Impact of the Finance Act 2020 on Small Businesses in Nigeria.
- Exemption of Small Companies from Payment of Tertiary Education TaxSection 1 (2) of the tertiary education trust fund act has been amended to include a provision that provides for the exemption of small companies from the payment of Tertiary Education Tax (‘’TET’’) which is chargeable at 2% on the assessable profit of a company registered in Nigeria. The Finance Act, 2019 had introduced an exemption for small companies (i.e. those with gross turnover of not more than #25million) from CIT but they were not exempted from TET. This exemption has now addressed this issue and should reduce the tax burden on small companies.
- Introduction of additional items exempt from value-added tax (VAT)
The Financial Act 2020 has introduced new items to the VAT exemption list as follows:
- Commercial aircraft, commercial aircraft engines, commercial aircraft spare parts
- Airline transportation tickets issued and sold by commercial airlines registered in Nigeria
- Hire, rent, or lease tractors, plows, and other agricultural equipment for agricultural purposes.
These exemptions are significant especially for companies in the transportation and agricultural sector who will now transact without the additional financial and compliance burdens of VAT on those items. It is expected that there will be a boost in these industries and by extension, in the Nigerian economy.
- Even though not elegantly worded, the Finance Act provides that small businesses (i.e. with a turnover of N25million or less) are exempt from CIT, whilst medium-sized companies (i.e. with a turnover greater than N25million but less than N100 million) are to be taxed at a reduced rate of 20%.
The timeline for payment of CIT has now been aligned with the due date for filing tax returns — 6 or 18 months after the accounting year-end for old and new companies, respectively — and CIT may be paid in a lump sum or in installments, with the approval of the FIRS. Furthermore, large and medium-sized companies who remit CIT 90 days before the due date will, respectively, be granted 1% and 2% of the CIT paid as a credit against future taxes. This will serve as a motivation for people to go into small businesses in the country.
- Previously, new and existing businesses in Nigeria under commencement and cessation rules are faced with the risk of paying income tax twice or more on the same income due to the rules been applied initially. But after the amendment, this risk has been eradicated and this will definitely reduce the tax exposure of the companies and give shareholders the chance to benefits from the profits they earned during commencement and cessation.
- Another impact of the Finance Act 2020 on businesses the introduction of a VAT compliance threshold of #25,000,000 in annual taxable supplies will also have a positive impact on new businesses and other small companies because it tends to reduce the burden witnessed via compliance at the beginning of a business. Noting that, they are also exempted from penalties applied in the VAT Act for not complying.
- A major negative impact of the new finance bill on business in Nigeria is the increase in VAT rate; initially the VAT rate 5% but now that it is now 7.5%, there will be an adverse effect on the cost of VAT-able goods and services that are been consumed in Nigeria. For example, telecommunications companies now added the VAT to any call made by their customers which now increase the charges on every call made with like 50% increment
- Also, when the act refers to the significant economic presence, it fails to break down what it means and also gave the Minister of Finance full powers to determine when and what digital services can be taxed. This decision might affect businesses especially application stores, electronic data storage, social media, e-commerce platforms, etc. This can also imply that businesses that used social media means (like Facebook etc.) to advertise their products will also be a tax for that.
- In line with the ease of doing business and in accordance with CAMA 2020, small companies were exempt from the requirement to appoint auditors. Effectively, small companies are no longer required to prepare audited financial statements which is a requirement for filing annual corporate tax returns with Federal Inland Revenue Service (FIRS). Consequently, the finance act 2020 introduced an amendment to section 55 of CITA by introducing a new sub-section 7 which empowers the FIRS to issue a notice specifying the forms of accounts to be included in the tax returns of small companies. This implies that the cost of engaging the service of an auditor has been eliminated for SMEs