- The new taxes, charges and exemptions
By EMEKA EJERE
On January 13 2020, President Muhammadu Buhari signed the Finance Bill into law, thus making it an Act after it secured legislative approval. The new document amends 80 provisions across the companies’ income tax, petroleum profits tax, personal income tax, value added tax, customs and excise duties, capital gains tax and stamp duties.
This is the first time since the return of democracy in 1999, that a federal budget is accompanied by the passage of a Finance Bill specially designed to support its implementation and to create an enabling environment for business and investment by the private sector.
“We introduced the bill alongside the 2020 budget to reform Nigeria’s tax laws to align with global best practices, support MSMEs in line with our Ease of Doing Business Reforms, incentive investments in infrastructure and capital markets and raise government revenues”, President Buhari had tweeted shortly after signing the Bill.
The amendments made by the Finance Act are intended to raise necessary revenue required to defray public expenditure, support sustainable increase in public revenue and ensure that tax law provisions are consistent with the national tax policy objectives of the federal government of Nigeria
A closer look at Act reveals that although its objectives appear attractive for big and small businesses, they are tailored to rake in more revenue for the government. A case in point is the recent hike of Value Added Tax (VAT) to 7.5 per cent from the previous 5 per cent.
The Minister of Finance, Budget and National Planning, Mrs. Zainab Ahmed, said that the implementation of the VAT increase commences February 1, 2020, as all the necessary administrative procedures, especially the gazette of the Act by the Federal Ministry of Justice, would have been completed by then.
Besides, the finance law aimsto promote fiscal equity by mitigating regressive taxation, reform domestic tax laws and align with global best practices as well as introduce tax incentives for investments in infrastructure and capital markets.
It will also support micro, small and medium-sized businesses in line with government’s Ease of Doing Business reforms. It is expected that there will be more revenue to finance government projects in health, education and infrastructure.
Analysts are of the view that the finance law merits public support, provided the funds will be used to develop infrastructure and improve the quality of life of Nigerians.
The new Act has also made some changes to the Company Income Tax (CIT), Petroleum Profits Tax Act (PPTA), Personal Income Tax Act, Capital Gains Tax Act, Customs and Excise Tariff and Stamp Duties Act. Due to the removal of some tax exemptions and other incentives they previously enjoyed, the oil and gas sector will incur more operational costs.
Before now, oil companies enjoyed a five-year ‘tax holiday,’ accelerated capital allowance after the tax free period as well as tax-free dividends for five years. These incentives, which are also enjoyed by industrial projects that use gas, have been repealed by the new Finance Act.
Previously, under Section 60 of the Petroleum Profits Tax Act, withholding tax was not charged on dividends from upstream operations. Henceforth, dividends from upstream companies are subject to withholding tax at the prevailing rate of 10 per cent or 7.5 per cent if payable to recipients of a treaty country.
The new law has also taken into consideration the cost often incurred by oil majors by way of technical management and other professional services. Little wonder the Act allows a Nigerian recipient of such services to deduct withholding tax from the applicable fees.
Concerning the CIT Act, the law has introduced provisions that create a taxable presence for non-resident firms that are doing digital activities in the country, provided such companies have “significant presence” in Nigeria. This is meant to ensure taxation of companies with economic base in the country.
Analysts say it is laudable that small businesses will be exempted from company income tax, which is 30 per cent of the profit earned. The over 17 million small and medium-sized registered businesses will benefit from the largesse as only SMEs with over N25 million turn-over will pay.
The insurance industry is not an exception, because under the new Act, they can carry forward their losses almost indefinitely. This was not the case previously when they were restricted to carry forward such losses for only four years. Now, life and non-life insurance businesses will no longer be liable to special minimum tax provision.
At a recent two-day tax seminar organized by Okwudili & Co (Chattered Accountants) in Lagos, financial and revenue generation experts gathered to dissect the Finance Act with a view to educating stakeholders on how to adjust to the changes that will come with the amendment.
