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FutureNow Understanding the Nigerian Tax System and the Implications of the New Reforms on SMEs - Prof Oyedokun .pptx
Being a Paper Presented at the Future Now Africa Webinar Series on Sunday, February 16, 2025.
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FutureNow Understanding the Nigerian Tax System and the Implications of the New Reforms on SMEs - Prof Oyedokun .pptx
- 1. Understanding the NigerianTax System and the Implications of the New Reforms on SMEs Prof. Godwin Emmanuel Oyedokun Professor of Accounting and Financial Development Department of Management & Accounting Faculty of Management and Social Sciences Lead City University, Ibadan, Nigeria Principal Partner; Oyedokun Godwin Emmanuel & Co (Accountants, Tax Practitioners & Forensic Auditors) Being a Paper Presented at the Future Now Africa Webinar Series on Sunday, February 16, 2025.
- 2. ND (Fin), HND(Acct.), BSc. (Acct. Ed), BSc (Fin.), LLB., LLM, MBA (Acct. & Fin.), MSc. (Acct.), MSc. (Bus &Econs), MSc. (Fin), MSc. (Econs), Ph.D. (Acct), Ph.D. (Fin), Ph.D. (FA), CICA, CFA, CFE, CIPFA, CPFA, CertIFR, ACS, ACIS, ACIArb, ACAMS, ABR, IPA, IFA, MNIM, FCA, FCTI, FCIB, FCNA, FCFIP, FCE, FERP, FFAR, FPD-CR, FSEAN, FNIOAIM, FCCrFA, FCCFI, FICA, FCECFI, JP Prof. Godwin Emmanuel Oyedokun Professor of Accounting and Financial Development Department of Management & Accounting Faculty of Management and Social Sciences Lead City University, Ibadan, Nigeria Principal Partner; Oyedokun Godwin Emmanuel & Co (Accountants, Tax Practitioners & Forensic Auditors)
- 3. Understanding the Nigerian TaxSystem and the Implications of the New Reforms on SMEs
- 4. Contents Introduction The Nigerian Tax System Legaland Regulatory Framework Structure of the Nigerian Tax System Challenges of the Nigerian Tax System The New Proposed Tax Bill in Nigeria Objectives and Rationale Tax Incentives for Business Growth and Investment Changes to Personal Income Taxes Personal Income Tax (PIT) Structure VAT and Consumption Taxes Disparities in VAT Contribution and Allocation Impact on MSMEs and Startups Implications of New Tax Laws for Individuals and Businesses Tax Provisions for Businesses in Nigeria Personal Income Tax (PIT) Filing for Individuals Companies Income Tax (CIT) Filing for LLCs and Corporations Effect of WHT on SMEs & Consultancy Firms Effect of VAT on SMEs and Consultancy Businesses Conclusion
- 5. Introduction The Nigerian taxsystem is a critical component of the country's economic framework, serving as a key revenue source for government operations and national development. Taxation plays a fundamental role in wealth redistribution, economic stability, and public service funding. Small and Medium Enterprises (SMEs) constitute a significant portion of Nigeria’s economy, contributing approximately 48% of the national GDP and accounting for over 84% of employment in the country. The recent tax reforms aim to improve tax administration, increase government revenue, and create a more favorable business environment.
- 6. The Nigerian TaxSystem Economic Growth The Nigerian tax system is a structured framework for revenue generation designed to support economic growth, public infrastructure, and social services. Fiscal Federalism It is governed by various laws, policies, and regulatory agencies at the federal, state, and local levels. The system is based on the principle of fiscal federalism.
- 7. Legal and Regulatory Framework 1Constitution The Constitution of the Federal Republic of Nigeria (1999, as amended) provides the legal basis for taxation powers. 2 FIRS Act The Federal Inland Revenue Service (FIRS) Act (2007) establishes and empowers FIRS to administer federal taxes. 3 Companies Income Tax Act The Companies Income Tax Act (CITA) governs taxation of corporate entities.
- 8. Structure of theNigerian Tax System Federal Taxes Administered by FIRS, including Companies Income Tax (CIT) and Value Added Tax (VAT). State Taxes Administered by State Internal Revenue Services (SIRS), including Personal Income Tax (PIT). Local Taxes Local Government Taxes and Levies, including Tenement Rates and Market Taxes.
