Last month, we discussed the importance of taxation as a source of revenue for government to finance her expenditures – recurrent and capital. Today, I am here to prove to you that tax payment or compliance is beneficial to both government and the tax payers. Let’s take the Small and Medium Scale Enterprises (MSMEs) segment of the general economy as a case study on benefits for tax compliance.
For a start, tax compliance, especially for MSMEs is of great importance to the economy. According to the National Bureau of Statistics (NBS), MSMEs have contributed about 48 percent of Nigeria Gross Domestic Product (GDP) in the last five years.
In Nigeria, small scale businesses find tax compliance quite challenging due to their size and business structure, a reason many, especially the Federal Inland Revenue Service (FIRS) believe there is need to continuously support them through tax incentives and awareness.
In line with that disposition or resolve to encourage or support the survival and growth of businesses, the federal government through the (budget support) Finance Act, has granted some targeted tax incentives to MSMEs to lighten their compliance burden.
The Finance Act replaced existing incentives with well targeted ones to stimulate economic activities. The incentives cut across various tax types and range from tax rate reduction to outright exemption.
Tax incentives for SMEs
As a tax watchdog, the FIRS has continued to initiate policy programmes and measures to provide support for the growth of the MSMEs for job and wealth creation. From the prescription of special form of account for MSMEs, pioneer status of up to five years for MSMEs to establishing self- service stations in all FIRS offices nationwide and the introduction of a dedicated 24hourrs contact center to respond in different languages to MSME operators, the FIRS has made the cushioning of the effect of tax payment on the small businesses a priority.
Among other ways, the service has given serious attention to tax awareness and taxpayer education; N25,000000 threshold and exemption from VAT; N25,000,000 threshold and progressive CIT rate; N25,000000 threshold and exemption from EDT; and removal of commencement and cessation. That is in recognition of the role MSMEs play in the recovery and sustainability of the Nigerian economy. That is not all.
Under the 2019 finance Act to support the budget, the government announced the commencement rule and cessation rule which has been simplified to encourage startups and avoid double taxation of same income.
The Finance act 2019 exempts SMEs with annual turnover of not more than N25 million from CIT subject to timely filing of returns. Medium-sized companies with turnover exceeding N25 million but less than N100 million will be subject to CIT at 20 percent
Every other company with annual gross turnover of N100 million and above, which are defined by the finance act as “large companies,” will pay tax at the standard CIT rate of 30 percent.
As an incentive too, minimum tax – the basis for computing minimum tax under CITA was replaced with a simplified base rate of 0.5 percent of the qualifying company’s gross turnover less franked investment income.
You would agree with me that this is a shift from a minimum tax based on capital to a minimum tax based on revenue. Deletion of exemption from minimum tax available to companies with at least 25 percent imported equity capital and addition of a new class of companies exempted from minimum tax, being small companies with an annual gross turnover of less than N25 million.
The federal government is actually doing a lot to prioritise ease of doing business for the small-scale enterprises to spur job creation and economic growth.
At a Public presentation of the 2023 national budget proposal – breakdown & highlights to stakeholders recently, minister of finance, budget and national planning Zainab Ahmed said the federal government has decided to focus, this time around to complement ease of doing business and other reforms to support SMEs, youth and women-owned businesses (FinTech, ICT, entertainment, fashion, sports, arts, etc.) structure, approve and deploy NYSC diaspora scheme to create jobs as well as facilitate inbound capital & IP investments in domestic SMEs by diaspora youth.
The introduction of finance act by the federal government through the contributions and recommendations of the FIRS brought in 50 percent increase in the VAT rate from 5 percent to 7.5 percent. Some palliative measures were introduced for SMEs to cushion the adverse effect of the increase in VAT rate, ensure tax compliance and increase ease of doing business.
One of the palliative measures is the introduction of a VAT compliance threshold of N25,000,000. The palliative 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.
The introduction of a VAT compliance threshold, will reduce the cost of tax compliance for SMEs as they are not required to file monthly VAT returns.
Another noteworthy palliative is the exemption of services rendered by microfinance banks from VAT. This expected to create a wider opportunity for growth and development of micro, small and medium enterprises.
Not many people are aware of the fact that as it stands, dividend received from small companies are exempt from tax for the first five years of operation Medium sized companies are entitled to 2% reprieve as a further bonus where they pay their taxes as and when due.
Tax awareness and education
In addition to the tax incentives, the FIRS continues to create awareness and educate taxpayers particularly MSMEs on their statutory obligations under the various tax laws and the plethora of incentives available to them therein.
FIRS taxpayer services department has designed some MSME targeted tax awareness programmes to drive compliance.
Against this background, it is expected that these incentives will encourage MSMEs to comply with their tax obligation now and into the future.
Easy steps for MSMEs to make tax payments
Registration: After registration of a business with the Corporate Affairs Commission, a taxpayer is expected to register with the Federal Inland Revenue Service and obtain a Taxpayer Identification Number (TIN) at the relevant tax office.
Record keeping: Taxpayers are expected to keep appropriate accounting records of their day-to-day financial transactions. This includes receipts, vouchers, invoices, bank statements etc. These records should be maintained for a minimum of 6 years and provided on demand.
Company income tax returns filing: It is the responsibility of the directors of the company to prepare annual returns, pay tax and file company income tax returns online via TaxPromax. Company income tax returns are due annually within 6 months after the taxpayers accounting year end.
Value Added Tax returns filing: Value Added Tax (VAT) returns are due monthly. Taxpayers are expected to compute VAT on their total turnover for the month, make payment and file returns within 21 days of the following month.
Withholding tax returns filing: Withholding Tax (WHT) is an advance payment of income tax. Taxpayers making payment to a third party liable to CIT are required to deduct and remit WHT at 5 percent or 10 percent. WHT returns is due with 21 days of the month following the month in which the transaction occurred.
Relevant tax authority: The relevant tax authority for VAT, CIT and WHT of companies is the FIRS while the relevant tax authority for PIT, WHT, CGT etc is the State Internal Revenue Service of the taxpayers state of residence.
Mode of payment: Mode of payment of taxes is online through Remitta, Interswitch and e-tranzact gateways or through any of the collecting banks after generating document identification number (payment reference number) on TaxPromax.
Tax clearance certificate: A taxpayer can obtain tax clearance certificate covering the previous three years of assessment after complying with their tax obligations for the period.
Self-assessment: The self-assessment regime allows taxpayers to assess themselves and file their returns with the relevant tax authority.
Desk examination: The tax office will review the tax returns submitted by the taxpayer to ensure arithmetic accuracy and general compliance with the provisions of the tax laws.
Tax audit: This is a statutory audit by the relevant tax authority to confirm the records of the taxpayer leading to the self-assessment filed by the taxpayer.
Tax investigation: This is an exercise to establish evidence of tax evasion or criminal reduction of tax assessment by taxpayers. A tax investigation is aimed at obtaining credible evidence to prosecute criminal tax offenders.
Enforcement: The FIRS and other relevant Tax authority have the power to enforce taxpayer who fail to register, file returns or make payment for taxes as at when due or fail to comply with other tax obligations under the law.
Tax refund: A taxpayer can claim a refund in a case of over payment of tax or existence of withholding tax credit notes that are not utilized to off-set CIT. A refund audit is usually conducted to re-verify the taxpayers claim even after the conventional tax audit exercise.
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