SMEs and the tax burden – a human angle
On Saturday 8th of February, two tax consultants from the Lagos state internal revenue service LIRS were on a popular radio show in Lagos, explaining how the tax authorities are deploying the new tax law passed as part of the financial bill 2019 which was gazetted and came into effect on the 1st of February 2020 and prior tax laws to increase government revenue.
Parts of what they explained as it affects registered companies were the following:
All VAT deducted by a company from transactions in a month must be domiciled with the tax authorities on or before the 21st of the next month. Failure to do so would attract a penalty of N5,000 for every month of default.
All companies must return their employee taxes for the previous year by the 31st of January on a new year or face penalties of at least N500,000. This amount of penalty is also applicable to any other year that a company failed to return its tax obligations.
Companies must also return their income taxes for the previous year within 6 months from their year-end or face penalties of N50,000 in the first month of default and N25,000 subsequently.
Small businesses with turnover less than N25m to be FULLY exempted from Companies Income Tax (CIT) and entities with less than N25 million in turnover are exempted from VAT registration.
A CIT rate of 20 percent applies medium-sized companies with turnover between N25 million and N100 million.
The Value Added Tax is proposed to increase from 5 percent to 7.5 percent.
Banks will request Tax Identification Number (TIN) before companies are allowed to open bank accounts. Existing account holders must provide their TIN to be able to operate their accounts.
The new finance bill which was signed into law by the president on the 13th of January 2020 but was gazetted and came into effect on the 1st of February 2020 will not only bring more revenue to the government but will also go a long way to bring the informal sector into the tax net with the requirement that all corporate accounts should have Tax Identification Numbers (TIN)and Bank Verification numbers (BVN) of all the directors as well as giving the tax authorities access to the bank account statement of companies through the financial institutions.
With the new tax law, there is no place to hide for SMEs as their financial transactions are now accessible to the tax authorities. But for an economy that had been largely informal for a very long time with a lot of companies operating in the shadows, providing employment to millions of Nigerians and services to several clients including multinationals, the threat to their existence is real from the implementation of this finance bill.
A former associate started a consulting business from his rented apartment in 2011, had always used interns as staff and gradually grew his business to a point where he just rented his first real office space in January 2020, employed his first full time staff and got a tax consultant to advise him on how to navigate the new tax law. In essence he has decided to formalise his business and come into the tax net as he had operated largely in the shadows while building the company. To his shock, the tax consultant after reviewing his financials and calculating his tax obligation from 2011 when the company was registered till date with the accrued penalties advised him to shut down and start all over again as his business cannot pay the accrued tax.
He is in a dilemma now, how does he close a business he has spent a decade building into a national brand with several stake holders including his staff, vendors, and most especially customers and clients who now rely on their services. What options are available to him? Should he continue to operate in the shadows and be unable to scale up his business because of the new tax regime? Should he register a new company and start all over again?
The second scenario is not very different from the first. A start-up in the fintech industry. This company was registered in 2016 and started operations same year. As this industry is in its infancy, many regulatory authorities found it hard to place their business in any known category when they sought licenses to allow them operate in their chosen field. It took the better part of three years for customers to accept their solution then in 2019, they signed up a major multinational as a client, other customers started signing up and their customer base grew. Their business is a high turnover, low margin plays such that they retain hundreds of millions of customer money in their accounts but their service charge is less than 0.1 percent of each transaction value. They got a tax consultant to compute their tax in January 2020 and after computation with accrued penalties, their tax liabilities are over N10 million which they clearly don’t have the money to pay.
There is another company in their Oil and Gas industry that has accrued tax liability of over N250 million and another start up in the real estate industry that has accrued tax liability of over N33 million, these two companies also do not have the fund to pay.
With the implementation of the new tax law, these companies and several other companies that had remained in the tax shadow as they grew and wants to come into the tax bracket may all have to either remain in the informal sector hoping the tax authorizes do not sniff them out which is almost certain to be impossible as their bank accounts are now linked to their TIN numbers or they shut down operations when the pressure of the tax authorities becomes unbearable.
While the governments at the federal and state levels have perfected plans to get all the taxable incomes from companies and individuals, certain discussions must take place such as how do the authorities manage companies and individuals with accrued tax liabilities that they can’t pay?, How does the country avoid mass closure of SMEs due to tax defaults considering that the Nigerian economy before now was largely informal and untaxed?. What is the use of the collected tax when Nigerians continue to be a government unto themselves by provide essential services for themselves such as power, water, security, road etc.
Nwigwe is a business consultant and public affairs analyst.