Understanding The Tax And Fiscal Reforms

OBI TRICE EMEKA

Two major factors control the performance or underperformance of an economy: monetary policies and fiscal policies. There is yet another, closely related to the fiscal side but rarely talked about—the structural side.

These factors are interwoven and need to synchronise to optimise economic performance. Monetary policy is strictly the responsibility of the Central Bank of Nigeria (CBN), with its main focus being managing the exchange rate, foreign exchange reserves, and interest rates, all while keeping inflation under control.

Fiscal policies, on the other hand, focus on strategies to manage the revenue and debt of the country, as well as policies aimed at attracting and sustaining investments. Without the fiscal side doing the appropriate work, monetary policies will always struggle.

Earlier this year, I wrote that Cardoso had played all the tricks in the book, while the fiscal side had done nothing. For example, many of us wrongly assume it is the job of the CBN to generate dollars and crash the naira’s exchange rate. While the CBN plays a role, the primary responsibility lies with the fiscal authorities, whose job it is to increase the dollar supply through policies that trigger exports. If supply increases, the exchange rate will stabilise or fall. Without such an increase, the CBN will only resort to the tools available to it, such as hiking interest rates to attract dollars and locking naira liquidity into government securities.

Debt and Revenue: A National Crisis

The Nigerian economy is plagued by two major problems: debt and revenue. In 2022, the debt-to-revenue ratio was an alarming 97%, meaning 97% of revenue was spent on debt servicing, leaving just 3% for salaries, overheads, and capital expenditure. In 2023, this figure improved slightly to 74%, but it still illustrates why it is nearly impossible to execute projects in Nigeria within set timelines.

Tax Policies as Drivers of Investment

Tax policies are a significant part of fiscal management. Taxes do not necessarily mean the government forcing you to hand over your money. Beyond macroeconomic conditions, tax policy is the main driver of investment in any country. Investors need clarity on the amount payable, so they can factor it into their profit margins and compare it with other possible investment destinations. They also look at tax incentives and the ease with which taxes can be paid and claims settled as a factor for investing

These are the issues that the tax and fiscal policy reforms are designed to address. Personally, I have been following the work of the fiscal committee since its inauguration last year. On several occasions, I have criticised the government for being too slow with fiscal policy reforms and for failing to appreciate the urgency of the situation.

The New Tax Bills

The new tax bills, four in total, aim to address several long-standing fiscal challenges:

1. Harmonising Tax Collection Processes

These bills aim to streamline tax collection processes between the federal, state, and local governments, consolidating all taxes into a single framework and a cumulative single-digit tax( below 10 across all tiers) as compared to the tens of taxes collected by each tier. If successfully implemented, this should eliminate the activities of touts who collect revenues on behalf of the government. It remains to be seen how the state and local government will play to this

2. Expanding the Tax Net

The reforms seek to increase government revenue by bringing more people into the tax net. Under the new system, everyone must have a tax identification number (TIN), and those who meet the threshold for taxation will be required to pay. Nigeria’s tax-to-GDP ratio is under 7%, the worst in Africa after Equatorial Guinea. Nigeria is a poor country with zero corruption factored in. And to overcome our infrastructural challenges, government revenue must rise. I must also add that our poor crude oil output has necessitated that we transition fully from a resources-run country to a tax-run country

3. Gradual VAT Increases

VAT will be progressively increased over the next five years, items which contribute to inflation by 82% are exempt, which should prevent inflationary pressures.

4. Incentives for Investors

Corporate income tax will be reduced to 25%, and the numerous levies imposed on companies to fund various agencies of government will be replaced by a single development levy of 2% by 2030 which goes to NELFUND.

5. Simplifying Tax Filing and Settlement

Filing taxes and settling claims will become more straightforward, encouraging compliance and reducing disputes.

6. Centralising Revenue Collection

The Federal Inland Revenue Service (FIRS) will be transformed into the Nigerian Revenue Service, making it the sole agency responsible for revenue collection. This will eliminate leakages and improve efficiency.

7. Attracting Investments and Creating Jobs

Various tax incentives have been introduced in the bill to attract investments and stimulate job creation.

8. Protecting Low-Income Earners

The poor will be exempt from paying income taxes, increasing their disposable income, while the wealthy will bear a larger share of the tax burden.

And others.

The benefits of the bill outweigh and negatives which have largely revolved around VAT distribution.

– Chukwuemeka Obi is a graduate of Agricultural Engineering and also has an M.Eng in Processing and Storage from the University of Ibadan. Though an engineer, he is a profound attraction to investment and finance. In this pursuit, he took a course on the Financial Market offered by the University of Yale and taught by Robert Shiller a 2013 co-winner of the Nobel Prize in Economics. He has also taken different courses on the financial market and has a robust investment portfolio cut across different financial markets and instruments.