The Presidential Fiscal Policy and Tax Reforms Committee, says about 98 per cent of Nigerian workers will be either stop paying tax or have their tax rate under the Pay As You Earn (PAYE) category crashed to its barest minimum under the new tax laws.
This formed part of the clarifications made by Dr. Taiwo Oladele, Chairman of the Committee at the Nigerian Economic Summit discussion session yesterday in Abuja.
This declaration which drew wide applause from the audience, came at a backdrop of several apprehensive comments from the public over alleged increasing economic burdens on Nigerians under the present government.
This figure which, according to the tax boss, represents about 33% of workers in the public and private sector combined, will no longer pay PAYE because they’ll be exempted, adding, ‘between that 33% to 98% will pay lower PAYE and the remaining two percent or two plus will pay more’.
The remaining two to two and half percent, according to him, represents the high income earners.
‘They are our rich people that we can find’, he stated.
Explaining further, Oyedele stated: ‘We need the system to be progressing and I’ll tell you more seriously, two major reasons why we’re doing that. Number one is you can’t be taxed in poverty and then magically become a wealthy country. It’s a contradiction.
Though he didn’t categorically give income amounts that would be enjoying zero to low income tax he was compelled by the audience to explain the poor class category and he said: ‘To know poverty level, you need to look at a household. You can’t look at an individual. So if you look at the amount I earn alone, you don’t know how many people depend on that amount. So we looked at the study that was done by the NBS (National Bureau of Statistics), and the average household size in Nigeria is put at five.
‘Based on the data on employment, gainfully employed people, you have a little over two out of the five that are employed.
‘Since you can’t have a fraction to an individual member of the household we adopted two out of five as employed. ‘So the question for us is how much must two people earn to cater for five people so they don’t fall into poverty? ‘We decided not to use the United Nations or World Bank two point one five dollars because it’s not applicable to us, honestly. People in the villages produce everything. They don’t earn two dollars and fifteen cents a day, and they’re fine. They don’t pay rent. They don’t buy food.
‘Anyway, long and short of it all we came up with a conclusion of between a hundred and a hundred and twenty thousand Naira a month. It’s two people and the household would then earn around N200,000 to cater for five people so they don’t fall below the poverty line.
‘People in this room will struggle to reconcile that because that’s the money they spend in, one day. But when you see people that are really poor, this is a lot of money. So, now they shouldn’t pay tax on that.
‘Under the old laws, you earn thirty thousand naira a month, you’re paying tax. So this is a significant improvement, a better deal for the poor.
‘And then, by the way, if somebody earns a hundred thousand naira a month, they are better than thirty three percent of workers in Nigeria’.
On the issue of the impact of the tax exemptions on revenue of the sub-nationals, Oyedele said, ‘These are not easy reforms because the states are there wondering about the impact on their finances. One state Governor said to us that you’ve exempted everybody that pays tax in my state. So you need to balance that’.
Still on income categorization Oladele explained further, ‘Above that threshold to around N1.8 million a month is our middle class. So middle class, less. Low income, no tax. Upper income, a bit more’.
Oyedele also gave insight into other areas of the impacts expected with the commencement of the new tax regime.
He explained: ‘In many countries around the world, what you’ll find is that the top rates for personal income tax is usually higher than the rate for corporate tax so that you can incentivize formalization.
‘I’m better off to operate as a company because I pay lower rates than as an informal person or an enterprise.
‘But in Nigeria it is the direct opposite of that. When you operate in the informal sector, you want to pay your taxes, your maximum income tax doesn’t even hit twenty percent. But with the same business when you formalize it, register as a company, your tax burden goes to over forty per cent.
And then we lament that the informal sector is too big. We were creating it. We created a disincentive to formalization.
‘We are now trying to reverse this under the new tax regime. It’s the reason why we have to take the top rates for personal income tax to twenty-five per cent. But it is still lower than thirty five per cent in Ghana, thirty five percent in Kenya, forty five percent in South Africa.
‘We are, however, reducing the corporate tax rate from 30% to 25%. At least let’s try and equalise first so people no longer have a disincentive to formalization.
‘The Corporate Affairs Commission, a few days ago, said they’re opening free registration for two hundred and fifty thousand businesses. This should complement what we are doing to encourage formalisation.
‘Under the new law, if your annual turnover is N100 million or less as a company, your corporate tax rate is zero per cent. Some people are not sure if to clap or not. They are bigmen. They don’t run small businesses and therefore they are not covered by this exemption’.
Giving further insight into the tax challenges and the reform process, Oladele said, ‘For us, when we are thinking about this reform, we thought that tax evasion is a major problem that we have to solve for two reasons, two important reasons.
‘Number one, the task gap in Nigeria is wide. What is a task gap? The difference between how much we’re collecting now and how much we could be collecting.
‘That gap is made up of two major components. One is compliance, that is people who are just not paying, they are evading or under-declaring. And then there’s a policy gap where we ourselves just waive taxes, grant waivers even when they’re not really beneficial to the economy.
‘But when it comes to tax evasion, not addressing it is incentivizing illegality and it hits back at us.
‘So for more reasons than one, beyond generating revenue, we must fix that problem.
‘So we are confident that this system will be a no respecter of anyone. If you earn the income you must pay a tax’.
