Small and medium-scale enterprises (SMEs) have a significant impact on the economic development of countries around the globe and in Nigeria, especially in the aspect of employment generation, improvement of local technology, output diversification, and the development of indigenous entrepreneurship.
The growth of SMEs particularly in developing countries has been met with significant regulatory and economic constraints which have hindered their ability to expand and thrive in the business landscape. Some of these challenges include but are not limited to unpredictable regulatory oversight, lack of market for their products, multiple taxes, difficulty in accessing credit, and unpleasant government policies.
Under the Nigerian Startup Act, it is mandatory for all grants, sponsorship, and loan facilities provided by all statutory bodies to be accessible to SMEs
Notwithstanding the foregoing, in Nigeria, there are ample opportunities for business growth and development which have been made available by existing laws and government policies, to stimulate the growth, expansion, and competitiveness of SMEs and contribute meaningfully to the development of the country’s economy.
This article therefore examines some of these friendly policies and incentives created by relevant laws, with a view to x-raying the opportunities for growth and expansion they present for SMEs in Nigeria.
Tax Incentives for SMEs in Nigeria
Some of the Tax Incentives created by relevant laws for SMEs in Nigeria include:
i. Tax Holiday: Tax holiday is a period during which a company is exempted from paying tax on all or part of its profits. Tax Holiday is provided for in the Industrial Development (Income Tax Relief) Act (as amended) Cap. I17 Laws of the Federation of Nigeria (LFN) 2004. Tax Holiday is available to SMEs and Startups who satisfy the requirements for pioneer status in the qualified industries in Nigeria. SMEs who have been accorded pioneer status are usually exempted from paying tax for a cumulative period of five years. First, for an initial period of 3 years from their year of commencement, with an extendable period of two years.
Industries that qualify and are classified as pioneer industries include information and communication Industries, agriculture, financial services, e-commerce, waste management, mining and quarrying, manufacturing, electricity and gas, trade, construction, and administrative services. SMEs who carry on business in any of the above sectors can apply to the Nigerian Investment Promotion Commission (NIPC) for pioneer status in their first year of production and attach relevant documents such as Incorporation documents, business plans regulatory permits, etc.
ii. Value Added Tax (VAT) Compliance Threshold: The introduction of the VAT compliance threshold for companies under section 38 of the Finance Act 2019 enhances business operations and profit maximization by SMEs. The VAT compliance threshold which is ushered in by a new Section 15 of the Value Added Tax Act, Cap. V1, LFN 2004 (as amended) is aimed at exempting companies with an annual turnover of #25,000,000 (Twenty-Five Million Naira) or less, from registering with the Federal Inland Revenue Service (FIRS), for purposes of VAT, rendering of monthly returns and from all sanctions prescribed for non-compliance with the Act.
For SMEs, this would occasion a reduction in the cost of tax compliance as the VAT Act does not require them to remit VAT to the FIRS on a monthly basis.
Furthermore, SMEs who offer services as Microfinance Banks are exempted from remitting monthly VAT returns to the FIRS.
iii. Tax Exemptions: To the advantage of SMEs, the Finance Act 2019 expanded the scope of the tax exemptions in section 23 of the Companies Income Tax Act (as amended) (CITA). Section 23(1)(o) of the CITA exempts profits of small companies (that is companies with an annual turnover of N25 million or less) from paying company income tax (CIT). It equally exempts the dividends received from a small company engaged in manufacturing within the first five years of operation.
Section 1 (7) and Section 25 of the Industrial Development (Income Tax Relief) Act (as amended by Section 23 of the Finance Act 2020) make provisions for tax exemption for SMEs, in the primary Agricultural production sector, with an annual gross turnover of 25 million to 100 million Naira, upon application to the President, for a period of 4 years which can be further extended to an additional period of 2 years.
Also, Section 34 of the Finance Act 2020 amended Section 1 (2) of the Tertiary Education Trust Fund Act to provide that small companies as defined under the CAMA are exempted from payment of the tertiary education tax. These exemption incentives, amongst others, will undoubtedly assist SMEs to thrive better.
