Outline

1. Imperatives For Increase in the Value Added Tax (VAT) Rate and Potentials For Expanding The Narrow Tax Base in Nigeria Being Presentation by the Immediate Past President, Chartered Institute of Taxation of Nigeria, Chief Mark Anthony Chidolue Dike, FCTI at the Guardian Tax Conference

2. Outline • Overview of Nigeria’s Tax System • National Tax Policy Direction: Direct v Indirect Taxation • Introduction of Value Added Tax • Value Added Tax in ECOWAS Region • The Business case for Value Added Tax: Trending PPT, CIT, EDT, VAT (Graph and Y-o-Y Growth Rate) • Scope for expanding VAT base: 5-yr Time plot of Manufacturing, Trade, ICT and Financial/Insurance Service GDP on VAT • Expanding the Tax Base • Proposals for increase in Value Added Tax rate: VAT rates in ECOWAS, VAT/GDP ratio • Disaggregated trend of Internally Generated Revenue in States: 2008 - 2014 • Growth and Tax Policies • Conclusion Imperatives for increasing the Value Added Tax rate and the narrow tax base in Nigeria

3. UNDERSTANDING NIGERIAN TAX SYSTEM • The Nigeria tax system, like any tax system, comprises of a tripartite structure which includes; Tax Policy, Tax Legislation and Tax Administration. • Tax Policies form the basis for tax laws while tax administration is the implementation of the tax laws. • This shows that in a bid to establish an effective and efficient tax system that will make taxation the pivot for national development, appropriate tax policies and legislations should be put in place and adequately implemented Imperatives for increasing the Value Added Tax rate and the narrow tax base in Nigeria

4. UNDERSTANDING NIGERIAN TAX SYSTEM Imperatives for increasing the Value Added Tax rate and the narrow tax base in Nigeria

5. NATIONAL TAX POLICY • Chapter 1 - Introduction • Chapter 2 - Role of Stakeholders in the Nigerian Tax System • Chapter 3 - Taxation as a tool for wealth creation and employment • Chapter 4 - Tax Administration • Chapter 5 - Fiscal dispute resolution (appeal) mechanisms • Chapter 6 - Institutionalising tax culture in Nigeria • Chapter 7 - Implementation of the policy • Appendices • Appendix One - Existing Tax Legislation • Appendix Two - Strategy for implementation of the National Tax Policy • Appendix Three - State Policy on Taxation Imperatives for increasing the Value Added Tax rate and the narrow tax base in Nigeria

6. NIGERIAN TAX LEGISLATIONS • Companies Income Tax Act, Cap. 21, LFN 2004 (As Amended) • Personal Income Tax Act, Cap. P8, LFN 2004 (As Amended) • Stamp Duties Act, Cap. S5, LFN 2004 • Value Added Tax Act, Cap. V1, LFN 2004 • Petroleum Profits Tax Act, Cap. P13, LFN 2004 • Taxes and Levies, Approved list for Collection, Cap. T2, LFN 2004 • Education Tax Act, 2011 • Capital Gains Tax Act, Cap. C1, LFN 2004 • Nigerian Information Technology Development Act Imperatives for increasing the Value Added Tax rate and the narrow tax base in Nigeria

7. NATIONAL TAX POLICY DIRECTION: DIRECT v INDIRECT TAX • Chapter 3- Taxation as a tool for wealth creation and employment • Shift from Direct to Indirect Taxation for Economic Growth • Oil taxes predominates Direct taxes • Weaning the economy away from oil taxes, hence the need for shift from Direct to Indirect taxes • Efficiency in realization of Indirect taxes and delivers higher rate of return • Aimed to move emphasis away from Direct to Indirect taxes especially in the non-oil sector for stimulating economic growth • Reduce cost of doing business by reduction in Company Income tax and Personal Income Tax rates while shift to indirect taxes would still meet revenue requirements Imperatives for increasing the Value Added Tax rate and the narrow tax base in Nigeria

