So, over the past week, the news had been awash of the new Finance Bill. The bill has been described as a fiscal tool aimed at stimulating the fiscal environment and spur growth across all sectors of the economy.
While the bill seeks the improvement of the overall economy, the new law has a special focus on driving ease of doing business for small and medium enterprises by alleviating the tax burden.
Beyond the soundbites, here at least 10 most important takeaways for the micro, small and medium enterprises operating in Nigeria.
1. There Is No Provision for VAT on Online Transactions: This is one aspect of the new Finance Act that you probably have not heard about. The new Finance Act makes no provision for payment of value added tax, VAT during an online transaction.
Recall that the Federal Inland Revenue Service, FIRS recently announced that it was putting together a framework to enforce collection of VAT on online transactions, by mandating banks to deduct such VAT at source. However, the new law contains no provision in this regard.
2. Small Businesses Excluded from Tax Net: So, before this new law, Nigeria arguably had the worst tax burden on SMEs in Africa.
The previous tax laws expected small businesses with annual revenue as low as N12,000 or N1,000 per month to register and file VAT returns.
But in countries such as Ghana, if you are making sales as a small business, and your turnover in a year is less than GHS194,000, about 13 million naira or less, you are not supposed to register for VAT. And you don’t need to charge VAT.
In Kenya, it is an equivalent of 17 million naira and in South Africa, it is 23 million naira.
So, the new Finance Law tried to correct this anomaly and make Nigeria competitive. Under the new law, small businesses with turnover less than 25 million naira will be exempted from registering and filing VAT returns.
More so, small businesses with turnover of less than 25 million naira shall also be exempted from paying company income tax, CIT.
This is even as a lower CIT rate of 20 per cent will apply to medium-sized companies with turnover between 25 million naira and 100 million naira.
Meanwhile, this does not preclude small businesses from maintaining a properly audited accounts because they would need to prove to their customers that they do not meet the threshold to avoid withholding tax.
3. Tax Losses Can Now Be Carried Forward: Under the new law, tax losses can now be carried forward indefinitely. A tax loss is a loss that can be offset against taxable profit earned elsewhere or in a different period.
“This is useful as start-ups who incur significant losses in the first few years of business can now carry forward tax losses against future taxable profits,” said PwC in a report on the new law.
4. Companies will only be subject to minimum tax at 0.5 per cent of turnover if turnover exceeds 25 million naira.
5. There Is Incentive for Early Tax Returns: So, the new law has also made a provision of bonuses for early filing of taxes. For instances, companies that make the Company Income Tax, CIT payment on or before 90 days from the due date for filing will be entitled to a bonus of 1 per cent (for large companies with turnover greater than N100 million) or 2% (for medium-sized companies with turnover between N25 million and N100 million).
6. Small Companies Won’t Be Able to Recover Input VAT: So, let’s say a small company with a turnover of less than 25 million naira buys a raw material from a company with an annual turnover of more than 25 million naira. The raw material supplier would be expected to charge VAT, which the small company must pay. But the small company stands no chance of recovering this input VAT since it has been exempted from filing for VAT. That is one of the downsides of the VAT exemption for SMEs.
7. Remittance of VAT is Now Cash-Based: You see, before now, businesses were expected to just collect VAT and remit to the FIRS without any consideration to the input from the businesses. That has now changed under this new law. The new 7.5 per cent VAT will be remitted on cash basis. This means that it is the difference between output VAT collected and input VAT paid in the preceding month.
8. Banks’ Request for TIN Still Limited to Corporate Accounts: Contrary to popular reports, banks will not demand your Tax Identification Number, TIN if you want to open an individual bank account. However, if you aim to open a bank account for your business, banks will demand the TIN. Such demand will also be made for existing corporate account holders to keep operating their accounts.
9. Stamp Duty is from 10,000 Naira and Above: Before this new law, banks charged a stamp duty for any transaction involving any amount from 1,000 naira and above. But this new law stipulates that the stamp duty will be charged on transaction involving 10,000 naira and above. Transfers between the same owner’s accounts in the same bank also to be exempted.
10. Not All Items are VATable: To ameliorate the impact of the increase of VAT from 5 per cent to 7.5 per cent, some items have been excluded from VAT. These items include such basic food items as bread, milk and extends to other items such sanitary pads.
Below is the full list of items exempted from VAT:
2. Cereal (raw or semi-processed)
3. Cooking oil
4. Culinary herbs (if raw and unprocessed)
5. Fish (other than ornamental)
6. Flour and starch (refined or unrefined)
7. Fruits (including dried)
8. Milk (including powdered)
9. Nuts and pulses (including roasted, fried, boiled, salted).
10. Roots (also in the form of flakes)
11. Salt (excluding industrial)
12. Vegetables (dried or ground)
13. Water (excluding sparkling or flavoured)
14. Sanitary items
15. Services provided by Microfinance Banks
16. Tuition paid for nursery, primary and secondary education.