- 9. Challenges of theNigerian Tax System Tax Evasion High levels of informal sector activities make enforcement difficult. Multiple Taxation Businesses often face overlapping tax burdens from different government levels. Low Tax-to-GDP Nigeria's tax revenue as a percentage of GDP remains low compared to global standards.
- 10. The New ProposedTax Bill in Nigeria Nigeria Tax Bill 2024 Seeks to provide a comprehensive fiscal framework for taxation, harmonizing major taxes into a single legislation. Tax Administration Bill Aims to reduce disputes and enhance compliance by providing streamlined tax administration procedures. Nigeria Revenue Service Establishment Bill Intended to strengthen tax collection and administration. 4 Joint Revenue Board Establishment Bill Aimed at creating a tax tribunal and a tax ombudsman, this bill seeks to harmonize, coordinate, and resolve disputes arising from revenue administration in Nigeria.
- 11. Objectives and Rationale ProgressiveTaxation The tax system aims to be more progressive, ensuring that higher-income earners and large corporations pay a fair share of taxes. Protecting Low-Income Earners The bill includes provisions for protecting low- income earners, such as tax credits and exemptions for basic necessities. Boost Revenue To increase government revenue for critical infrastructure projects, social programs, and economic development. Enhancing Tax Compliance The bill aims to increase tax revenue by expanding the tax base and ensuring that more individuals and businesses contribute to national development. Modernizing the Tax System The bill seeks to introduce digital tools for tracking and collecting taxes, streamline tax processes, and reduce bureaucratic inefficiencies.
- 12. Objectives and Rationale Tax Incentives Thebill encourages both local and foreign investment, especially in sectors such as manufacturing, technology, and renewable energy. Stimulating Business Growth These provisions are designed to stimulate business growth, create jobs, and foster entrepreneurship, particularly in the formal and informal sectors. Broaden Tax Base To expand the tax base by capturing previously untaxed income and activities, including the informal sector.
- 13. Tax Incentives forBusiness Growth and Investment R&D Tax Credits The bill proposes a 15% tax credit for businesses investing in R&D, especially leading to new products or services. This incentive is aimed at promoting innovation, improving productivity, and bolstering industries that can create jobs and stimulate the economy. Tax Relief for Strategic Sectors The bill provides tax incentives such as investment allowances, exemptions, and credits for specific sectors, including renewable energy, agriculture, and technology. These incentives are designed to attract both domestic and international investment, propel sectoral growth, and reduce Nigeria’s reliance on oil revenue.
- 14. Changes to Personal IncomeTaxes 1 Tax Brackets Introducing revised tax brackets to make the system more progressive and ensure fairness. 2 Tax Relief Expanding tax relief provisions for low-income earners and individuals with dependents to alleviate the tax burden.
- 15. Personal Income Tax(PIT) Structure 1 ₦800,000 0% 2 ₦2,200,000 15% 3 ₦9,000,000 18% 4 ₦13,000,000 21% 5 ₦25,000,000 23%
- 16. The Current VATSharing Formula: A Breakdown 50% Equality A 50% share is allocated equally to all states, regardless of their contributions or population. 30% Population A 30% share is distributed based on population, favoring states with larger populations. 20% Derivation A 20% share is allocated based on the derivation principle, rewarding states with natural resources.
