It is generally believed by economists that there is the need for minimal direct intervention by the government in resource allocation and development process.
The government intervenes through fiscal policies and instruments, such as taxation, public expenditure and regulation.
Tax, being one of these instruments, is a compulsory levy imposed by the government on its citizens in order to provide public goods and services and ensure their social and economic welfare.
The main taxes in Nigeria can be classified into two: direct and indirect taxes.
While direct taxes are charged on a tax payer‘s income, profits or other gains and are paid directly to the tax authority, indirect taxes are levied on spending and are charged when a taxpayer buys an item and the money is paid to the supplier as part of the purchase price of the item.
No doubt, the most potent fiscal instrument in Nigeria is taxation. It is so because not only does it facilitate the reduction of private consumption; it is also a weapon that is used to increase investment and transfer resources to the government for economic development.
However, experts still contend that there is the need for policy makers to reposition the nation‘s tax system for effectiveness
This, according to them, is imperative, considering the high level of tax evasion in the country.
But experts contend that payment of taxes could be made simpler and cheaper through effective tax planning.
The Institute of Chartered Accountants of Nigeria and the Chartered Institute of Taxation of Nigeria are both agreed that tax planning requires a detailed knowledge of tax legislation and its application to particular circumstances.
For instance, ICAN posits that tax planning involves taking into consideration the applicable tax legislation to ensure that the tax laws are properly complied with by tax payers such that the taxes due are paid as at when due.
In the same vein, CITN notes that it involves anticipating a set of circumstances and the identification of opportunities to minimise or defer tax liabilities within the law by arranging affairs in such a way that would ensure that the maximum allowances, exemptions and reliefs are enjoyed.
The Federal High Court gave credence to this in a case between the Federal Inland Revenue Service and American International Insurance Company, when it said, ”Tax is an obligation; not a duty. One is not a bad citizen if one can organise his business or trade in a legal manner to minimise his tax liability.
”He could resist, within legal means, any unduly wide interpretation or unconventional implication of legislative intent of a tax that might increase tax burden.”
In achieving this, the Managing Director, Global Access Consult Mr. Ismaila Yusuf contends that consideration should be given to the likely effects of the tax liabilities on the timing of the acquisition of fixed assets and their disposals.
Similarly, he also notes that the choice of the accounting date of a business entity can also have a significant effect on the tax payable by that business.
According to him, ”The impact of the commencement rules in the tax legislation on the taxable profits of the tax payer needs to be considered in tax planning before deciding on the tax payer‘s accounting date.
”One should also look out for vital areas such as the timing of the acquisition and disposal of fixed assets. This is important as it is a factor that would help to determine the amount of capital allowances to be claimed.
”Also, when assets are to be hired instead of outright purchase, there is need to consider the tax implication because in taxation, full hire charge is tax deductible.”
He adds, ”There is also need to know where to invest. For instance, when one invests in buildings, the tax payable is more, compared to investment in stocks and shares which is exempted from taxation.
”When computing tax liability, also consider current tax incentives such as investment tax credit, export processing zone allowance, pioneer status, gas industry incentives, among others.”
Yusuf, who is also a member of the Association of Certified Chartered Accountant of England, argues that tax planning is different from tax avoidance.
He says that tax avoidance, though legal, occurs where the taxpayer arranges his financial affairs in a form that would make him pay the least possible amount of tax.
When stretched to the limit, Yusuf says tax avoidance would make transactions to be lacking in substance.
”When this happens, the commercial effect of such transactions would be lacking, making the tax authorities to step in to disallow such transactions,” he says.
By Ifeanyi Onuba
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