One of them, the immediate past executive chairman of Abia State Internal Revenue Services (AIRS), Dr. Udochukwu Ogbonna, noted that the upward review of value added tax (VAT), from 5 per cent to 7.5 percent, though a lofty idea, is coming at a wrong time.
Speaking on the topic, “Finance Act 2019: Understanding Underlying Challenges & Procedures To Counter Such Challenges”, Dr. Ogbonna argued that although the VAT in Nigeria is below the world average, the federal government should have made the economy more vibrant before increasing VAT which, he said, will lead to increase in prices of goods and services.
He, however, explained that if Nigerians want to be sincere to themselves “VAT is not supposed to affect everything.”
On the exemption of companies of N25 million or below turnover from the CIT, Dr. Ogbonna said though it will lead to reduction in revenue, it is intended to encourage Micro, Small and Medium Enterprises (MSME).
To counter the challenges associated with the exemption, Dr. Ogbonna called for widened tax net, increased close monitoring for total compliance and more collaboration between states internal revenue services and federal revenue service. He also urged the government to make concerted efforts in the provision of amenities like good roads and essentially power.
“If the tax net is widened, there will be no need to increase taxes”, Ogbonna said.
Arguing that the gesture may trigger off creative accounting in order to avoid tax payments, Ogbonna cautioned that tax authorities “must be upto their game to make sure proper books of accounts are kept.”
Reacting to the fact that losses of insurance firms will now be carried forward indefinitely as opposed to the four year restriction previously in place, Dr. Ogbonna said, “It is my view that a ceiling be made to the years that losses should be allowed, probably taking it up to 10 years against the previous 4 years..”
On his part, Dr. Patrick Modilim, former deputy general manager, Zenith Bank Plc who spoke on the topic: “Finance Act 2019: An Overview”, noted that it is laudable that small businesses will be exempted from company income tax, which is 30 per cent of the turnover, but expressed fear that it may lead to high rate of manipulation.
“Now, Medium and Small Scale Enterprises in Nigeria can focus on growing their businesses with little concern about taxes”, he said.
“However, there is a possibility that some investors may abuse this provision by setting up several companies to carry out similar businesses with earnings just below ₦25million or ₦100million in order to avoid paying tax or paying at a higher rate accordingly.
“In this regard, proper administrative regulations that would discourage such practice have to be in place. Furthermore, there is another band of tax rate that may have to be reflected – 5% or 10% for companies/income with withholding tax as the final tax.”
Modilim pointed out that the new Act creates an opportunity for the insurance companies to thrive because they can carry forward their losses almost indefinitely.
“This was not the case previously when they (insurance firms) were restricted to carry forward such losses for only four years. Now, life and non-life insurance businesses will no longer be liable to special minimum tax provision”, he said.
On the increase in VAT, Modilim said “This would increase government revenue generated from VAT while also increasing the financial burden on taxpayers.”
Alhaji Musa Mamman Kolo, chief executive officer, Armlink Ventures and former General Manager/GCFO, Continental Reinsurance Plc spoke on the topic “Finance Act 2019: Tax Incentives Embedded In Different Sectors.”.
He said the Finance Act 2019 is a welcome development as it will assist in the 2020 budget implementation and also affords government the opportunity to review and align tax laws with the nation’s current realities.
Kolo noted that the Act is aimed at curing the deficiencies of the major primary tax legislations by amending obsolete and contentious provisions, adding that this is a major aspect of the initiatives suggested by the President Enabling Business Environment Council (PEBEC)1and the National Tax Policy Implementation Committee.
He said, “Provisions of the Act have the capacity to boost the economy by stimulating the growth of micro, small and medium scale enterprises and encourage foreign direct investments.
“The bill is the first of its kind since Nigeria’s return to democracy in 1999. It is expected that the Executive will continue the practice of submitting a Finance Bill along with the Budget to the National Assembly in subsequent years in accordance with global best practice.”