerians are being hurt more by the reforms, they were also hurt by the policies of the past, and they have no buffers. Their welfare should be uppermost in our minds.”
Explaining further on why the oil dependent economy failed Nigeria, he listed three crucial aspects of the commodity and the need for a transition, he said, “First, it is an exhaustible asset. Second, it is a fickle asset—its prices are among the most volatile of commodity prices. Third, it is a national asset. This means that—like Nigeria’s forests and rivers and seas—its benefits should be shared across every segment of the society and across all generations.
“Over the last forty years, oil has come to dominate in the Nigerian economy. Nigeria’s economic growth, exchange rate and stock market move with the oil price. This was not always the case: it happened because of poor fiscal and exchange-rate policies during the oil boom of the 1970s. Massive increases in oil prices brought massive increases in wealth. Yet Nigeria’s fiscal deficit shot up to 7 to 10 percent of GDP. Current account deficits ballooned, along with external debt. In short, Nigeria’s fiscal policy became highly procyclical, so the government’s policies amplified oil price volatility instead of reducing it. Instead of insulating ordinary Nigerians from the vagaries of oil markets, the government made them even more vulnerable.
“This was the first mistake,” he stated.
Tinubu’s Tax Reform Initiative
As noted by the World Bank’s Chief Economist, one of the misgivings of the oil boom era was elites cornering the common good of all to build buffers for themselves at the detriment of the poor.
There are indications that the Tinubu’s economic team, though not perfect and are part of the acclaimed elites, is determined to ensure that the reforms in the taxation system are holistic and all-encompassing.
In July 2023 President Tinubu approved the establishment of a Presidential Committee on Fiscal Policy and Tax reforms and appointed Taiwo Oyedele, who until his appointment was the former Fiscal Policy Partner and Africa Tax Leader at PriceWaterhouseCoopers as the chairman of the committee comprising of representatives of various organs of society including student bodies.
Inaugurating the body on behalf of Mr. President in August 2023, the Executive Chairman, Federal Inland Revenue Services, Zaccheus Adedeji assured Nigerians that under Tinubu’s leadership, the country will overcome its unpalatable revenue problem.
Adedeji who was then the Special Adviser to the President on revenue stated that Nigeria has huge potentials for revenue mobilisation that should be sufficient to cater for the people without resorting to excessive borrowing. Stressing that excessive borrowing by the government often crowds out the private sector and limits the ability to finance sustainable development, create jobs and prosperity.
“President Tinubu is doing the hardest work ever. He is using his head to make decisions hard enough for any politician in his position. People who will come after him will have easy jobs to complete. Times are hard, but it is for the survival of the nation”
He explained that the Committee will engage with various stakeholders to identify their pain points and critical concerns bothering tax and fiscal policies and to collectively develop the solutions necessary to address these challenges.
Legislative drive to back tax reforms
Bearing in mind the legal implications of introducing reforms without a legislative backing especially in a federal system of government, President Tinubu, last month submitted four tax reform bills to the National Assembly for consideration, approval and passage into law.
The bill is designed to tackle the complicated and confusing tax system by bringing all tax laws together into one clear framework. It deals with the issue of multiplicity of taxes across the country and aims to create a fairer and more transparent tax process, promoting a better relationship between the government and taxpayers.
The bill also aims to promote ease of doing business, which has long been a hurdle in Nigeria’s economic growth. By streamlining tax rules, the Nigeria Tax Bill 2024 simplifies compliance, enabling businesses to focus more on innovation and expansion rather than wading through bureaucratic red tape. In doing so, it creates a more conducive environment for entrepreneurship and investment.
Varied opinion over tax reform bill
Tax experts and economists seem to have different views as to the perfection of the new bill and how it can help revamp the economy.
Commenting on the tax reform initiative of the present administration, a lecturer at the University of Abuja, Olanrewaju Aladeitan, said while the move is a welcome development, there is the need for the National Assembly to pass the bill into law so as to allow for a review of what has been passed into law.
According to him, whatever is being said now are mere speculations as only the final document that is passed into law is authentic, and binding on the citizen.
He however, commended the president and the committee for their commitment to ensuring reforms in the sector.
“From what we are hearing, the proposed reforms are critical to the economic transformation of the nation.
“The Presidential Committee on Fiscal Policies and Tax Reforms chaired by a renowned tax expert, Taiwo Oyedele has done a noble job of overhauling the tax system, but we must wait for it to be passed into law before we can applaud them and the government.
“No doubt the idea of expanding the tax net and ensuring that those with higher income pay more is the way to go. That is what obtains in the developed society, but here the reverse is the case, the rich have a way of evading tax payment, and the few who pay tax are over taxed.”
He however, expressed worries over the implementation of the proposed law.
On his part, a tax expert, Adebayo Olamide, is confident that the new tax bill will drastically overhaul the economy. He noted that the new bill is proposing a new sharing formula for tax revenue.
“The new tax bill proposes a drastic overhaul of the sharing formula distributable to Federal Government, States and Local Government Areas (LGAs) from the Federal Account Allocation Committee (FAAC).
