THE IMPACT OF FINANCE ACT, 2019 ON BUSINESSES IN NIGERIA
By Ayoade Apelegan
The Finance Act is a fiscal policy statement, which shows how the Government intends to finance budgeted expenditure and achieve other socio-economic objectives.
The Finance Bill 2019, which was submitted to the National Assembly by President Muhammadu Buhari alongside the 2020 Appropriation Bill, and signed into law by the president on January 13, 2020, has among others the following objectives:
1. To promote fiscal equity by mitigating instances of regressive taxation.
2. Reforming domestic tax laws to align with global best practices.
3. Introducing tax incentives for investments in infrastructure and capital markets.
4. Supporting Micro, Small and Medium-sized businesses in line with the administration’s Ease of Doing Business Reforms.
5. Raising Revenues for Federal, State and Local Governments.
The Finance Act, 2019 also saw changes to some tax laws. This article examines some of those changes.
VALUE ADDED TAX (VAT)
The Finance Act, 2019 saw an increase in the rate of VAT on goods and services from 5% to 7.5%. A taxable person shall upon commencement of business, register with the Federal Inland Revenue Service (FIRS) for Value Added Tax (VAT).
Remittance of VAT is now on a cash basis, rather than an accrual basis.
Businesses with turnover below ₦25,000,000:00 (Twenty-five Million Naira) are exempted from VAT payments, while VAT registration is compulsory when a business crosses the VAT threshold which is ₦25,000,000:00 (Twenty-five Million Naira).
Paragraph 4 (Section 37 of the Finance Act, 2019) states: “Where a person to whom taxable supplies are made in Nigeria is issued an invoice on which no tax is charged, such a person shall, self-account for the tax payable and remit the output tax to the service…”
The implication of this is that a small company is exempted from output VAT i.e VAT on the sales invoice.
However, if a small company is involved in a transaction with a large company, the small company is expected to pay VAT on the purchase invoice but if a small company is involved in a transaction with another small company, VAT would not be paid by either of the small company.
It is expected that the increase in the rate of VAT would result in a general increase in the cost of goods and services.
The Finance Act also included some additions to the list of VAT-exempt goods and services.
The additional exemptions include the following:
- Locally manufactured sanitary towels, pads or tampons.
- Basic food items
additives (honey whether raw or semi-processed)
bread (white and brown)
cereal e.g. maize, rice, wheat. Millet. Barley, sorghum, oats, fonio, finer millet and others of the same kind, however, supplied in such form as grain, flour, crop, bulk or retail, raw or semi-processed
cooking oils e.g. vegetable oil, soya oil, palm oil, groundnut oil, shea butter, beniseed oil, live oil coconut oil and others of the same kind: provided that they are of a type and grade suitable for culinary purposes and do not contain any substance such as perfume that will make them unsuitable for culinary use
culinary herbs e.g. curry, thyme, onions, ginger, mint and others of the same kind, raw and unprocessed for human consumption
fish of all kinds other than ornamental whether live, fresh, frozen, smoked or dried
flour and starch e.g. cornflour, plantain flour, cassava flour, beans flour, wheat flour, rice flour, yam flour, garri and others of the same kind, bleached and unbleached, refined or unrefined provided that it is suitable for culinary purposes
fruits e.g. pineapples, oranges, mangoes, guavas, grapes frits, banana, pawpaw and others of the same kind, whether it is fresh or dried
live or raw meat and poultry e.g. beef goat, lamb, pork, chicken, and others of the same kind, whether live, butchered, complete, in parts, fresh, frozen, eggs and others of the same kind
milk (fresh, liquid and powdered)
nuts e.g. groundnut, walnut, cashew nut, hazelnut, kola nut, tigernuts, coconut and others of the same kind, if raw and unprocessed for human consumption, also roasted, fried, boiled, salted or in their shells
pulses e.g. beans, lentils, peas, chickpeas, tamarind and others of the same kind, if raw and unprocessed for human consumption, also roasted, fried, boiled, salted or in their shells
roots e.g. yam, cocoyam, sweet and Irish potatoes, water-yam, cassava and others of the same kind, in raw and unprocessed form, also, in form of flakes or flour for human consumption
salt for culinary use only including fine salt and in retail packs but excluding industrial salt
vegetables e.g. pepper, melons, lettuce, okro, cabbage, carrots and others of the same kind, whether fresh, dried or ground
water i.e natural water and table water e.g. spring water, rainwater, pipe-borne water, well water and all-natural water of the same kind, all table water other than sparkling or flavoured water.
The list of VAT exempt services was expanded to include;
Services rendered by microfinance banks; tuition relating to the nursery, primary, secondary and tertiary education.
Exported service means a service rendered within or outside Nigeria by a person resident in Nigeria, to a non-resident outside Nigeria.
a) all forms of tangible properties that are movable at the point of supply, but does not include money or securities
b) any intangible product, asset or property over which a person has ownership or rights, or from which he derives benefits, and which can be transferred from one person to another excluding interest in land
Services mean anything other than goods, money or securities which is supplied excluding services provided under a contract of employment
Failure to notify of change of address or permanent cessation of trade or business
A taxable person who fails to notify the Federal Inland Revenue Service of any change of address within 30 days of such change, or who fails to comply with the requirement for notification of permanent cessation of trade or business is liable to pay;
₦50,000:00 (Fifty Thousand Naira) for the first month in which the failure occurs,
₦25,000:00 (Twenty Five Thousand Naira) for each subsequent month in which the failure continues.
