THE IMPACT OF FINANCE BILL ACT 2020 ON BUSINESS IN NIGERIA
According to Stendord, Business is all those activities in providing the goods and services needed or desired by people. This implies that, business activities is an activities which tends to provide goods or services required and desired by people of a particular society.
Nigeria, just like every other country employ manual tax administration rather than a technology driven risk based approached tends to have problems. Due to this fact, companies that intends to do business in Nigeria and any other individual needs a professional tax and management advisor to help them in analyzing the impact that tax laws will have on their business.
Deleted: For a business to thrive in any country, using Nigeria as a study, the company must consider various tax provisions and the basic requirement for commencing and sustaining such business and those provisions that the business owner have to take cognizance of are the ones that the new finance act 2020 is based on Finance Act is an act of a legislature to acquire funds for the public treasury. It can also be said to be fiscal legislation enacted by the parliament containing multiple provisions as to taxes, duties, exemptions and reliefs at least once per year and in particular setting out the principal tax rates for each fiscal year.
Moreover, the impact of this act on Nigeria business must be critically analyzed and focus on. Last year (2019) Nigeria was ranked by World Bank as the 131st out of 190 countries on how easy it was in doing business here and also ranked as 159th country that have the simplest tax system and we have to note that, any country that have these two things (Ease of business and ease of paying taxes), no way their growth and development of national economies will not be influenced significantly.
Therefore, due to the focus on the growth and development of the Nation’s economy, the new finance bill must be able to impact business and the economy positively, largely in a very good way and little in the other way round.
Taking cognizance look at the objectives of the Finance bill Act of 2020 we will be able to deduce the fact that, the act will impact business in Nigeria, negatively and positively. Those objectives that might probably impact on business in Nigeria positively are: – (1) Supporting small businesses in consistent with the current ease of doing business reforms. (2) Introduction of tax incentives for investments in capital markets and infrastructure. (3) Promotion of fiscal equity by justifying instances of regressive taxation. And, those objectives that might probably impact business in Nigeria negatively are: (1) Raising of Revenue for the government. (2) Reforming domestic tax laws to align with global best practices.
Furthermore, in the process of analyzing the impact of Finance act 2020 in this article, we will be explaining how those aforementioned objectives negatively or positively impacted business in Nigeria.
POSITIVE IMPACT OF FINANCE BILL ON BUSINESS IN NIGERIA
President Muhamadu Buhari in July 2016, established the Presidential enabling business environment council (PEBEC) to implement reforms in the Nigeria business environment in order to make the country an easier place to start up a business operation and this bring about the implementation of the Finance Act 2020.
In the new finance bill, companies are categorized under both CITA and VAT, where any company with gross turnover that is not more than #25,000,000 was categorized as small company, and company with gross turnover withing the range of #25,000,000 to #100,000,000 was categorized as Medium-sized companies and large companies are companies with a gross turnover above #100, 000,000. Apart from this categorization, a new tax rate applicable to these various categories were introduce and the implication of this is that, small companies are exempted from paying CITA and will not also make VAT returns in respect of goods and services rendered. This will serve as a motivation for people to go into small businesses in the country.
Previously, new and existing business in Nigeria under commencement and cessation rules are faced with 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 shareholder the chance to benefits from the profits they earned during commencement and cessation. Likewise, prior to the implementation of the new finance bill 2020, dividend distributed (under Section 19 of CITA) by companies are been taxed before and not minding that the profits which the dividend are been dispersed has already been taxed; but after the finance bill implementation, shareholders are relieved by exempting distributed dividends from tax and this eliminate the issue of double taxation by the old provision.
Another impact of the Finance Act 2020 on business is the introduction of a VAT compliance threshold of #25,000,000 in annual taxable supplies will also have a positive impact on new business and other small companies because it tends to reduce the burden witnessed via compliance in the beginning of a business. Noting that, they are also exempted from penalties applied in VAT act for not complying.
Meanwhile, in the angle of agriculture sector, companies that are into agricultural production are now granted initial tax-free for five years and this can also be renewed for an additional three years which is subjected to satisfactory performance of their production. This impact positively on business in Nigeria, because more people are now willing to go into agri-business because of that incentive. Additionally, the Finance act tends to boost small and medium scale enterprises by way of reducing their tax burden. It tends to replace existing incentives with more targeted incentives to kindle economic activity in the infrastructure sectors and capital market.
