TAX BENEFITS TO SMES UNDER THE FINANCE ACT 2020
Margaret Iember Tivlumun
Margaret Iember Tivlumun, ACA, NIM (CHARTERED)
Finance and Tax Analyst
The Finance Act is a comprehensive amendment of seven (7) different tax laws, which include: The Companies Income Tax Act, Cap C21, Value Added Tax Act, Cap. VI, Customs And Excise Tariff, Etc. (Consolidation) Act, Cap. C49, Personal Income Tax Act, Cap. P8, Capital Gains Tax Act, Cap. C1, Stamp Duties Act, Cap. S8, Petroleum Profit Tax Act, Cap. P13, Laws of the Federation of Nigeria, 2004 to provide for the review of tax provisions and make them more responsive to tax reform.
The primary reasons for the wholesale amendments to the various tax laws are for the government to raise revenue by increment of some tax rates, blockage of avenues where tax avoidance could be legally deployed to refrain from payment of taxes, clarification of ambiguous tax provisions by clearly defining and bringing the desired economic activities within the tax nets and expanding in some instances the bases of activities that are taxable.
What then are the tax implication of the Finance Act 2020 on both direct and indirect tax regime on small and Medium Scale Enterprises in Nigeria?
THE COMPANIES INCOME TAX ACT
The good news is that small and medium-sized Enterprises are major beneficiaries of the amendments. This is to the effect that Companies are categorized for the purpose of corporate tax liability under the Finance Act 2020 by annual gross turnover.
Therefore, a small company is defined (Finance Act 2020) as a company which has an annual gross turnover of N25, 000, 000.00 (Twenty Five Million Naira) and below. Such a company does not pay Company Income Tax. A medium-sized company is defined as a company having an annual gross turnover of over N25, 000,000.00 (Twenty Five Million Naira) per annum but below N100, 000, 000.00 (One Hundred Million Naira). Such a corporate pays Companies Income Tax at the rate of 20%, while a large company is defined as a company that is neither a small company nor a medium-sized company and pays Companies Income Tax at the extant rate of 30%. Gross turnover is defined as the gross inflow of economic benefits (cash, revenues, receivables, other assets) arising from the operating activities of a company, including sales of goods, supply of services, receipt of interest, rents, royalties or dividends.
Companies Engaged in Agricultural Production
The Act section 10 amended Section 23 of CITA to pave way for agric business tax incentive. The Act in Section 10 (1C) provides that; any company engaged in agricultural production shall be granted the following incentives in addition to other incentives in the Act-
- an initial tax free period of five years which may be subject to satisfactory performance of agricultural production, be renewed for an additional maximum period of three years, and
- such company cannot be granted similar incentive under any other Act in Nigeria.”
This is indeed good news for Agric businesses as this is done to increase participation in agriculture in Nigeria so as to ensure food security.
VALUE ADDED TAX ACT
The Finance Act provides for a VAT rate increase by 50%, i.e., from 5% to 7.5%. In furtherance to the analysis provided by KPMG, the rate increase, when combined with other VAT-related changes, is expected to increase VAT revenue significantly. However to Cushion the impact of the revised VAT rate increase to 7.5% and facilitate economic growth and development through SMEs, the Finance Act introduces palliative measures for micro and small enterprises. One of the palliative measures is the introduction of a VAT compliance threshold. The threshold is to exempt companies with an annual turnover of N25, 000,000 or less from registering for the tax, charging the tax, rendering a monthly return of its sales and purchases and from the penalties prescribed by the Act for non-compliance with the administrative provisions. It is expected that, by introducing a VAT compliance threshold, the cost of tax administration will reduce because the FIRS can now focus its compliance monitoring efforts on large businesses only. When combined with an increased VAT rate, increased tax yield may be achieved on an overall basis. This measure also encourages many more companies to come voluntarily into the formal tax net for the purpose of non services and supply thereof cannot attract VAT.
The tax implication of this is that small businesses, individuals, entities and other taxable persons whose taxable supplies or projected taxable supplies fall without this threshold are not caught by this provision. Despite the widely held view that anyone who does not fall within the threshold above is exempted from registering, remitting, issuing tax invoice and collecting VAT, the correct position is that such individuals and entities are to register and file their returns monthly.
Elimination of Ambiguity as to the Definition of Goods and Services
The amendment to the Value Added Tax has also eliminated any ambiguity as to the definition of goods and services as well as what constitute exported service, basic food items and taxable supplies. While there has been a lot of ambiguity on this issue, for instance, that sanitary towels, pads and tampons are not liable to Value Added Tax, the correct position is that this is qualified. The Act provides, as it relates to such product- category, that only “locally manufactured sanitary towels, pads or tampons” enjoy such non-taxable status. While a 50% increment in VAT for those in the threshold is huge and since it is a multi-level, consumption tax which is ultimately passed down to the final consumer, the fact that the list of exempted goods and services is expanded is a commendable act.
By and large, the innovations to categorizing companies for the purpose of corporate tax liability under the Finance Act 2020 by annual gross turnover, introduction of palliative measures for micro and small enterprises such as VAT compliance threshold with exemption to companies with an annual turnover of N25, 000,000 or less from registering for the tax, charging the tax, rendering a monthly return of its sales and purchases and from the penalties prescribed by the Act for non-compliance with the administrative provisions as well as incentives to agric business is a step in the right direction .
