Finance Act 2019 and its Impact on several sectors of the Economy Pt. I

By

Onwuchekwa Obinna Agwu, Esq.

On the 13th of January, 2020, President Muhammadu Buhari, GCFR, signed the Finance Bill, 2019 into law to become the Finance Act, 2019. Following that, the Honourable Minister for Finance, Budget and National Planning announced 1st February, 2020, as effective date for implementation of the Value Added Tax (VAT) rate increase from 5% to 7.5%.

The Finance Act, 2019 (“the Act”) is an all-encompassing draft legislation that amended 7(seven) substantive Tax Laws namely: Companies Income Tax Act, Value Added Tax Act, Customs and Excise Tariff Etc. (Consolidation) Act, Personal Income Tax Act, Capital Gains Tax Act, Stamp Duties Act; and Petroleum Profit Tax Act Cap P13, LFN 2004.

The Act reviewed the several tax provisions with a view to making them more responsive to tax reform. Also, the amendments made by the Finance Act are intended to raise necessary revenue required to meet the cost of public expenditure, increase public revenue and ensure that tax law provisions are consistent with the national tax policy objectives of the Federal Government of Nigeria.

The main objectives of the amendments made by the Finance Act are to:

a)      Promote fiscal equity by mitigating instances of regressive taxation;

b)     Reform domestic tax law to align with global best practice;

c)      Introduce tax incentives for investment in infrastructure and capital markets;

d)     Support small businesses in line with the ease of doing business reforms and;

e)      Raise revenue for government, by various fiscal measures, including, for instance, increase in the VAT rate from 5% to 7.5%.

This article shall be in five parts containing an in-depth analysis of the amendments contained in the Finance Act and the expected impact of these changes on businesses operations in various sectors of the economy.

In this part we shall attempt to give a brief summary of the Finance Act 2019 and its impact on Start-ups, Small and Medium Enterprises are identified below:

1.      SUMMARY OF THE FINANCE ACT, 2019

Exclusion/ exemption from Taxation under Companies Income Tax Act (CIT Act)

In a bid to prevent multiple taxation of a company’s profit, profits that are taxed under the Capital Gains Tax Act, Petroleum Profits Tax Act and Personal Income Tax Act are now excluded from taxation under CIT Act.

Also, the Finance Act, under section 9, expanded the categories of income exempted from Companies Income Tax. They include the profit of a small company; goods exported from Nigeria if the proceeds of such exports are used for the purchase of raw materials, plant equipment and spare parts; dividend and rental income of a Real Estate Investment Company (REICs); compensating payments amounting to dividends received by a Borrower in a Regulated Securities Lending Transaction.

Tax rates

Before the enactment of the Finance Act 2019, a general applicable tax rate of 30 kobo per naira (30% of their gross annual profits) was levied on all sizes of companies by the CIT Act. The Finance Act 2019 now provides that -

Small companies. That is Companies that makes annual turnover of less than N25 million will no longer pay Companies Income Tax.

 Medium companies. That is Companies that makes annual turnover of between N25 million and N100 million will now be taxed at 20% of their profits as CIT

Large companies. That is Companies that makes annual turnover of N100 million ad above will continue to be taxed at 30% of their profits as CIT

Installmental payment of tax

A company can now pay its assessed tax in several installments, by obtaining the approval of FIRS to pay in such number of installments and upon fulfillment of certain condition precedent.

Tax Exemptions on foreign loan

Tax exemptions of 100% no longer apply for interest on foreign loans. Under the Finance Act, the highest tax exemption allowed is 70% which applies to loans of above 7 years repayment period with not less than 2 years moratorium.

Taxable Foreign companies

Foreign companies (FCs) providing digital services to Nigeria or carrying on technical, management, consultant or professional services outside of Nigeria to a person resident in Nigeria; to the extent that such company has significant economic presence in Nigeria and profit can be attributable to such activity is now taxable. However, what amounts to ‘significant economic presence’ is to be determined by the Minister through an Executive Order.

Before now, the CIT Act was silent on tax for these categories of foreign companies. Thereby, giving rise to conflicting judgments both in favour and against taxing the above categories of foreign companies.

VAT rate now goes up from 5% to 7.5%

Who is required to pay VAT?

