By Prof. Kabiru Isa Dandago
Inheritance Tax has been working in the United Kingdom (UK) and some other countries of the world. It is a tax on wealth transferable from a deceased person to his/her heirs. It is imposed for some purposes, including tax revenue generation to government, wealth re-distribution and economic growth and development. Inheritance Tax was introduced in Nigeria by the Military administration of General Olusegun Obasanjo in 1979 and called Capital Transfer Tax, but it was repealed by the Military administration of General Sani Abacha in 1993, in view of the fact that the Tax was found to be contrary to the teachings of the two main religions in Nigeria (Islam and Christianity).
Capital Transfer Tax, which is purely an inheritance tax, was being charged on the wealth left behind by a deceased person for his/her heirs to inherit. It is not about the income earned by the death before he/she dies, but about wealth left behind by the death which is distributable to his/her heirs as per the teaching of a religion or a custom or a tradition in place. The law, Capital Transfer Tax Act, was to be applied on the wealth left behind by the deceased person and the tax payable deducted, before arriving at what the heirs would share among themselves, as per their religion, custom or tradition.
Section 4 of the CTT Act provides as follows: “In respect of every person dying on or after 1st April 1979 there is here imposed on the value of all property passing on the death of such person capital transfer tax at the graduated rates specified in section 18 of this Act”.
The CTTA then specified the categories of property that are deemed to pass upon death for the purpose of the capital transfer tax. Deductions allowed from the wealth left behind before charging CTT are in respect of cost of burial execution, legal expenses and other sundry allowable expenses. By the provision of Section 18 of the Act, the scale of rates of the capital transfer tax to charge on the net income or capital transferable to the heirs is given as follows:
First 100,000 .. .. .. .. Nil
Next 150,000 .. .. .. .. 10%
Next 150,000 .. .. .. .. 20%
Next 250,000 .. .. .. .. 30%
Next 500,000 .. .. .. .. 40%
Next 1,000,000 .. .. .. 50%
Any amount above N2, 150, 000 shall be taxed at the rate of 60%.
Capital Transfer Tax Act appears as a veritable source of tax revenue to government, especially when a “big elephant” dies. Assuming a deceased leaves behind wealth/estate worth N200m, and total burial, legal and other administrative cost of waving goodbye to him/her is 10m. The amount that would be subjected to CTT is N190m. The tax authority (state internal revenue service) where he was residing before his death would use the progressive rates of the Tax to determine what would be paid to the government out of the net wealth, as follows:
0% on the first 100, 000 = 0
10% on the next 150, 000 = 15, 000
20% on the next 150, 000 = 30, 000
30% on the next 250, 000 = 75, 000
40% on the next 500, 000 = 200, 000
50% on the next 1,000,000 = 500, 000
60% on the next 187, 850, 000 = 112, 710, 000 ((190, 000, 000-2, 150, 000) x 60%)
The total amount government would take out of the wealth left behind would be N113, 530, 000. The heirs of the deceased would be left with N76, 470, 000 (which is just about 40% of the net amount) to share as per the teaching of their religion or custom. Government takes about 60% in the name of Inheritance Tax!
As the wealth is taxed going by the progressive rates above, what would accrue to the heirs of the death might not be good enough for them to have a reasonable life after the death of their loved relations (father, mother, brother, sister, etc.). After all, in Islam, the sharing of inheritance has already been done by Allah Himself as per the appropriate verses in the Holy Qur’an, and there was no allocation at all from the inheritance to the government or any of its agencies in the name of tax, donation, levy, fee or any form of contribution (voluntary or compulsory).
As too much pressure was mounted on the government against the CTTA provisions, by religious and traditional leaders, and other concerned Nigerians, the government decided to abrogate the 14 year old law, in order to give peace a very good chance.
Here comes the Tax Reform Bills, and within the provisions of the Nigeria Tax Bill, which is one of the four Bills sent by the President to the National Assembly for legislation, there are some provisions that suggest the manipulative return of the Inheritance Tax or Capital Transfer Tax through the ‘Back Door’.
Chapter 2, Part 1, Section 4 (sub-section 3) of the National Tax Bill provides that “Income of a family recognized under any law or custom in Nigeria as family income in which the several interests of individual members of the family cannot be separately determined is chargeable to tax”. There are other mentions of family income or income of family in some sections of the Bill, as well as the Nigeria Tax Administration Bill.
