Monday letter

A major fiscal policy direction was recently marked by Nigeria’s President signing of the 2019 Finance Bill into Law, a month after putting assent to the 2020 national appropriation bill, both submitted to National Assembly as executive bills in October 2019. The new financial legislation is technically known as the Nigerian Tax and Fiscal Law (Amendment) Act 2019, because it comprises of about 90 amendments to seven primary acts relating to taxation.

A highlight of the fiscal provisions of the act relevant to small business enterprises include an increased Value Added Tax rate of 7.5%, a 0% Company Income Tax rate for small-sized companies, a lowered rate of 20% for medium-sized companies, a new requirement for Tax Identification Number to open and operate a business bank account, and an increased threshold of N10,000 for electronic bank transfers liable to stamp duty charge of N50. Essentially, the finance act will structurally define a new fiscal outlook at the microeconomic level of the national economy.

Prior to its passing, Nigeria’s Finance Minister had rationalized drafting the finance legislation and pairing it with the 2020 national appropriation bill as a move to shoring up government’s revenue base, by realizing available revenue potential. Besides, the government stressed that the two bills aimed to accelerate its plan to pull a proverbial 100 million Nigerians across the World Bank-designated poverty line.

The increment of VAT for business transactions from 5% to 7.5% will arguably have the biggest economic impact on microeconomic agents of the local economy, from households to firms as well as other microeconomic variables. It will automatically give rise to a hike in the gross value of goods and services, as businesses pass the new tax burden down to buyers, through inflated invoices across different stages of production and distribution. Among the ultimate taxpayers, households with low income will have their purchasing power adversely impacted. People will pay more for the same commodities they had paid a lower price tag in the past. As one of the drivers of price growth, the raised VAT rate will have direct impact on headline inflation across markets in the short run.

In the long run, the multiplier effect of the new VAT regime will also affect the smooth operation of small businesses which would struggle to maintain price stability, by resisting the inflationary pressure of adding VAT deduction to every transaction. It’s an open secret in taxation that micro, small and medium enterprises tend to perform poorly in terms of adherence to the guidelines for VAT billing and remittance, within their semi-formalized modes of transactions. Nigeria’s Federal Inland Revenue Service as the designated authority for VAT collection may have to grapple with high rate of non-compliance by small private firms. Hence, while tax authorities push for expansion of VAT coverage across informal markets, this newly approved VAT rate will potentially translate to a serious operational hurdle for MSMEs in general.


The new Finance Act effectively puts an end to regressive taxation on company income tax rates, by providing for a sweeping change to the annual percentage of tax rate payable by incorporated companies against profit earned. Small businesses with an annual turnover of less than N25 million are now exempted from company income tax, while a lowered CIT rate of 20% is now the approved rate demanded of medium-sized companies with annual turnover of between 25 and 100 million naira.

Aside promoting fiscal equity between different scales of business ventures, the new CIT legislation will stimulate growth for small businesses, and encourage greater corporate governance by potentially co-opting corporate outliers. The lower benchmark for stamp duty charges on cash deposits into company accounts will reduce operational costs of MSMEs and enhance their propensity to incorporate. Over the years, Business Development Service Providers dealing with MSMEs have reported bank account statements and tax clearance among the common missing credentials in the eligibility checklist, for existing companies applying to access financial incentives from development finance institutions like the Bank of Industry and NIPC. A O% CIT will thus be a direct impetus for small business entities toward incorporation and opening business accounts with banks. Additionally, this single tax incentive for small businesses would further attract favorable rating for Nigeria in the global Ease of Doing Business ranking.

On the other hand, the new downward review of charges for electronic banking transactions now requires deposit money banks to commence the application of stamp duty charges for electronic (WEB & POS) funds transfers to business accounts, only from deposit amount of N10,000. This would likely curtail the reported slump in the use of POS and online transfer by MSMEs, and thus boost financial inclusion, and the CBN cash-less policy.

With the new finance act taking full effect, government and the CBN must work toward smooth implementation without creating excess burden on the financial industry and hampering MSMEs growth, and startups mortality.

Mazhun Idris is a Fellow-in-Residence at IBY Corporate Solutions Ltd.