From individuals to households, businesses (big and small), and the government, the Finance Act 2019 that came into effect yesterday, Monday, has something for every economic agent in Nigeria.
In what seems to be a new dawn for the Nigerian economy, President Muhammadu Buhari on Monday signed into law the Finance Bill 2019. The newly signed law was presented alongside 2020 Appropriation Bill to a joint session of the National Assembly on 8 October 2019.
With the signing into law, the Finance Act 2019 is expected to set the tone for Nigeria’s fiscal policy for 2020.
However, while the development may mean money for the government from increased tax revenue, and growth of the small businesses, it would in the short-term affect negatively the purchasing power of most Nigerians.
Among others the Bill seeks to promote fiscal equity, align domestic laws with global best practices, and support Micro, Small and Medium-sized businesses. Other objectives of the new law include increase in government revenues and stakeholder investments in investment/capital market through the introduction of incentives.
The new Act made changes to the Companies Income Tax (CIT) act, Value Added Tax (VAT) Act, Petroleum Profits Tax Act (PPTA), Personal Income Tax Act, Capital Gains Tax Act (CGTA), Customs and Excise Tariff Etc. (Consolidation) Act and Stamp Duties Act.
Responding to the impact of the new finance law on the economy, Ayodele Akinwunmi, relationship manager, corporate banking, FSDH Merchant Bank Limited, said it means more money for the Federal Government to finance its operations and infrastructure to lay the required solid foundation for the growth of the economy.
“It should also lead to the growth of many small-scale businesses that have tax exemption. However, the increase in the tax rate may reduce the purchasing power of the people in the short term”, he said.
In the oil and gas industry, it will raise costs for the companies by removing tax exemptions and other incentives granted these companies to invest in the sector.
Downstream companies hitherto enjoyed incentives including a five-year tax-free period, accelerated capital allowance after the tax period and tax-free dividends for five years. Now, these provisions have been removed in the new law.
These incentives extended to industrial projects that use gas in power plants, gas-to-liquid plants, fertiliser plants and gas distribution and transmission plants, allowed companies to claim Gas Utilisation Incentives (GUI) and Pioneer Status Incentive (PSI) on the same qualifying project. This is no longer the case.
To drive investments into machinery, the Nigerian government grants companies that replace obsolete plant and machinery 15percent investment tax credit. The new law eliminates this incentive.
According to section 60 of the Petroleum Profit Tax Act (PPTA) withholding tax was not charged on dividends from upstream operations. The Finance law has repealed this section and now dividends from upstream companies will henceforth be subject to withholding tax at the prevailing rate of 10 percent (or 7.5% if payable to recipients of a treaty country).
Since oil and gas companies often incur significant costs by way of technical, management, consultancy or professional services carried out by non-resident companies, the new law creates a proxy for such activities performed outside Nigeria if there is a significant economic presence for the services provider in Nigeria.
According to the finance law, the Nigerian recipient of such services will now be required to deduct withholding tax from the applicable fees which will be regarded as the final tax in the hands of the recipients.
“This could increase the costs of such services to Nigerian companies where the service providers pass on the withholding tax costs through “net of tax” clauses, especially if there is no tax relief available to the foreign company in its home country,” said Tax analysts at PwC Nigeria in their review of the Finance Bill.
Companies Income Tax (CIT) Act
The new law introduces provisions that create a taxable presence for non-resident companies (NRCs) carrying on digital activities, consultancy, technical, management or professional services in Nigeria, provided that they have “significant economic presence” (SEP) in Nigeria; and profit can be attributable to such activity. This is to ensure taxation of companies with an economic base in Nigeria.
In what could be a game changer for players in the insurance sector, the new law removed some impediments that have restricted the growth of insurance companies.
Under the new Act, insurance companies would be able to carry forward losses indefinitely as opposed to the 4-year restriction currently in place. 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.
Also, the new Act removes the double taxation caused by excess dividend tax (EDT) thereby encouraging corporate savings and retention of profits. The new law granted exceptions to the EDT provisions as against what is currently obtainable where a company that pays dividend in excess of its taxable profits, such dividend is subject to CIT at percent whether or not the income from which such dividend is paid had been taxed hitherto or whether the underlying income is altogether exempt from tax.
Henceforth, EDT is inapplicable to dividends paid out of retained earnings, exempt profit and rental/dividend income of Real Estate Investment Company (REIC). The exemption also covers franked investment income (FII).
The Finance Act also introduces thin capitalisation rule by disallowing “excess interest” on related-party lending (involving a foreign lender). Excess interest is any amount paid or payable as interest on a loan, which exceeds 30percent of Earnings Before Interest Tax Depreciation and Amortisation (EBITDA)
With the new Act, Medium-and-Small Scale Enterprises in Nigeria would now focus on growing their businesses with minimal issues around taxes.
Section 33 of the Act focuses on payment of minimum tax as small businesses earning lower than N25 million turnover in any tax year will also benefit from the amendment as any business in that category will be exempted from Companies Income Tax which is 30 percent of the profit earned by registered companies in Nigeria.