The Venture Capital Incentive Act, Cap. V2, LFN 2004 also provides a tax incentive that is targeted at SMEs who are engaged in venture projects. The Act provides for 100% capital gain tax exemption on any capital gains accruing to Venture Capital Investors where their equity interest is disposed.
Moreso, the Act provides for a rate of 30% capital allowances for eligible Startups on equity investment made by Venture Capitalist Firms.
Furthermore, Section 39 (a) of the CITA provides that companies engaged in the utilization of gas in downstream operations are entitled to be granted an initial tax-free period of 3 years, which may be extended by another two years. However, this tax-free period shall only start on the day the company is certified to have commenced production by the Ministry of Petroleum Resources and can only be claimed by the same company once.
Subsection (1) (c) further provides for accelerated capital allowances after the tax-free period, i.e., the company is allowed to enjoy an annual allowance of 90 percent, with 10% retention for investment in plant and machinery. Section 36 of CITA also grants an initial three-year tax exemption to new companies going into the mining of solid minerals. SMEs can take advantage of these tax allowances to establish their firm presence and expand in these industries.
iv. Reduced Tax Rates:
The Finance Act 2019 amended Section 40 of CITA such that medium-sized companies with turnovers between N25 million and N100 million are now required to pay CIT at a rate of 20% as against 30% which was formerly obtainable. However, the 30% CIT is still applicable to large companies with turnovers above #100,000,000.
These tax incentives, amongst others, are immensely beneficial to SMEs especially in their early stages to enable them to reinject their profits into the business and create more channels of growth, expansion, and competitiveness.
v. Export Processing Zone (EPZ) Allowances
Under Section 35 of CITA, companies carrying out approved manufacturing activities in an EPZ, that have incurred qualifying building and plant equipment expenditures, are entitled to a 100 percent capital allowance in any year of assessment. This also encourages SMEs to invest and expand into the EPZs.
Increased Involvement of SMEs in Government Projects
The Guidelines for Nigerian Content Development in Information and Technology 2019, requires companies to undertake the involvement of Startups and SMEs in projects involving the Federal Government. These projects are expected to have a gross value of 500 million naira or above. This Guideline seeks to foster the participation and direct involvement of SMEs in key national projects. These projects will, in turn, provide the SMEs with the visibility, experience, and expertise required to stand out in a competitive market and be able to partner with top-tier national and multinational companies in undertaking subsequent projects.
Access to Loan Facilities and Grants
Under the Nigerian Startup Act, it is mandatory for all grants, sponsorship, and loan facilities provided by all statutory bodies including the Central Bank of Nigeria, to be made readily accessible to SMEs and entrepreneurs in Nigeria. So far, this has been championed through the activities of the Nigerian Bank of Industry Limited, and the Agricultural Credit Guarantee Scheme of the CBN among others. This greatly supports the growth and expansion of SMEs and has been largely beneficial to many entrepreneurs and startups in Nigeria.
Many Startups and investors may not be aware of the existence of, and mode of assessing these incentives. There is therefore a need for a more comprehensive public sensitization on these policies and opportunities.
The Nigerian Government should establish new or empower existing agencies that would be saddled with the responsibility of overseeing the successful implementation of the numerous tax incentives available for SMEs in Nigeria under the laws highlighted above. This would position the Nigerian business landscape as a hub for business investment and expansion.
SMEs are also advised to seek guidance on how to register and be properly positioned to benefit from these policies and incentives.
Marvis Oduogu is a Team Lead at Stren & Blan Partners and supervises the Firm’s Taxation, Immigration, Labour and Employment Practice Groups. Ifeanyi Ezechukwu is an Associate in the Firm’s Commercial Dispute Resolution, Taxation, Immigration, Labour and Employment Practice Groups.
Stren & Blan Partners is a full-service commercial Law Firm that provides legal services to diverse local and international Clientele. The Business Counsel is a weekly column by Stren & Blan Partners that provides thought leadership insight on business and legal matters.
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