The Finance Act 2020, Tax Burden and FG’s Aggressive Revenue Drive

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Though already operational for over one year, the Nigerian Finance Act 2020 has remained a topic of debate, particularly among operators in the economy, who feel being burdened by the aggressive revenue drive of the Federal Government. Nume Ekeghe writes

Nigeria’s fast-rising debt profile, which has triggered concerns across board, understandably put the Federal Government under pressure to diversify its revenue sources in such a way that would not roll a burden down the road for future generations.

With a N16 trillion budget for 2022, which has over N6 trillion deficit, the Federal Government hopes to slow down its borrowing spree by looking inwards to raise the needed revenue. Taxation became an easy resort.

The Finance Act, 2020, which was signed into law by President Muhammadu Buhari on 31st December, 2020, alongside the 2021 budget, introduced sweeping changes to a number of tax and major legislations governing taxation in the country.

With the 7.5 per cent Value Added Tax (VAT), which was originally pegged at 5 percent, becoming effective since last year, other aspects of the Act that come into effect this year have become contentious issues pitching the government and operators in the Nigerian economy.

Changes in the Finance Act

Among the critical changes made in the Finance Act legislations include the Capital Gains Tax Act, Companies Income Tax Act, Industrial Development (Income Tax Relief Act), Personal Income Tax Act, Tertiary Education Trust Fund Act, Customs & Excise Tariff (Consolidation) Act, Value Added Tax Act and Federal Inland Revenue Service (Establishment) Act.

Introduced is the 10 per cent Capital Gains Tax chargeable on the disposal of shares worth N100 million or above in any 12 consecutive months, except to the extent that such proceeds are reinvested in the shares of any Nigerian company.

There is also the Education Tax payable by Nigerian companies, which was increased from two per cent to 2.5 per cent of assessable profits, while companies engaged in educational activities are now subject to Corporate Income Tax, regardless of whether such activities are of a public character. This means that private institutions are now to pay Corporate Income Tax.

Aside this, a science and engineering levy of 0.25 per cent of profit before tax is being levied on companies engaged in banking, telecommunications, ICT, aviation, maritime, and oil and gas with turnover of N100 million and above.

The Act also stipulates that the Federal Inland Revenue Service (FIRS) is mandated to assess, collect and enforce the payment of Nigerian Police Trust Fund levy. The tax was introduced in 2019 at the rate of 0.005 per cent on the net profit of companies operating in Nigeria.

Also, the FIRS is allowed to assess tax on the turnover of a foreign digital company involved in transmitting, emitting, or receiving signals, sounds, messages, images or data of any kind, including e-commerce, app stores, and online adverts. Such companies are also obliged to charge, collect and remit VAT to FIRS.

Even more controversial is the imposition of Excise Duty at N10 per litre on non-alcoholic, carbonated and sweetened beverages, which analysts say could translate to an increase in the retail price of products by up to five per cent with lower end products bearing higher burden.

Experts’ Concerns

Commenting on the amendments, Fiscal Policy Partner and Africa Tax Leader at PwC Nigeria, Mr. Taiwo Oyedele, warned that some of the taxes being implemented would have adverse effect on the Nigerian economy.

For example, he said the tax being levied on educational institutions will not only negatively impact tuition fees but further degenerate human capital in Nigeria in the long run. He noted that with human capital being a major deficit in Nigeria, tax increase towards education shouldn’t have occurred in the first place.

“I struggle to understand why we are trying to tax educational institutions, I don’t understand why when every plan that we have speaks to the fact that we need more education not just in terms of the quantity, but the quality and depth of education for us to lead in this new age.

“So, the implications would be that you have increased funds and my estimation is that educational tax will go up by about N60 billion in a year, so that we agree is significant, but it means that higher burden for companies that have to pay this. Tuitions are likely to go up because if I have a school and I have to pay tax now I have to do my calculations. I need to still pay salaries of staff, I need to do so many other things like infrastructure that you need to maintain. So, I’ll just adjust my tuition. “

On the implication it would have for Nigeria in the long-term, he said: “We may have long-term impacts on human development if we don’t find other safeguards to ensure that these does not create a bigger problem than the solution we are hoping to address.”

Oyedele stated that gains on disposal of shares in any Nigerian company worth N100 million or in any 12 consecutive months are liable to CGT at 10 per cent, with the returns to be rendered annually even for disposal proceed less than the threshold.

He also added that notable exemptions would include cases where the amount is “reinvested in the same or other company and the shares are transferred between an approved borrower and lender in a regulated securities lending transaction.”

On implications of the tax levied on share purchase in the country, Oyedele stressed that there would be a likely shift of focus from equity investments to government securities, as revenue generation is likely to be minimal. “It may discourage investment in the capital market given the expiration of tax exemption also on corporate bonds.”

Going Forward

However some analysts are of the view that stakeholders in the economy need to collaborate with the Federal Government in finding solutions to Nigeria’s perennial low public revenue challenge. Their arguments were premised on the fact that the time had come to evolve strategies that would hold public officials accountable and checkmate wasteful and unjustifiable public expenditure in the country.

President of the Institute of Chartered Accountants of Nigeria (ICAN), Mrs. Comfort Olajumoke Eyitayo, said the current revenue challenge facing the country has made it an imperative that all stakeholders should work with the government to address the recurring issue.

Eyitayo said: “The Finance Act introduced with the budget process in the country over two years ago is aimed at developing strategies to shore up capital (public revenue) for the economy. This is a step that had to be taken by the government to enhance the income-generating potentials of the country.”

She, however, added that as, “we focus on modalities for revenue generation, the country must not lose sight of the expenditure side, develop strategies to guide against wasteful and unjustifiable spending.

“In essence, all stakeholders must continue to advocate for a public sector where value for money needs to be entrenched and office holders will be held accountable, and transparency in public financial management promoted.”