MUST READ: Fiscal Impact of the 2020 Finance Act on MSMES.

The Introduction after many years, the Federal Government of Nigeria has reintroduced the practice of presenting a Finance Bill along with the annual budget proposal. This practice, which is standard in many tax jurisdictions, was a usual feature under the Military Governments in Nigeria. The Finance Act is a fiscal policy statement, which shows how the Government intends to finance budgeted expenditure and achieve other socio-economic objectives.

The President of the Federal Republic of Nigeria signed the Finance Act into law on 13th of January, 2020. The objectives of the 2020 Finance Act include: to support Micro, Small and Medium-sized Enterprises (MSMES) in line with the Ease of Doing Business Reforms (EDBR). The EDBR aims to remove critical bottlenecks and constraints to doing business in the country and make Nigeria a progressively easier place to do business.

MSMES are the engine growth of most economies of the world including Nigeria. The collaborative National survey carried out by the National Bureau of Statistics (NBS); and Small and Medium Enterprises Development Agency of Nigeria (SMEDAN) in 2017 found that MSMES constitute over 90percent of businesses in Nigeria and employ about 60million people. These businesses contributed about 49.78percent to Nigeria’s GDP in 2017. Based on the National Policy on MSME, businesses that qualify as MSME typically employ less than 200 people with assets base of less than N500million. The overriding differentiator between micro, small and medium scale enterprises is the number of employees. 

However, under the Finance Act, a company that earns gross turnover of N25 million or less is defined as a small company and a company that earns gross turnover greater than N25 million but less than N100 million is defined medium-sized company.

The collaborative survey referenced above found that high/ multiple taxes was considered as the second most unfavorable policy affecting MSMES in Nigeria. Therefore, one of the initiatives of the Presidential Enabling Business Environment Council is improving the ease of paying taxes, by evaluating the administrative burden of paying taxes on medium-sized companies. The Finance Act and MSMES The Finance Act introduces a few provisions targeted at MSME. These provisions include:

(i) The exemption of small companies from payment of any tax under the Companies Income Tax Act (CITA). This includes the normal corporate income tax (CIT) at 20percent or 30percent of taxable profit or minimum tax, tertiary education tax, and deduction of withholding tax (WHT) by its customers. With regards to the non-deduction of WHT by customers, the Federal Inland Revenue Service (FIRS) may need to issue certificates to these small companies to enable them to present same alongside their bids, contracts and invoices.

However, to qualify for this exemption, the small company must register for the tax and submit its annual income tax returns to the FIRS. For small businesses, this exemption should provide additional funds which can be ploughed-back into the business for growth. It should also help to improve cash flow, considering that customers are not required to deduct WHT from their invoices