Already struggling with the impact of COVID-19, Nigerian companies may be faced with more challenges as the Federal Government plans to increase tax, review tax waivers/concession to generate revenue to fund its 2021 ‘Budget of Economic Recovery and Resilience’.
With a budget deficit of N5.19 trillion, which represents 3.64 percent of Nigeria’s gross domestic product (GDP), the proposed 2021 budget with an aggregate expenditure of N13.08 trillion is expected to be funded through the estimated federal revenue of N7.886 trillion while the deficit will be financed by both domestic (N2.14trn) and foreign (N2.14trn) borrowing.
While reading the public presentation of the 20201 budget proposal on Tuesday, Zainab Ahmed, Minister of Finance, Budget and National Planning said: “In producing the Finance Bill 2020, we are further reviewing current tax and fiscal laws and consulting widely.”
According to Ahmed, “the objective of the incremental, but necessary changes in the Finance Bill include;” supporting the realization of the revenue projections in the 2021 budget; mitigating regressive taxation; integrating international taxation trends to domestic tax laws; supporting Micro, small and medium-sized businesses.
“I would not expect that taxes should go up, it would be a wrong fiscal policy strategy. You can increase the taxes you collect without increasing rate. You can reduce the deduction, allowances and the waiver or increase the tax base,” Taiwo Oyedele, the Fiscal Policy Partner and West Africa Tax Leader, PwC said.
While presenting the proposed 2021 budget on Thursday 8 October 2020, President Muhammadu Buhari said he has directed the Minister of Finance to finalise the Finance Bill 2020, which will be forwarded to the house of assembly for passage into law.
“The Finance Bill is to support the realization of our 2021 revenue projections, adopt appropriate counter-cyclical fiscal policies and enhance the efficiency of fiscal incentives,” Buhari said.
According to the 2021 budget presentation document seen by BusinessDay on Tuesday, one of the ways Nigeria government plans to improve revenue, particularly to fund the proposed 2021 budget removal of tax incentive.
“We included a Tax Expenditure Statement (TES) as part of the documents accompanying the 2021 budget for the National Assembly which and it “seeks to dimension the cost of tax waivers/concession and evaluate their policy effectiveness,” the finance minister said.
As at 31 March 2020, Pioneer Status Incentive (PSI) data by the Nigerian Investment Promotion Commission ( NIPC) shows that 39 companies were still enjoying tax waiver, and some of which include Lafarge Africa Plc; Obu Cement Nigeria limited; Crown Flour Mills; Olam Hatcheries Limited, Hayat Kimya Nigeria Limited among others. Meanwhile, about 125 applications were still pending.
According to Oyedele, analysis from the finance minister shows that Nigeria is currently giving away more in tax waiver than what they are collecting and “that’s something any responsible government would want to rationalise.”
But he also warned that the government should bear in mind that “this is the time companies are trying to survive so anything that’s going to be rationalized should not affect their survival.”
Meanwhile, the total revenue of the Federal Inland Revenue Service (FIRS) for the 2019 fiscal year stood at a total of N5 trillion, below the N8.8 trillion target for the year which translates to a tax to GDP ratio of 6.1 percent
Nigeria’s very low tax to GDP ratio has often been blamed on low tax base as over 50 percent of the economy remains informal. While a source at FIRS said the revenue agency has over 2million registered companies, only about 120,000 are said to be are tax compliant.
With many companies expected to make losses in 2020 amid the impact of COVID-19, analysts expect the tax revenue from company income tax to be less than the value remitted in the past. The CIT rate is 30percent for large companies (i.e. companies with gross turnover greater than NGN 100 million), assessed on a preceding year basis.
The success or failures of businesses, according to analysts mirrors macroeconomic realities of a country. When businesses thrive, there appears to be economic prosperity in a country and vice versa.
For Africa’s largest economy which for a larger part of the last five years, has suffered stunted economic growth since 2016, the scenario appears not different
Analysts believe that the poor performance of some Nigerian companies is a reflection of the country’s slow economic growth which has in the last five years remain lower than the country’s population growth rate.
Since 2017 when oil-dependent Nigeria emerged from its economic recession, not only has the country’s economic growth been sluggish but only a few sectors triggered the expansion, further undermining the country’s capacity to increase its capita per income level.
Market analysts have unanimously agreed that food manufacturers and fast-moving consumer goods (FMCG) companies, for example, have been walking on thin ice before the advent of COVID-19 that ravaged economies across the globe.
The number of consumer goods firms that failed to turn a profit in the first half of 2020 jumped to a level that was last seen after 2016 recession.
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