Lagos State is the state to emulate when it comes to running an efficient tax system, posting huge monthly Internally Generated Revenues (IGRs). The Executive Chairman, Lagos State Internal Revenue Service (LIRS), Mr Olufolarin Ogunsanwo, speaks to Group Business Editor SIMEON EBULU and COLLINS NWEZE on ongoing tax reforms in the state and how tax revenues are deployed to key developmental projects that meet the needs of the people.
At a time like this, Lagos State needs you. How are you faring?
Well, I can say it has been very, very interesting and challenging at the same time. Why it is interesting is because as a tax administrator saddled with the responsibility of generating revenues for Lagos State, I see it as service to humanity. If you look at all the things that the money being generated have been used for, I see it as a call to service. Where the government has to provide schools, good roads, water and other social amenities for the larger society. And you are being saddled with the responsibility of sourcing for the money, because government runs on a budget. There is the revenue and expenditure sides of budget. So, for you to be given that responsibility of generating revenues on behalf of the government, with which they can render all these services to the populace, is a very interesting one. The fact is that the job itself, there is no where in the world where anybody wants to pay tax. So, you have to put together all the skills that you have.
What are you doing about enforcement against tax defaulters?
Sometimes you need to encourage, enlighten and explain and when you are pushed to the extreme, you might need to enforce. And when you look at all these, it makes it a bit challenging. Like I said, there is no where in the world that people want to pay taxes with ease. For us in Lagos State, I want to believe that with this new administration, a lot has been done and we are still going to do more with a view to ensuring that we make life easier for tax payers. And what do I mean by this, we look at the World Bank ease of doing business report, even though before this administration came on about six months ago, a lot has been done in terms of advocacy, enlightenment, improvement in processes, and all these things. We see ourselves as taking over from where my predecessor stopped. And we discovered that there is need to do more for the tax payers in Lagos State. As I was trying to explain, the World Bank Ease of Doing Business Index ranks Nigeria 169, out of 189 countries, and this was benchmarked against ease of registering business, ease of registring property documents, getting title documents, and then the ease of paying tax.
Of all these, which one touches you most about this report?
For me, it is the ease of paying taxes than concerns me more, which further explains that it takes 309 hours to pay taxes in Nigeria. And on that basis, Nigeria ranked 181, out of 189 countries. And that made Nigeria to just be a step ahead of countries that are at war. That for me was a big challenge and I feel that something must be done from my own area of specialisation. So, we started by looking at the form that is used to file returns. That form has been in existence since Lagos State came into existence, and Lagos is going to be 50 years sometime next year. This means that the form is as old as Lagos State itself. So, we looked at that form and the position of the law–Section 41, of the personal income tax act. And what does it say? It says a taxable person must file a return on his/her income in a prescribed format and prescribed information to the relevant tax authorities.
We then compressed the form to just two pages. We also put a guideline on completing the form. We need to enlighten the tax payer on when, where and how to pay their taxes. We also looked at our population. Lagos has over 20 million people. People are always coming to Lagos everyday. The population is always on the increase. And out of this 20 million approximated figure, further research showed that there should be between 8.5 and nine million people on the tax net. But of this number, it is only five million that we have, which means we still have a gap of between 3.5 and four million people. Our research further showed that about 70 per cent of them are supposed to be from the informal sector.
What is your view on tax payment by the informal sector?
The informal sector, happens to be the underground economy. They deal on cash basis; they do not have records which make it a bit more difficult to penetrate the sector. So, we feel that one thing that we can do to make an inroad, is to go a step further by interpreting those forms in English, Yoruba and pidgin. Also, we went ahead to acquire the Perosnal Income Tax Act which we have been distributing to people in English, Igbo, Yoruba, Hausa and other languages. They also know their rights and obligations, as well as the consequences of not obeying the tax law. Not only that, we also looked at the ease of payment.
Before now, people can only go to the banks to pay. So, many people, especially in a place such as Lagos where there is always traffic. So, payment of taxes may just take the whole day. And many of these people will not want to leave their businesses to go and pay taxes. So, if the mode of payment is not comfortable to them, then it creates a problem. We discovered that almost everyone has a mobile phone and automated teller machine (ATM) cards. So, we deployed point of sale (PoS) terminals to all our tax stations, where people can actually use ATM cards to pay, or even pay online.
