By Prof Kabiru Isa Dandago, PhD.
Presumptive tax regime (which is also known as simplified tax regime) intends to reduce tax compliance difficulties, especially for low-income earners as well as Nano, Micro and Small businesses/enterprises. It is an arrangement that has the potentiality of heavily reducing cost of income tax collection, ensuring friendliness between taxpayer and tax revenue collector, and boosting tax revenue collection at various levels. With presumptive tax regime well institutionalized, the costs of tax administration and tax revenue collection would be very minimal or zero as the agreed tax payable is requested from the presumptive taxpayer.
Many developed and developing economies are resorting to presumptive tax regimes to encourage voluntary tax compliance among individual taxpayers (usually the small taxpayers) as they earn income, profit and gains in the course of their economic activities. There are some common factors that are being recognized and respected across several countries, for institutionalization of presumptive tax regimes. These factors are: (i) the taxpayers involved (owners of Nano, Micro, and Small enterprises/businesses, vocations or professions and low-income earners, especially salary earners); (ii) relevant methods of presumptive tax; and (iii) the economic condition/situation. These factors serve as guides to fiscal policy makers and tax reformers as they develop ways of effectively administering taxes in countries where voluntary tax compliance appears a wishful dream.
Some of the countries that have successfully institutionalized presumptive tax regimes are Argentina, Austria, Brazil, Chile, Colombia, Costa Rica, Czech Republic, Denmark, Ecuador, France, Georgia, Ghana, Greece, Hungary, Israel, Italy, Kenya, Malaysia, Mexico, Pakistan, Russia, South Africa, Spain, Tanzania, Tunisia, Ukraine, Uruguay, United States of America, Zambia, and Zimbabwe. Each of these countries has made good use of the above three factors to separate conventional taxpayers from “small taxpayers”. They also use one method of presumptive tax or another to collect appropriate amount from them as tax. The taxpayers, in turn, feel encouraged to become voluntarily compliant conventional taxpayers as their levels of income, profit or gain increase to the chargeable level.
Presumptive tax is simply a tax based on “officially negotiated tax payable” as against tax based on the rate or rates captured in the tax law for enforcement on capable taxpayers, who have excess earnings (income, profit or gain) on which standard tax must be paid. It is a tax payable by small income, profit or gain earners to encourage them to develop the culture of paying tax voluntarily, as they grow to become conventional taxpayers. It benefits small businesses as well as salary income earners, on the one hand, and the tax authorities, on the other hand. This is because it reduces compliance and administration costs; ensures much disposable income goes to the hands of small tax payers; enhances total tax revenue collection by government; and inculcates the culture of paying tax voluntarily among small taxpayers, who constitute more than 95% of all income earners in Nigeria.
There are, however, three main challenges to appreciate and overcome about the institutionalization of presumptive tax regime. Firstly, while presumptive tax regime may or may not induce formalisation; it potentially entails unintended consequences as a result of introducing a separate tax system for small businesses and small fixed income earners. Secondly, designing the presumptive tax regime can be a big task as efforts are made to balance (i) simplicity, equity and efficiency and (ii) the likely cost of stabilizing the presumptive tax regime. Thirdly, the presumptive tax regime might even require more human and material resources in its implementation. Policymakers are not to lose sight of the costs and benefits of the presumptive tax regime in weighing policy options to address the challenge of ensuring voluntary tax compliance.
For the Nigerian fiscal space, the concept of Presumptive Tax appears to have made its first appearance in the Personal Income Tax (Amendment) Act 2011 where sub-section 6 was inserted into Section 36 of the Principal Act as follows: “(6) Notwithstanding any of the provisions of this Act, where for all practical purposes the income of the taxpayer cannot be ascertained or records are not kept in such a manner as would enable proper assessment of income, then such a taxpayer shall be assessed on such terms and conditions as would be prescribed by the Minister in regulations by order of gazette under Presumptive Tax Regime”.
This single-paragraph provision on presumptive tax regime has not specified the type or nature of taxpayers that are likely to be involved, the dimension of presumptive tax to be covered, the methods of presumptive tax to be used, and the condition under which it is to be practically used. Again, the power of its regulations was vested in the Minister (probably Minister of Finance). It appears as if it was a reluctant provision made, without any hope that it could make any serious impact on the Nigerian tax system!
Surprisingly, in the Nigeria Tax Bill 2024 (13 years after), one could only see a sort of ‘copy and paste’ of the PITA 2011 Section 36 (6) above, without any value addition. Chapter 2, part 7, section 29 of the Bill provides that: “Notwithstanding any provision of chapter 2 of this Act, where for all practical purposes, the income of a person chargeable to tax under this Act cannot be ascertained or records are not kept in such a manner as to enable proper assessment of income, then such person shall be assessed on such terms and conditions as may be prescribed by the Minister in a regulation under a presumptive tax regime”. One could note very few changes in wordings, but substance and meaning remain the same.
