AN EFFECTIVE TAX SYSTEM PROMOTES TRANSPARENCY AND ACCOUNTABILITY

ABSTRACT

 An effective tax system is closely linked to good governance. The tax policies, legislation and the tax authorities determine whether the tax system is effective. The corresponding response from the citizens to show that a tax system is effective is evident in tax compliance which is also an indicator of the effectiveness of the tax system.[1] Good governance as a vital tool in a democratic society presupposes transparency and accountability. The question is how transparency and accountability can be promoted in the society through an effective tax system. A tax system can promote transparency only when the tax system is effective. An effective tax system ensures tax compliance through its policies, legislations and the institutions put in place for implementing these laws and collecting taxes. . A tax system is defined as being effective when the true essence of tax is achieved.  The sole purpose of taxation in every country is to ensure that the government is provided with sufficient funds to execute its business and provide social amenities. In countries like the United States of America where the citizens are in support of taxation, the government render accounts of its revenue and how the revenue is spent.  Where the citizens are actively participating in the governance of the country through taxation, there’s usually the innate demand for accountability and transparency.  Accountability requires political power-holders to carry out their mandate and exercise their powers in a way that is transparent, in the sense that it enables other institutions and the public to see what is actually done and assess whether it is in accordance with the mandate and the relevant norms and rules. Transparency also requires power-holders to be answerable in the sense of being obliged to provide reasons for their decisions in public (which also implies an element of responsiveness). The twin principles of accountability and transparency also makes provision for institutional checks or control mechanisms to prevent abuse of power and ensure that corrective measures are taken in cases where the mandate of the revenue derived from tax is contravened or rules are violated.

 Accountability and transparency could be evident in the manner the revenue is utilised for the benefits of the citizens.  The main issue is the need for an effective tax system.  The question now is what makes a tax system effective?  This article deal with whether the Nigerian tax system is effective so as to ensure transparency and accountability.

1.     AN EFFECTIVE TAX SYSTEM IN NIGERIA

TAX POLICIES

Section 14 (2) (b) succinctly declares that “the security and welfare of the people shall be the primary purpose of government”. These lofty goals which in addition to the cost of governance require funding can only be achieved through an effective tax system and not through aids from external resources which could accumulate into debts. The most secured form of generating revenue is through taxation without over dependence on natural resources as evident in Nigeria and Uganda. Nigeria is currently experiencing economic recession because of the huge drawback in the cost of oil. Notwithstanding the inefficiency of the tax authorities, Nigeria’s tax laws have been reformed over the years to ensure transparency in the collection and the use of the taxes. The Taxes and Levies (approved list for Collection) Decree, 1998 combined all the previous laws and made for some certain reforms and clarity in the provisions of tax laws.  The provision of this law has made for good governance in that it has delineated the taxing powers of the different tiers of government with respect to policy making and tax collection.  It explicitly describes the process of collection and the authorities responsible for collection of taxes. This enables transparency and accountability in that the government’s actions can be predetermined as regards the amount of revenue it derive from its citizens.  Transparency is envisioned through the tax agencies and other laws as it prevents unnecessary imposition of tax, double taxation and undue increase of tax base. The acts of government’s representatives that are the tax authorities and those responsible for the collection of taxes, penalty for offences are adequately provided for in the Act. This is a reflection of transparency in government.

          For Nigerian’s tax system to be effective the Nigerian‘s tax system must be fair and shall institutionalize horizontal and vertical equity. Horizontal equity ensures equal treatment of equal individuals. The Nigerian tax system should therefore seek to avoid discrimination against economically similar entities. Vertical equity on one hand address the issue of fairness among different income categories in this regard/the Nigerian tax system shall recognize the ability to-pay principle in that individuals should be taxed according to their ability to bear the tax burden. Individuals and entities that earn high income should pay a corresponding high percentage of tax. Overall tax system shall therefore be fair so that similar cases are treated similarly in addition any ambiguity or confecting provision in the law shall be resolved in a manner as to ensure fairness to taxpayers and the tax authorities. Where the tax system is effective, this will stimulate the public’s confidence in the government. This will also enable the citizens to actively participate in the use of the funds by seeking that the government give a detailed account of how the revenue derived from tax is spent.