We are still working out plan to use credits on the phone to pay taxes in Lagos State. We now believe that we have simplified the processes of payment of taxes and filing processes. The end product of the whole process is the electronic tax clearance card, which must be ready within 72 hours on application. Not only that, those that have lost their cards will only pay N1,000 against N2,500 previously. You must be a Lagos resident. All these are some of the initiatives that made life easier for the tax payer and add value to what they are doing. We have also been training and retraining our workers, to be in sync with the recent technology. In terms of customer service and relationship management as well as current trend in tax administration. We have also created the directorate of the informal sector, who are mainly traders, lawyers, and photographers. We also looked at household domestic workers, cleaners, security men, cooks and stewards who also form part of the larger population. Analysis shows they are not actually paying taxes. And the position of the law is that everyone must voluntarily pay their taxes as and at when due. We believe that without enforcement, it is not easy to collect taxes because nobody wants to pay taxes. Once we have established a case against you, and we have gone through the due process and you are still recalcitrant, the person will be prosecuted. We are actually prosecuting tax defaulters. Apart from the 18 high net-worth individuals that are undergoing prosecution, we also have 20 cases being handled. Not filing your returns early is an offence. Not paying your tax is a criminal offence that can even come with both fines and jail terms because not paying your tax is a criminal offence. So, all these are some of the reforms we have been carrying out as a tax administrator and revenue agency.
How are these reforms changing the tax collection figures?
We all know that price of oil has dropped and revenues too. Everyone is now looking inwards to improve Internally Generated Revenues. All these reforms for us, have helped us improve results, but there is still much to be done in the area of revenue generation for the state. We are all aware that many companies are downsising, and some have even cut salaries. And all these have affected the yield on revenue generation. But for us, we believe that if we run an efficient tax administration, we will be able to collect whatever is due to the state government optimally. And that is what we have been trying to do, and has led to significant improvement in revenue generation for the state.
Business owners have been crying over multiple taxation in the state too. How are you addressing this ?
Nigeria is running a federal system of government and all tiers of government have been empowered by the constitution to collect their own taxes. We have the Federal Government, state government and the local government, which is the third tier of government. But the truth of the matter is that it is an interesting topic, when we talk of multiplicity of taxes. The very nature of Nigeria, there is what we call usage taxes, rates and levies. The simple definition of taxation is that tax itself is a compulsory levy that is paid to government without any direct benefit to that person. If you use water in your house and you are asked to pay, it is usage charge and not tax because you benefit directly from it. Then, if you put a signpost in front of your office and you are asked to pay the advert rate, definitely it is a levy. Then if somebody chooses to block the road for a party, instead of renting a hall, inconveniencing your neighbours, and they ask you to pay something to the local government, called merriment tax, it is not a tax, but a charge. Registration of birth and death (also fall within this category). In the real sense of it, we do not have multiplicity of taxes, I think tax administrators should go a step further to categorise what taxes, levies, usage charges and so on are. Act 21, 1998 actually lists what taxes are collectible by each tier of government. So, if there is any tax collected that does not fall within the approved list for collection, then it can be escalated to the Board of Internal Revenue of the state, or to the Joint Tax Board, so that the person that is charging you will have to explain the rational or basis for charging the tax. In all there are just 61 items, in both the federal and state and local government. So, anyone outside the list, is not acceptable and is illegal collection. Out of even these 61, a significant numbers are actually usage charges, rates and levies and not actually tax.
Some people believe that they are not getting the impact of such payment on their lives. How are you going to address the issue of incentives for tax payers?
That is not the story in Lagos State. For us, there is transparency; there is integrity; and there is accountability. For instance, in Lagos, both this administration and the ones before, particularly in the last one year, everybody can see what tax payers money are being used for. There are so many projects that Lagos State government has embarked on, and there are still many that are in the pipeline. For instance, you can see what the governor has been doing. You want to talk about Operation Light up Lagos project, where you can go about your business at any time without fear of attack and molestation. It is not government’s money, it is people’s money that is being put to use. You can see massive constructions, flyovers at Abule Egaba, and Ajah, pedestrian bridges all over the place, even traffic control alone. We have effective traffic control. Even the governor has said the Memorandum of Understanding (MoU) for the fourth Mainland Bridge will be signed even before celebrating the administration’s first year anniversary. You can see the launch of equipment for security personnel and the N25 billion Employment Endowment Fund, first tranche which amounts to N6.25 billion has been released. The fund will be given at low interest rates to small businesses. The businesses will create jobs. All these are being funded by taxes people pay. So, when you talk about the direct relationship between what the government is doing with the taxes they are collecting, and what they are doing with it, it is very, very clear and unambiguous in Lagos.
Which sectors of the state economy are giving you the biggest compliance and collections?