The moment the inheritance wealth/estate of a deceased is ascertained, it becomes ‘…… family income in which several interests of individual members of the family cannot be separately determined’. The wealth has to be shared as per the agreed sharing ratio before every member of the family knows his/her share of the inherited wealth. It is clearly an income (or wealth) which is being recognized under some laws (for example Islamic law) and custom in Nigeria. For Islam, the sharing or distribution of that income or wealth left behind by the deceased has already been done by Allah, and government or its functionaries are not made part of the beneficiaries.
Government and its agencies (including tax authority) may have to await the sharing of the wealth as per the prescription of the Almighty Allah, for the time being, and then pursue the beneficiaries at a later time when they start using their share of the inherited wealth as capital for earning profit, income or gains, which are then to be subjected to appropriate taxes!
If we are to go by the progressive Personal Income Tax, as per the provisions in the Nigeria Tax Bill, using the example of the deceased ‘big elephant’ above, the wealth left behind (which would be taxable as a family income) is to be taxed as follows (assuming that the N10m presumed expenses would be allowed):
First 800, 000 at 0% = 0
Next 2, 200, 000 at 15% = 330, 000
Next 9, 000, 000 at 18% = 1,620, 000
Next 13, 000, 000 at 21% = 2,730, 000
Next 25, 000, 000 at 23% = 5,750, 000
Above 50, 000, 000 at 25% = 35,000,000 (140, 000, 000 x 25%)
Total income tax collectable from the net amount of N190m would be N45, 430 ,000, which is about 24% of the net wealth left behind by the deceased.
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Even though the negative effect of the “family income” tax (which is a sort of Inheritance Tax coming from the Back Door) is less than the full-fledged CTT that was abrogated in 1993, bringing back any element of inheritance tax to the Nigerian tax system will not augur well for the social, political and economic well-being of Nigeria. This is simply because of the fact that inheritance tax is against the teaching of the two main religions of Nigerians.
The taxman (and the treasury to which he generates revenue) might have to continue to mourn the huge figures he/she could be amassing from taxing the huge wealth left behind by deceased persons, while the prospective taxpayers (the family income earners) revel in the breathing space afforded by the dearth of inheritance tax (the CTT). The current regime for taxing the incomes and assets left behind by deceased persons in Nigeria appears to provide reasonable room for tax avoidance by the heirs. But when the ‘family income’ is shared to the heirs as per the acceptable sharing formula, it is expected that individual beneficiaries will inject their share allocations into the process of trade, business, profession or vocation from where income, profit, or capital gains could be generated for taxing.
This issue of re-introduction of Inheritance Tax (through the Back Door) in Nigeria, 31 years after its abrogation, needs to be given the critical assessment it deserves for appreciation of its consequences before it is too late. Already there are many notorious issues that are enjoying public debates, which suggest that there was weak engagements with relevant stakeholders before packaging the Bills for legislation by the National Assembly. Some of the other notorious issues in the public domain are:
(i) progressive increases in VAT rates, which are likely to attract continuous increases in prices of goods and services and, consequently, more hunger and poverty in the land;
(ii) sharing formulae of VAT revenue, especially the ‘Derivation allocation’ in the Horizontal formula, which is likely to favour some few states;
(iii) introduction of new Development Levy with decreasing rates of 4%, 3% and 2% chargeable on Assessable Profits of taxable companies over the relevant years and the allocation of the realized amount among four infrastructure development agencies, with the plan to stop patronizing 3 of the 4 agencies (TETFund, NITDA and NASENI) and to continue to fund only NELFund with the 2% Development Levy from year 2030 and thereafter, and the consequences of (a) pushing the 3 agencies to the mainstream budgetary system of the federal government, (b) systematic scrapping of the 3 agencies and (c) the likelihood of high indebtedness of students of public tertiary educational institutions to NELFund for tuition fees and living cost;
(iv) the squeezing of the country’s tax base/net and increasing of its tax rates; and
(v) the watering down of the many small and medium sources of tax revenues available to state governments (thereby grossly reducing their IGR) on the pretext of reducing multiplicity of taxes in the country.
As ‘hot debates’ are on-going on several controversial aspects of the four proposed Tax laws, I am of the view that the subject matter of his paper should not be taken for granted, so that as the Bills become Acts, nobody should complain against the re-emergence of Inheritance Tax in Nigeria!
I personally think the bill should be scrutinised before it is passed. Thanks.
Prof. Kabiru Isa Dandago PhD, FCA, FCTI, FNIM, FNAA, FFAR, ACS, MNES, AQIF
Department of Accounting, Bayero University, Kano-Nigeria
Kidandago.acc@buk.edu.ng, kidandago@gmail.com
