The effect of effect of finance act 2020 on small businesses has been the major area of concern and interest for many people in the past few days. However, the changes in finance act 2020 and 2019 respectively lessen tax effect on small businesses. Also, they improve the ease of doing business in Nigeria.
Effect of Finance Act 2020 on Small Business in Nigeria
The recent changes in Nigeria tax laws through the finance act 2020 and 2019 lessen the effect of tax on small businesses in Nigeria in the following ways:
- Pre-operation levy
The pre-operation levy of #25,000 in the first year and #20,000 in the subsequent years to pay by small companies that are yet to commence operation when applying for a Tax Clearance Certificate (TCC) has been abolished. This means that the companies that yet to commence operation can apply for a TCC without incurring any cost.
- Company Income Tax
Finance act 2019 classified companies into small, medium, and large companies. Small companies are companies with gross turnover of below NGN25 million. Medium companies are companies with gross turnover of between NGN25 million and below NGN100 million. While the large companies are with a turnover of NGN100 million and above. However, the tax rate for small companies is 0% which means they are no longer pay company income tax until when they grow to medium companies.
Definition of a small company
However, The Companies and Allied Matters Act (CAMA) 2020 defined a small company as the private company with not more than NGN120 million and NGN60 million as an annual turnover and net asset value respectively. Having no foreigner as its member. If the company is limited by shares, the directors must hold not less than 51% of the share capital. This definition of a small company is contrary to the definition in the finance act 2019. Therefore the finance act 2020 tried to resolve the issue by requesting the small and medium companies to submit a special type of account when filing tax returns.
- Value Added Tax
Although value-added tax (VAT) increases from 5% to 7.5%, the threshold of NGN25million of taxable supplies in a calendar year is set. This means that the small companies with less than NGN25 million are exempted from charging VAT on their goods and services as well as exempted from filing VAT returns. Additionally, remittance of VAT is now on a cash basis not on an accrual basis as it was before.
- Tertiary Education Tax
Section 1(2) of the Tertiary Education Trust Fund act exempts small companies from the payment of tertiary education tax. Therefore, companies with less than NGN25 million are now exempt from both company income tax and tertiary education tax.
In conclusion, some of the changes in finance act 2020 reduce the negative effect of tax on the small companies operating in Nigeria. Consequently, they will surely enhance economic growth and development in Nigeria.
Afeez is one of the founding partners of Marasas Consulting limited. He consults for both individuals and entities in the area of accounting, management, audit, tax, and investment. He has a wide range of experience both online and offline which allows him to provide relevant and timely professional advice and assistance to business owners with their accounting, tax, management, audit, and investment plans.
Afeez is a member of the Institute of Chartered Accountants of Nigeria (ICAN) and a member of the Nigerian Institute of Management (Chartered). He is a certified Google analyst and strategist. He earned his Bachelor degree in Management and Accounting from Obafemi Awolowo University, Ile-Ife, Nigeria, and earned an ordinary national diploma in Accountancy from The Polytechnic of Ibadan, Oyo State, Nigeria. He earned certification in “Excel Crash Course” and “Reading of Financial Statement” from Corporate Finance Institute, Canada.
Afeez is dedicated to helping clients achieve business success by helping them to establish solid and sound accounting, tax, and financial processes.