With over N6tn lost to tax waivers annually, the Federal Government is no longer persuaded to allow that regime of waivers as it has set machinery in motion to review as well as drastically reduce same, reports Ibrahim Apekhade Yusuf
The present regime of tax incentives and tax waivers is nothing to cheer about judging by the humongous amount of N6trillion being expended on servicing both on an annual basis.
This is the damning verdict of the Chairman of the Presidential Tax Reform Committee, Mr Taiwo Oyedele.
Oyedele, dropped this hint recently in Abuja when the Minister of Finance and Coordinating Minister for the Economy, Wale Edun, unveiled the eight-point agenda, which the Bola Tinubu-led government hopes to use in transforming the challenging economic environment.
Speaking at the press briefing, Oyedele said “Incentives in and of themselves are not bad. But you will also agree with me that as time changes, you need to also review what you have done for years.”
He added that Nigeria has about N6tn annual tax expenditure, which needs to be reviewed.
“When you don’t look at your incentive regime, it can get to a point when it becomes a distortion for economic growth because some people benefit and others don’t but they operate in the same sector; so, they cannot compete. You also have to think about it from the point of view of cost benefits. As a country, if we are giving away N1, we need to be able to convince ourselves that the benefit we are getting is more than N1. Otherwise, that is no longer an incentive for the economy but for some individuals.
“If you look at our tax expenditure reports over the past three to four years, on the average, we are giving away around N6tn per annum. That is significant. What we have not been measuring enough is the benefit we are getting from that. But I can confirm to you that part of the mandate given to us by Mr President is to look at the incentive regime in Nigeria so that we can, based on data and evidence, design what is appropriate for us as a country. In terms of what we want to drive, those incentives will be targeted, data-driven, evidence-based, and in most cases, we have subset clauses so that they don’t last forever and we will only find out after losing so much money,” he added.
The tax expert further said the government plans to remove disincentives in the tax system of the country.
Oyedele said, “We think that what is more pressing and even more important than giving incentives is removing disincentives. The good thing about removing disincentives is that it doesn’t cost the government money. It stimulates the economy and helps us to create wealth and growth that is inclusive.”
He noted that the country has a N20tn tax gap, which when closed with automated processes, can boost government revenue.
He also stressed that when people were allowed to be prosperous and businesses to thrive, the government could make money from revenue naturally.
Oyedele added, “We are looking at the impediments to doing business. Whether you are a small business, large business, multinational or domestic, we want to be a destination for all investors.
“We want Nigerian companies and businesses to become global. You may even find that some of them can easily earn a lot of foreign exchange more than the amount of money we are making from crude oil. That is the aspiration.”
Justification for tax incentives
Tax incentives are exclusions, exemptions or deductions from taxes owed to the government. Businesses receive tax incentives from the government in order to invest back in their businesses, make environmentally-sound choices or to support minorities or disadvantaged business owners.
The pioneer status is an incentive offered by the Federal Government, which exempts companies from paying income tax for a certain period. This tax exemption can be full or partial.
Offered under the Industrial Development Income Tax Act with tax reliefs for a three-year period, the incentive is generally regarded as an industrial measure aimed at stimulating investments in the economy.
The products or companies eligible for this pioneer status are those that do not already exist in the country.
Read Also
Lawmakers’ angst over abuse of tax waivers
Like Oyedele, the lawmakers have also denounced the abuse of tax incentives and waivers.
The Speaker of the House of Representatives, Hon. Tajudeen Abbas who made these remarks during the inauguration of the Ad-hoc committee recently, also noted that those involved in tax waiver abuse acts are engaging in economic sabotage that must be stopped.
The Ad-hoc committee tasked with investigating allegations of tax incentive abuse, tax breaks, and tax waivers by public institutions and companies benefiting from such incentives.
The Speaker, represented by the leader of the House, Julius Ihonvbare, conveyed that the House’s investigation aimed to curtail this economic sabotage and ensure transparency, accountability, and fairness within the tax system.
Tax incentives, he stressed, constitute a vital governmental tool for fostering economic growth, attracting investments, and stimulating job creation. He further emphasized the need to ensure that these incentives, provided by the government, are appropriately employed and not subject to misuse or exploitation.
Ihonvbare said, “The allegations brought before the House suggest that certain public institutions and companies may be exploiting these incentives for personal gain or to evade their tax obligations,” declared the Speaker, underscoring the committee’s establishment in response to these concerns.
He charged the committee, “In carrying out this investigation, the Committee is required to thoroughly investigate these allegations and provide recommendations for necessary sanctions and reforms.
