05 Aug FINANCE ACT 2020 – THE MAIN TAXES ALL MSMES NEED TO PAY AND AVAILABLE EXEMPTIONS
The growth of Micro, Small and Medium-sized Enterprises (MSMEs) is said to be the backbone of any thriving economy. As such, it is important that businesses just starting or expanding understand their tax liability and compliance obligations, to ensure that they are always compliant and avoid incurring fines and penalties from the relevant tax authorities.
Although there are a number of tax categories, depending on the industry the business operates in, this article aims at highlighting the most essential tax obligations that must be adhered to by any enterprise regardless of the industry or size.
Companies Income Tax (CIT)
Where a business is registered as a company and incorporated at the Corporate Affairs Commission (“CAC”), it will need to adhere to the provisions of the Companies Income Tax Act (as amended by the Finance Act 2019 and the Finance Act 2020) (“CITA”). Under the CITA, a small company, (i.e a company with an annual gross turnover of ₦25million and below), is completely exempted from paying CIT. This is, however, subject to the filing of the company’s income tax returns with the Federal Inland Revenue Service (“FIRS”) as at when due.
Alternatively, where a company’s annual gross turnover is above ₦25million but it is less than ₦100million (which is classified as a medium-sized company), the company would have to pay income tax at the rate of 20% of its income. Where a company’s annual gross turnover is above ₦100million, the company is classified as a large company and would have to pay income tax at the rate of 30% of its income.
With the 2020 amendment, there is currently a tax relief for companies that donate to a coronavirus (COVID-19) relief fund up to a maximum of 10% of assessable profit after other allowable donations.
Personal Income Tax (PIT)
Where a business owner decides not to incorporate a company, such a business can be registered as a business name at the CAC. Although the business will not be liable to pay companies incomes tax on its income (being registered as a business, not a company), the individual business owner will nevertheless be required to pay personal income tax on any income received from the business. As such, whatever income the business generates a business owner is required to file its PIT with the State Inland Revenue Service. An incorporated company is also required to deduct PIT from its employees (which is known as Pay As You Earn “PAYE”) and remit the same to the State tax authorities. Depending on an individual’s indicated income, the tax could range from between 7% to 24%.
There is however an exemption for low-income earners earning minimum wage or less from paying any PIT on their earnings.
Value Added Tax (VAT)
This is a tax imposed on the supply of goods and services payable by consumers at the rate of 7.5% of the value of the good or service. VAT is not a personal tax on a company or business instead, it is a tax which the business is required to charge and collect from its consumers, on its goods or service and then remit it to the government. Therefore, the business acts as an agent for the government in this regard. There are however exceptions to this tax. Where a business has a turnover of ₦25million or less, the business is not required to collect or remit any VAT. Furthermore, there are certain goods and services that are exempted from VAT under the law. These include basic food items, medical and pharmaceutical products, medical services, all exported services, etc.
However, if a business qualified to charge VAT fails to collect and remit VAT to the tax authorities, such a business shall face penalties for its non-remittance.
Withholding Tax (WHT)
Withholding tax is an indirect and advanced form of taxation deducted at the source from the invoices of the taxpayer on specified transactions. It is a way of collecting other taxes and increasing the Government’s tax revenue. The rate of WHT is usually 2.5%-10% depending on the nature of the payment and the recipient and the type of transaction. These types of transactions include contract sum, professional fees, technical or management service providers, etc.
Tertiary Education Tax (TET)
This tax is governed by the Tertiary Education Tax Trust Fund (Establishment, etc.) Act 2011 and it is mandatory on all companies registered in Nigeria liable to pay tax. The tax rate is 2% on the assessable profits of a company. However, where a company’s turnover is less than ₦25million, such a company is exempted from having to pay TET.
In conclusion, explained above are 5 main taxes that are important for MSMEs and SMEs to be aware of and to work towards ensuring the business is in compliance with. While there are other forms of taxes like consumption tax, petroleum profit tax, information technology tax, etc, these taxes are industry-specific and would not apply to every business owner or company.
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