The Case for Indexing Taxes in Nigeria

Similarly, where an individual earned a particular amount in 2002, the individual has less disposable income today thanks to inflation, as the value will have less purchasing power. This situation affects investors and their investments, too. According to Section 12 of the Central Bank of Nigeria Act 2007, the Monetary Policy Committee of the Central Bank of Nigeria is tasked with the responsibility of ensuring price stability in Nigeria. Despite the measures proposed and adopted by the Monetary Policy Committee to tackle inflation, the annual inflation rate in Nigeria remains stubbornly high.

In Nigeria, both taxpayers and tax authorities feel the effects of inflation. Since the value of money changes over time, high inflation can affect taxpayers if taxes are not adjusted in line with the changing value of taxable income. When taxes are not adjusted, the real income available to the consumer or investor reduces. ‘Real’ in this context refers to the present value of the income in terms of its purchasing power as opposed to the value at a different time. Unadjusted taxes also affect tax authorities, the punitive effects of whose sanctions (placed in tax legislations) become eroded as inflation diminishes the monetary value of the sanctions.

To avoid these losses, a typical solution is to require taxpayers to pay taxes on their real income. This requires ensuring the tax rate reflects the real value of the income expressed in the tax legislation and not the income’s nominal value (typically expressed at a different time). This additional step is what is called indexing. Proponents of indexing argue that because of inflation, taxes should be adjusted to ensure that rates applicable to the taxpayers are adjusted in line with the real value of the profits and incomes, and not just the nominal values of these figures. Consider, for instance, a taxpayer made to pay seven per cent in personal income taxes on their first N300,000 in 2011. In 2020, when N300,000 has even less purchasing power, leaving the nominal tax rate at seven per cent of 300,000 naira (rather than increasing it to say seven per cent of 450,000 naira) effectively reduces that individual’s consumer income. This discrepancy exists because the tax rates remain fixed as the real value of income continues to fall.