Taxation remains a veritable instrument for national development.[2] The end result of an efficient tax system is to achieve economic development in the country. Economic development can only be attained where the people perform their civic obligation of paying taxes. The payment of taxes can be reinforced through policies that protects the rights of all citizens and ensures people are taxed accordingly [progressive / regressive form of taxation] depending on the system of taxation most suitable. This is one of the key indicators of transparency in any given economy. Tax evasion and its sister tax avoidance are key fundamental problems of tax administration in a developing country like Nigeria. All forms of taxes in Nigeria are to some extent avoided or evaded because the administrative machinery to ensure effectiveness is weak. As a result of the diversities and complexity in human nature and activities, no tax law can capture everything hence; loophole will exist and can only be reduced or eliminated through policy reforms. Tax evasion and avoidance lead to loss of revenue for the government. A high degree of tax evasion has unpleasant repercussions on resources; it affects wealth redistribution and economic growth; it creates artificial bias in macroeconomic indicators. No matter how fair a tax system appears to be on paper, it will lack the standards of equity if there is high incidence of tax evasion or artificial tax avoidance. The border line of tax evasion and avoidance is very thin. Excess tax avoidance leads to tax evasion. The increasing lack of trust of the Nigeria government by the tax payers and the perceived corrupt practices of the tax authorities have been responsible for low tax morale, and hence high rate of tax evasion in Nigeria.  Where the majority in a country evade tax, then this will probably lead to a reduction in the government’s revenue. This will prevent transparency and prevent tax compliance because it will make the citizens lose faith in the government.

          A complex tax system can’t be effective. The Nigerian tax system is not complex as evident in the tax policies except for the incongruence between the land tenement rate and the land use charge in Nigeria.[3]  A complex tax regime encourages noncompliance which is a serious problem that fosters a climate of disrespect, antagonism, and selfishness in the relationships among citizens and between them and the government and at the same time distorts the distribution of the tax burden and wealth in society .Thus, a simple tax system makes it easier for taxpayers to judge the consequences of their actions

The Nigerian Tax system has historically suffered from challenges ranging from poor compliance, inefficient tax administration, corruption and fraud.[4] This state of affairs which led to several reforms initiatives culminated in the enactment of the FIRS (Establishment) Act and the positioning of the FIRS as an autonomous and modern tax agency. The Federal Inland Revenue Service (Establishment) Act 2007 (Hereinafter referred to as ―the FIRS (Establishment) Act  established the Federal Inland Revenue Service as an autonomous parasternal charged with assessment and collection of Federal Taxes and accounting for tax revenues accruable to the government of the federation. Section 44 of the FIRS (Establishment) Act 2007 provides that any person who is appointed for the due administration of the Act or employed in connection with the assessment and collection of a tax who demands from any company an amount in access of the authorized assessment of the tax, withholds for his own use or otherwise any portion of the amount of tax collected, renders a false return of the amount of tax collected or recovered by him, defrauds any person or embezzles any money or uses his position to deal wrongfully with the Service, steals or misuses the document of the Service or compromises on the assessment of any tax commits an offence and shall be liable to a fine equivalent to 200 per cent of the sum in question or to imprisonment for a term not exceeding 3 years or to both fine and imprisonment. In a recent case the North Central Zone of the Tax Appeal Tribunal (TAT) sitting in Jos ordered the Department of Public Prosecution (DPP) office of the Attorney General of Plateau State to arraign seven members of staff of the Service for alleged tax fraud. The suspects were alleged to have forged Federal government tax receipts to claim over N17 million from the State Universal Basic Education Board (SUBEB). The forged tax receipts were uncovered by the tribunal when the Service dragged SUBEB before the TAT for tax evasion. The forged documents which were tendered by SUBEB before the court to substantiate their claim to having remitted some tax led the court to suspect that the documents were fraudulently produced and subsequently ordered the state police command to investigate the forged documents. The police command said it had investigated the matter and discovered the said documents were truly forged.[5] In Commissioner of Internal Revenue v J.A.O Aworeni88, the case against the defendant concerned his failure to pay tax deducted to the Government Treasury. The defendant was sued in respect of the tax deduction from the salaries of various employees of his school, which he did not pay to the government Treasury. Before the case was heard in court, the defendant paid the amount due but refused to pay the penalty on the ground that he was not liable to penalty. The court found the defendant liable to pay the penalty and the cost of the suit[6].  This case mirrors transparency and accountability and evaluated the nexus between good governance and tax in Nigeria.

