Implications of Finance Act on taxation and investment

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President Muhammadu Buhari on December 31, 2020 signed both the 2021 Appropriation Bill (the Budget) and Finance Bill, 2020 into law following their passage by the National Assembly.

In particular, the Finance Act reviews and amends several tax laws and consolidates into one statute many tax provisions from different tax statutes with the objective to increase revenue of the federal government and curb avenues by which tax has been evaded, and/or avoided over the years.

But while the Finance Act may seem to be favorable to small scale businesses and encourages growing Nigerian companies, it appears not to encourage foreign investors and international businesses. In addition, the increase of the VAT rate from 5 percent to 7.5 percent would put more hardship on the governed while increasing the revenue of the government.

Some key proposals in the Bill include 50 percent reduction in minimum tax rate from 0.5 percent to 0.25 percent of gross turnover for financial years ending between January 1, 2020 and December 31, 2021; exemption of small companies with less than ₦25million turnover from payment of tertiary education tax under the Tertiary Education Trust Fund (Establishment, Etc.) Act, 2011 and granting of tax relief to companies that donated to the Covid-19 relief fund under the private sector Coalition Against Covid (CACOVID).

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Others include, introduction of software acquisition as a qualifying capital expenditure to improve the ease of doing business, clarification on the amount of compensation for loss of office exempted from tax as well as significant reduction in the rate of import duties payable on tractors and motor vehicles to 10 percent and 5 percent, respectively.

The affected laws are The Companies Income Tax Act, Value Added Tax Act, Customs and Excise Tariff, etc (Consolidation Act), Personal Income Tax Act, Capital Gains Tax Act, Stamp Duties Act and Petroleum Income Tax Act

A total of about 23 sections of the CITA have been either amended, repealed or substituted by the Finance Act. Section 9 of the CITA was amended to check for double or multiple taxation, also to charge taxes on collateral.

The requirement for Tax Identification Number (TIN) for companies is made mandatory under the new section 10 of the CITA. TIN is also made mandatory for opening of company bank accounts and the operation of existing ones by account holders.

Section 13 was expanded to make companies with electronic or online business within the spheres of Nigeria and having some significant economic presence in Nigeria taxable. Under section 19 of the CITA, excess dividend is exempted from further tax. Section 23 exempted franked investment incomes from tax liabilities under CITA.

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Section 16 of the CITA was further amended by the addition of a new subsection, which defines what an ‘investment income’ is for the purposes of taxation of life insurance companies.

The Act also increased the monetary penalty for late filing of tax returns. The CITA also categorized companies by their annual gross turn over or income for the purposes of corporate tax liability such that companies with annual gross turn-over of N25 million or less are categorized as small companies and are exempted from tax liability.

A medium-sized company is defined as a company having an annual gross turnover of over N25 million per annum but below N100 million. Such companies shall pay Income Tax at the rate of 20 percent while companies other than small or medium sized companies are defined as large companies and their income tax rate is stated to be 30 percent.

The Capital Gains Tax Act was amended at section 36(2) of the CGTA to the extent that exemption on tax liability for compensation for loss of office which was hitherto limited to N10,000 is now extended to N10 million

There is a new section 32, which provides that no tax shall apply to any trade or business transferred to a Nigerian company for the purposes of better organization of that trade or business etc. This tax exemption is, however, not applicable if the acquiring company subsequently disposes of the assets within one year of acquiring same.

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There is a new section 8 of the VAT Act to cater for the registration of a taxable person upon commencement of business. The penalty for failure to register has been increased from N10, 000 to N50,000 in the first month and from N 5, 000 to N 25, 000 in the subsequent months.

However, the time within which a taxable person is required to register with the service is not specified under the new law as the law simply hinged the time “upon commencement of business.” This is somehow ambiguous and may be subject for court’s interpretation. Also the new finance Act 2020 deletes section 60 of the PPTA.

All said and done, the provisions in the Finance Act will go a long way in resolving many of the controversies and challenges arising from various provisions in the existing tax laws. The amendments will also promote fairness, facilitate ease of compliance and cost of data collection.

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