PwC MSME Survey 2020
Recommendations: Tax enhancement strategies for SME growth and sustainability
Esiri Agbeyi
Partner & Head,
Private Wealth Services
Nigeria is the largest economy in Africa but the country lags behind
South Africa, the second largest, in terms of the tax to GDP ratio.
Whereas Nigeria's tax to GDP is estimated at about 6%, South Africa's
is 28%, while the average tax to GDP in Sub-Saharan Africa is 17%.
Nigeria probably has more tax authorities than any other country in the
World with the exception of the United States. Yet, unlike Nigeria's tax
administration system, the United States has a much more robust
database of tax payers and payments. Furthermore, the United States'
tax to GDP ratio is 26% - over 4 times higher than Nigeria's.
Results from our survey reveal that multiple taxes & levies, lack of
coordination of federal & state agencies, and the absence of a central
technology platform for the ease of payment of taxes, are some of the
challenges faced by MSMEs.
According to the annual PwC report, Ease of paying taxes 2020, it took,
on average, 343 hours for entities to comply with tax payments. This
was the time taken to prepare, file and pay value added or sales tax,
profit tax, labour taxes and contributions. Furthermore, most
businesses made, on average, 48 tax payments to the tax authorities in
a year. An interesting observation over the years is that countries which
ranked low in paying taxes, had a direct correlation to the drag in the
GDP of the economy.
In 2015, a drive to harmonise taxes at the federal, state and local
government levels resulted in a review of the Taxes and Levies Act
which lists the approved taxes to be collected. The amendment
resulted in a longer list of approved taxes from 39 to a staggering 61,
mostly at the state and local government levels confirming the cost of
tax compliance especially for SMEs. Without doubt, this is a problem
for SMEs.
As a nation, we should consider these recommendations for higher tax
revenues and more profitable SMEs.
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Review the Constitution and tax laws: Multiple taxes remain a
problem as the Constitution gives the 3 government tiers distinct taxing
powers. Businesses will continue to struggle with this problem unless
something more concrete is done about excluding overlapping powers
e.g. with consumption taxes. The tax laws should be reviewed and
amended annually through Finance Acts. Over time, Nigeria can lean
towards a lower direct tax on income and more indirect tax on spend as
we find in developed economies.
Centralised administrative system: Deploying a single centralised
technology platform for tax administration in the country will help to
improve tax collection, enhance ease of payment, reduce the cost of tax
collection, as well as plug or eliminate the leakages in the system. The
time saved in paying taxes could be put to more productive use by
businesses and the nation as a whole.
Single Tax Authority: Most countries adopt the model of a single tax
authority for tax administration of both corporates and individuals. This
is the case with the UK's HMRC and South Africa's SARS. Both
countries have significantly higher tax to GDP ratios than Nigeria.
Companies are run by individuals. Linking both provides much gain in
closing gaps on non taxation or evasion. The reverse is the case when
information is disaggregated across several tax authorities.
Formalise the informal sector: Multiple taxes may be an issue but
what is worse is when tax is paid by a few and the tax net is not
widened. Some say the missing piece has been the informal sector.
However, players in the informal sector cry that they pay taxes too. The
problem is there is no data and some of the taxes collected may only
find their way into private pockets. Evening the playing field for all
taxpayers would involve relaxing the entry rules and easing the barriers
for informal businesses to get into the formal sector.
Whichever strategy Nigeria adopts, ensuring the SME sector is free of the
burden of multiple taxes is very critical.
PwC MSME Survey 2020
PwC
June 2020
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