Task Before Tax Administrators

In my view, there are at least four principles that should guide true fiscal federalism. The first is that each federating unit continues to be as autonomous as possible and to manage its affairs as it deems fit.

The second principle is that each federating unit raises its own government revenue to meet its expenditure. The third is that, where there are constraints on the ability of the federating units to raise their respective revenues, then a revenue distribution scheme is operated.

Finally, any revenue distribution scheme must ensure that each federating unit has a major stake in the revenue raised within its territory.

From the foregoing, it is to be noted that true fiscal federalism should therefore be reflected in the manner of both the distribution of tax jurisdiction among the federating units, and the distribution of tax revenue among them.

In Nigeria, taxing responsibilities are split between the Federal, State and Local Governments based on the stipulations in the Exclusive and Concurrent Lists of the 1999 Constitution.

In truth, for all tax matters in the Exclusive and Concurrent lists, the Constitution gives the Federal Government through the National Assembly, the powers to impose any tax or duty on: capital gains, incomes or profits of persons and companies and documents or transactions by way of stamp duties.

All other tax matters are deemed to be on the residual list and are therefore the responsibilities of the states.

Accordingly, the current split of responsibility between the Federal and the State on the above areas on which taxes and duties are to be charged are merely concessions by the Federal Government to the State Governments, perhaps in recognition of the need for states to generate their own internal revenue.

Tax Jurisdictions

As currently split, the responsibilities of the Federal Government (through the FIRS and Customs) and the State and Local Governments are as stated below:

Federal Government Responsibilities as assigned by the Federal Government

Two main agencies of the Federal Government are involved in the discharge of this responsibility: the Federal Inland Revenue Service, and the Nigeria Customs Service.

FIRS on the one hand, assesses, collects, and accounts for the following taxes:

Companies Income Tax (CIT) - on the exclusive legislative list

Petroleum Profit Tax (PPT) - on the exclusive legislative list

Value Added Tax (VAT) - Constitution is silent on what list this tax belongs to (it's a taxation on consumption not on persons or companies).

Personal Income Tax (for FCT residents, Armed Forces and Police Personnel and non-residents) - on the concurrent list (the Federal Government largely ceded this responsibility to the State Governments through the enabling legislation which could be changed)

Education Tax - on the concurrent list by virtue of being a tax on income.

Capital Gains Tax for Companies and residents of the FCT - on the concurrent list

Stamp Duties for Companies and residents of the FCT - on the concurrent list

The Nigerian Customs Service, on the other hand, is responsible for the collection of Customs and Excise Duties.

State and Local Government Responsibilities as assigned by the Federal Government

The responsibilities of the State are for Personal Income Tax for residents of the respective states and other taxes or levies on the Concurrent Legislative list, provided they do not conflict with Federal counterparts.

The responsibilities of the Local Government are for charges and levies like tenement rates etc.

All taxes not specifically mentioned in the constitution are deemed to be residual in nature and fall under the purview of the State Government.

Food for Thought

Apart from the Value Added Tax - which taxes consumption - the Constitution is quite clear on the role of the Federal Government in matters pertaining to the powers to impose taxes on capital gains, incomes, profits of persons and companies, and stamp duties. The Federal Government has complete jurisdiction over these matters.

It has been promoted in some quarters that the current position of ceding some of its tax collecting powers (on Persons) to the states does not support but rather stifles federalism. This raises questions: Does the current position negate fiscal federalism? Does it stifle competition which some may argue could lead to enhanced development?

There is an urgent need to give the issues very careful consideration. The manner in which fiscal federalism is applied has implications for the level of unity existing in a country, and indeed on how individuals perceive their stake in a country.

In most, if not all other jurisdictions, individuals pay their income taxes to the Federal, State - encouraging such persons to be interested in what the country (not the State) does with the monies collected. In addition, income taxes are more effectively collected at the Federal than at the State levels, in view of instances of multiple residences as well as loyalties to local authorities which could hinder effective tax administration. But changing the current situation, even though a Federal Government prerogative, raises major political implications which cannot be ignored.

In some jurisdictions, Company Income Tax is on the concurrent list, to enable States compete with each other and attract investment as may be required for development. It is on the Exclusive legislative list in Nigeria. Some have argued that federalism in Nigeria should be seen from a distribution, and not from a collection, point of view, and that a central tax authority is therefore desirable especially for a system that strives for efficiency. Others have argued that federalism has to be seen from both a collection and distribution perspective, especially since what is collected is expected to be applied directly to where collection is sourced from. In such instances, care needs to be taken to ensure that the very rich States do not see this as a basis for secession.

One area of agreement is that fiscal federalism must support and align with all other forms of federalism for it to be truly seen in its proper perspective.

The current tax reforms of the Federal Government have not addressed this issue because of the political ramifications arising therefrom. In addition, these are not simple problems - their solutions would impact not only taxation but also the essence of how Nigerians live together in the same country.

The forthcoming Federal and State retreat is an opportunity to hopefully rest these issues once and for all. One hopes that the issues would be taken holistically rather than approached from a narrow form of Fiscal Federalism.

Ms Omoigui, is Chairman Joint Tax Board (JTB), and Executive Chairman of the Federal Board of Inland Revenue/Federal Inland Revenue Service.