In a daring move to revitalize Nigeria’s economy, former President Muhammadu Buhari introduced a groundbreaking policy on May 28, 2023, known as the New Tax Act or The Finance Act. This law was enacted to bring positive changes to tax regulations, with the goals of stimulating economic growth, ensuring fiscal stability, and promoting sustainable development.
The impact of this transformative policy will be directly felt by small and medium-sized enterprises (SMEs) across Nigeria. While these changes may initially pose challenges, they pave the way for long-term benefits and opportunities. Let’s delve into the details of the New Tax Act and explore its implications for Nigerian SMEs.
Understanding the New Tax Act
The New Tax Act introduces a comprehensive framework designed to streamline the existing tax structure and foster economic growth. It aims to create a fairer and more efficient tax system by addressing issues such as multiple tax windows, complex procedures, and inadequate revenue collection. The government seeks to simplify compliance and encourage investment in the SME sector by unifying the tax system.
Key Highlights of the Finance Tax Act.
- Capital Gains Tax (CGT) Act: Digital assets are now included as taxable assets, and gains from selling digital assets will be subject to a 10% CGT.
- Companies Income Tax Act (CITA): Nonresident taxpayers in shipping and airline businesses can file income tax returns with a certified statement of gross revenue.
- Tertiary Education Trust Fund Act (TETFA): The TETFA rate has increased from 2.5% to 3%, providing additional funding for tertiary educational institutions in Nigeria.
- Customs, Excise Tariff, etc. (Consolidation) Act (CETA): A new 0.5% levy has been introduced on eligible goods imported into Nigeria from outside Africa. The levy will fund contributions to multilateral institutions for development and cooperation.
- Value Added Tax (VAT) Act: Anti-avoidance transfer pricing rules have been added to prevent artificial agreements between related parties for VAT purposes. This ensures fair and credible transactions, combating tax evasion.
- Petroleum Profit Tax Act (PPTA): Amendments have been made to align with the provisions of the Petroleum Industry Act (PIA) 2021.
- Personal Income Tax Act (PITA): Premiums paid to insurance companies for life insurance or deferred annuity contracts are now deductible. Additionally, early withdrawal of the deferred annuity will be subject to taxation.
- Stamp Duties Act (SDA): The Electronic Money Transfer Levy (EMTL) revenue-sharing formula has been revised. The federal government and capital now receive 15%, state governments receive 50%, and local governments receive 35%.
- Corrupt Practices and Other Related Offences Act (CPORO Act): The fine for signing contracts without budget provision, administrative approvals, and procurement plans has increased from NGN100,000 to NGN10 million.
- Public Procurement Act (PPA): Public procurement proceedings by a procuring entity are now subject to approved procurement plans and guidelines.
- Ministry of Finance (Incorporated) Act: A Governing Council, Executive Board, and Management Team has been established to enhance the operational efficiency of the Ministry of Finance.
Short-Term Challenges: Navigating the Transition Period.
As with any significant policy change, the implementation of the New Tax Act presents short-term challenges for SMEs. One immediate effect is the potential increase in the cost of doing business. SMEs may face higher tax obligations, impacting their profitability and cash flow. Additionally, adjusting to new tax reporting requirements and procedures may require additional resources and expertise. However, these challenges should be seen as temporary hurdles on the path to long-term growth.
1. Improved Price Discovery:
Boosting Market Efficiency A fundamental goal of the New Tax Act is to improve price discovery and eliminate unfair advantages. Previously, SMEs in Nigeria faced varying exchange rates across different tax windows, leading to pricing disparities and favoritism. With the unification of the tax policy, the playing field becomes more level, allowing businesses to compete based on merit rather than financial connections. This increased transparency fosters a more efficient market that rewards fair competition and innovation.
2. Increased Dollar Supply:
Unlocking Opportunities for SMEs The New Tax Act is expected to boost the supply of dollars in the market, providing SMEs with greater access to foreign currency. Previously, limited foreign exchange reserves hindered businesses’ ability to engage in international trade and restricted their growth prospects. With a more robust supply of dollars, SMEs can confidently import goods, expand export activities, and access global markets. This opens doors to new business opportunities and strengthens the Nigerian economy as a whole.
3. Enhanced Access to Foreign Currency:
Empowering SMEs Under the previous tax Act, many SMEs struggled to obtain foreign currency from local banks, hindering their ability to fulfill international obligations. The New Tax Act addresses this challenge by promoting transparency and availability of dollars across different tax windows, particularly through Bureau De Change (BDC) operators. This means that SMEs can readily access foreign currency for various purposes such as paying international fees, receiving remittances, and conducting cross-border transactions. Such accessibility empowers SMEs to expand their global reach and compete on an international scale.
4. Future Outlook:
Long-Term Benefits for SMEs While the implementation of the New Tax Act may present initial hurdles for SMEs, the long-term benefits are promising. As the tax system stabilizes and businesses adapt to the new requirements, SMEs should expect improved market efficiency, increased access to dollars, and enhanced growth opportunities. The unification of the tax policy supports a fair and competitive business environment, fostering innovation, investment, and job creation.
5. Job Creation and Economic Prosperity:
SMEs are the backbone of Nigeria’s economy, contributing significantly to job creation and economic prosperity. The primary objective of the New Tax Act is to promote SME growth and development, which directly translates into increased employment opportunities. As SMEs expand their operations, they require a larger workforce, thereby reducing unemployment rates and improving the standard of living for countless Nigerians. Moreover, the economic ripple effect of a thriving SME sector extends beyond job creation, positively impacting various industries and stimulating overall economic growth.
6. Collaboration and Support Networks:
The implementation of the New Tax Act creates an environment conducive to collaboration and supportive networks among SMEs. As SMEs navigate the changes brought about by the new tax policy, they can come together to share knowledge, insights, and best practices. Collaborative initiatives, industry associations, and networking platforms among SMEs facilitate peer learning, mentorship, and resource sharing, fostering a vibrant community that empowers SMEs to overcome challenges and seize opportunities collectively. The power of collective action strengthens the resilience of SMEs and enhances their bargaining power when dealing with external stakeholders.
7. Streamlined Compliance:
Easing the Burden for SMEs Complying with tax regulations has long been a complex and burdensome process for SMEs in Nigeria. The New Tax Act provides much-needed relief by simplifying tax procedures and reducing bureaucratic obstacles. With clearer guidelines and streamlined processes, SMEs can focus more on their business operations and growth strategies rather than dealing with intricate tax compliance issues. This ease of compliance allows SMEs to redirect their time, resources, and energy toward innovation, expansion, and talent development, unlocking their full potential.
As SMEs embrace this transformative policy, they position themselves as key drivers of Nigeria’s economic prosperity, job creation, and innovation. With a supportive community and favorable regulatory framework, the limitless potential of SMEs can be fully unleashed, ushering Nigeria into a new era of economic stability and sustainable growth.