By Eric Ojo
The Finance Bill 2019 recently passed by the Senate is an omnibus and cross-cutting piece of legislation. It has been described by many as a potential game changer when passed into law.
The bill which was presented alongside the 2020 Appropriation Bill to a joint session of the National Assembly on 8 October, 2019 by President Muhammadu Buhari, seeks an amendment to Nigeria’s tax laws. Basically, it is aimed at addressing the deficiencies of major extant tax legislations by amending obsolete and contentious provisions therein. This is a major aspect of the initiatives suggested by the Presidential Enabling Business Environment Council and the National Tax Policy Implementation Committee. The passage of the bill was sequel to the consideration of the report by the Senate Committee on Finance.
Chairman Senate Committee on Finance, Senator Olamilekan Adeola, said the bill specifically seeks to amend Nigeria’s tax provisions and make them more responsive to the tax policies of the Federal Government, among other things. Adeola added that the amendment and passage of the Finance Bill would enhance the implementation and effectiveness of government’s tax policies, noting that the initiative to reform the tax system and the proposed modifications to the fiscal rules around taxation are clearly aimed at creating an enabling business environment with a view to minimizing the tax burden for Micro, Small and Medium Enterprises, MSMEs. In addition, the bill also seeks to promote fiscal equity, align domestic laws with global best practices, as well as increasing government revenues and investments in the capital market through the introduction of incentives.
To achieve this lofty ideals, the bill amended seven existing tax and fiscal policy laws which namely, Companies Income Tax Act, 2004; Value Added Tax Act, 2007; Customs and Excise Tariff (Consolidation) Act, 2004; Personal Income Tax Act, 2007; Capital Gains Tax Act, 2007; Stamp Duties Act, 2007 and Petroleum Profit Tax Act, 2004.
The new Finance Bill as amended would promote fiscal equity by mitigating instances of regressive taxation. It has tax incentives for investment in infrastructure and capital markets. “This bill when signed into law by the President, would support small businesses in line with the on-going ‘Ease of Doing Business Reforms’ and raise revenues for the government”, Adeola had explained.
Lending credence to this, Senate President, Ahmad Lawan said the bill’s passage by the Senate was intended “to ensure that we (National Assembly) streamline the tax system in Nigeria and get revenue for government to provide services and infrastructure to the citizens of this country”. Continuing, he said: “What we have done is very significant because this is to ensure we not only have credible and reliable sources of funding for the 2020 Budget, but also for subsequent activities of government. The revenue generating agencies will have to sit up”.
Lawan further assured that the National Assembly, particularly the Senate, will oversight revenue generating agencies, adding that if such agencies have targets, the Senate must ensure that they meet these targets. Indeed, the Senate intends to engage the revenue generating agencies on a quarterly basis to evaluate their performance on revenue generation and identify if there are challenges and how better outcomes can achieved.
President Muhammadu Buhari said it is absolutely essential to intensify the revenue generation efforts of government but not to the detriment of the poor and vulnerable in the society. “That said, this Administration remains committed to ensuring that the inconvenience associated with any fiscal policy adjustments is moderated, such that the poor and the vulnerable, who are most at risk, do not bear the brunt of these reforms”, the President added.
The essence of the new law is to raise Value Added Tax from 6 to 7.5 percent as part of government’s search for income to fund health, education and infrastructure programmes. The President identified a sore point as the inefficiency of states and local governments which collectively earn 85 percent of all VAT revenues. “As the states and local governments are allocated 85 percent of all VAT revenues, we expect to see greater quality and efficiency in their spending in these areas as well.”
The new tax regime has pegged VAT registration to N25 million on turnover per annum. The idea is to enable revenue authorities focus efforts on larger businesses thereby bringing relief to Micro, Small and Medium-sized businesses. The new tax law has expanded exceptions to VAT including pharmaceuticals, educational items, and basic commodities.
Minister of Finance, Budget and National Planning, Zainab Ahmed has listed 83 modifications meant to improve the business environment, particularly for small and medium businesses. Taxes on such category of concerns are now reduced from 30 per cent to 20 per cent with a complete waiver for some categories of industries, especially those with turnover less than 25 percent.
“We have made some adjustments in the laws that have put significant pressures on the insurance industry. We have tried to make things easier for everyone. It was not about increasing taxes. The only item that is on increase in the Finance Bill is the increase of VAT from 5 per cent to 7.5 per cent. Everything else is targeted at improving the business environment”, the minister explained.
Finance experts and analysts have also been dissecting the provision of the Finance Bill. The verdict is positive and there is a consensus that it will bring changes to the operations of Nigeria’s tax laws. For instance, under the Companies Income Tax Act, the Finance Bill introduces provisions that create a taxable presence for non-resident companies engaged in digital activities, consultancy, technical, management or professional services in Nigeria, provided that they have “significant economic presence” in Nigeria, and profit can be attributable to such activity. Meanwhile, this provision has been described as a welcome development as it seeks to ensure taxation of activities with an economic base in Nigeria.
The new law has cheery news for investors. It seeks fair taxation for insurance companies. Under the proposed amendment, insurance companies would be able to carry forward losses indefinitely as opposed to the 4-year restriction currently in place. Moreover, life and non-life business would no longer be liable to special minimum tax provision and all wholly, exclusively, reasonably and necessarily incurred expenses will be tax deductible.
There is a provision for exception to Excess Dividend Tax. Currently where a company pays dividend in excess of its taxable profits, such dividend is subject to CIT at 30 percent, whether or not the income from which such dividend is paid, had been taxed hitherto; or whether the underlying income is altogether exempt from tax.
Other crucial changes the Bill will bring to the table eventually include a regime where excess dividend tax will apply only to untaxed distributions other than profits specifically exempted from tax and franked investment income. Small businesses with turnover less than N25 million will be exempted from CIT, a lower CIT rate of 20 percent will apply to medium-sized companies with turnover between N25 million and N100 million.
Other provisions of the tax regime include expense incurred to earn exempt income now specifically disallowed as a deduction against other taxable income; dividend distributed from petroleum profits now to attract 10 percent withholding tax; request for Tax Identification Number before opening business bank accounts for individuals, while existing account holders must provide their TIN to continue operating their accounts and email correspondences to be recognised for communicating with tax authorities.
Significantly, the meaning of supply and definition of goods and services has been expanded to cover intangible items other than land. Remittance of VAT now to be on cash basis, indicating that difference between output VAT collected and input VAT paid in the preceding month. For loss of employment compensation below N10 million to be exempted from CGT Stamp duty on bank transfer to apply only on amount from N10,000 and above. Transfers between the same owner’s accounts in the same bank will also to be exempted as stipulated in the amendment.