Tax Implication for Micro Businesses (MSMES) under the Nigeria Finance Act 2020
Margaret Iember Tivlumun, ACA, NIM (CHARTTERED)
Finance and Tax Analyst
Abuja
Businesses that qualify as small companies are informal in nature. According to the collaborative National survey carried out by the National Bureau of Statistics (NBS); and Small and Medium Enterprises Development Agency of Nigeria (SMEDAN) in 2017, the informal sector (that is Micro businesses) account for about 99.8percent of businesses in the MSME category. Further revelation shows that only 10.6percent of these micro businesses are registered with the Corporate Affairs Commission (CAC) – mostly as business names (that is, non-limited liability companies). This Prompted the Federal Government of Nigeria to introduce an incentive by reducing the cost of business name registration to N5,000.00 for a period of more than six months. Among the small and medium enterprises surveyed, only 21 percent were registered as limited liability companies. Also, based on our analysis of the number of registered entities with the CAC, about 75percent are registered business names.
MSMES are the economic brain box for growth of most economies of the world, Nigeria inclusive. The collaborative National survey carried out by the NBS/SMEDAN in 2017 revealed that MSMES as the engine of Nigerian economy constitute over 90percent of businesses in Nigeria and employ about 60 million people. These businesses contributed about 49.78percent to Nigeria’s GDP in 2017. Based on the National Policy on MSME, businesses that qualify as MSME typically employ less than 200 people with assets base of less than N500 million naira. The overriding differentiator between micro, small and medium scale enterprises is the number of employees. However, under the Finance Act, a company that earns gross turnover of N25 million or less is defined as a small company and a company that earns gross turnover greater than N25 million but less than N100 million is defined medium-sized company.
President, Muhammadu Buhari signed the Nigeria finance bill 2019 (now Finance Act 2020) into law. The new legislation which became effective February 1, 2020 seeks to cut taxes for small businesses; while increasing Value Added Tax (VAT).
The essence of the new Finance Act is to:
- Enhance and Promote fiscal equality
- position local tax laws with international standards
- put in place tax incentives for investments in infrastructure and capital markets
- Encourage and support Small and Medium Scale Enterprises
- Increase Government revenues
Economically, the Finance Act has some tax implications on Micro Businesses (MSMES) which include:
Increase in VAT Rate
The Finance Act recently signed by the Federal Government of Nigeria increased the VAT rate from 5% to 7.5%. Conversely, some items were exempted from the new VAT to cushion the burden of taxation on vulnerable segments, and promote equitable taxation. These items include:
- Basic food items
- Natural and table water
iii. Locally manufactured sanitary towels, pads or tampons
- Services rendered by Microfinance banks
- Educational institutions’ tuition fees
The tax implication MSMES of increase in VAT rate on goods and services from 5 percent to 7.5percent would result in an increase in the cost of goods and services bought and sold by businesses.
Company Income Tax Exemption for Small Businesses
Company Income Taxes (CIT) are based on the gross profit that your business earns after subtracting operating expenses from gross revenue. The tax implication of this under the new Finance Act is that small businesses with annual turnover of less than ₦25 million are exempted from paying Company Income Tax.
Again CIT for businesses with gross profit between ₦25 million to N100 million has also been reduced from 30% to 20%. The benchmarked 30% will remain for Large Scale Businesses earning ₦100 million or above in gross profit.
NOTE: Businesses that pay their taxes on time will get a reprieve of 2% bonus for medium-size companies and 1% bonus for other companies.
Reduction in Stamp Duties Charges
With the new Finance Act, the ₦50 Stamp duty charge will now be applicable only to transactions amounting to ₦10,000 and above, a significant increase on the former threshold of ₦1,000. Some MSEs can now save more without payment of stamp duties. This is good for small business with daily profit margin of ₦, 1000. However those with Profit Margin of ₦10,000 and above will be charge the ₦50 for all their savings.
Mandatory Tax Identification Number to Operate Business Account
Another tax implication for MSEs under the Finance Act is that all businesses are now required to provide their Tax Identification Number (TIN) as a precondition to holding and maintaining a bank account in Nigeria. Existing account holders opened prior to the enactment of the Finance Act as at September 30, 2019 will be required to provide their TINs to continue operating such accounts.
The Finance Act has general provisions that would have good impact on MSMES as in: Businesses engaged in agricultural production to enjoy a tax holiday for a maximum period of 8 years (an initial period of 5 years with a possible extension of 3 years); those engaged in crop production, management of plantations and animal husbandry will benefit significantly from this provision; non-payment of excess dividend tax on distribution of dividend to shareholders; expansion of the VAT exempt list to include additional basic food items and raw materials for food processing
The new Finance Bill will affect every business owner one way or the other; directly or indirectly, regardless of scale. Therefore Small business owners should keep proper books of account as proof to claim the tax exemption as contained in the act.
