A CRITICAL ANALYSIS OF TAX SECTOR REFORMS IN NIGERIA FROM 1978-2012

CHAPTER ONE

INTRODUCTION

1.1         Background

The history of Taxation in Nigeria is traceable to the reforms initiated in the first decade of the 20^th Century in Northern Nigeria. The High Commissioner of the Northern Protectorate, Sir Fredrick Lugard issued the Stamp Duties Proclamation 1903 and followed it with the Native Revenue Proclamation in 1906¹. The Native Revenue Proclamation 1906 systematized all pre-colonial taxes that existed in Northern Nigeria by defining taxable rates, procedures for assessment and collection as well as penalties for default. This made away with the arbitrariness that was the case in the pre-colonial era and introduced the four certainties essential in modern tax practice: what to pay, when to pay, where and who to pay to. In this Thesis, Federal Inland Revenue Service shall hereinafter be referred to as ‗the Service‘, the Federal Board of Inland Revenue shall hereinafter be referred to as ‗The Board‘. The Federal Inland Revenue (Establishment) Act 2007 shall hereinafter be referred to as the ‗FIRS Act‘.

The amalgamation of the Northern and Southern Protectorate to form the colonial federation of Nigeria in 1914 led to the Native Revenue Ordinance 1917, which was extended from the Northern territories to the Western² and Eastern territories in 1918 and 1927 respectively. Since then, there has been a steady progress in that regime with various attempts to modernize, expand, reform and improve the process, procedure and sanctions inherent in the system of taxation in Nigeria. In 1943, the Nigerian Inland Revenue Department was carved out of the Inland Revenue Department of British West Africa³. This department was later renamed the Federal Board of Inland Revenue under the Income Tax Ordinance, No. 39 (1958). This was followed by the Companies Income Tax Act, No. 22 (1961) which established the Federal Board of Inland Revenue (FBIR)⁴: the Act created a Body of Appeal Commissioners to resolve Tax-related disputes. In 1993, the Finance (Miscellaneous Taxation Provisions) Act No. 3 and decree No. 104 established the Federal Inland Revenue Service (hereinafter FIRS) as the operational arm of the FBIR and reviewed the functions of the Joint Tax Board (hereinafter JTB), respectively⁵. However, the history of Tax Administration in Nigeria changed dramatically in 2007 with the enactment of the Federal Inland Revenue Service (Establishment) Act, 2007 (hereinafter FIRS (Establishment) Act) and the granting of financial and administrative autonomy to the FIRS. The passage of the FIRS (Establishment) Act 2007 was an actualization of one of the several reform initiatives that arose from the recommendations of the Study and Working groups on Nigerian Tax System.

In the past, attempts have been made to engineer the reform process though without much progress. The Federal Government has made four separate attempts to reform the tax system. In 1978, a Task Force on Tax Administration headed by Alhaji Shehu Musa was set up by the Federal Government and achieved the following:⁶ introduction of withholding tax regime, imposition of 10% special levy on the excess profits of banks, imposition of 2.5% Turnover tax on Building and Construction Companies. Also, in 1991 a study group on the Nigerian tax system and Administration headed by Professor Emmanuel Edozien was set up to review the tax system and make appropriate recommendations. In 1992 a study group on indirect taxation headed by Dr. Sylvester Ugoh was again set up by the government and they achieved the following⁷: the establishment of the Federal Inland Revenue Service (FIRS); the establishment of the Revenue Services at the three tiers of government; indirect/Consumption tax- Value Added Tax (VAT). Furthermore, the 2002 Study Group on the Nigerian tax system headed by Professor Dotun Philips was set up and they achieved the following⁸: centralizing tax administration with emphasis on tax administration, efforts to reduce tax rate and developing a tax policy for Nigeria.

The report of the Study Group, submitted in 2003, contained some other radical shifts in policy. This necessitated the Federal Government to set up a Working Group, headed by Mr. Seyi Bickerseth, to review the report of the Study Group on January 12, 2004. The Working Group⁹ which concluded their review in March, 2004, agreed with some of the suggestions of the Study Group and disagreed with some of these suggestions. The report of the Study Group was reviewed by the Working Group and the implementation of the harmonized report of the two groups commenced in 2004.

The implementation of the critical changes in the laws and institutions governing taxation and tax administration fell to the new board and management headed by Ifueko Omoigui Okauru, who was appointed as the Chairman and Chief Executive of the Federal Inland Revenue Service by President Olusegun Obasanjo in May 2004. This marked a new era in the history of both the legal and institutional processes of tax administration in Nigeria, bringing into place the modernization and reform practices which had never been attempted in the history of taxation in Nigeria¹⁰. The reforms include organizational reforms in funding, legislation, taxpayer education, dispute resolution mechanism, taxpayer registration, human capacity building, and automation of key processes, refund mechanism and several other areas, which are explained in this Thesis.

In essence, the outcome of these wide consultations has resulted in the ongoing radical and wide ranging reform of the FIRS and tax administration and policy in general in Nigeria. This throws up the urgent need for a concerted study into tax administration in Nigeria.