It’s February 1, Nigeria begins implementation of its new Finance Act which is focused on boosting government revenue through a rise in the value-added tax rate while at the same time supporting small businesses in Africa’s biggest economy.
Nigeria has been trying to boost tax income as part of efforts to diversify its economy to reduce dependence on sales of crude oil.
But raising more money from taxes has proved difficult in a country where most small businesses are not registered. The government has repeatedly said it wants to boost non-oil revenue since oil sales make up 90% of foreign-exchange receipts.
Under the finance bill signed into law on Monday, VAT rates will rise from 5% to 7.5%, which is still one of the lowest rates in the world.
The bill, passed by parliament last year together with the record 2020 budget of 10.59 trillion naira ($34.6 billion), aims to help lift Nigeria’s economy from low growth following a recession four years ago.
Under the new law, the government will introduce a graduated tax scale for small businesses, with firms that generate less than 25 million naira ($70,000) in annual turnover exempt from corporate tax.
Tax experts say the finance bill will seek to tax companies with digital activities that have significant presence in Nigeria and generate profits.
The government hopes the new bill will help to reform its domestic tax laws and provide incentives for investments in infrastructure and the capital markets while supporting small businesses.
Nigerian Stock Exchange chief Oscar Onyema said on Monday he expects the new bill and 2020 budget implementation to have a positive impact on corporate earnings and consumer spending.
In most countries, there is an annual review of the tax code alongside the budgeting process, which allows for changes Into be made and our understanding is that the intention is for Nigeria to have a more regular review of its fiscal structures going forward.
Originally introduced in 2016/17 by former Minister of Finance Kemi Adeosun, the proposal faced challenges in the 8th Senate as part of the conflict between executive and legislature that characterized the first term of President Buhari.
The new Act raises VAT from five per cent to 7.5 per cent.
To allay fears that low-income persons and companies will be marginalised by the new law, reduce the burden of taxation on vulnerable segments and promote equitable taxation, the Finance Act 2019 has extended the list of goods and services exempted from VAT.
The additional exemptions include the following:
“Basic food items – additives (honey), bread, cereals, cooking oils, culinary herbs, fish, flour and starch, fruits (fresh or dried), live or raw meat and poultry, milk, nuts, pulses, roots, salt, vegetables, water (natural water and table water).
“Locally manufactured sanitary towels, pads or tampons.
“Services rendered by microfinance banks; tuition relating to the nursery, primary, secondary and tertiary education.
“Nigeria’s increased new VAT rate of 7.5 pe rcent is still the lowest in Africa, and one of the lowest anywhere in the world — South Africa VAT: 15 per cent; Ghana: 12.5 per cent; Kenya: 16 per cent; Egypt: 14 per cent; Rwanda: 18 per cent; Senegal: 18 per cent.”
Under Nigeria’s revenue sharing formula, 85 per cent of collected VAT goes to States and Local Governments.
This means that the bulk of additional VAT revenues accruing from the increase will go towards enabling States and Local Governments meet their obligations to citizens, including the new minimum wage as already noted by State Governors.
The Buhari administration had firmly resisted previous suggestions to raise VAT.
The new Finance Act exempts Businesses with turnover below 25 million from VAT payments.
Tagged 2020 Appropriation Bill, with a focus on “budget of sustainable growth and job creation”, was presented by the President to the National Assembly on the 9th of October 2019 along with the draft Finance Bill (which has now been passed into law as Finance Act) which is intended to effect crucial changes to the existing fiscal laws that will enable the Federal Government increase its revenue generation capacity .
The Appropriation Bill which was signed into law by the National Assembly on the 5th December, 2019 and assented by the President on the 17th December 2019.
Companies Income Tax (CIT) — under the new law small companies – companies with less than N25 million in annual turnover are charged Zero CIT.
“CIT for Companies with revenues between N25 and N100 million (described in the Act as “medium-sized” companies) has been reduced from 30 per cent to 20 per cent.
“Large companies with an annual turnover greater than N100 million will continue to pay the standard 30 per cent CIT.
“The new Act includes a provision that grants to all companies engaged in agricultural production in Nigeria, an initial tax-free period of five years renewable for an additional three years.
“The new Act also provides incentives to promote tax compliance through bonus reductions in CIT for early remittance:
“Two per cent bonus for medium-size companies; one per cent bonus for other companies.”
On Personal Income Tax, the new Act now includes electronic mail as an acceptable form of correspondence for persons disputing assessments by the Tax Authorities.
Contributions to Pension and Retirement Funds, Societies and Schemes are now unconditionally tax-deductible.
Stamp Duty Tax — with the new Act, the N50 Stamp duty charge is now applicable only to transactions amounting to N10,000 and above, a significant increase on the former threshold of N1,000.
The new Act expands the list of items exempted from stamp duty.
The new Act also makes provisions for Customs and Excise Tariff.
It stipulates that to reduce unfair advantages previously conferred on imported goods at the expense of locally manufactured ones, certain imported goods are now subject to excise duties similar to locally manufactured goods.