President Muhammadu Buhari signed the 2019 finance bill into law on Monday13th January 2020, the new finance bill alongside the 2020 Budget aside increasing government’s revenue is aimed at reforming Nigeria’s tax system to align with global best practices, support MSMEs through the Ease of Doing Business initiative.
What key benefits do MSMEs now enjoy?
The Micro, Small and Medium-scale Enterprises (MSMEs) are the backbone for accelerating inclusive, robust and sustainable economic growth in any economy.
According to a PwC report, the official report puts the total MSMEs in Nigeria at about 41.5 million (compared to 17.5 million in 2010) with Lagos, the nation’s commercial capital, accounting for a substantial proportion. In 2017, over 59 million people were employed by MSMEs (representing more than 86% of the national workforce) and the sector contributed about 49.8% of the national GDP. With a total number of about 17.4 million, they account for about 50% of industrial jobs and nearly 90% of the manufacturing sector, in terms of number of enterprises.
Despite the pivotal role MSMEs play in driving growth and development, they continue to grapple with key issues such as inadequate finance, multiple tax regimes, infrastructural deficit such as epileptic power supply.
According to the NBS SMEDAN MSME survey conducted in 2017, for most enterprises –both Micro and SMEs –personal savings was the most common source of capital. Nationally, only 49.5% of SMEs (that are sole proprietorships) reported having access to bank credit.
It is expected that with continued support in form of policy reforms and regulations aimed at improving market conditions, the MSME sector will grow further and develop in the coming years.
The Finance Bill seeks to introduce across-the-board changes to the various tax laws in Nigeria that would impact on MSMEs and their role in sustainable economic growth. The bill provides certain incentives for businesses in this category.
We present below the key amended provisions and the implications for MSME stakeholders.
Company Income Tax (CIT)
Based on the law, Small businesses with turnover less than N25m will be exempted from CIT while a lower CIT rate of 20% will apply to medium-sized companies with turnover between N25m and N100m. Small businesses may have to prove to their customers that they do not meet the threshold to avoid withholding tax deductions at source.
- Commencement and cessation rules have been modified to eliminate overlaps and gaps to avoid double taxation and complication during commencement.
- The restriction of carry forward of tax losses has been amended such that tax losses can be carried forward indefinitely. This is useful as startups who incur significant losses in the first few years of business can now carry forward tax losses against future taxable profits.
- Companies must now pay their CIT liability on or before the due date of filing in one lump sum; or in instalments agreed with the FIRS with the last instalment paid on or before the filing due date
- Companies will only be subject to minimum tax at 0.5% of turnover if turnover exceeds N25m.
- Companies that make CIT payment on or before 90 days from the due date for filing will be entitled to a bonus of 1% (for large companies with turnover greater than N100m) or 2% (for medium-sized companies with turnover between N25m and N100m).
Value Added Tax (VAT)
The VAT rate is now increase from 5% to 7.5%.
- VAT registration threshold of N25 million turnover in a calendar year to be introduced, this implies that SMEs that do not meet the threshold would not need to register for VAT and as a result would not be able to recover input VAT on their purchases
- Penalties for failure to register will increase to N25,000 for the first month of default and N20,000 for each subsequent month
- The meaning of supply and definition of goods and services has been expanded to cover intangible items other than land, among others
- Remittance of VAT now to be on a cash basis, that is, the difference between output VAT collected and input VAT paid in the preceding month.
- A clear definition of basic food item and definition of exported service as “service rendered within or outside Nigeria by a person resident in Nigeria to a person outside Nigeria” has been provided.
Other useful updates
Banks to request for Tax Identification Number (TIN) before opening bank accounts, while existing account holders must provide their TIN to continue operating their accounts
- Stamp duty on bank transfer to apply only on amount from N10,000 and above. Transfers between the same owner’s accounts in the same bank also to be exempted
- Increase in the threshold of online transfers liable to stamp duty of N50 from N1,000 to N10,000
- Taxation of foreign entities involved in digital transactions with significant economic presence in Nigeria.
- The scope for goods subject to excise duties based on the Customs Act now expanded to include “goods imported and those manufactured in Nigeria…”
- Under the new amendment, the SDA now defines ‘instrument’ to include “every written document including electronic documents”
It was intended that the Bill would be signed into law in December 2019 and take effect from 1 January 2020. However, there was a delay due to the need for harmonization of changes introduced by the Legislature and a further vetting process by the Executive. Technically the law takes effect from today unless a future date is stated when the law is published in the gazette. We however expect that the effective date will be in the near future (February 2020 or later) to enable smooth implementation by both the tax authorities and taxpayers.
The Finance Bill (now an Act) cannot be implemented based on speculations regarding its content and effective date. Therefore, changes will not take effect until the new law has been published in the gazette or otherwise officially made public
It is clear from these amendments that the government is trying to improve the fiscal policies and regulatory environment to stimulate growth in the MSME sector. However, there is also a deliberate effort to ensure that the sector contributes to revenue generation without excessive financial burden. An area of focus for the government would be to formalize these businesses through the TIN project in collaboration with the banks.
Although the definition of instruments for stamp duty has been expanded to cover electronic transactions to give legal backing to the Central Bank’s N50 stamp duty drive. The increase of the chargeable amount to N10,000 and above would reduce the challenges faced by SMEs and retailers who have recently transferred the N50 as an additional cost to their customers.
Majority of the incentives in the bill are targeted at SMEs, and we hope that this will improve the ease of doing business in Nigeria. Some other incentives that would impact the SMEs includes Export Expansion Grants and the Pioneer Incentives Schemes especially given that the effective tax rate for a small company will now be less than the personal income tax rate for an informal business owner. This presents an opportunity for many informal sector players to formalize their businesses.