On 13 January 2020, the Finance Bill, 2019 was signed into law to become the Finance Act, 2020, with February 1, 2020, the effective date for implementing the Value Added Tax rate increase from 5% to 7.5%.
The Finance Act introduces changes to the CIT Act, Value Added Tax Act, Petroleum Profits Tax Act, Personal Income Tax Act, Capital Gains Tax Act, Customs and Excise Tariff Etc. (Consolidation) Act and Stamp Duties Act.
The amendments are staged across different broad areas to:
• promote fiscal equity by mitigating instances of regressive taxation
• reform domestic tax law to align with global best practice
• introduce tax incentives for investment in infrastructure and capital markets
• support small businesses in line with the ease of doing business reforms and
• raise revenue for government, by various fiscal measures, including, for instance, increase in VAT
• make changes to taxation of non-resident companies
• introduce Digital and Service Permanent Establishment
IMPLICATIONS ON BUSINESSES
In line with the Federal Government of Nigeria’s commitment to encourage growth and development of SMEs, the Finance Act introduces a new progressive Company Income Tax (CIT) rate regime. Under the revised regime:
a) Start-ups and SMEs with annual gross turnover of not more than N25 million would be completely exempted from paying CIT subject to timely filing of CIT returns
b) SMEs whose turnover exceeds N25 million but is less than N100million will be subject to CIT at 20%
c) Every other companies with annual gross turnover of N100million and above, which are defined by the Finance as “large companies,” will pay tax at the standard CIT rate of 30%
Increase in VAT rate and measures to manage its impact
The Finance Act provides for a VAT rate increase by 50%, i.e., from 5% to 7.5%. The rate increase, when combined with other VAT-related changes, is expected to increase VAT revenue significantly. To mitigate the impact of the revised VAT rate increase to 7.5% and facilitate economic growth and development through SMEs, the Finance Act
introduces palliative measures for micro and small enterprises. One palliative measure is the introduction of a VAT compliance threshold. The threshold is to exempt companies with an annual turnover of N25,000,000 or less from registering for the tax, charging the tax, rendering a monthly return of its sales and purchases and from the penalties prescribed by the Act for non-compliance with the administrative provisions.
Expansion of the list of VAT-exempt goods and services
The Finance Act expands the list of VAT-exempt goods in the First Schedule to include locally manufactured sanitary towels, pads and tampons, as well as the following broad categories of “Basic Food Items”:
a) Brown and white bread;
b) Cereals including maize, rice, wheat, millet, barley and sorghum; c) Fish of all kinds, other than ornamental; d) Flour and starch meals; e) Fruits, nuts, pulses and vegetables; f) Roots such as yam, cocoyam, sweet and Irish potatoes; g) Meat and poultry products including eggs; h) Milk; i) Salt and herbs of various kinds; and j) Natural water and table water.
In addition, the Finance Act also expands the list of VAT-exempt services to include tuition relating to nursery, primary, secondary and tertiary education. Tax Holiday for Agric Business.
The Finance Act amends Section 23(1) of the CITA to grant tax exemption to companies engaged in agricultural production from tax for a period of five year(s), which can be extended for another three years subject to the determination of satisfactory performance of such business.
Exemption of services rendered by Microfinance banks from VAT
The Finance Act has now modified the VAT Act to clarify the VAT exempt status of services rendered by microfinance banks.
a) were only allowed to carry forward tax losses for a maximum of 4 years of assessment whereas other companies under the same CITA could carry forward their tax losses indefinitely
b) were prohibited from taking a full tax deduction for unexpired risk provision as it relates to their operations in the financial year. Unexpired risk provision is limited to 25% of total premium for marine cargo insurance business and 45% of total premium for other general insurance businesses
c) were required to limit tax deductible claims and other outgoings to 25% of total premium for general business and 20% of gross income for life business. This is contrary to the general provisions in the CITA that permits companies to claim as tax-deductible all expenses that were wholly, reasonably, exclusively and necessarily incurred for the purpose of generating profit, without limitation.