By By Kingsley Adegboye
A front line real estate developer and Managing Director and Chief Executive Officer, Propertygate Development and Investment Plc, Mr. Adetokunbo Ajayi, in this interview with Vanguard Homes & Property reviews the essence of taxation and how non-compliance with taxation rules by many operators in the real estate sector of the economy, coupled with government’s lethargy towards enforcement, have created loopholes for unfair advantage at the expense of responsible corporate citizens.
What is your assessment of Government’s approach to economic management?
One of the visible actions of the current administration is the drive to increase public revenue and diversify income sources. These are major high points on their agenda. These became more pressing when the country entered recession. Learning the hard way that over-reliance on oil revenue is not sustainable; government at federal and state levels have heightened the drive in collection of tax revenue at an unprecedented tempo.
But in Nigeria, there is always apprehension on the subject of taxation as individuals and organisations tend to believe that taxation is more of extortion than revenue source…
There is usually an atmosphere of anxiety with respect to the impact of tax drive on businesses including real estate. However, on the assumption that the tax authorities will follow due process and the laws in their drive, one can say there should be no cause for anxiety. In any case, the current position is that businesses are normally required by law to pay tax.
While parting with funds in form of taxes may be burdensome to businesses, the positive side is that when the government deploys such funds for good uses such as providing critical infrastructure for businesses to thrive and security among others, the benefits of such payments can be quite satisfying.
In addition, there is a positive side to government’s awakening to its tax enforcement responsibility. A weak enforcement regime where few are compelled to pay taxes and majority allowed to carry on their businesses without paying taxes creates an unfair competition.
As a real estate developer, what is your assessment of compliance with payment of tax in Nigeria?
As an incorporated real estate development company, there are numerous obligations the tax authorities expect from you. You are required to deduct applicable withholding tax from contractors, consultants and suppliers on your projects and pass them to government.
When contractors, consultants and suppliers know that you will deduct, they typically mark up their prices to accommodate the WHT deductions. You are also expected to deduct value added tax (VAT) from your sale price. If two companies produce similar real estate products and all other cost of production remain the same, the company that is tax-compliant will have higher production cost than the other company that does not pay WHT and VAT. This gives the tax-evading company an advantage over the tax-compliant one.
Are you saying that ineffective compliance with payment of tax encourages unfair advantage in some quarters?
It does create an unfair advantage. The overall business cost of the tax evading company is lower. They have a comparatively lower wage cost, as staff would have demanded for more pay if they were deducting personal income tax and other statutory deductions. In addition, they pay little or no corporate income tax and education tax on their profit before tax.
The overall implication is that the tax-evading company, producing exactly the same quality of real estate products with a tax-compliant company, can mark their sale price down by up to 30% in view of these unwholesome gains, thus securing a huge market advantage.
When this situation persists, the tax-compliant operators may not see the need to continue on the right path since other operators are getting away with fortune, while they struggle. If the tax-compliant company still intends to stick to the right path, it may be compelled to withdraw from the market, as it may not be able to compete.
The system has succeeded in rewarding crookedness and the entire society suffers! As a practitioner in real estate, you see this unfair advantage played out in other areas to the detriment of those who want to do the right thing.
For instance, when it comes to development matters and planning regulations, you see the non-compliant operators having clear advantage.
How does this affect competition for development opportunity?
The non-compliant operators indulge in gross and brazen violation of setback, density and land use rules. When competing for a development opportunity with them, you may lose out because you will not be able to come up with as much development units as these non-compliant operators who disregard density and setback rules. Similarly, you may not be able to produce retail outlets on purely residential parcel. The non-complaint operators win, and typically they get away with these infractions.
Unfortunately, you may also lose out as rules-complying operator when competing for tract development. While you are insisting to the potential partners (usually land owners) that estate layout be produced, your competitors are not that mindful.
There have always been controversies on the issue of compliance with layout in Nigeria as most houses are built at variance with the approved layout. What is responsible for this?
Producing estate layout requires that part of the land will go for infrastructure, landscape and other facilities. The land owners want more land for development, disregarding critical minimum standard that will make for good built environment. While you are still pontificating on the need for standard, your competitors are already on site clearing. Usually there are no adverse consequences to them.
The situation of uneven playing field is further compounded by unaccountable operators (typically individuals), who are usually in gross violation of planning rules and their tax responsibilities. Unfortunately, the market that is buying cares more about pricing and not about the ethical standard of an operator.
You notice a similar situation even among building materials’ vendors where vendors of quality and standard materials have left the market or have joined the non-compliant out of necessity to continue in business.
