Tax Policy in Nigeria

Topics: Tax, Taxation, Income tax Pages: 7 (2265 words) Published: March 9, 2011

A tax policies represent key resource allocator between the public and private sectors in a country. It is usually imposed on individuals and entity that make up a country. The funds provided by tax are used by the states to support certain state obligations such as education systems, health care systems, pensions for the elderly, unemployment benefits, and public transportation. A nation’s tax system is often a reflection of its communal values or the values of those in power. To create a system of taxation, a nation must make choices regarding the distribution of the tax burden-who will pay taxes and how much they will pay-and how the taxes collected will be spent.

In Nigeria, the taxation system dates back to 1904 when the personal income tax was introduced in northern Nigeria before the unification of the country by the colonial masters. It was later implemented through the Native Revenue Ordinances to the western and eastern regions in 1917 and 1928, respectively. Among other amendments in the 1930s, it was later incorporated into Direct Taxation Ordinance No. 4 of 1940. Since then different governments have continued to try to improve on Nigeria’s taxation system. The general opinion among scholars is that Nigeria’s fiscal regime is characterized by unnecessary complex, distortionary and largely inequitable taxation laws that have limited application in the formal sector that dominates the economy.

Given the foregoing, it is important that Nigeria adopt a taxation policy that would enhance national development. I am aware of the draft national tax policy that has been submitted for enactment by the National Assembly of Nigeria. My intention is to examine the Draft National Tax Policy with a view to correcting perceived flaws inherent in the document. To enhance the understanding of this paper, I begin with making a review Nigeria’s tax system and the current Draft National Tax Policy. I will attempt to identify the challenges inherent in the current reform and proffer strategies for an efficient tax regime in Nigeria.

The Nigerian tax system is basically structured as a tool for revenue collection. This is a legacy from the pre-independence government. Based on 1948 British tax laws and have been mainly static since enactment. The need to tax personal incomes throughout the country prompted the Income Tax Management Act (ITMA) of 1961. In Nigeria, personal income tax (PIT) for salaried employment is based on a ‘pay as you earn’ (PAYE) system, and several amendments have been made to the 1961 ITMA Act. For instance, in 1985 PIT was increased from N 600 or 10 per cent of earned income to N 2,000 plus 12.5 per cent of income exceeding N 6,000. In 1989, a 15 per cent withholding tax was applied to savings deposits valued at N 50,000 or more while tax on rental income was extended to cover chartered vessels, ships or aircraft. In addition, tax on the fees of directors was fixed at 15 per cent. These policies were geared to achieving effective protection for local industries, greater use of local raw materials, generating increased government revenue among others.

Since the implementation of the structural adjustment programme (SAP), however, taxes have been used to enhance the productivity and competitiveness of business enterprises. Consequently, attention has been focused on promoting exports of manufactures and reducing the tax burden of individuals and companies. In line with this change in policy focus, many measures were undertaken. These involved, among others, reviewing custom and excise duties, continuing with the reduction of company and income taxes, expanding the range of tax exemptions and rebates, introducing capital allowance, expanding the duty drawback scheme and manufacturing-in-bond scheme, abolishing excise duty, implementing VAT, monetizing fringe benefits and increasing tax relief to low-income earners.

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