8. INTRODUCTION OF VALUE ADDED TAX • Works of Professor Sylvester Ugoh’s Study Group on Indirect Taxes and Mr. Emmanuel Ijewere’s Modified Value Added Tax (MVAT) Committee. • Introduced in Nigeria in 1993 through the promulgation of the Value Added Tax Decree No. 102 of 1993, now Value Added Tax Act, Cap VI, Laws of the Federation of Nigeria, 2004. • Government reasoned that it would: • Be difficult to evade unlike income tax • Bridges the yawning gap between the potential tax revenue of the country and the actual tax collected. • It covers both locally manufactured and imported goods and it has zero rate for exports. Imperatives for increasing the Value Added Tax rate and the narrow tax base in Nigeria

9. INTRODUCTION OF VALUE ADDED TAX CONTD…. • Features: • It is an indirect tax on consumption which is borne by the final consumer of goods and services. • The tax is included in the price paid. • It is based on a flat rate of five per cent even though some goods and services are exempted or zero-rated. • It is collected on behalf of government by businesses and organizations registered with the tax agency, the Federal Inland Revenue Service. Imperatives for increasing the Value Added Tax rate and the narrow tax base in Nigeria

10. INTRODUCTION OF VALUE ADDED TAX CONTD….. • Models of Value Added Tax • There are basically three recognized models of VAT. These are namely: • Gross National Product – This taxes all final goods and services except for intermediate goods. Capital and investment costs are not allowed. The advantage of this model is that the base is relatively large giving rise to high VAT yields. • Net National Product or Income Variant – This excludes from the tax base the value of intermediate inputs and depreciation thereby making it similar to the one in income taxation. • Full Consumption – The base excludes the value of both intermediate inputs and investment costs from the gross value of goods and services. This is in contrast to the Gross National Product model. Imperatives for increasing the Value Added Tax rate and the narrow tax base in Nigeria

11. VALUE ADDED TAX IN ECOWAS REGION Imperatives for increasing the Value Added Tax rate and the narrow tax base in Nigeria

12. VALUE ADDED TAX IN ECOWAS REGION CONTD…. • The Importance of VAT harmonization to Regional Economic Communities • Harmonisation of VAT policies deals with the challenges of tax competition particularly within Regional Economic Communities • The European Union (EU) – is the best example of VAT harmonisation - where the adoption of the VAT System is a prerequisite for becoming a member and member countries must have a VAT rate of at least 15%. Imperatives for increasing the Value Added Tax rate and the narrow tax base in Nigeria

13. VALUE ADDED TAX IN ECOWAS REGION CONTD…. • Key principles of a coherent and co-ordinated tax treatment include: • Removing discrimination and double taxation, • Preventing inadvertent non-taxation and abuse, and • Reducing the compliance costs associated with being subject to more than one tax system. Imperatives for increasing the Value Added Tax rate and the narrow tax base in Nigeria

14. VALUE ADDED TAX IN ECOWAS REGION CONTD…. • MAJOR PLANKS OF ECOWAS PROTOCOL ON VAT • VAT rate differentials • Inefficient refund systems • Difference in rules for the determination of tax base (activities chargeable vis-à-vis exemptions) • Difference in treatment of VAT on exports • Lack of political will to converge with Regional standards Imperatives for increasing the Value Added Tax rate and the narrow tax base in Nigeria

15. VALUE ADDED TAX IN ECOWAS REGION CONTD…. • MAJOR PLANKS OF ECOWAS PROTOCOL ON VAT • Develop a common VAT Model for the region; • Clearly state the treatment of transaction between parties from member countries vis-à-vis third parties; • Zero-rated transactions should be restricted to exports; • Harmonisation and reduction of exempt transactions; • Harmonisation of tax bases and tax rates within the region; • Similar definition of terms; Imperatives for increasing the Value Added Tax rate and the narrow tax base in Nigeria

16. VALUE ADDED TAX IN ECOWAS REGION CONTD…. • MAJOR PLANKS OF ECOWAS PROTOCOL ON VAT • Apply harmonised rules and practices for VAT refunds; • Establish a balance in the administration and tax procedures in all member countries; • Joint capacity building in various areas of administration and policy making; and • Exchange of Information on audits and other compliance enforcement activities. Imperatives for increasing the Value Added Tax rate and the narrow tax base in Nigeria

