In normal times, there is every justification to widen and deepen the tax net, upgrade tax laws and machinery, adopt cutting edge tech tools and harmonise rates, charges, levies and penalties to improve revenue and achieve optimal productivity, job creation and exports. With a particularly low tax base (less than 30 per cent of the workforce pay income taxes according to the National Bureau of Statistics) and over-dependence on crude oil, Nigeria especially, needs desperately to improve its taxation system and enforce tax laws. Property and rent taxes are levied by national, region/state or local authorities on real estate transactions. In many jurisdictions, they provide the bulk of local government revenues. According to the London School of Economics’ International Growth Centre, taxes on real estate are used by governments to optimise land resources and achieve national economic objectives. It cited East Asian countries where “high levels of land taxation, alongside lower taxes on productive sectors, have reduced land speculation and encouraged manufacturing investment.”
But the FIRS measure is coming at a wrong time and should be deferred while the country struggles to climb out of recession. The furore was kicked off when the FIRS, in furtherance of the Stamp Duties Act 2004 (as amended by the Finance Act of 2019), directed property owners and agents to immediately commence collection of stamp duty on all tenancy and lease agreements. Stakeholders, including Organised Private Sector, labour and real estate sector groups, immediately criticised the move on the grounds of wrong timing and faulty messaging. The retraction that the six per cent rate applies only to leases of 21 years and above did not mollify Nigerians who accused the government of imposing further burdens on the populace to make up for revenue shortfalls and official profligacy.
Beyond the uproar lie the critical issues of widening the tax net, effective tax collection and marrying these creatively with the imperative of granting reliefs and incentives in an economy under severe stress. Even for fiscally prudent countries, these are tough times. The Nigerian economy, wobbly since the oil price crash of 2014, has taken a severe hit with the COVID-19-induced global downturn. The revenue target for the first five months of this year fell short by 44 per cent, revealed Zainab Ahmed, the Minister of Finance and Budget, as oil revenues crashed by 80 per cent. Revenue shortfall in Quarter 1 was N1.46 trillion. The initial expectation of a -3.4 per cent contraction in GDP this year is now seen as overly optimistic by the IMF, which forecasts a -5.4 per cent drop. Up to 40 per cent of workers, Vice President Yemi Osinbajo said, have been laid off. Distress has hit many households in an economy where over 90 million people were already adjudged very poor.
Governments across the world are doing everything to help citizens shoulder the financial and social burdens of the coronavirus pandemic. The Federal Government claims to have rolled out relief measures to help households, the vulnerable and businesses to sustain consumer demand, save jobs and rejuvenate critical sectors and SMEs. Compared with what other governments around the world have done, these measures are like a drop in the ocean. Among other countries that sought to relieve citizens, Turkey, for instance, provided 1,177 Turkish liras (roughly $170), monthly to disengaged workers during their unpaid leave or unemployment period. The country also eased tax and loan burdens of the businesses. The decision therefore to implement hitherto dormant taxes at this time is misplaced. As the OPS and labour have pointed out, this is the time to suspend some existing collections, reduce others and identify and compel compliance by those who can afford to pay but have been dodging taxes. It is time to tax luxury items and non-essential imports, not add to the burden of businesses and households. Many states have in fact, granted reprieves, exemptions and deferrals on taxes and levies on land transactions.
To be sure, the most desirable outcome is to raise Nigeria’s miserable tax-to-GDP-ratio of eight per cent even much higher than the modest 15 per cent the government targets by 2023 under its Strategic Revenue Growth Initiative and the Economic Recovery Growth Plan. Ahmed expects the identified new revenue sources to bring in between N13 trillion and N18 trillion. There is inherently nothing wrong in the taxes. In fact, the episode exposed the casual approach of the government to tax collection; stamp duty on property has been in existence for long but not enforced.
For now, the measure should remain suspended to reduce the costs of transactions in a high job-creating industry that is already beset with multiple taxes and levies and prohibitive borrowing rates that hover at between 24 and 39 per cent. Among the objectionable consequences of the collection, say critics, are higher costs of products that will be transferred to consumers and additional pressure on SMEs that are critical in achieving a rebound. It would be particularly hard on the weak: about 73.7 per cent of the workforce is in the informal sector, PwC estimates, many of whom are idle and can hardly pay rent. The OPS says the cost of collection is not even worth the effort.
The government should take a cue from others. The United Kingdom in July suspended collection of its Stamp Duty Land Tax on property purchases of a certain threshold, while homeowners and buy-to-let property owners are to enjoy a three-month mortgage payment holiday. This measure is already benefiting 1.2 million homeowners. Belgium’s mortgage repayment holiday scheme suspended payment for six months. Spain imposed a four-month moratorium on rent payment for the economically vulnerable. Being primarily a state and local prerogative in federal polities, provincial and local authorities have deployed deferrals, reductions and write-downs on real estate taxes. Iowa State in the United States suspended evictions, penalties and interest related to property tax collection.
The federal and state governments should identify all sources of revenue, leakages, eligible taxpayers and evaders; scrutinise existing legislation on taxes and build an accurate database. The Federal Government should prepare state–owned enterprises for immediate privatisation targeting capable foreign and local investors. McKinsey, a consultancy, reports that private equity investors are on the lookout for bargains in the midst of the economic crisis and Saudi and Kuwaiti SWFs are already moving in on some prime assets in the market. The Saudis just spent $1 billion on stakes in four European equities. Raising taxes on luxuries like private jets, jewellery and expensive cars, textiles and furniture will help raise revenue, discourage unnecessary imports and protect local producers.
The tax system should target maximising revenue, stimulating production and commerce in critical sectors and supporting job-creation and exports. Collection should henceforth be driven by technology, drastic reduction in human interface and backed by up-to-date research and data.