May 29, 2019 is a big day in Nigeria – most governors would begin to serve their mandates. We sincerely wish them well as they serve the Nigerian people across our nation. Traditionally, I expect many to issue statements early June, informing the citizens that most of those promises that got them to the government mansions may not be realizable because of funding paralyses in the state. Yes, we just met an empty treasury and did not know it was this bad before those promises of heaven-on-earth!
People – it is not a joke as only about ten states are deemed economically viable in Nigeria. Yes, most states would need help to meet their financial obligations to their citizens and workers. It is on this premise that I write: we want to provide supports to states towards deepening their IGRs (internally generated revenue). This is our proposal:
- Setup SME Growth Fund: We will work with a state to setup an SME (small and medium scale enterprises) Growth Fund. This fund can come from many sources including the state and our own funds. The primary motivation for this fund will be to help growing SMEs expand operations and employ more people in the state.
- SMEs to Adopt TAP Technology: With TAP (Touch and Pay Technologies) technology, all transactions, offline and online, will be digitally recorded. Only SMEs using TAP to collect and record revenues will qualify to tap into the SME Growth Fund. The fund will be setup in such a way that support will go only to companies with demonstrated track record via receipts of payments captured via TAP.
Our goal is simple: zero revenue leakage even on cash-based transactions whether you are in your shop or not. You sell garri, we capture all payments digitally. You sell mama put, all payments are recorded. You have okada riders riding for you, you get revenue visibility. You own a bus, you know how much the conductor collected. You run a shop, all transactions are captured live.
- Waive “Taxes” for users of TAP: The state should waive all taxes for users of TAP for the first five years for any SME with total annual revenue below $100,000 (i.e. N36 million). Yet, through TAP, states can efficiently collect VAT as SMEs will be encouraged to add VAT as their customers pay and all elements will be recorded.(Taxes, levies and fees under the control of states. On VAT, states can assume same contractual deals federal government gives to tax collecting bundlers; states do not control VAT but could help federal government with an arrangement.)
Implications
By waiving the corporate taxes even when collecting the VAT, the state could expand the tax base to make up for the losses on corporate taxes. Also, by making the use of TAP as a prerequisite to connect into the SME fund, a clear incentive will be for many to adopt receipted and digital-captured transactions with VAT tied to them in the informal economy. The clear benefits are:
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- The SME builds a credit and business record to access growth fund.
- State collects VAT and expands the taxpaying pool.
- SME will use actual business records to access more funds to grow, beyond the growth fund.
- Most informal economy participants become more integrated into the formal economy.
All Together
We will be happy to discuss this in more details with any state (or state agent or contractor) that has interest. Sure, we will earn income from small interest fees on the SME Growth Fund since it would be managed as a pure financial lending solution. With cashflow records used for loan making, we expect defaults to be very low. Also, we will also earn transaction fees for the use of our technology.
For the state, there will be a clear stimulated IGR base. Our model shows that we can triple the number of SME-compliant VAT collectors through this mechanism within 12 months. Also, the IGR of a state will at least double within the same period.
If interested to learn more, contact our team here.
Comment on LinkedIn Feed
Great idea prof, but the State will be lukewarm in accepting this proposal as VAT is only centrally collected and redistributed to all via FAAC, it is not what is obtainable in the US where states administer and manage VAT in their domain. Tax holiday from Corporate tax can only be granted centrally too through FIRS and not via State revenue agencies, The only taxes that the States will be interested in boosting would be PAYE which they majorly control and administered by the State Revenue agencies.
My Response – Adedeji – the use of “Governors” does mean it can facilitate many things with the federal govt. Largely, a state can be a very efficient vehicle to collect VAT and could be paid just the same way federal government is paying contractors. There is innovation here if we want to run a future-proof economy by bringing the informal sector in. With the incentives of injecting more cash into the business, many may connect. Besides the tax, a state has incentives to make SME support based on real cashflow – and that is where we are going with this.
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It will be very interesting and a welcome idea to see informal economy participants become more integrated into the formal economy. However, the state must be ready to think outside the box, or play as if there are no boxes in the first place. Well done Prof.