Similarly, medium-sized companies will also have their bites of the government’s tax largesse aimed at helping businesses grow. Companies in this category with revenue running between N25 million and N100 million in any tax year will be required to pay a company income tax rate of 20 percent, while companies with turnover bigger than N100million annually would pay CIT rate of 30percent.
To create incentives for early payment of taxes under the self-assessment framework, Section 77 of the Act proposes a 2percent and 1percent bonus for medium-sized and large firms, respectively, where companies’ income tax liability is paid before 90 days to the due date of filing/ payment.
Value Added Tax
The new Act increases Value Added Tax rate to 7.5percent from the current 5percent, which is expected to increase government revenue. Items exempted from VAT are basically essential items and other food items.
With the passage of the new finance bill into law, the amount paid as Value Added taxes (VAT), would be 7.5 per cent.
The new rate shows an increase of 50 per cent from the 5 per cent initially paid as VAT before the bill was signed into law.
The need for the increase came amid concerns of dwindling revenues that has made the government handicapped and unable to fulfil a fiscal obligation.
Proceeds from the taxes would also enable the government to pay the new minimum wage of N30000, which was increased by 67 per cent, following agitations by trade unions on the need to raise the least amount paid to the country’s least workers.
To lessen the burden of the tax increase on small businesses, the bill stipulates only businesses that have an annual turnover of N25 million and above, will be required to register for VAT, charge and collect VAT on its sales.
It also exempts several basic items including such as bread, cereal (raw or semi-processed), cooking oil, culinary herbs (if raw and unprocessed), fish (other than ornamental), flour and starch (refined or unrefined), fruits (including dried), milk (including powdered), nuts and pulses (including roasted, fried, boiled, salted), roots (also in the form of flakes), salt (excluding industrial), vegetables (dried or ground), and water (excluding sparkling or flavoured), which are known to be mainly consumed by the poor, from being affected by the VAT increase.
Similarly, the services provided by Microfinance Banks, and tuition paid for nursery, primary and secondary education is VAT exempt.
Despite the exemptions to cater for the over 90 million citizens living below $1.90 a day, the increase would still be borne by the masses in the form of higher price, according to several analysts who spoke to BusinessDay.
According to them, unlike in many other countries, VAT in Nigeria is incurred on fixed assets and services cannot be claimed as a credit against
VAT collected from sales making the implications is that the VAT increases to result in higher-cost production and investment, which will be passed on to the consumers.
“The current “VAT” system in Nigeria is closer to a cascading Sales tax structure, and unfairly increases the cost of doing business along with each level of the value chain,” said analysts at global consulting firm PricewaterhouseCoopers.
“While the 7.5 percent VAT rate is low compared with the rate in other countries, these countries have a proper VAT system that avoids these challenges. Any further increase in the VAT rate without addressing this issue may be detrimental to the economy,” PWC said.
There are also concerns that the new tax increase might not translate into the needed revenue for the government since it would be major to fund the new minimum wage which was increased last year from N18, 000 to N30, 000, pre-empting analysts to say term the increase as “robbing Peter to pay Paul”.
Gabriel Okeowo, Principal Lead, BudgIT, in his response to BusinessDay, said that the increase in VAT is a welcome development as it would help raise revenues but stressed the need for government to ensure effective use of incomes generated to strengthen institutions that will boost productivity of businesses in Nigeria.
“The increase in VAT is relative. When we compare the VAT at 7.5 percent to what is obtainable in other countries we discover that we are still way below what they pay as tax, but what an average citizen wants to see is how well the government is using the taxes they pay,” he said.
“If when we were collecting 5 percent, we were not able to finance our economy yet we had so much that goes into financing the excess luxury of elected officials, then it will be easy for us to say that the increase may not yield any reasonable result and may not lead to any development in the nation. It might just be avenue for more money to be available for the government officials,” Okeowo noted.
He lauded government for exempting small-scale businesses from the increased VAT “because we have seen cases where these enterprises suffer multiple taxation but the introduction of this bill will help them focus more on building their businesses”.
Personal Income Tax Act
The new Act introduced a new requirement for banks to obtain tax identification number (TIN) from customers. Henceforth, Banks are to request for TIN before opening bank business accounts for individuals, while existing account holders must provide their TIN to continue operating their accounts.
Customs and Excise Tariffs (Consolidation) Act
The new Act also expanded the goods liable to excise duties to include imported goods. This is expected to eliminate any unfair advantage on imported products over local products and also ensures a level-playing field between local producers and imported products.
Stamp Duty Act
The Act increases the stamp duty on receipts to ₦50 on every transaction from ₦10,000 and above; and expands the definition of receipt to cover electronic transactions. This
Petroleum Profits Tax Act
The new law repealed the provision of PPTA that exempts dividends paid out of profits derived from petroleum operations from withholding tax. Taxpayers in this space would now be saddled with the responsibility of withholding tax when paying dividends. Email communications with tax authority is now accepted as a valid means of communication. companies would be exempted from CGT.
HOPE MOSES-ASHIKE, ISAAC ANYAOGU, OLUFIKAYO OWOEYE, MICHAEL ANI & CYNTHIA EGBOBOH