The unprecedented increase in tax waivers granted by the federal government in recent times has been hotly debated by concerned stakeholders who have argued that it is a drainpipe on the economy. Ibrahim Apekhade Yusuf reports
In saner climes, certain businesses, especially startups usually request tax waivers or tax holidays and other concessions as incentives. Nigeria is not an exception. However, there are concerns over the rapidity of the occurrence of tax waivers in Nigeria, a development that is ruffling feathers.
Position of the law on tax waivers
In an article explaining the scope of tax holiday provisions in Nigeria, Chinedum Umeche is an Attorney with commercial law firm, Banwo & Ighodalo said, tax holidays are government incentive programmes that offer tax reduction or elimination to business.
“Almost always, tax holidays are granted in the hope of increasing a country’s gross domestic product (GDP) as well as attracting foreign investments. In Nigeria, several tax incentives, designed to promote investment have been introduced. One of such incentives is granting “pioneer status” to a business pursuant to the provisions of the Industrial Development (Income Tax Relief) Act, Cap I 7, Laws of the Federation of Nigeria, 2004,” Umeche stressed.
The irony, however, is that today tax waivers are generating a lot of hoopla among lawmakers who hold the view and very strongly too that something doesn’t add up.
No longer at ease with tax waivers
For instance, the Senate Committee on Finance, days ago reportedly rejected the N6 trillion tax and import duties waivers proposed by the federal government in the 2023 budget, stating that wastages and leakages must be blocked.
Subsequently, the Minister of Finance, Zainab Ahmed, was directed to cut down the tax waivers by half to N3 trillion, to offset the N12.43 trillion deficit of the N19.76 trillion proposed as expenditure for the 2023 budget.
Apparently miffed over the development, Chairman of the Committee, Solomon Adeola, told Ahmed last Tuesday during a panel meeting to review the proposed 2023-2025 medium-term expenditure framework and fiscal strategy paper (MTEF/FSP) that “The proposed N12.43 trillion deficits for the 2023 budget and N6 trillion waivers are very disturbing, and must be critically reviewed.”
The lawmaker’s grouse is that many of the beneficiaries of the waivers are not ploughing accrued gains made into expected projects as far as infrastructural developments are concerned. “The same goes for the tax credit window offered by the FIRS to some companies,” he stressed.
Revealing his displeasure, Adeola further stated that, “Billions and trillions of naira can be generated by the government as revenue if such windows are closed against beneficiaries abusing them and invariably provide required money for budget funding with less deficit and borrowings.
“The NCS should help in this direction by critically reviewing waivers being granted on import duties for some importers just as the FIRS should also review the tax credit window offered to some companies without corresponding corporate social services to Nigerians in terms of expected project executions like road construction.
“We cannot accommodate these N6 trillion tax waivers. It is in this way that the committee frowns at the projected N12.41 trillion budget deficit contained in the 2023-2025 MTEF/FSP and the alarming projection of ‘no provision for treasury-funded MDAs’ capital projects in 2023.
“This scenario is unacceptable, and we must find ways to drastically reduce the deficit,” the lawmaker noted.
However, Ahmed and the chairman of the Federal Inland Revenue Service (FIRS) Muhammad Nami, defended the tax waiver, stating that it was crucial to the development of the country, and it was only given to companies with project evidence.
According to the Senate Committee, it is no longer convenient to allow borrowing, revenue generation left unchecked.
In his address, he said, “It is apparent that the borrowing trends cannot be allowed to continue unchecked and conscious efforts must be made to reduce budget deficits.
“Achieving these goals requires us to look inwards towards increased revenue generation, blocking of leakages and restraints on what are generally frivolous expenditures by MDAs, particularly the Government Owned Enterprises (GEOs).
“Our preliminary findings and directives to some of the agencies had led to the payment of millions of naira into CRF in accordance with the fiscal responsibility Act 2007 and the 1999 Constitution.
“It is needless to say that these millions not paid to CRF contribute to the yearly huge budget deficits of the federal government.
“The investigation was also able to get some agencies to accept opting out of the federal budget altogether based on their internal revenue generating ability. Some of these findings are relevant to the proceedings of this five-day interactive session.
“From the challenges thrown up against our economy in terms of the Russia-Ukraine war, the impact of crude oil theft, insecurity, and continuing infrastructure deficits, it is time for all to agree that it cannot be business as usual for government revenue and expenditures.
“We need to block all revenue leakages and misuse in ministries, departments and agencies (MDAs) as well as control expenditure to free funds for needed infrastructure development and provision of social services,” Adeola said.
Lingering debates over tax waivers
Investigation by our correspondent also revealed that the lawmakers raised a similar objective over five months ago when it decried the high N1 trillion tax waivers to be granted by the federal government.
It would be recalled that President Muhammadu Buhari had, in a letter to the National Assembly dated February 10, sought an amendment to the budget to make provision in the sum of N106.1 billion for capital expenditures and N43.870bn for recurrent without increasing budget deficit.
Leading debate on the general principles of the bill at the time, Senator Yahaya Abdullahi gave the key highlights of the amendment to include eleven areas such as funding to cushion the impacts of the recent suspension of the petrol subsidy removal, among others.
Senator Gabriel Suswam (PDP, Benue) bemoaned the high tax expenditure in the 2022 budget.
