Finance Act 2020: Tracking fiscal changes to meet pressing trends

Posted by News Express | 19 March 2020 | 1,188 times

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•Ezekiel Archibong

By EZEKIEL ARCHIBONG

I woke up on February 2, 2020, only to realise that my data was used up. So I purchased N1,000 airtime to subscribe to a 1.5-gigabyte data plan. Upon confirmation that my recharge was successful, I punched in the necessary codes and selected a data plan of interest. Shortly, I received a message that my request was not successful due to insufficient balance. I thought I had input the wrong codes or probably selected a higher data plan, so I tried it again. Lo and behold, it was the same. I decided to check my account balance to be sure I had not fallen to network indiscriminate tariffs. To my chagrin, my account balance was intact. Out of perplexity, I put a call through to my service provider. A customer care representative picked my call and I explained my ordeal. The customer care representative apologised and replied that the reason why I was unable to subscribe to desired data plan was because of the increase in VAT from 5 per cent to 7.5 per cent. She advised that I top my balance to be able to subscribe to the data plan.

The Finance Act 2020 was birthed on January 13, 2020, with commencement date pegged at February 1, 2020. The Act amended seven fiscal legislations, namely: Companies Income Tax Act, Value Added Tax Act, Petroleum Profits Tax Act, Personal Income Tax Act, Capital Gains Tax Act, Customs and Excise Tariff Act and Stamp Duties Act. The goal of the Act is to raise revenues for infrastructural development and to mark a return to an era of active fiscal monitoring geared towards stimulating the economy and creating an enabling environment for sustainability. The loudest impact from the Finance Act is the amended Value Added Tax (VAT) Act, which increased the VAT rate by 50 per cent from 5 per cent to 7.5 per cent. In this article, I will go through some salient impacts of the Finance Act and how they affect the Nigerian economy and society at large.

Nigeria’s economy has experience down-turn over the years which has led the country to stoop to borrowing as an antidote, but the situation only worsen as we keep piling up debts day by day. Nigeria has taken a clue from this and made a shift by looking inwards for solutions to its multifaceted problems. One way has been by enacting the Finance Act 2020.

The Finance bill was introduced to the National Assembly along with the 2020 federal budget.  According to the president, “This is the first time since the return of democracy in 1999 that a federal budget is accompanied by the passage of a Finance Bill.” The president had stated that the finance bill was introduced to: “Reform Nigeria’s tax laws to align with global best practices; support MSMEs in line with our ease of doing business reforms; incentivise investments in infrastructure and capital markets, and raise government revenue.” The Finance Minister, Zainab Ahmed, had commended the initiative and further stressed that the Act was “designed for the good of Nigerians as 15 per cent of the capital would go to the Federal Government, 35 per cent to Local governments and 50 per cent to state government.” She continued, “The Act proposes to introduce tax reforms that will help the government achieve its revenue projections for the 2020 Budget (8.155 trillion).” The minister further explained that the Finance bill “is a peoples’ bill, considering the expansion of the VAT list of exemption.”

Measures for micro small and medium enterprises

According to data from the National Bureau of Statistics, micro small and medium enterprises (MSMEs) employ about 84 per cent of Nigeria’s labour force, while contributing about 50 per cent of the number of industrial jobs. The sector accounts for 48 per cent of GDP and has been described as the engine room for Nigeria’s development and industrialisation. As stated earlier, the Finance Act sought to shield budding companies or MSMEs from withering, create more employment opportunities across board while allowing the tax administration focus its additional resources towards harnessing tax revenue from the sectors of the economy with the largest revenue footprints. The Act also takes care of some essential palliatives for the MSMEs to mitigate the impact of the tax rates. There are three notable provisions in the Act to that effect. They are:

  1. Introducing a VAT registration threshold for MSMEs with a turnover of less than N25 Million per annum.
  2. Reducing the corporate tax rate for the MSMEs from 30 per cent to 20 per cent for small firms (with turnover between N25 million and N100 million per annum)
  3. Exempting micro-firms (with a turnover of less than N25 million per annum).