In the business of Real Estate Investment Companies (REICs), the finance act 2020 exempt dividend and rental income received on behalf of its unit holders from Company income Tax, provided that a minimum of 75% of the dividend or rent earned is distributed within 12 months of the end of the financial year in which the income was earned. Analyzing this, this exemption will favor people into these types of business and make them to always distributed minimum of 75% dividend or rental income before the stipulated 12 months given in the finance act.
Also, life and non-life businesses would no longer be liable to special minimum tax provision and all wholly, exclusively, reasonably and necessarily incurred expenses will be tax deductible. Therefore, the act is a game changer in ensuring the fair taxation of insurance companies.
Thin capitalization and interest have been placed on foreign loans and this is the first time that such is been introduced. This act has limited the deductible interest paid by Nigerian Companies on loans from gotten from foreign lenders to a maximum of 30% of earnings before interest, tax, depreciation and amortization (EBITDA). This is channeled towards regulating the debt to equity ratio of companies and certifying that investors have the right mix of investment portfolio spread between debt and equity.
NEGATIVE IMPACT OF FINANCE ACT ON BUSINESS
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. Take a look at this instance, 1 minutes and 30 seconds call normally made for like #30 before now cost like 72 naira. That’s a way too much.
Another negative impact of this Act on business in Nigeria is that, when the act refers to significant economic presence, it fails to break down what it means and also gave Minister of Finance full powers to determine when and what digital services can be taxed. This decision might affect business 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 tax for that. Meanwhile, there is no global agreement on how digital business should be tax and this pose a big problem on this side of the act on business in Nigeria. Presently, as it is now, Nigeria don’t have serious digital tax plans because finance minister still has to define what criteria to be used for the potential tax.
One of the objectives of the new finance act that will really impact business in Nigeria negatively is increasing government revenue; there is no way government will want to increase their revenue by way of adding to tax rate or imposing tax on new stuffs that it won’t have negative impact on some set of business.
There are some imported goods that their custom, excise tariffs etc. are charged at the same rate locally manufactured items are charged (the aim is to create a level playing ground for local producers too), though, it will increase government revenue but its not favorable to the importer.
The application of stamp duties has a potential negative impact which may encourage cash payments or customers making multiple transactions under #10,0000 to products or services so as to avoid the charge.
Deleted: Furthermore, another amendment that impacts the debt portfolio of companies is the reduction in exemption of interest on foreign loans and this will make foreign lenders to loose appetite in granting loans to Nigeria companies which may definitely discourage long term loan investments. The services rendered by Microfinance Banks, fees paid for secondary, primary and nursery education is now VAT exempted but one way or the other in increase in VAT of others goods and services would still be borne by the masses in the form of higher price. And generally, VAT increase will leads to higher cost of production and investment which will be a burden pass on to the customers.
It is a known fact that, every new law comes with its own challenges and opportunities, existing businesses and potential investors should seek professional direction for them to be able to understand how the finance act will impact their operations by taking cognizance look at the requirements to be complied with, so as to enjoy the tax obligations.
The Nigeria tax legislation is now updated to respond to the challenges of today’s business environment which consequently stresses the importance of the Act. This act has been seen as the first of its kind for a long time. The Finance act contains so many changes to the tax framework which tends to solve the issue of low tax revenue growth and the introduction of deductibility rules which will favor businesses in Nigeria at the end.
All in all, the major negative impact of the finance act is that, final consumer bears the burden of the increase in VAT and not making businesses to be able to obtain credit for their VAT costs. Moreover, most countries that increase their VAT have a proper VAT system that avoids the problem that increase in VAT rate might bring.
Government said they want to encourage small business owners by exempting them from some tax; whereas they increased VAT, and this current VAT is making Nigeria to be close to Spilling sales structure which will definitely increase cost of production and cost of investment in Nigeria.
Finally, Nigeria’s SME’s are lacking capital and have poor access to finances and this constitutes a major constraint for business. And another challenges business is facing is the high cost of doing business and multiplicity of taxes and it’s all this problem that the new finance act eliminate and government must be aware that, any further increment in the VAT rate in Nigeria without taking cognizance look at this issue, it may be unfavorable to the economy.
Editorial Staff at Bulls Capital Limited is a team of Tax experts led by Matthew OGAGAVWORIA, FCA, ACTI. Trusted by over 500 Clients and counting.
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