Taxing Peter, robbing Paul

NIGERIA’S feeble federalism is likely to be subject to even further stress if the Federal Government attempts to further curb the rights of states to levy tax, using the excuse of preventing multiple taxation as a cover for its actions.

Speaking at the inauguration of the Ministerial Implementation Committee (MIC) on the Harmonisation of Taxes and Levies across the Federation in Abuja last Monday, the Minister of Finance and Coordinating Minister for the Economy (CME), Dr. Ngozi Okonjo-Iweala, bemoaned the prevalence of multiple taxation. She pointed out the negative effects it had on the expansion of business, creating employment, diversifying the economy and attracting foreign direct investment, and said that the MIC’s work would be expedited so that it could be enshrined in the nation’s law.

On the surface of it, the finance minister’s remarks were eminently reasonable. Multiple taxation is a well-known drag on economic development: it constrains industrial growth, makes planning difficult, and encourages tax-evasion. The “Doing Business” study used by the International Finance Corporation (IFC) to measure the ease of business regulations ranked Nigeria 155th out of the 185 countries it analysed in 2011. Nigerian entrepreneurs continually complain about the numerous and arbitrary taxes, charges and levies that their businesses are subject to, as well as the sometimes crude methods utilised in collecting them.

However, the suspicion that the Federal Government is embarking upon yet another unconstitutional power-grab cannot be wished away. A recent tax law has increased its already-extensive powers. Among other things, the law bans state governments from engaging tax consultants in the collection of internally-generated revenue (IGR); recalcitrant consultants have been allegedly threatened with arrest if they persist in their activities. Lagos State is set to lose an estimated N6.25 billion monthly as a result.

When this tax law is combined with the mandate given to the MIC, it does seem that the Jonathan administration is interested in enhancing its own ability to collect tax revenue while hampering the capacity of states to do the same. This is blatantly unfair and runs counter to the most fundamental principles of federalism.

In the United States, levels of taxation differ depending upon resource base, financial situation and political policy, resulting in a very diverse tax landscape. Delaware, Montana, New Hampshire and Oregon do not levy state or local sales tax. Oil-rich Alaska has an average sales tax rate of 1.11 per cent, and its citizens receive an annual financial windfall through its Permanent Fund Dividend. At the other end of the scale, Tennessee has state and local sales tax rates averaging 9.44 per cent, comparable to California (9.08%), Arizona (9.01%), Louisiana (8.69%) and Washington (8.61%).

Nigeria’s Federal Government seems to be saying that states should not have the flexibility to establish tax regimes that are appropriate for their peculiar situations. A heavily-populated state like Lagos, with its plethora of business establishments, simply cannot be expected to pursue a taxation policy similar to agrarian Ebonyi, or oil-rich Bayelsa. If a state recognises that it does not yet possess the ability to fully handle tax matters, it is unreasonable to deprive it of the capacity to bring in organisations that can help it to achieve its goals.

If the Federal Government is sincere about reducing the tax burdens on businesses operating in the country, it should seek to work with the states, rather than against them. It must understand that the right of states to levy taxes is non-negotiable, and that different states will of necessity pursue different taxation policies which will aim at a variety of socio-economic goals. Lines of authority should be clearly demarcated: in determining who is responsible for what, taxes can be imposed more accurately and less unfairly.

The post Taxing Peter, robbing Paul appeared first on The Nation.

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