17. The Business case for Value Added Tax: Trending PPT, CIT, EDT, VAT (Graph and Y-o-Y Growth Rate) Contributions of Petroleum Profits, Education Tax, Company Income Tax and Value Added Tax Year-on-Year Growth rate in PPT, EDT, CIT and VAT Imperatives for increasing the Value Added Tax rate and the narrow tax base in Nigeria

18. SCOPE FOR EXPANDING VAT BASE

19. Expanding the Tax Base • Nigeria’s 2015 Gross Domestic Product figures, at current basic prices, was N94.144 Trillion • Of this figure, only 58.56% is in the formal sector • The remaining 41.43% are in the informal sector • The task is to reign in the informal sector and get them to obey Sec. 24 (f) of the 1999 Constitution of the Federal Republic of Nigeria, CAP. C23, Laws of the Federation of Nigeria, 2004 (as amended) which says: It shall be the duty of every citizen to – …….. (f) Declare his income honestly to appropriate and lawful agencies and pay his tax promptly. • Greater Inter-agency cooperation and collaboration is canvassed also here. Imperatives for increasing the Value Added Tax rate and the narrow tax base in Nigeria

20. Proposals for increase in Value Added Tax rate National Tax Policy Reduction in rates of direct taxes means lower tax revenue from such sectors Upward review of Indirect taxes such as VAT But, there should be: Improvement in VAT Administration Correction of anomalies in the VAT in line global best practices for VAT administration Introduction of thresholds for protection of low income earners VAT increase should be in line with regional and economic commitments Imperatives for increasing the Value Added Tax rate and the narrow tax base in Nigeria

21. Proposals for increase in Value Added Tax rate: VAT rates in ECOWAS, VAT/GDP ratio

22. DISAGGREGATED TREND OF INTERNALLY GENERATED REVENUE IN STATES: 2008 - 2014 Imperatives for increasing the Value Added Tax rate and the narrow tax base in Nigeria

23. GROWTH AND TAX POLICIES Direct taxes such as Company Income and Personal Taxes and Social contributions are the most adverse factors to growth as they affect labour force participation rate, hence the need to shift tax focus from direct to indirect taxes for positive growth outturn. Tax expenditures by way of exemptions and waivers are broadly costly and ineffective as they create distortions in their wake. Specific tax expenditures are canvassed. Take away Nigeria must remain tax competitive as investment decisions lie in taking advantage of a well articulated growth based tax policy by emerging markets Public expenditures must be value adding to the welfare of the Citizenry and health of businesses According to International Monetary Fund: Fiscal space should exist for purpose of productive spending Fiscal reform packages should be designed to balance growth-equity trade-offs Test of implementing Growth-Friendly Policies Emerging markets have the option of raising additional revenue through improved tax compliance and policy reduction gaps. Resource-rich countries can raise more revenue from property tax and excess returns or rent considered to be the least distortive for growth. Imperatives for increasing the Value Added Tax rate and the narrow tax base in Nigeria

24. CONCLUSION • Nigeria has an underground economy that is so large. Reigning in their activities provide great scope for widening the tax base • Inter-agency cooperation and collaboration required to bring about greater tax compliance. Lets collectively implement Sec. 101 (2) of Company Income Tax which says: Any Ministry, department or agency of Government or any commercial bank with whom any person has any dealing with respect to any of the transactions mentioned in subsection (4) of this section, shall demand from such person a tax clearance certificate of three years immediately preceding the current year of assessment. And Sec. 85 (2) of Personal Income Tax which equally states that: A Ministry, Department or an agency of Government or a commercial bank with whom a person has any dealing with respect to any of the transactions mentioned in subsection (4) of this section, shall demand from the person a tax clearance certificate for the three years immediately preceding the current year of assessment. • Tax administration must be proficient in the dispense of their duties and cut down on red-tapism and bureaucracy leading to long hours of dealing with taxpayers • Government should adopt a revenue neutral approach to reducing direct taxes while pandering to indirect taxes Quote: “Taxes are the lifeblood of government and no taxpayer should be permitted to escape the payment of his just share of the burden of contributing thereto” - Arthur Vanderbilt Imperatives for increasing the Value Added Tax rate and the narrow tax base in Nigeria

25. THANK YOU FOR YOUR ATTENTION Imperatives for increasing the Value Added Tax rate and the narrow tax base in Nigeria