The introduction of VAT registration threshold exempt companies with an annual turnover of N25 million or less from registering, remitting, issuing tax invoice and collecting VAT. The new provision also exempts the profits of small companies earned in their first five years of operation. Companies whose annual returns are over N25 million but less than N100 million are to pay 20 per cent Company Income Tax, instead of the initial 30 per cent while companies with net worth of over N100 million are to pay CIT at 30 per cent.

VAT increased by 50%

The loudest part of the Finance Act is perhaps the increase of VAT by 50 per cent from 5 per cent to 7.5 per cent. This has been met with motley reactions. Some have welcomed the idea with wide arms on the premise that Nigeria has one of the lowest VAT rates in the world. According to the 2019 report of Revenue Statistics in Africa by the Organisation for Economic Cooperation and Development (OECD), when compared with the same index across other African countries, Nigeria's tax revenue generation was significantly low for the level of economic activities in the country. Specifically, the 26 African countries (including Ghana and Botswana) reviewed in the OECD's study reported an average tax to GDP ratio of 17.2 per cent (11.5 basis points higher than Nigeria's ratio).

On the flip side, there has been public outcry on the perceived hardship the Act could visit on the dwindling economy and the potential increase in the cost of certain goods and services which will be largely borne by the final consumer. It is also projected that for companies to stay competitive, they may have to absorb the impact of the VAT so that the price of goods and services are not affected. Others have murmured that the increment in VAT is a ploy by the government to enable it cater for the new minimum wage.

Exemption list

Another notable stride in the Act is the expansion of the VAT Exemption List to include “basic food items” such as, agro and aqua-based staple food described as additives, bread, cereals, cooking oils, culinary herbs, fish, flour and starch, fruits, live or raw meat and poultry, milk, nuts, pulses, roots, salt, vegetables and water, etc. The list is inexhaustive.

Section 47 also provides other exemptions to include:

  1. Locally manufactured sanitary towels, pads or tampons
  1. Services rendered by microfinance banks, people’s banks and mortgage institutions, and 
  1. Tuition relating to nursery, primary, secondary and tertiary. 

Making the intangibles tangible

Nigeria has a growing the market for intangible goods such as intellectual property, copyrights, patents, trademarks, royalty, etc. These augment business processes, increases productivity and have yielded massive turnover for participants at it. Intellectual property is referred to as a product of the mind and sometimes does not translate beyond the intangibles. The begging question then is, whether intangible goods should attract VAT. The erstwhile provisions of the VAT Act had limited the VATability of goods to just tangible goods and, as such, intangible goods or incorporeal properties were not VATable since they did not fall within the purview of the Act. This position was given judicial backing in the case of FIRS v CNOOC Exploration & Production Nigeria Limited, where the court held that an interest in rights in an oil concession is an incorporeal or intangible property and such should not attract VAT. The new Finance Act has done away with that provision and has expanded the scope of “goods” to include:

“Any intangible product, asset or property over which a person has ownership or rights, or from which he derives benefits, and which can be transferred from one person to another, excluding interest in land.”

Digital difference

Technology is a growing necessity. As the years swing by, the world of business is leaning more and more towards the Internet and technology and the Finance Act 2020 cannot afford to be left behind in the scheme that will ease fiscal process.

An interesting provision in the Finance Act is the amendment of section 13 of CIT Act to include digital services with “economic presence.” Digital services such as e-commerce, e-business, e-payment, cloud storage platforms, online consultancy and management services, among others, which are completely rendered from offshore to a Nigerian resident may now be taxed in Nigeria, if it is determined that the service provider (foreign company) has a significant economic presence in Nigeria. This deviates from the previous provisions of the CIT Act, which requires foreign companies to have a physical presence in Nigeria. As more and more online businesses are springing up with massive turn-up from Nigerians, it becomes incumbent that the government uphold the economic presence of a company over the physical presence. With this, foreign companies such as Google, Amazon, Facebook, etc. whose physical presence, although nowhere in Nigeria, may become taxable based on their economic presence in Nigeria. This provision in the Finance Act is evidence that the Nigerian tax landscape is being aligned to reflect global best practices in emerging sectors of the economy. A fall out to this might be that more Internet fraudsters would emerge in the guise of being a foreign company and then carry out their obnoxious activities with nowhere to trace them to.