Again, the power of regulating the Presumptive Tax Regime (PTR) is vested in the Minister (probably Minister of Finance). The whole regime is described in one paragraph provision, without details on: (i) specific circumstances that could lead to PTR adoption; (ii) applicable presumptive tax methods; (iii) taxpayers that would be involved; (iv) conditions precedent; (v) need for special account to credit with presumptive tax collection; etc. What a casual or reluctant provision for a tax matter that is very important as the tax system of the country is reformed towards making Nigeria a tax-voluntary-compliant and tax-based economy!
Apart from the need to make items i-v clear in that chapter of the Bill, vesting the power to regulate presumptive tax regime on the Minister (of whichever ministry) needs to be reconsidered for correction or expansion. Taxation of individual income earners (salary earners, and owners of Nano, Micro and Small scale businesses/enterprises) is mainly for state tax authority, and some state governors have already been intervening to resolve some tax disputes between tax authority and some hard-to-tax income taxpayers based on some circumstances, and their request based on sympathy could be considered using relevant presumptive tax measure.
The Minister could be vested with the power to regulate presumptive tax regime in respect of the incomes of individuals who pay their personal income tax to the Nigeria Revenue Service (NRS). States Governors or their Commissioners of Finance are the authorities to satisfactorily regulate the presumptive tax regime to be institutionalized at the state level.
In 2011/2012, this writer was made to chair a special committee of the Academic Staff Union of Universities (ASUU) chapter of his university to ‘negotiate’ an appropriate tax payable by its members with the government’s committee headed by the then Honourable Commissioner of Commerce, Industry, Mines and Tourism, at the instance of the then Governor of Kano State. The dispute was that the amount payable as personal income tax by each member of the Union and other staff in the University, going by the then progressive tax rate, would further damage the already very poor disposable income the totality of the University staff are carrying to the market. An agreement was finally signed on the reasonable amount payable as tax by each member of staff, which is just about one-quarter of what each staff is to pay going by the standard/conventional income tax. That ‘presumptive tax regime’ was extended by the then Governor to cover other public tertiary educational institutions in the state, and the regime continued until the introduction of IPPIS, which killed the spirit!
The then Edo state Governor also followed suit, together with other state governors which this writer could not ascertain the governors involved. The power of intervention in any disputed personal income tax matter, in respect of pay as you earn (PAYE) or Direct Assessment, is much better vested in the Governor of a state or his/her Commissioner of Finance rather than the Minister of Finance. Whatever positive measures taken would be very pleasant to the taxpayers, and they would become voluntary-tax-compliant to the terms and conditions that have been agreed on and would be ready to pay taxes on whatever incomes, gains or profits they realize in the future, from other sources, with a high sense of responsibility.
This method of presumptive tax, institutionalized by the Governors of Kano, Edo and other states in year 2011 and beyond, is greatly needed in Nigeria now for application on all civil servants, from permanent secretaries down to the lowest level staff in the Nigerian civil service; on all the staff in public educational institutions (Universities down to primary schools), from Professors to the lowest level primary school teacher and all non-academic staff/workers; on all staff of private sector organizations whose total annual emolument is less than N6, 000, 000 per annum. With a monthly take-home of N500, 000 a family of just 6 members would not be able to meet the demands of their necessities of life monthly. So, when N75, 000 is further deducted from the monthly pre-tax take-home, a lot of the necessities must have to be sacrificed or the bread-winner of the family resorts to borrowing to make ends meet! But when the bread-winner is asked to pay a presumptive tax of N18, 750 (for example), he would feel encouraged to pay and to become voluntary-tax-compliant on the personal income tax when his income goes to the level beyond his basic needs and on other taxes that he would have the capacity to pay.
During the period 2015 to 2017, when this writer was the Chancellor of the Exchequer in Kano State, the provision of Section 6 (6) of PITA 2011 was put to use, with the permission of His Excellency, the state governor then, to engage in “presumptive tax negotiation meetings” with groups of traders, business men and women and entrepreneurs that are considered incapable to keep proper records of their transactions for proper preparation of financial statements. The meetings with the groups were held after sensitizing them about the importance of paying tax no matter how small it is, including having the moral right to claim ownership of government; qualifying for TCC to contest for elective offices in government; eligibility for some financial interventions; etc. With this arrangement, we were able to get members of various trade, business or vocational associations agreeing on amount to pay as presumptive tax monthly (ranging from N300 to N1000 per person).
The State IRS was directed to keep separate accounts of the individual payers of the presumptive tax, so that we can account for each one of them when the need arises. This, and some other measures that we took then, raised the IGR position of the state from number 24 to number 4 in the country, and the state was rated as number 1 among the 19 northern states by the RMAFC.
