The president of the Federal Republic of Nigeria, President Muhammadu Buhari not too long ago signed the Finance bill into law.
The Finance bill subsequently amended to “The Finance Act” saw to it that Value Added Tax (VAT) formerly 5% was increased to 7.5% for any product and services sold in Nigeria.
The President in a bid to shed light on the decision had explained that:
“This Finance Bill has five strategic objectives in terms of achieving incremental but necessary changes to our fiscal laws”
These objectives are:
- Promoting fiscal equity by mitigating instances of regressive taxation
- Reforming domestic tax laws to align with global best practice
- Introducing tax incentives for investments in infrastructure and capital markets
- Supporting Micro, Small and Medium-sized businesses in line with our Ease of Doing Business Reforms; and Raising Revenues for Government.
The new law states that small businesses with a turnover of less than N25 million are to be exempted from Companies Income Tax, while it lowers the tax rate for companies making up to N100 million from 30 percent to 20 percent.
This is expected to come as a relief to the lot of Small and Medium Enterprises (SMEs) in Nigeria, most of which already struggle to stay afloat in a hostile business environment.
What the increase in VAT really means
When the rate was 5%, it means that for a price of ₦1000 the buyer will pay an extra of ₦50 as VAT to government making the bill a total of ₦1050. If the item is to be used or for consumption, then that is where the VAT story ends.
But if the Item is to be sold, or used to produce something else which will be sold at say₦1500, then VAT of ₦75 needs to be charged, so the buyer pays ₦1575.
Since the first buyer payed VAT of ₦50 (input VAT) when the initial item was bought, he/she is entitled to deduct it from the VAT of ₦75 just charged (output VAT) and only pay the difference of ₦25 ( ₦75 – ₦50) to the Federal Inland Revenue Service (FIRS).
The above scenario is the same but the VAT has now been increased from 5 percent to 7.5 percent.
A Positive Effect?
Small and Medium scale enterprises in Nigeria are starved of capital as poor access to finance constitutes a major constraint for businesses.
Similar challenges encountered by the sector include the high cost of doing business and multiplicity of taxes, a problem the new bill looks to eliminate.
In analysis of the bill, some industry players had this to say:
“The initiative is laudable and the modifications to the fiscal rules around taxation are clearly aimed at creating an enabling business environment and alleviating the tax burden for small and medium enterprises”
-KPMG (accounting firm)
“With unrestricted access into the bank accounts of companies, businesses are now open to paying taxes more than ever. And to reduce tax evasion”
-Tayo Oluwole (Tax consultant)
“It is clear the amendments that the Act makes to existing tax laws will have a “significant impact” on businesses operating in the country.”
-Andersen Tax (website)
In consideration of standard of living and ease of doing business, the Finance Bill seeks to cushion the harsh effects of the 7.5% VAT by introducing other palliative measures.
For example, stamp duty on receipts became ₦50 for every transaction worth ₦10,000 and above, instead of the ₦1,000 threshold earlier used by banks.
Also, for Company Income Tax (CIT), businesses with a turnover of less than N25 million will be exempted.
CIT for businesses with sales of between 25 to 100 million falls from 30% to 20%. Also,businesses which pay their taxes on time will get a reprieve of 2%.
What do you think of the new finance bill? Have you started implementing it in your business? I would love to know!