The Finance Act technological footprint is also seen in the modes of objection by a tax-payer. Generally, when a tax-payer receives a letter from the tax authorities indicating the amount of tax to be paid, a tax-payer has 30 days to raise an objection in writing. Where an objection is not made within the timeframe given by law, such is deemed accepted and assessment, thus becoming final and conclusive. In the case of Earth Moving International Limited v. FIRS, the issue became whether a tax-payer's objection through online means was valid. The Tax Appeal Tribunal (TAT) held that the CITA did not provide the means by which the Notice of Objection must be served (it just provided that it must be in writing), and that a taxpayer can object via online means to FIRS tax assessments. This issue was laid to rest in Section 31 of the Finance Act which amends the Personal Income Tax Act to include courier service and electronic e-mail as means of communicating a notice of objection. This is to say, if the tax authorities assess a person wrongly, a tax-payer can object to this assessment by simply sending an e-mail to the State Inland Revenue Service, as opposed to journeying to their offices.

Again, in this age of e-commerce and payment through POS, electronic transactions now attract stamp duties. Where a transfer of N10,000 or more is made from one account to another, N50 will be charged. An exemption, however, is transfers made by a person into his own account within the same bank. 

FIRS response

The Federal Inland Revenue Service in an attempt to enforce the Act had issued public notices at different times. One of the notices was made pursuant to the new VAT's implementation. The notice urged tax-payers to effect changes to reflect the new VAT rate from 5 per cent to 7.5 per cent. Consumers are also to confirm from receipt that the adoption of the new tax rate doesn’t apply to the expanded list of exemption of consumer’s goods and services. There is also a mandatory rendering of the monthly VAT returns to reflect the new rate before filing and to penalise late submissions of returns.

Another Public Notice issued by the FIRS speaks to the existence of the Non-Resident Persons Tax Office (NFPTO) with a commencement date of January 1, 2020. The NFPTO handles all tax affairs of non-resident persons (individual and corporate). By the notice, all non-resident persons were requested to regularise their outstanding tax obligations with and to direct their future correspondence to the NRPTO. It also clarifies that a Non-Resident Person means a foreign company as defined by the Companies Income Tax Act or an individual as defined by the Personal Income Tax Act.

The third notice was to inform the general public that FIRS shall join forces with the Corporate Affairs Commission, the National Financial Intelligence Unit (NFIU), Money Deposit Banks (MDB), among legions of other agencies to ensure that all tax-payers file and pay appropriate taxes as and when due and to beset any non-compliant, including dormant companies and placing liens on their bank account (s) or delisting such company from the list of incorporated companies. Dormant Companies who had notified FIRS that they would be temporally out of business for at least a period of one financial year are advised to regularise their tax returns with the FIRS on or before 30 June 2020.

In conclusion, the Nigerian government has made conscious efforts to improve the business environment by designing impressive systems, followed by a holistic amendment of the core tax laws in Nigeria and improving fiscal policy and regulatory apparatus to further strengthen our domestic capital market and ultimately ensure sustained and inclusive growth and development. The Act also takes care of essential palliatives to support MSMEs and mitigate the impact of the VAT rate increase on the most vulnerable businesses, communities and citizens. While making laws may never be a problem in Nigeria, implementation is the crux of it all. The viability of the Finance Act of 2020 depends largely on execution and not a “paper tiger.” Good thing is that the FIRS had published notices to that effect. We, therefore, hope that the implementation of the Act would be done in a manner that allows companies and individuals to enjoy the maximum benefits of the changes and be showcased as evidence of the government's further commitment to improving the ease of doing business in Nigeria and the lives of the citizens at large.

•Ezekiel Archibong, Attorney, Budding Speaker and Poet, is Editor of The People’s Accolade Law Magazine. He writes from Lagos and can be reached through his e-mail address: salvagearchibong459@gmail.com


Source: News Express

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