2.     NIGERIA’S TAX SYSTEM PROMOTES TRANSPERANCY AND ACCOUNTABILITY

Studies have shown that a good tax system engenders good governance and vice versa because of the congruence between good governance indicators and the characteristics of a good tax system. There is therefore the need for a complete revolution in the Nigeria tax system in line with the basic tenets of taxation so as to boost revenue and increase citizen interest in tax matters. This will enhance transparency, accountability, and also reduce conflicts that results from dependence on natural resources as witnessed in the Niger Delta. A state that depends on taxes depends on the prosperity and the enterprising spirit of her citizens and the government that depends on this for the delivery of public goods and services will be more transparent and accountable by seeing to the growth and development of business enterprises.  Similarly, the citizens that pay tax will in turn hold the government accountable in the use of tax revenue and thus ensuring good governance. Therefore, it is argued that taxation can be encouraged and made a national culture if good governance is achieved as the basis for prompt and effective service delivery sustained interest in taxation. In particular, it is through an effective tax system that revenue can be generated to finance democratic governance.

3.     RECOMMENDATION

1.     TAX POLICIES AND ADMINISTRATION

The basic recommendation is to ensure that the agencies involved in taxation are well funded.[7] However, the Study and Working Groups amongst other things recommended that the existing tax laws should be revised and updated to conform to current realities.  In order to ensure a higher level of transparency and accountability, all levels and arms of Government, Ministries, Extra-Ministerial Departments and Agencies where

Applicable should:

I. implements and regularly reviews tax policies and laws;

ii. Provide information on all revenue collected on a quarterly basis;

iii. Ensure adequate funding, administrative and operational autonomy of tax authorities; and

iv. Ensure a reasonable gestation period of between three and six months before implementation of a new tax.

Other strategies that could be employed include;

1.     Enforcement of tax laws with appropriate steps to ensure penalties and sanctions on tax offenders.

2.     A drive for a wider tax base to ensure that all taxable entities and transactions are covered.

3.     New enforcement and compliance initiatives e.g. Bank transactions provides window for effective compliance and enforcement and this should be vigorously exploited in a concerted effort with other government agencies.

4.     Improved and more up-to-date IT solutions for data gathering, revenue collection and access to tax information.

5.     Media sensitization campaigns to enhance voluntary compliance and improve tax

MODERNIZATION OF TAX ADMINISTRATION – this includes automation, introduction of electronic processes and tailored made projects to address specified areas of the tax system such as:

• Project FACT (Factual Accurate Complete Timely) - an integrated electronic system of tax registration, tax payment and accounting which has been concluded

• U-TIN (Unique Taxpayer Identification Number) Project – being overseen by the Joint Tax Board and funded by FG/ States, it is an electronic system of tax identification, involving the assignment of a unique identifier to every taxable person in Nigeria and development of National Tax Database linking all revenue authorities and major stakeholders

• ITAS (Integrated System of Tax Administration) includes, Business Process Reengineering, Systems Development, Change Management and automation of Finance and Accounts Function

• HR Reengineering and Automation

• Finance and Accounts Reengineering and Automation

• Reengineering of Facility Management and Procurement

• E Library and E Learning

• Tax clearance verification

• Tax Refund Application Software

• Contact Management Centre

• Electronic Platform for automatic tax payments

• Electronic Platform for Mobile Banking and Electronic Payments

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[1] Oyo, S. (2003) Fundamental Principles of Taxation in Nigeria, (Sagribra Tax Publications, Lagos-Nigeria.

[2] Nigerian Tax Reform in 2003 and Beyond: Main Report of the Study Group of Nigerian Tax System

[3] Olakanmi, J.,(2012) FIRS, Compendiun of Tax Laws, 3rd Edition, Law lords Publications, (2012) P.895

[5] Adinoyi, S.‘Tribunal Orders Trial of Seven FIRS Workers over Fraud‘, Thisday, 29 June 2013. Available at http://www.google.com.ng/tat+appeal+tribunal (last accessed 19/6/2018)

[6] 88 Suit No. 1/404/72 in the High Court of Western Nigeria see also the cases of Commissioner for Finance v Ukpong (2000) 4, N.W.L.R (pt. 653) p. 363; R v IRC (1987) STC p. 211

[7] Ayua, I.A. (1999) The Nigerian Tax Law, Spectrum Books, Ibadan-Nigeria

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