After being in the works for some time, Nigeria’s President, Muhammadu Buhari, finally signed the much-vaunted Finance Bill into law on January 13th, 2019.
One of the key clauses in the bill is the increase in Value Added Tax (VAT) rate from 5 percent to 7.2 percent.
The new bill also stipulates that persons must also submit their Tax Identification Numbers (TINs) before they can run new bank accounts in Nigeria, or existing bank account accounts. The implication of this provision is that effective from 2020, every bank account in Nigeria will be taxed.
Those two clauses are probably the most controversial in the new bill and most of the debates have been centered around them. And that’s undoubtedly why it did not register as much as it should have that the new law has some clauses, which are actually fantastic for the survival early-stage of start-ups in Nigeria.
One of those clauses is that businesses with annual turnover below NGN 25 Mn (USD 68.5 K) do not, as mandated by the federal government, have to pay the Company Income Tax (CIT). Previously, CIT was quite standard for all licensed and/or resident Nigerian businesses.
Under tax law, after 18 months of tax-free period, all companies registered and resident in Nigeria are responsible for sending 30% of their global profits to the federal government annually, regardless of their profits, as CITs. Non-residents are only obliged to pay tax on annual profits made in Nigeria.
Nevertheless, only companies with an annual turnover of NGN 25 million and above are in that tax net under the new finance bill. However, it is extremely unlikely that a Nigerian company will be drawn to the net at an early stage.
The new tax exemption policy may, therefore, be said to be immense for startups in Nigeria, because it offers them the leverage of first channeling all their resources into productivity and growth until they become medium-sized businesses, but at lower rates than large companies, with tax payment requirements.
According to the new bill, the lowest CIT is 20 percent for medium-sized companies with annual sales between NGN 25 million (USD 68.5 K) and NGN 100 million (USD 274 K). The larger companies with annual sales of above NGN 100 million have a rate of 30 percent CIT
In addition, Nigeria’s government is determined to raise investments, especially in the ICT sector — which added more to Nigeria’s GDP than its unaffected oil and gas sector in the first quarter of 2019.
ICT is an area in which the majority of home-grown Nigerian start-ups have placed their tent. And in order to support the ICT industry, the federal government recently offered a number of benefits to new entrants in the field by setting up the Nigerian Investment Promotion Commission (NIPC).
Some of these benefits include tax breaks and a clause to shield against the withholding of tax paid to company shareholders on dividends.
In a start-up environment where companies often seem to be in a precarious position in which they are only a law away from destruction, all the above benefits reflect an unlikely accomplishment.
Last year, the FIRS announced plans to begin charging 5% Value-added Tax (VAT) on online transactions for VATable items starting from 2020. With the change in the FIRS chairman, the fate of that plan hangs in the balance
If it is put into effect, it could also alter Nigeria’s e-commerce profile, because the Finance Bill says, the VAT on all VATable goods for online transactions would no longer be 5 percent but 7.5 percent.