So, presumptive tax has been practically operational in Nigeria, even though the methods in use have not been clearly specified in the relevant tax law. It is important that the drafters of the Tax Reforms Bills create a separate Chapter for presumptive Tax regime in the NTB and give details about how it is to be implemented especially at state and local government levels, with the primary goal of achieving voluntary tax compliance, apart from other novel objectives that are achievable if properly put to use. Measures to overcome its challenges are also to be specified in the Bill. The drafters may have to commission some research works on the way some or all the 30 countries cited in this write up are implementing their institutionalized presumptive tax regime so as to recommend an appropriate regime for adoption in Nigeria, in view of its glaring benefits.
The 30 countries earlier mentioned, that have adopted various dimensions of presumptive tax regime (7 Africans; 10 Europeans; 7 South Americans; 3 Asians; and 3 North Americans), mainly did that to achieve voluntary tax compliance. It is high time Nigeria joins the league of countries with sincere and strong presumptive tax regime, so that the country catches up with the rest of the world on voluntary tax compliance and for reaping other important benefits. It is okay to exempt many taxpayers from the conventional or standard taxes, including minimum tax, but it is important to avoid the negative effect of doing that, by resorting to Presumptive tax regime. While minimum tax is about an agreed minimum rate chargeable on ascertained income, profit, gain or consumption, presumptive tax is about an amount agreed to be paid as tax out of the financial inflow to the taxpayer, which could be a small proportion of the determined tax liability under a conventional tax system.
The Nigeria Tax Bill carries some provisions exempting many present taxpaying individuals and firms from tax. The PFPTRC might be basking in self-glorification for coming up with the bills that carry these ‘exciting provisions’, proudly telling the world that about 97% of the existing taxpayers would be removed away from the tax net. This is not a good development for the Nigerian tax system. It is not a matter for celebration, for a number of reasons:
(i). Every ambitious citizen would want to be responsible enough to qualify for contesting election into various offices. One of the necessary requirements to be met is submission of Tax Clearance Certificate (TCC). If you don’t pay tax, you are not entitled to a TCC and so, you are not qualified to contest election in your locality no matter how popular you are, unless if the tax authority decides to give you a Tax Exemption Certificate (TEC). TEC would portray you as an irresponsible contestant; with no moral right to manage the treasury, since you have not contributed anything to it.
(ii) Presumptive taxpayers would also be able to meet the requirements of TCC as they apply for any contract award or intervention (financial or otherwise) from governments, development partners, or any other organization making TCC a legibility criterion.
(iii). Being a taxpayer is what would give you the moral right to claim ownership of government and also have the courage to challenge those in government for poor public funds management.
(iv). As fixed income earners and owners of businesses/professionals/vocations pay tax at presumptive tax level, they would be expected to develop the culture of voluntary tax compliance when they eventually become non-exempted taxpayers. This would be good enough for the economy as the culture of voluntary tax compliance is developed among most citizens in the country from the presumptive tax level to the conventional tax level.
(v) Apart from bringing those exempted taxpayers from income tax, WHT, VAT, etc. to the tax net, through relevant presumptive tax methods, for them to be proud conventional taxpayers, the state governments would enhance their total IGR as they collect the small-small amounts from those presumptive taxpayers.
Above are just 5 out of the numerous benefits of institutionalizing presumptive tax regime, which Nigerian economy is presently missing.
As Nigeria gears towards reforming its tax system for the better, so that it catches up with countries that have used taxation as the basis of their development, the issue of voluntary tax compliance is a challenge that needs to be faced squarely by decision/policy makers. One of the instruments for achieving voluntary tax compliance is the institutionalization of Presumptive Tax Regime (PTR), which was reluctantly provided for in the NTB (just one paragraph provision). The country has to concretize efforts made earlier in the country at various levels in favour of the institutionalization of PTR (as mentioned in this write up) and also borrow some leaves from countries that have successfully institutionalized it in their tax system.
One very good thing to note about most of the 30 cited countries that have good PTR to show is that they go by the philosophy of ‘service-for-tax’ (as opposed to tax-for-service). This philosophy is about ensuring that adequate quality social amenity projects are executed with the resources/funds available (obtained through tax or non-tax sources) to the extent that even ‘small taxpayers’ that are treated as presumptive taxpayers are eager to graduate to become conventional taxpayers. The demonstration of this philosophy was practically noted when this writer was in two of the mentioned countries: Malaysia (for some years as a Visiting Professor) and Israel (for some weeks at GIMI for a Course on Public Financial Management).
For now, all the Nano, Micro and Small businesses/enterprises and all fixed income earners in the public and private sectors as highlighted in this write up should be treated as small taxpayers, who should qualify as presumptive taxpayers that are to be nurtured to graduate to become conventional taxpayers. As they develop the culture of voluntary tax compliance, there is the hope that on reaching the level of subjecting their incomes, profits or gains to conventional tax charges, there would be minimal resistance or evasion from them. Let the NTB make adequate provisions for institutionalizing presumptive tax regime in Nigeria.
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Prof. Kabiru Isa Dandago, PhD, is of the Department of Accounting, Bayero University, Kano, Nigeria.
Image: Sunday Abegunde Unsplash
