The Nigerian government is keen to open up new opportunities to earn more monies, and to do this, it sent a finance bill to the National Assembly. The bill is essentially a fiscal bill and it is driven by the objective of generating additional revenues for the Government to potentially partly finance the deficit in the 2020 Budget. Nosa James-Igbinadolor examines the bill
The latest World Bank report on Nigeria is blunt and bleak. The report shows that economic growth remains muted, with growth averaging 1.9 per cent in 2018 and plateauing to 2 percent in the first half of 2019. The report notes that “domestic demand remains constrained by stagnating private consumption in the context of high inflation (11 per cent). On the production side, growth in 2019 was primarily driven by services, particularly telecoms. Agricultural growth remains below potential due to continued insurgency in the North-east and ongoing farmer-herdsmen conflicts. Industrial performance is mixed. Oil GDP growth is stable, while manufacturing production is expected to slow down in 2019 with weaker power sector performance. Food and drink output is expected to increase, likely in response to import restrictions. Construction continues to perform positively, supported by ongoing megaprojects, higher public investment in the first half of the year, and import restrictions.”
Growth, the report further added, “is too low to lift the bottom half of the population out of poverty. The weakness of the agriculture sector stymies the rise in incomes of the rural poor, while high food inflation adversely impacts the livelihoods of the urban poor. Despite expansion in some sectors, employment creation remains weak and insufficient to make a dent in the high rate of unemployment (23 per cent). Furthermore, the instability in the North and the resulting displacement of people contribute to the high incidence of poverty in the North-east.”
Since the third quarter of 2015, the Nigerian economy has been characterised by a plethora of debilitating maladies that the government seems unable to rectify. According to the International Monetary Fund, declining budgets and a less supportive external environment complicate the challenge of finding ways to address human and physical capital investment needs, and create enough jobs to absorb the millions of new entrants to labour markets each year. The fund concluded that “some 21 countries are expected to sustain growth at 5 per cent or more in 2019. The remaining countries, mostly other resource-dependent economies, including the largest (Nigeria and South Africa) are set to face sluggish growth in the near-term.”
It was with a view to mitigating these macroeconomic challenges that President Muhammadu Buhari, while presenting the 2020 Appropriation Bill to a joint session of the National Assembly on October 14, 2019, submitted a Finance Bill. The finance bill seeks to put in place practical measures to generate additional revenues for the government to partly finance the deficit in the 2020 budget. To do this effectively, the bill sought to amend various tax laws in the country.
The bill proposes fiscal measures in support of the 2020 budget of the federal government, with extensive tax implications for the country. With a total proposed expenditure of N10.33 trillion against total expected revenue of N8.15 trillion, resulting in a deficit of N2.18 trillion; the 2020 budget is projected to be financed partly by tax revenues expected to be generated through the key fiscal changes introduced by the bill.
Fundamentally, the finance bill seeks to introduce sweeping changes to the tax laws covering seven different tax laws. Many of the changes are expected to have positive impacts on investments and ease of paying taxes especially for MSMEs.
The bill contains vast changes to the Companies Income Tax Act, Value Added Tax (VAT) Act, Petroleum Profits Tax Act (PPTA), Personal Income Tax Act, Capital Gains Tax Act (CGTA), Customs and Excise Tariff Etc. (Consolidation) Act and Stamp Duties Act.
The bill is crucial to the federal government’s ability to raise additional revenues that it needs to finance investments. Minister of Finance, Budget and National Planning, Zainab Ahmed, opined that the bill would provide the government with additional opportunities to incrementally improve its fiscal policy and regulatory/legal environment to further strengthen the domestic capital market, and ultimately ensure sustained and inclusive growth and development.
According to PwC Nigeria, the Bill which was recently passed by the senate has five main objectives including promoting fiscal equity reforming domestic tax laws to align with global best practices, introducing tax incentives for investments in infrastructure and capital markets, supporting MSMEs, and raising revenues for government.
Taiwo Oyedele, Partner and West Africa Tax Leader at PwC Nigeria, believes that the significance of the finance bill lies in the fact that “for the first time in a generation, more than twenty years, there is a comprehensive amendment to many of the nation’s tax laws”. The bill, he added, “seeks to amend seven tax laws and introduce more than 80 different changes with a view to enhancing their implementation and effectiveness. Some of these changes will be pro-business, particularly SMEs with some SMEs exempt from paying Corporate Income Tax (CIT) and others paying lower rates of 20 per cent.”