The United Nations gave us a template with which we can benchmark success. They believe that it is not about the amount collected. There should be Gross Domestic Product (GDP) to revenue ratio. And though, it is still low, about eight per cent for us in Lagos, but we believe there should be significant improvement. The benchmark they gave us is being sectorised so that we will be able to measure the contribution of each sector to the GDP-that means the revenues that are being collected from each sector, as against their contributions to the GDP of the state. And what we are saying is that each of these sectors contribute significantly to the GDP. Though the energy sector is still the major contributor to the GDP, but we still want to drive the business aspect. With all these things that government is trying to do, to improve commerce, small and medium enterprise (SMEs), because most people want to run their own businesses and create employment for people. Someone running a tailoring shop, will employ more people and all that, and they will all contribute to the GDP. I want to beleive that with the way we are going, we will raise our contribution to the GDP to over 20 per cent. We are also helping businesses to thrive because it is when businesses thrive that we will be able to collect taxes. This is our focus, and our areas of interest.
Do you have challenges with leakages?
That is a thing of the past. We have keyed into the Treasury Single Account policy in the state. All the revenues that come in are swept into one single account on daily basis. We have complemen-ted that with strong internal control and checks and balances. No one can start a process, and complete the process of revenue collection. There are levels of approvals and signoffs that are involved. Even as an Executive Chairman, I cannot just signoff on any thing; we have our checks and balances. We believe it is a legacy we must leave behind. The legacy of accountability, transparency and integrity which are the tenets on which governance and tax administration rest. We also have stringent disciplinary measures. We have zero tolerance for corruption and zero tolerance for fraud. If any body is caught in corrupt act, we have our autonomy, we are not subjected to civil service bureaucracy. The agency has the power to hire and fire. To a large extent, such cases have been reduced to the barest minimum. Nobody can collect cash. Tax payers have to pay straight to the bank. It is a serious offence for anybody to collect cash from taxpayer. And the policy on that is very clear. It is summary dismissal for anybody that collects cash.
Do you have incentives for motivating your workers?
We do motivate our workers. We pay performance incentives. If one meets target against certain benchmark, the government gives us something to motivate the staff to perform better. It exists even in banks. That is one of the reasons the revenues of Lagos State has increased significantly and consistently over the years.
What is the compliance level for financial institutions?
Many organisations, multinationals even the banking sector and all these sectors, are our agents of collection, in accordance with the law. They are employers of labour. And over the years, we have constantly audited them in the past eight to nine years. When we started that process, what we discovered that the level of voluntary compliance, was about 70 per cent and 30 per cent from tax audit. And it has continued to improve significantly over the years. As at last year, voluntary compliance is about 95 per cent, while what we got from tax audit was five per cent. That shows there is significant improvement in voluntary compliance. They know it is better for them to voluntarily comply because the cost for them is higher.
Every N100,000 that you do not remit to the government, you have to pay additional N31,000 as penalty and interest. When you look at that ratio that one third of what you are expected to pay is for penalties and interest, it is in their own interest for them to voluntarily comply. If we have to enforce payment, they still have to pay for the cost of such enforcement and their businesses would have been disrupted.
How do you ensure that people are rightly taxed?
We carry out proper profiling of the taxpayer. Even if they chose not to file the proper returns, for everyone, there is always the income and expenditure side. We can from their expenditure profiles, determine what their income should be.
What do you recommend for other states ?
I think Lagos State caught the vision many years ago, during the tenure of the former Governor, Asiwaju Bola Ahmed Tinubu, who is now the National Leader of the All Progressives Congress (APC). He saw that the amount of money we were getting from the Federal Government cannot significantly take a state like Lagos to the promised land. So, he granted autonomy to the agency to ensure efficiency, professionalism and optimal collection of revenues. That vision moved the monthly revenue of the state from N600 million to what it is today. It is on that basis that we want sister states of the federation to look inwards to improve their IGR. They have to grant autonomy to their revenue agencies, so that they can work optimally and not subjected to civil service bureaucracy. Revenue generation is a business and should be run as a serious business and the whole process must be businesslike. They need to also constantly showcase what the government does with the revenue so that people see what the money is being used for and they will be encouraged to pay their taxes.
As you drive this vision, where do you want to take the state revenue to?
There is still a lot of potentials; we are looking forward to a point where monthly revenue of Lagos can hit N50 billion. Lagos has the potential to do that and we are not shying away from that. It is a journey that we have embarked on. We want to believe that even as the economy also improves, the revenue profile will also continually improve.