“Endeavor to find out whether the beneficiaries of these tax incentives have lived up to the conditions attached to them and if they have fulfilled their obligations to the Nigerian people as required.
“Your mandate will be to examine the extent of the alleged abuse by public institutions and organisations, review relevant legislation, policies, and regulations governing these incentives to identify any loopholes or weaknesses that may have contributed to the alleged abuse.”
He added, “The purpose of this investigation is to end all forms of economic sabotage and ensure transparency, accountability, and fairness in our tax system.
“I, therefore, call on all relevant stakeholders, including government agencies, public institutions, and companies benefitting from tax incentives, to cooperate fully with the committee’s investigation for the House to have a full understanding of the tax system with a view of taking appropriate legislative actions.”
Chairman of the Committee, Hon. Abubakar Makki, underscored the pivotal role taxes play in funding developmental initiatives.
He expounded that insufficient tax revenue, leakages, or systemic infractions lead to reduced tax inflow, prompting the government to resort to borrowing, which can have adverse consequences for national development.
He said, “Abuses of tax incentives by the supposed beneficiaries and the statutory institutions meant to regulate the tax regime could push the government into fiscal constraints.
“While tax incentives are granted to encourage businesses to stand well and be strong enough to contribute to the economy, its abuse creates distortions in fiscal and monetary policy management.
“As Nigeria experiences dwindling oil revenue and public debt approaches prohibitive levels amidst allegations of abuse of tax incentives, there is the need to know the scope of tax incentives and the possible existence of abuses to enable proper administration of the tax breaks, waivers, and incentives.”
Makki said the investigation is not a witch-hunting exercise, but a fact-finding mission that aims to correct the abuses in the management of tax incentives and ensure the right thing is done for the general good.
In 2011, the House of Representatives revealed that not less than 183 undertakings and individuals were at the period beneficiaries of tax waivers, exemptions and concessions running into several billions of naira that should ordinarily accrue to the federation account.
Beneficiaries of tax waivers
From available information, the average annual tax waiver figure is estimated at about N5tn. Companies including Dangote Sinotrucks West Africa Limited, Lafarge Africa Plc, Honeywell Flour Mills Nigeria Plc, Jigawa Rice Limited, and Stallion Motors Limited, among others had benefited from tax waivers in the form of pioneer status.
Others also include African Foundries Limited, Royal Pacific Group Limited, Kunoch Hotels Limited, Princess Medi Clinics Nigeria Limited, Medlog Logistics Limited, and Masters Liquefied Gas Limited.
The latest move by the government may affect some of these companies and others which have benefited in one form of tax waiver or the other, The Nation has learnt.
How Finance Bill 2022 mulled tax waiver suspension for rural firms
Independent checks by The Nation revealed that in the Finance Bill 2022 passed by the National Assembly, the federal government had sought amendments to key provisions in the Capital Gains Tax Act under which most of these controversial tax waivers, incentives, and exemptions (revenues not coming to government) are captured.
Specifically, in the Finance Bill 2022 by the National Assembly, the government had sought amendments to the Capital Gains Tax Act, among which seeks to end Reconstruction Investment Allowance and Rural Investment Allowance, among others.
In the bill, the Federal Government sought to amend 34 amendments to 10 existing Acts, namely Capital Gains Tax Act; Companies Income Tax Act; Customs, Excise Tariff, Etc (Consolation) Act; Federal Revenue Service Establishment Act; Personal Income Tax; Petroleum Profits Tax Act; Stamp Duties Act; Value Added Tax Act; Corrupt Practices and Other Related Offences Act; and Public Procurement Act.
The current Section 32 of the CGT Act, which provides for Reconstruction Investment Allowance, partly reads, ‘(1) Where a company has incurred an expenditure on plant and equipment, there shall be allowed to that company an investment allowance as provided in Subsection (2) of this section and shall be in addition to an initial allowance under the Second Schedule of this Act.’
“Without prejudice to any pre-existing rights relating to any qualifying capital expenditure incurred or qualifying capital assets acquired on or before (31st December 2022), Section 32 of the Companies Income Tax Act is hereby deleted, provided that a company that has incurred capital expenditure on plant and equipment on or before the effective date of this repeal shall continue to enjoy the allowance under this section until it is fully utilised.”
Suspension of tax waivers
Investigation by The Nation revealed that at least 172 companies might not benefit from about N2.4tn tax waivers under the Pioneer Status Incentive and other tax exemptions as the Federal Government moved to phase out some tax waivers.
In a related development, Eze Onyekpere, Lead Director, Centre for Social Justice in a report obtained by The Nation last December had revealed that between 2020 and this year, a total of N16.4 trillion has been lost as a result of tax waivers and exemptions handed by the Federal Government.