Under the CIT amendment, the bill expands the base for taxing non-resident companies (NRC) by introducing provisions that create a taxable presence for NRCs carrying on digital activities, consultancy, technical, management or professional services in Nigeria, provided that they have “significant economic presence” (SEP) in Nigeria; and profit can be attributable to such activity. The bill also seeks to repeal the current provision where, companies that declare and pay interim dividends are required to remit income tax at 30 per cent on such dividends to the FIRS. PwC noted that “while the repeal will address the intended exemption of advance tax on interim dividend, it may also imply that WHT should be applied on bonus shares or dividend-in-specie.” It further noted that “the bill seeks to amend the contentious commencement and cessation rules in CITA. The effect of these rules is that companies suffer tax twice on profits of at least 12 months, when they commence business. Conversely, on cessation of business, a period of up to 12 months escapes tax. The removal of these rules is considered a welcome development.”
Under the Personal Income Tax Act (PIT), the amendment seeks to clarify that pension contributions no longer require the approval of the Joint Tax Board (JTB) to be tax-deductible. On the other hand, the bill seeks to remove the tax exemption on withdrawals from pension schemes except the prescribed conditions are met. Child relief (2,500 per child up to a maximum of 4) and dependent relief (2,000 per dependent for a maximum of 2) are to be deleted, with banks being required to request for Tax Identification Number (TIN) before opening bank accounts for individuals, while existing account holders must provide their TIN to continue operating their accounts. In addition, emails are to be accepted by the tax authorities as a formal channel of correspondence with taxpayers, while penalties for failure to deduct tax will also apply to agents appointed for tax deduction. This penalty is 10 per cent of the tax not deducted, plus interest at the prevailing monetary policy rate of the Central Bank of Nigeria. Furthermore, the conditions attached to tax exemption on gratuities have been removed, and duties currently performed by the Joint Tax Board (JTB) as relates to administering the Personal Income Tax Act, will now be performed by the FIRS.
With the government keen to grab as much monies as it can, the amendment to the value added tax (VAT) Act, sees the bill introducing an increasing in VAT from 5 per cent to 7.5 per cent to help reduce budget deficits, fund the new minimum wage and provide social services. In Nigeria (unlike most other countries), VAT incurred on fixed assets and services cannot be claimed as a credit against VAT collected from sales.
The implication is that the VAT rate increase will result in higher cost production and investment, which will be passed on to the consumers. There is also VAT exemption on group reorganisations, provided that the, the sale is to a Nigerian company and it is for the better organisation of the trade or business, and the entities involved are part of a recognised group of companies 365 days before the transaction, and the relevant assets are not disposed earlier than 365 days after the transaction. PwC noted that this was against the “current practice is that companies send an approval request letter under CITA Section 29(9) to the FIRS, and include a VAT exemption request, even though there is technically no basis for this in the VAT Act.” The amendment also specifies penalties for VAT late filing of returns increasing to N50,000 for the first month and N25,000 for subsequent months of failure. The penalty for failure to register for VAT is reviewed upwards to NGN 50,000 for the first month of default and NGN 25,000 for each subsequent month of default, while the penalty for failure to notify FIRS of change in company address is to be reviewed upwards to N50,000 for the first month of default and N25,000 for each subsequent month of default. This penalty also covers failure to notify FIRS of permanent cessation of trade or business.
Like the VAT amendment, the bill is also introducing CGT exemption on group reorganisations. The bill also seeks to extend the scope of stamp duties in Nigeria to cover electronic documents and impose a one-off stamp duty of N50 on bank transfers of the sum of N10,000 and above.
However, this is proposed to exclude transfers between banking accounts of the same owner, provided that the banking accounts are maintained in the same bank. The bill also excludes share transfers and payments made in a Regulated Securities Lending (“RSL”) transaction from the payment of stamp duty.
Once the bill is signed into law, banks are to begin requesting for TIN before opening bank accounts, while existing account holders must provide their TIN to continue operating their accounts. What this portends is that there is the likelihood that banks will begin requesting that customers provide their TIN from that date. This has the potential of disrupting the normal flow of business.
What is obvious from these amendments is that the government is trying to improve the fiscal policies and regulatory environment to stimulate growth in the MSME sector. However, PwC posits that “there is also a deliberate effort to ensure that the sector contributes to revenue generation without excessive financial burden.
An area of focus for the government would be to formalise these businesses through the TIN project in collaboration with the banks. Although the definition of instruments for stamp duty has been expanded to cover electronic transactions to give legal backing to the Central Bank’s N50 stamp duty drive.
The increase of the chargeable amount to N10,000 and above will reduce the challenges faced by SMEs and retailers, who have recently transferred the N50 as an additional cost to their customers.”