Persons whose business turnover falls below N25 million in a calendar year is exempted from paying VAT or filing VAT returns. In determining whether a person meets the N25 million threshold, the value of a taxable supply of a capital asset of the person; and a taxable supply made as a result of the person selling the whole or a part of its business or permanently ceasing to carry on business will be excluded.

TIN Requirements

Section 3 of the Act requires every company to have its own Tax Identification Number (TIN) which the company must display on all its business transactions and documentation; also, under s.8, forthwith, same will be required as a precondition for opening or maintaining a bank account.

Banking requirements

Banks and other financial institutions required to obtain TINs from customers before opening new accounts for business purposes and for continued operation of existing business accounts;

Electronic transfers of N10,000 and above are liable to stamp duty of N50.

Allowable deductions and non-allowable items under CITA

Interest on loans by foreign connected person is allowable provided it does not exceed 30% of earnings before interest, taxes, depreciation and amortization in the first six (6) years;

Dividends and mandatory distributions by Real Estate Investment Companies on behalf of its shareholders are now allowable deduction from tax provided they are approved by SEC;

Managerial and technical fees must comply with Transfer Pricing Regulations failing which they will not constitute an allowable deduction. Ministerial approvals (e.g. NOTAP approvals) are no longer a basis for determining allowable deduction;

Penalties prescribed in any Act of the National Assembly are not allowable deductions;

Tax or penalties borne by a company on behalf of another company are not allowable deductions.

Incentives

Companies in agricultural production are entitled to income tax holiday of 5 (five) years (renewable for an additional 3 years)subject to satisfactory performance;

The following additional items are now exempt from VAT:

? Locally manufactured sanitary towels, pads and tampons;

? Services by Micro Finance Banks, people’s banks and mortgage institutions;

? Tuition in nursery, primary, secondary and tertiary institutions.

2.     FINANCE ACT, 2019 AND ITS IMPACT ON MSME’s

One of the most exciting aspect of the Finance Act, 2019, is the tax exemption incentives provided to the Micro, Small and Medium Enterprise sector in Nigeria. It is expected that such incentives will positively impact on the growth and productivity of MSMEs in Nigeria and enhance their contribution to the nation’s Gross Domestic Production.

According to data from the National Bureau of Statistics, SMEs are responsible for employing about 84% of Nigeria’s labour force and contribute about 50% of the number of industrial jobs. The sector plays a dynamic role as the engine room for Nigeria’s development and industrialization and it contributes about 48% of Nigeria’s GDP at the moment.

Before the enactment of the Finance Act 2019, a general applicable tax rate of 30 kobo per naira (30% of their gross annual profits) was levied on all sizes of companies by the CIT Act; with exception to the manufacturing and agriculture businesses in their first 5–7 years that were allowed to pay tax at a reduced rate of 20%. Unfortunately, this incentive did not apply to start-ups, Small Enterprises and Medium-sized Companies. However, in line with the Federal Government of Nigeria’s commitment to encourage growth and development of the MSME’s, the Finance Act introduces a new progressive regime in CIT rate. Under the new tax regime:

a)      Small companies. Including Start-ups, small enterprises, that is Companies that makes annual turnover of less than N25 million will no longer pay Companies Income Tax subject to timely filing of CIT returns

b)    Medium scale companies. That is Companies that makes annual turnover of between N25million and N100 million will now be taxed at 20% of their profits as CIT

c)      Large companies. The Finance Act define Large Companies as companies that makes annual turnover of N100 million and above. They will continue to be taxed at the standard rate of 30% of their profits as CIT

Granting tax concessions or incentives on start-ups and MSME’s in general makes a lot of economic sense. It provides them with a significant reduction in operating or overhead cost and frees up additional capital for them to deploy into their business for growth and productivity. This will in turn result in greater employment opportunities across board whilst allowing the tax administration focus its additional resources towards harnessing tax revenue from the sectors of the economy that have the largest revenue presence.

The benefits of MSMEs to any economy cannot be overemphasized as they are easily apparent. For instance, they contribution to the economy in terms of output of goods and services, they create jobs at relatively low capital cost, especially in the fast-growing service sector and they are a vehicle for reducing income disparities. These palliatives are therefore welcome for the sector to deliver optimal benefits of sustainable growth and employment for the nation.