The nongovernmental, nonprofit organisation, in its report entitled: ‘Frivolous, Inappropriate, Unclear and Wasteful estimates in the 2023 Federal appropriation bill.’
Onyekpere, in the report submitted to the Fiscal Responsibility Commission (FRC), said “from 2020 to 2022, a total of N16.4trillion revenue was foregone as tax expenditure while FGN and the states continued to pile up debts.”
Foregone revenue refers to tax waivers, concessions and money which should have accrued to the Federal Government of Nigeria (FGN) or the Federation Account which was waived and will no longer be collected.
Onyekpere had stated that “Foregone revenue is meant to encourage investors to start businesses in Nigeria in favoured sectors, create jobs, create goods and services for export to earn foreign exchange etc.”
According to the report, in 2020, N5.664 trillion was “foregone” as tax waivers and exemptions; N5.476.10 trillion in 2021; and so far in 2022, N5,304.55 trillion.
Onyekpere noted that “the proposal in 2023 to give away N5.204trillion against a projected revenue of N9,725,863,745,173, while incurring N10,782,078,435,531 deficit is difficult to reconcile under fiscal responsibility rules.”
Section 29 (1) of the Fiscal Responsibility Act (FRA) titled restriction on the grant of tax relief, states that: any proposed tax expenditure shall be accompanied by an evaluation of its budgetary and financial implications in the year it becomes effective and in the three subsequent years, and shall only be approved by the Minister, if it does not adversely impair the revenue estimates in the annual budget or if it is accompanied by countervailing measures during the period mentioned in this subsection through revenue increasing measures such as tax rate raises and expansion of the tax base.
Onyekpere in his report stated that “there is no documentation showing evidence of compliance with the provisions of the FRA on these tax expenditures. There is no evidence of an evaluation of their budgetary and financial implications in the years they were granted and in the three subsequent years.
These expenditures adversely impaired the revenue estimates and there were no countervailing measures through revenue increases, etc” he said.
Divergent views on tax incentives
The Lagos Chamber of Commerce and Industry (LCCI) has advised the federal government against the plan to remove the waivers, incentives and exemptions granted some large enterprises on grounds of Pioneer Status Incentives.
According to the LCCI Director General, Chinyere Almona, “Leaving rates at their levels will not lead to a loss of revenue.”
The Managing Director/Chief Executive Officer of Cowry Asset Management Limited, Mr Johnson Chukwu, said that introducing new taxes and cutting down some tax incentives might negatively affect manufacturers and consumers in Nigeria.
He said, “We could see a situation where the manufacturers are unable to pass on those costs and absorb the costs, which will reduce their profitability and even the appetite for further investments. If they are able to pass those costs to consumers, this will be a difficult situation because of the existing weak purchasing power.”
In the view of Dr. Muda Yusuf, Chief Executive Officer, Centre for the Promotion of Private Enterprise, there was nothing wrong with waivers if they were in line with tax policies.
He noted that tax incentives were necessary to encourage investment and the establishment of some pioneer businesses.
He said, “The whole idea of incentives is to grow the economy. When you are growing the economy, you are not only looking at revenue, you are looking at employment and multiplier effects. In the medium to long term, you will get this revenue by the time you are able to grow these investments. It is inappropriate to see it as revenue loss unless the incentive policy itself is discriminatory.”
He stressed that the process should be transparent and seen as an effort by the government to grow the economy.
Granted that waivers and exemptions are sometimes necessary to provide incentives for businesses to expand, to generate jobs and grow the economy, experts are quick to argue that a review of the effectiveness of existing waivers, not just pioneer status will thus be necessary for any government that is interested in increasing revenue.
The businesses benefiting from these waivers will always protest such a review and often threaten economic collapse. That is also normal. Some incentives may be necessary and useful. To that extent, the federal government should conduct its own studies and run models. For example, tax credit for infrastructure is a good initiative. We have seen some roads from that initiative. But there have also been reports over several years that the pioneer policy is being abused. Many who do not pioneer anything can access it just by adding another line to existing factories.
Analysts further noted that there is nothing wrong with waiver, which is one of the instruments used by governments all over the world to achieve specific set goals and objectives in line with their economic aspirations.
They were however quick to admit that the way and manner it is granted in Nigeria has over the years raised fundamental questions about transparency and accountability.
“The use of waiver has been bastardised to the extent that successive administrations in the country have turned it into an avenue for monumental graft as top government officials connive with some unscrupulous elements in the private sector to corner billions of naira into their pockets and that of cronies,” lamented Afolabi Waheed, a tax expert.
