In our last edition of InsideTax publication, we explored the concepts of tax avoidance and tax evasion and the impact of tax leakages on government revenue. We also highlighted some ways through which tax evasion occurs in Nigeria.
In this edition, we will evaluate one common tax evasion scheme – sales suppression and explore the technology-based counter-measures prescribed by the Organisation for Economic Cooperation and Development (OECD).
Perpetrators of sales suppression aim at under-reporting sales and its corresponding profit and income tax liability. Sales suppression also has the impact of under-reporting value added tax. Specifically, sales suppression occurs when taxpayers do not record cash sales or transaction trails are altered or deleted with the use of electronic tools.
Generally, cash sales are considered synonymous with small and medium enterprises (SMEs) that constitute the informal sector. Considering that SMEs contribute more than half of Nigeria’s gross domestic product, one would have expected concerted efforts from tax authorities in tackling leakages from sales suppression in a cash environment. Ironically, we are not seeing this happening. This may not be unrelated to the fact that a large number of businesses in Nigeria are not registered for taxes in the first place. Since a significant portion of unregistered businesses operate in the informal sector, the approach for the informal sector should be geared towards expanding the tax net. This is one of the objectives that the recently launched voluntary assets and income declaration scheme (VAIDS) seeks to achieve.
Meanwhile, as a result of the cashless economy being implemented by the Central Bank of Nigeria (CBN), many business enterprises including SMEs are beginning to adopt technology tools such as online transfers and point of sale (POS) systems for receipt and payment of cash. This could be deemed good news for tax authorities on the premise that business transactions, which could have erstwhile been suppressed under the cash system, should increasingly become easier to track. Be that as it may, it is not yet ’jubilation moment’ due to the availability of electronic tools that can alter evidence of transactions by falsifying the electronic records of POS systems, according to OECD.
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