“The Federal Government is proposing to take only 10% while states and LGAs take 90 percent.
“Provided that 60 percent of the amount standing to the credit of States and Local Governments shall be distributed among them on the basis of derivation,” he stated.
“This is the concession the Federal Government has to make to eliminate all manner of nuisance taxes and get states to buy into centralized and efficient collection of taxes.
“Secondly, this is a way of establishing fiscal federalism.
“It is left to be seen if the Federal Government will also be taking 10% of personal income tax accruable to every state,” he stated.
According to him, the Federal Government has always “eyed” Personal income tax (PIT), adding that a national centralized PIT collection can easily generate N50 trillion yearly, that is N5 trillion for the Federal Government.
He stressed that the Federal Government will be relying on MDAs for most of its revenue.
He however expressed confidence that MDAs are already generating almost N1 trillion monthly for the Federal Government, with lots of loopholes and leakages to close.
“President Tinubu is doing the hardest work ever. He is using his head to make decisions hard enough for any politician in his position. People who will come after him will have easy jobs to complete. Times are hard, but it is for the survival of the nation,” he said.
A political/social commentator who spoke with The Point, Imaga Andrew, wondered about the type of federal structure the new bill is designed for.
“Can it be said that we want to practice fiscal federalism with the proposed tax reform bill, when the Federal Government still collects money on behalf of the states and then shares it, though retaining a lesser percentage (according to the newly proposed bill)?.
“My idea of a true fiscal federalism is to allow states to generate their money themselves using both human and natural resources in their respective states and then remit a percentage to the Federal Government.
“For emphasis’s sake, they (the states) would be in control of all the resources in their respective states. Manage the resources themselves, and then remit a percentage to the Federal Government. Not that the Federal Government will collect all revenues due to the federation before sharing it with states as we currently do.
“The current practice makes a lot of states lazy and unproductive because they’re waiting for allocation of money they didn’t work for from the Federal Government at the end of every month.
“A true fiscal federalism would put each state on a constant hustle mode, not the current I-can’t-kill-myself mode because of the monthly “free money” they collect.”
Also commenting on the development, the chairman of Tekedia Capital, Ndubuisi Ekekwe, described the new tax policy as a good one, adding that he gives it an ‘A’ rating.
“The government is on the verge of reshaping Nigeria’s revenue collection system in a bold reform aimed at consolidating efforts and boosting government earnings. If passed, his new plan would bar over 60 revenue generating agencies from collecting revenues on behalf of the Federal Government. In their place, a single entity, the Nigeria Revenue Service (NRS), will take up the responsibility of tax and levy collection, drastically altering how revenue streams flow into national coffers.”
He however emphasized that, “No private company or contractor should be engaged in the revenue collection.
He added that, “But on the merit of this call, I support it because it makes sense to centralize this process. This is an electronic age where people do not pay cash. So, it is doable.
“As always, Nigeria is extremely great on innovation on revenue collection. Where we struggle is how to help companies and people increase their revenue and income,” he stated.
A former President, Chartered Institute of Stockbrokers, Olatunde Amolegbe, stated that “Managing the economy of a country such as Nigeria cannot be all about a balanced budget and nice sounding financials; it must have a human face. While the reforms we’ve seen might be considered necessary, it’s clear that the bulk of the negative impacts are being borne by the most vulnerable within the society.
“If the reforms are not paced and efforts made to ameliorate the negative impact they might very well not achieve their intended purpose due to lack of public consensus.”
A Public policy analyst, Clifford Egbomeade, said, “The advice from the World Bank Vice President, Indermit Gill, that Nigeria must sustain the Tinubu administration’s reforms for the next 10 to 15 years has sparked significant debate. On one hand, the reforms—including fuel subsidy removal and foreign exchange rate unification—are aimed at promoting long-term economic stability and growth. However, the hardship they have imposed on ordinary Nigerians, such as increased living costs and inflation, raises questions about their immediate feasibility and social impact. While Gill argues that reforms are necessary for Nigeria to break free from the legacy of oil dependency and elite capture, it is crucial to note that these same policies have exacerbated the burden on the most vulnerable.
“The World Bank has acknowledged that Nigeria’s oil wealth has historically benefited the small elite, while the ordinary population suffers from structural inefficiencies in the economy. The removal of fuel subsidies, for example, has led to skyrocketing transportation and food costs, further straining already struggling households.”
Similarly, in his response, an analyst and Executive Vice Chairman at Highcap Securities Limited, a Lagos-based investment firm, David Adonri, said, “Economic reforms always come with some pains. I do not think that the pain from the current market reform will last for more than two years because the economy will certainly adjust to the new price level.
Current reform is targeting the demand side of the economy but there is no strong supply-side effort to close the supply gap, which is the bane of the economy. If the domestic factors of production are mobilized to create a self-sustainable economy, the gains from current reform will be too enormous to imagine because both demand and supply will come to equilibrium.”
