VAT gaps need closing for enhanced revenue mobilisation

By Cynthia Ezekwe

The ideal benefits and importance of revenues generated in the form of tax has become imperative for developing economies to enhance the mobilisation of their internal resources for the enhancement of economic growth, and also to minimise the rates of fiscal deficits by ensuring effective implementation of an appropriate tax policy.

In Nigeria, Value Added Tax (VAT), a broad based business tax imposed at each stage of production and distribution process typically designed to tax final household consumption is an indirect  tax imposed on consumption of some specified goods and services which contributes to the economic development by influencing the rate of revenue accruable and the consumption rate the people.

The VAT Act requires manufacturers, wholesalers, importers, and suppliers of VATable goods and services to be registered within six months of commencement of business. The Federal Inland Revenue Service (FIRS) has the sole responsibility of VAT collection at the rate of 7.5 percent of the value of goods and services supplied.

Unfortunately, VAT administration and collection by the  revenue service has been subjected to  challenges including, inadequate VAT zonal offices, non-compliance of business owners, lack of transparency, evasion of VAT-able goods and services, inadequate workforce, amongst others.

This has resulted in a VAT gap in Nigeria, which according to a UN report into VAT gaps for 24 African countries in 2018, stood at 71.2 percent.

Soji Abolarin, managing director, Westmetro Limited, a leading provider of industry-focused Technology solutions, and advisory services, described the gap as alarming and a reflection of poor revenue generation in that aspect.  He added that the figure shows that about 72 percent of revenues that should accrue to the government is not being  remitted.

Abolarin, in a recent webinar hosted by KPMG themed, “Enhancing Tax Compliance Through Technology Sharing: The FIRS Experience”,  defined VAT gap as the difference between what is expected to be collected and the amount actually collected. He, however, noted that there has been an improvement over the last two years, especially with the introduction of TaxProMax.

The Westmetro MD identified some of the reasons for the huge gap in terms of VAT to include; underreporting, poor understanding of how VAT works, as well as  tax agents operating outside of the tax net.

Highlighting other challenges, the FIRS consultant said:

“We also have registered businesses, especially a sector like the hospitality sector, that are operating with a brand name that is different from their registered brand name. This  makes it significantly harder for the tax authorities to be able to keep track of such people.

“We also have the issue of  branch  management.  Of course, people just wake up and open a new branch without informing the tax management authorities. We also have the quality of records during retroactive audits/monitoring, which is accompanied with poor records.”

He further emphasised the lack of  software solutions, which calls for companies to check the type of software solutions that they use for resource planning and corporate management.

In order to adjust this, Abolarin noted that countries around the world are moving into what is known as Continuous Transaction Controls (CTCs).

According to him, CTCs are not only technological implements, but also a  legal and technological process that allows government and  relevant agencies to be able to build transactions in real time.

“Under CTCs, we have two things, one is called  electronic invoicing, and one is called fiscalization. Electronic invoicing has to do with the issuance of invoice electronically, but it does not only include invoicing, starting from the quotation,to when  actually register the payment; you also look at the documents that business uses to do the transactions. On the other hand, fiscalization is all about retail transactions,” he explained.

Abolarin noted that the Lagos State hospitality industry has a well detailed fiscalization law in Nigeria, adding that it speaks specifically on how federal receipts should be issued to customers.

On the journey so far, he pointed out that at about 2016/2017, Lagos State came up with its Fiscalisation  Act to cover for the construction tax in hotels, restaurants, and the model they used then was to include electronic to fiscal devices for the electronic sector.  He added that the project is still ongoing as there have been various forms of resistance to it.

“FIRS has also set up virtual fiscal devices in the retail sector, and of course we have what is called software fiscalization(API connections) in the hospitality sector,” he said.

On the challenges facing the innovative system, he said noted that since 2016  till now,there has been natural resistance   which has raised major concerns for  tax agents, with concerns bordering  on cybersecurity-threat to hacking, system compatibility which has to do with installation of third party devices or software, and then data privacy which has to do with threat to personal, proprietary and customer data.

“They are all valid concerns. In terms of cybersecurity, it is a global issue, because the more digital systems, the more the risk to your organisation. Adding this level of automation also exposes customers to different levels of risk. Also, installation of physical electronic devices or virtual devices will definitely be an issue overtime, due to the way systems are configured.

“We need to ensure that the right data is being sent to FIRS and not any type of personal identifiable information pulled out from the system,” he said.

Abolarin observed that the FIRS has so far been able to address the challenge through a system called the ATRS onboarding process.

On how it is being implemented, he said, “FIRS will first of all write to you and give you  30 days to comply, and all you need to do is to complete the form on the taxpayers platform. For FIRS to complete your tax integration,  all you need to do is to contact your software vendor to complete the integration on your behalf after  which FIRS issues a compliance certificate to you and  they continue to monitor and evaluate your device.

Talking about data privacy and protection, he noted that the data the FIRS requires includes tax identification number (TIN) of the tax agent, business place and device,the bill date and time, the bill number, the amount  of the transaction,the  total amount of the transaction, payment type, currency code, security code, and tax rate.

He noted that the  details of the transactions are very confidential as all transactional data needs to be secured. The above process, he explained, will help in the management of cybersecurity which needs to be understood by the general public.