Berkeley Legal | The Finance Act 2020 and Micro, Small and Medium Enterprises
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14 Feb The Finance Act 2020 and Micro, Small and Medium Enterprises

Nigeria is undoubtedly the largest economy in Africa by GDP and one of the largest economies in the world by purchasing power parity (PPP) comparison. A sizable amount of Nigeria’s GDP is as a result of the activities of Micro, Small and Medium Enterprises (MSME). It is thus a welcome development that the Federal Government of Nigeria continue to take steps to promote the ease of doing business in this sector. The recently signed Finance Act 2020 (the “Act”) provides certain tax incentives for MSME which will further enhance their role in sustaining the economic growth of the country. Some of the key provisions of the Act as it relates to MSMEs are as follows:

Company Income Tax (CIT) Exemption

Under the Act, small enterprises with turnover of less than N25 Million are now exempt from paying company income tax, subject to timely filing of their Company Income Tax returns. Medium size enterprises with turnover between N25 Million and N100 Million are to now pay a company income tax at a lower rate of 20%. Big Enterprises with a turnover N100 Million will continue to pay the rate 30% company income tax.

Minimum Tax

Prior to the Act, the computation for minimum tax computation was a higher of

  • 5% of Gross Profit or
  • 5% of Net Assets or
  • 25% of paid up capital or
  • 25% of revenue (turnover).
  • In addition, for companies with turnover higher than N500,000;

0.125% of revenue in excess of N500,000.

The minimum tax computation has now been simplified to a base rate of 0.5% of gross annual turnover. Also, since small enterprises with turnover less than 25 million are now exempted from tax, such enterprises are also exempted from minimum taxation.

Incentive for Early Payment

Any company who pays its Company Income Tax 90 days before the due date for tax payment or 3 months after the end of company’s accounting year, will be entitled to:

  • A discount of 2% of the tax payable for an enterprise with annual turnover between N25 Million and N100 million.
  • A discount 1% for companies with turnover above 100 million.

The Act also takes away the exemption formerly given to companies with at least 25% imported equity capital.

Dividend

Prior to the Act, whenever a company declared dividend in a year which was more than the total profit for that year, the dividend was deemed a profit and taxed accordingly. This sometimes resulted in double taxation of such dividends. The Act has tried to mitigate such double taxation by proving exceptions to dividend paid out of certain profits. These profits include, retained profits which have already been taxed, franked investment income, tax-exempt income and distributions made by Real Estate Investment Companies etc.

Exemption from Value Added Tax (VAT)

The VAT rate has been increased from 5% to 7.5%. The VAT registration threshold is now N25 Million turnover in a calendar year, as such, SMEs that do not meet this threshold would not need to register for VAT and as a result will not be able to recover input VAT on their purchases.

Penalties for failure to register has been increased to N50,000 for the first month of default and N25,000 for each subsequent month. Also, the Remittance of VAT is now to be on a cash basis, i.e. the difference between output VAT collected and input VAT paid in the preceding month.

Under the Act, the definition of goods and services has been expanded to encompass intangible items, product or rights excluding interest in land. The Act also now provides a clear definition of basic food items and of exported services as “service rendered within or outside Nigeria by a person resident in Nigeria to a person outside Nigeria…”. Furthermore, it is also interesting to note that the Act exempts the services of Microfinance Banks from VAT. This will have some effect in making the services rendered by such banks to small enterprises, artisans and individuals more affordable.

Conclusion

The Act is an encouraging development as it helps to reduce some of the tax liability of MSMEs as well as simplify certain taxation computations.

 

The information provided in this article is for general informational purposes only and does not constitute legal advice. If you require specific legal advice on any of the matters covered in this article please contact info@berkeleylegal.com.ng