These reasons need to be addressed before the tax policy can be implemented effectively. Nigeria’s Minister of Finance, Mrs Kemi Adeosun, has hinted that the government is finalising the introduction of a new tax known as ‘Luxury Tax’. This is aimed at some luxurious consumption by the rich and wealthy in the country.
Mrs Adeosun said about the proposed tax and its need to ensure the country’s tax system is fair to all.
Quote
“The rich are obligated to pay, and this has nothing to do with whether taxing the rich will increase public revenue or not.”
“The problem currently is that those at the lower level are the ones paying. If the man in the traffic control, with little income will pay at source, why should we not pursue the billionaire or the trillionaire to pay out of the income? We need to change the mindset in the country with regards to the tax system,”
she remarked. However, many tax professionals have commented on the challenges that may render the policy ineffective.“The problem currently is that those at the lower level are the ones paying. If the man in the traffic control, with little income will pay at source, why should we not pursue the billionaire or the trillionaire to pay out of the income? We need to change the mindset in the country with regards to the tax system,”
According to Bitrus Baba of the PricewaterCoopers (PwC) Nigeria, there are issues around what class of items would be tax, need for studies and black market tax practice as major challenges this new tax faced during its implementation.
Here are some other reasons the new tax might not be effective in Nigeria.
1. Inadequate data on private individuals’ income
The inadequacy of data about the income of High-worth individuals would be the first challenges that the tax would face.
Though, the minister stated that many of the class of citizens have provided some needed information about their wealth through the Voluntary Assessment and Income Declaration Scheme (VAIDS), but information needed is more than that.
There are many cases of undisclosed ownership in purchase of many luxurious items or assets in Nigeria, hence making it difficult to track some transactions. Setting up a good commercial data capturing framework should put in place before commencement of the tax policy.
2. Problem of item classification and value that would make them taxable
Arriving at a general classification of items as luxury would be the next challenge facing the tax policy. This generalization would be deemed not proper based on relativity of need.
For some class of business in Nigeria, owning a Range Rover Sport is not a luxury but it may for a teacher. Thus, ascertaining the condition and value of supposed items that is a luxury would be great challenge for the tax policy.
3. Absence of study on luxurious consumption pattern of Nigerians
The absence of a study on the consumption pattern of Nigerians is one major setback for the policy. Over time, events have shown that luxurious items or article of ostentatious are not only owned by the rich. Many low-income people in Nigeria also own some of these items as well.
The government needs to first determine the consumption pattern of the people, and check if it is based on their income class or other social-economic factors. As this would help in the implementation of the tax policy.
4. Potential increase in black market patronage
In Nigeria, there is a black market for anything especially in the acquisition of government licenses. Therefore, the tax policy is noted would increase the patronage of many accountants and tax practitioners for illegal and other financial statements which would help reduce tax due.
This practice is common with import and excise duties. And it can be extended to income tax activities when this tax begins.
5. Infrastructural problems
The absence of needed infrastructural facilities to drive the process is one major challenge that the ‘Luxury Tax’ would face when the implementation begins.
Hence, the government should work towards ensuring all needed data frameworks are put in place before execution of the policy.
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