By Oke Godwin Olaoluwa
One issue that does not attract the general public’s interest is taxation. Once the topic is raised in a public forum, other public members ignore or pay divided attention aside from interested parties like tax or finance professionals. Someone once told me that Tax is a bitter pill to sell in Nigeria. One of the founding fathers of the United States of America, Benjamin Franklin, said, “In this world nothing can be said to be certain, except death and taxes”.
Among the duties of a citizen of Nigeria, enshrined in the constitution, is the payment of taxes. Section 24(f) of the Nigerian constitution states, “it shall be the duty of the citizen to; declare his income honestly to appropriate lawful agencies and pay his tax promptly”. The import of this statement can be divided into three parts; one part is voluntary compliance; with or without notice, a citizen is expected to declare his income and be honest about it. Secondly, the citizen has a fiduciary duty to the state by reporting his income to lawful agencies; lastly, it is time-bound, Tax must be paid promptly.
The federal government of Nigeria is empowered to legislate on taxes due on income, capital gain and profit of companies, while second schedule part II under section 7 gives the power to collect taxes from income, capital gains and profit of person resident within the state jurisdiction. As amended, such powers are well detailed in the personal income tax act 2011. As I have explained in my earlier article (see link), state governments are likely to face a dwindling federal allocation; hence the need to focus on the alternative internally generated revenue. The informal sector may be the saving grace in this light.
According to the Nigeria bureau of statistics (NBS), micro-enterprises which represent the informal sector majorly, account for 49.78% of Nigeria’s GDP, and contributes as much as 85% of total industrial employment and over 70% of total employment in the country. The micro-enterprises are largely one-man businesses, and they constitute the informal sector. They carry out their businesses on the roadside, in a kiosk, a makeshift stall, a mall or even an office space.
They are everywhere around us, from the members of the union of Road transport workers, market men and women association, co-operative societies, to the association of artisans, to the more organized pressure groups like the manufacturers association of Nigeria and the professional groups. According to the NBS, there are about 41.4 million of them in Nigeria and they are responsible for over 59 million jobs. They employ about one to 10 staff with a start-up capital of less than 100,000 naira. The finance act 2020 defined them as small-sized companies with a turnover of less than 25 million naira a year. They are a key determinant of the economy’s overall performance, thus, should get befitting attention from the government.
More than 3 million of these micro enterprises represent the informal sector in Lagos state, employing over 6 million men and women residents in Lagos. The state officially identifies only 2% of the informal sector operators as taxpayers. The question is, do the informal sector players pay any form of taxes? Yes! They do, albeit in the form of exorbitant fees, dues, levies and illegal taxes, to rent-seekers disguised as union leaders, market leaders and unscrupulous government officials. Lagos is a booming metropolis. In his famous classic work “the Future of capitalism”, Paul collier posited that a thriving metropolis generates huge economic rents, which should accrue to the state.
Understandably, this covid-19 period is a challenging period for the informal sector. Many analysts are suggesting palliatives like tax reliefs, but the illegal fees, dues and levies are still being paid daily to these rent-seekers. As Paul collier suggested, the government should redesign its tax system to redirect these payments to the state’s coffer
The Nigerian government is obliged to perform specific responsibilities to its citizens and the economy according to sections 14 to 23 of the 1999 constitution. Accepting such obligations unconditionally, with every sense of responsibility, encourages a norm of reciprocity in society.
If the government truly seeks economic development, the informal sector must be encouraged to contribute to the state’s purse. To do this, the government should adopt the approach of a libertarian paternalist, a term coined by Robert Thaler in his famous work “Nudge”, by deploying incentives to encourage the informal sector to be part of the development of the state.
The Lagos state government can nudge the informal sector operators into voluntary tax compliance, through the several state initiatives and programs. For instance; some time ago, I watched a television program, a lady sharing her experience on how she got the Lagos state employment trust fund loan without any referral and the fund, added to her start-up capital, helped scale up her beauty business to a household brand. The state government may consider increasing funding to the ETF scheme and relaxing its condition to attract more informal sector operators. Also, the covid-19 period has revealed that access to health facilities is paramount to everybody; hence the government can encourage voluntary tax compliance by heavily subsidizing its health insurance scheme and ensuring it is very effective.
One of the most practicable works on great leaders was written by Jonathan Tepperman in his book “the fix”, where he studied ten great leaders. In reviewing their strategies for solving grave problems, he found out that; great leaders are not dogmatic; they adopt pragmatic solutions to every problem as they arise and make necessary adjustments as the situation unfolds. They were prepared to be tough along the line and the hallmark to their success rests on their willingness to deny any patronage to powerful groups. The clouds are gathering already, and weathering this impending storm requires new thinking and a new approach to governance.
Oke Godwin Olaoluwa is an economist and a financial analyst. He is the co-founder of a research-based NGO advocacy for economic development (A-CED). He is also the Co-convener of the first Ikorodu division Economic Summit.
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