In regards to the pressing challenge of obtaining funding faced by small businesses, PricewaterHouseCoopers (PwC) has come up with strategies to ensure sustainable growth for Small and Medium Enterprises (SMEs) in Nigeria.
In an annual report titled “PwC’s MSME Survey 2020- Building to last”, it said Nigeria has 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.
Some notable recommendations were made for higher tax revenues and more profit for SMEs in Nigeria,
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.
Irrespective of the strategy Nigeria adopts, ensuring the SME sector is free of the burden of multiple taxes is very critical.