It is no longer news that Nigeria’s fiscal space is in need of fundamental changes to engender a healthy balance between government revenue and expenditure. Therefore, the challenge before both the outgoing and incoming administrations would be how to use fiscal instruments, especially taxation, to influence the trajectory of the economy from next year.
Like in all policy issues, what the government does with taxation, whether a reduction or increase in the rate or introduction of an entirely new form of tax, will signal where it wants the economy to go – and how. These facts are certain to play a significant part in determining the shape and colour of the country’s Finance Act 2022, which will be operative next year.
The above definitely is impacting the work of the Fiscal Policy Reforms Committee (FPRC), which works in conjunction with the Ministry of Finance to update the Finance Act each year in preparation for the subsequent editions. In doing this, the commission aims to respond to changing realities in the economy in order to achieve a major objective of the National Tax Policy, 2017, according to Taxaide Professional Services Ltd. This objective, it says, is to “Cautiously create a flexible and dynamic fiscal atmosphere that perpetually accommodates changing economic circumstances without resulting in a volatile tax system that unsettles economic activities”.
The FPRC in conjunction with the Ministry of Finance has indicated some focus policy areas for the FA22 and has categorised these policy areas into five groups, according to Taxaide. It says that a priority focus area is healthcare investments. “The FA22 would embody fiscal reforms that would drive and support domestic and international investments in healthcare systems and infrastructure in general and specifically for COVID and other priority diseases, as well as embody policies that would complement healthcare insurance,” Taxaide said in an explainer on FA22.
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The company establishes a nexus between the Act and the National Development Plan (2021 -2025), with the plan being a medium-term programme designed to tackle developmental challenges besetting the economy. Among these are fragile economic growth, insecurity, weak institutions, insufficient public service delivery, notable infrastructure deficits, climate change, and weak social indicators. In the health sector, for instance, the NDP identifies inadequate healthcare financing as a major challenge facing healthcare delivery. Government spending on health is less than five per cent of the total budget, an issue that should attract attention now, given the rate at which medical personnel are leaving the country.
Still, on the health sector, Taxaide declares that one of the ways in which the NDP seeks to optimise healthcare is to address human resource and infrastructure gaps, especially at the primary healthcare level, which it says is responsible for over 70% of the disease burden, in collaboration with the private sector. “This line of action aligns with reforms expected to be introduced under the FA22 to spur investments in healthcare systems and Infrastructure,” it noted.
Taxaide believes that there is a likelihood that the government will retain taxes such as the sugar tax in order to tackle health challenges occasioned by the consumption of sugar.
In addition, it opines that the Finance Act would be designed to complement non-fiscal reforms to reduce greenhouse gas emissions and to facilitate domestic and international investment in climate adaptation and mitigation, as well as green growth economies and job creation.
A further and critical area of focus of the Act is to reform tax incentives to phase out the outdated pioneer and other tax incentives for the then-infant industries that have now matured, and to gradually transition from expensive and redundant tax incentives. This will be a significant milestone in Nigeria’s industrial development.
The country has long been saddled with the irony of “adult infant” industries. This phenomenon arose from industries still clinging to tax exemptions granted to them while they were still infants indeed. Unfortunately, long after they attained adulthood, they are still laying claims to such unique treatments. This imposes double losses on the economy.
First, the tax revenue that should have come to the government is lost. Secondly, such companies fail to fill the gaps they were expected to fill. For instance, the Infant Industry doctrine was based partly on another concept: Import Substitution. This was predicated on the hope that, given help in their infancy, such companies or industries would grow up to produce goods to take the place of imports.
The dismal performance of this doctrine in Nigeria has given rise to the debate as to whether there is indeed any benefit accruing from the concept of the infant industry. Therefore, abrogating such incentives or privileges will certainly free up forgone revenue that should accrue to the public purse for use in other areas.
However, the government should go beyond this. Beyond ending such unproductive incentives, what should be the way forward? How best can the government incentivise our industries so they can produce optimally? This is part of the answer that the federal government has to provide to the question: How can we make this economy perform better?
In the same way, the new Finance Act should be used to spur job creation and economic growth by complementing Ease of Doing Business and other reforms to support SMEs, youth and women-owned businesses (FinTech, ICT, entertainment, fashion, sports, arts, etc). In addition, the Finance Act 2022 is expected to structure, approve, and deploy the NYSC Diaspora Scheme to create jobs as well as facilitate inbound capital and IP investments in domestic SMEs by diaspora youth, Taxaide said.
“Finally, the FA22 would complement Ease of Doing Business and other reforms by enhancing tax administration and introducing targeted fiscal and non-fiscal reforms to amend, address, and cure defects in existing tax and non-tax legislations,” says Taxaide.
The next few days will reveal what the government eventually does. But it is certain that tax issues will henceforth feature prominently in Nigeria’s fiscal measures. Everyone should prepare for this.
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