Failure to submit returns to FIRS
A taxable person who fails to submit returns to the Service (FIRS), is liable to a fine of ₦50,000:00 (Fifty Thousand Naira) in the month of default and ₦25,000:00 for every month in which the default continues.
TAX IDENTIFICATION NUMBER (TIN)
The Finance Act mandates every company to have a Tax Identification Number (TIN), which shall be displayed by the company on all business transactions with other companies and individuals and on every document, statement, returns, audited account and correspondence with revenue authorities, including the Federal Inland Revenue Service, Ministries and all Government Agencies.
Also, all new companies and businesses are now required to provide their Tax Identification Number (TIN) as a pre-condition for opening a bank account or, in the case of an existing account, the TIN shall be provided to the bank for the continued operation of their bank accounts.
COMPANY INCOME TAX (CIT)
Under the new law (Finance Act 2019), companies are categorized for the purpose of corporate tax liability by annual gross turnover.
A small company is defined as a company which has an annual gross turnover of ₦25,000,000.00 (Twenty Five Million Naira) and below. Such a company is exempted from paying Company Income Tax.
A medium-sized company is defined as a company having an annual gross turnover of over ₦25,000,000.00 (Twenty Five Million Naira) per annum but below ₦100,000,000.00 (One Hundred Million Naira). Such an entity pays Companies Income Tax at the rate of 20%.
A large company is defined as a company with an annual turnover greater than ₦100,000,000.00 (One Hundred Million Naira) and it pays Companies Income Tax at the rate of 30%.
Gross turnover is defined as the gross inflow of economic benefits (cash, revenues, receivables, other assets) arising from the operating activities of a company, including sales of goods, the supply of services, receipt of interest, rents, royalties or dividends.
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 subject to the determination of the satisfactory performance of such company.
The new Act also seeks to promote tax compliance through bonus reductions in CIT for early remittance:
Where a company pays its tax 90 days before the due date, such company shall be entitled to a bonus of;
a) 2% if such company is a medium-sized company;
b) 1% for any other company;
on the amount of tax paid which shall be available as a credit against its future taxes.
Companies must now pay their CIT liability on or before the due date of filing in one lump sum, or in instalments agreed with the FIRS with the last instalment paid on or before the filing due date.
Tax losses can be carried forward indefinitely. This is useful as startups who incur significant losses in the first few years of business can now carry forward tax losses against future taxable profits.
The commencement rule which before now applied to new business where there is a right of an election has been abolished.
The assessable profits of any company from any trade or business (or in the case of a company other than a Nigerian company) for its first year of assessment and the two following years of assessment shall be ascertained by the following provisions:
a) for the first year, the assessable profits shall be the profits from the date in which it commenced to carry on such trade or business in Nigeria to the end of its accounting period,
b) for the second year, the assessable profits shall be the profits from the first day after its first accounting period to the end of its second accounting period; and
c) for the third year and each subsequent year, the assessable profits shall be the profits from the day after the accounting period just ended.
Where a company permanently ceases to carry on a trade or business in an accounting period, its assessable profits shall be the amount of the profits from the beginning of the accounting period to the date of cessation and the tax thereof shall be payable within six months from the date of cessation.
Read about Post-Incorporation Requirements
Personal Income Tax
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
The new Act has expanded the definition of instruments for stamp duty to cover electronic transactions to give legal backing to the Central Bank of Nigeria’s ₦50 (Fifty Naira) stamp duty drive. There’s also been an increase in the chargeable amount of Stamp duty charge from ₦1,000 (One Thousand Naira) to ₦10,000 (Ten Thousand Naira) and above; this would reduce the challenges faced by small business owners who have recently transferred the ₦50 (Fifty Naira) as an additional cost to their customers and clients.
The Stamp Duties Act (SDA) now defines ‘instrument’ to include “every written document including electronic documents”.
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.
- The Finance Act, 2019 seeks to address the following;
· To improve the fiscal policies and regulatory environment to stimulate growth in the MSME sector.
· To ensure that the sector contributes to revenue generation without excessive financial burden.
· To avoid double taxation and complication during the commencement of a new business, commencement and cessation rules have been modified to eliminate overlaps and gaps
· Reform domestic laws to align with global best practices.
- Support small businesses in line with objectives of the ease of doing business
- exempting them from the payment of VALUE ADDED TAX (TAX)
- exempting them from the payment of COMPANY INCOME TAX (CIT)
- Raising revenue for the government through the increase in the rate of Value Added Tax (TAX).
- Introduction of tax incentives for agricultural companies.
NB: AS AT THE TIME OF WRITING THIS ARTICLE, WE ARE STILL AWAITING GUIDANCE FROM THE FEDERAL INLAND REVENUE SERVICE (FIRS) REGARDING IMPLEMENTATION OF THE NEW ACT.
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