He said, “Tax expenditures are waivers that are given to individuals or companies. Mr President, if you look at the tax expenditure in 2022, it is about N1 trillion and totally unnecessary.
“It is not just what the president has sent here; let us consider those areas that can help them save money, because we might decide to step down those tax expenditures.”
The bill, after scaling second reading, was referred to the Committee on Appropriation for further action and would report back.
Read Also: Buhari to present 2023 budget to National Assembly first week of October
How 79 firms got tax waivers in 2021-2022
From available information, the federal government approved pioneer tax status for no fewer than 33 companies for having an investment worth over N543.8 billion at the end of the first quarter of 2022.
Also in 2021, 46 companies benefited from the tax incentive scheme while the requests of 186 companies were still pending.
The tax waivers were granted under the Industrial Development Income Tax (IDIT) Act.
The pioneer tax status means that the 79 firms will not pay income tax for a particular period.
The waiver is contained in the first quarter report of the Nigeria Investment Promotion Commission (NIPC).
In the first quarter, NIPC reports that companies with a total investment of N45.5 billion received tax waivers.
In the second quarter, 31 firms benefited from the tax incentive scheme, while the requests of 160 companies were still pending.
Eight firms that invested N12.8 billion got tax holidays while seven firms got approval in principle.
During the second quarter also, 31 firms benefited from the tax incentive scheme, while the requests of 160 companies were still pending.
A breakdown of the tax incentives for the third quarter showed eight firms who invested N328.5 billion got PSI while the requests of two companies were rejected.
Also, 16 firms got approval in principle from the NIPC while 168 applications were still awaiting and 35 companies got tax incentives in Q3.
In the Q4 report of NIPC, six companies were granted tax relief for three years having invested N157.08billion
They are First Independent Power Company, Cormart Nigeria Limited, Premium Agro Chemicals Limited, West African Soy Industries Limited, Prudent Energy and Services Limited, and Checkers Africa Limited.
The Q4 report also revealed that 13 companies had their applications approved in principle while the application of one company was denied.
Tax waivers as drain pipes on economy
There are concerns that the nation loses humongous sums from tax waivers, fueling fears that it may have become a conduit pipe for milking the government dry.
It may be recalled that Oxfam International, a confederation of 20 independent charitable organisations focusing on the alleviation of global poverty, had reported that Nigeria loses about $2.9 billion (about N580 billion) yearly to tax waivers granted to multinational companies.
The body, through its Nigeria Country Director, Constant Tchona gave this insight at the launch of two reports – Fair Tax Monitor Index and the Commitment to Reducing Inequality Index in Abuja two years ago.
He noted that thirty per cent of the companies in Nigeria evade tax, while 25 per cent do not pay.
He mentioned that the fiscal incentives granted with the hope of stimulating investments into the country’s economy were eroded with poor governance and lack of transparency, especially when the Central Bank of Nigeria (CBN) had confirmed that there was no cost-benefit analysis to justify the exemptions and when there was no check on the discretionary powers residing with the executive in granting exemptions.
He added, “The procedures for granting tax incentives should undergo a thorough review, focused on transparency and governance. This should include mandatory parliamentary oversight, publication of annual tax expenditure reports, clear requirements for incentives and periodic review of expected results.”
Taxpayers, he said, often opted to negotiate with corrupt tax administration staff in return for gratifications and reduced sums.
This action, Tchona explained, is against the sanctions imposed by the Company Income Tax Act for such conduct.
He called on the Federal Government to hasten action on the new National Tax Policy (NTP) and clamp down on corporate crimes.
“Official Federal Inland Revenue Service (FIRS) numbers suggest that the entire tax system is fraught with crippling challenges of weak enforcement, corruption and outright evasion. The records show that about 30 percent of companies in Nigeria are involved in tax evasion and also 25 percent of registered companies in the country are not paying tax.
“Taxpayers often opt to negotiate with corrupt tax administration staff in return for gratifications and reduced sums to the coffers of the government. This is despite the sanctions imposed by the same Company Income Tax Act for such conduct,” he said.
In addressing this, he urged the National Assembly to enact a law that would criminalise the actions of banks, auditors, accountants and lawyers that facilitate illicit financial flows from the country.
“The National Assembly should enact a law that will totally criminalise the actions of middlemen – banks, auditors, accountants, and lawyers that facilitate Illicit Financial Flows (IFFs). When such professionals act contrary to existing regulations, they should be held accountable in Nigeria. This can be enforced through strengthened professional association bodies.
“The tax system should be reviewed and amended to be more equitable to women as drivers of Small and Medium Enterprises (SMEs); most especially Personal Income Tax Act in the unorganised sector needs to be amended to ensure they achieve gender equity, legitimate, and consistent with the government’s commitment to gender equity,” he submitted.
Way forward
Miffed by the parlous state of the economy, the International Monetary Fund (IMF) had advised the federal government to effect reforms in tax administration as well as rationalise the pioneer status system and other tax exemptions and customs duty waivers.
This, the Fund stressed, will help to get the economy on an even keel and right pedestal for growth and development.
In a recent comment, Dr. Jonatahn Aremu, professor of International Economic Relations at Covenant Universities, Ota, Ogun State, said at the centre of Nigeria’s development strides is an effective tax administration which should serve justice, equity and balance.
Arbitrariness in the area of tax holidays may not guarantee that, he stressed.
Pray, will the authorities take heed? Time will tell.