- 17. The Proposed NewVAT Sharing Formula 1 Derivation 60% 2 Population 20% 3 Equality 20% The proposed formula prioritizes derivation, allocating 60% based on natural resources while the Nigerian Governors’ Forum (NGF) proposed 30% based on derivation. This change aims to incentivize resource-rich states to contribute to national development while ensuring that they receive a greater share of the revenue generated from their resources. 1 2 3 Derivation 30% Population 20% Equality 50% Proposed New Tax Bill Governors’ Forum Proposal
- 18. 18 Geopolitical Zones andVAT Pool 1 SOUTH WEST Contributed: N3.11trn Received: N849.71bn (27.4%) 2 SOUTH SOUTH Contributed: N1.08trn Received: N543.49bn (50.3%) 3 NORTH WEST Contributed: N211.27bn Received: N574.32bn (271.8%) 4 NORTH EAST Contributed: N174.50bn Received: N411.84bn (236%) 5 NORTH CENTRAL Contributed: N154.54bn Received: N408.66bn (264.4%) 6 SOUTH EAST Contributed: N101.09bn Received: N341.46bn (337.8%)
- 19. VAT and ConsumptionTaxes Adjusted VAT Rates The bill suggests raising VAT rates on luxury goods while offering lower VAT rates or exemptions for essential items such as food and medicine. This approach aims to balance tax revenue generation with protecting lower-income earners from excessive consumption taxes. Digital Service Consumption Tax Following global trends, the bill introduces VAT on digital services provided by foreign companies, including streaming services, e-commerce, and online platforms. This ensures that digital companies operating in Nigeria contribute to the tax base and maintain a level playing field.
- 20. Disparities in VATContribution and Allocation Significant Disparities In 2024, States like Rivers, Lagos, and Delta contribute significantly to the VAT purse while receiving less than their contributions. Conversely, states such as Imo, Zamfara, and Abia contribute a fraction and receive far more. Example: Rivers State Rivers State, a major oil producer, contributed a substantial ₦70.54billion to the VAT purse, receiving only ₦15.54billion in return. Lagos State Lagos contributed ₦249.77billion VAT and received ₦40.22billion from VAT in return Zamfara State Zamfara contributed ₦432.8Million to VAT purse and received ₦5.65billion from VAT purse in return.
- 21. 21 Impact on MSMEsand Startups 1 Reduced Compliance Burden Simplified regimes, such as turnover-based taxation, can ease the compliance process for businesses with limited financial expertise. 2 Cost Savings Tax incentives for startups can lower initial operating costs, enabling them to allocate resources toward growth and innovation. 3 Encouragement of Formalization Reduced rates and streamlined filing processes may incentivize informal businesses to register and comply with tax laws. 4 Increased Access to Financing Formalized businesses with better tax records are more likely to attract loans and investments, boosting growth prospects 5 Technology Adoption Encouraging digital tax filing may promote broader adoption of digital tools, improving overall business efficiency
- 22. Implications of NewTax Laws for Individuals and Businesses 1 Personal Income Tax (PIT) Applies to individuals with progressive tax rates from 7% to 24%, depending on income. Those earning below ₦1 million annually may be exempt under recent reforms. 2 Pay-As-You-Earn (PAYE) Tax Employers deduct income tax from employees’ salaries. Individuals earning less than ₦30,000 per month are often exempt in some states. 3 Capital Gains Tax (CGT) Individuals are subject to 10% CGT on gains from the disposal of chargeable assets. Exemptions apply if proceeds are reinvested in another home.
- 23. Tax Provisions forBusinesses in Nigeria Companies Income Tax (CIT) Applies to registered companies, excluding oil and gas. Small businesses with turnover below ₦25 million are exempt from CIT. Tax-exempt profits apply to priority sectors for up to five years. Value Added Tax (VAT) Businesses collect 7.5% VAT on taxable goods and services. Small businesses with turnover below ₦25 million are exempt from VAT registration. VAT-exempt businesses include those in health, education, and humanitarian services.
- 24. Personal Income Tax(PIT) Filing for Individuals File Annual Tax Returns Individuals and sole proprietors must file their annual tax returns with the State Internal Revenue Service (SIRS) where they reside. Deadline: March 31st The deadline for filing is March 31st of each year. Filing Process Fill and submit an Annual Income Tax Return (Form A), providing details of income, reliefs, and allowances claimed. Pay applicable PIT based on the progressive tax rate (7% - 24%).
- 25. Companies Income Tax(CIT) Filing for LLCs and Corporations 1 File Annual CIT Returns All registered companies must file their annual Companies Income Tax (CIT) returns with the Federal Inland Revenue Service (FIRS). 2 Deadline New companies must file within 18 months of incorporation or 6 months after their first financial year-end. Existing companies must file within 6 months after the end of the financial year. 3 Filing Process Submit audited financial statements, declare total revenue, expenses, and taxable profits. Pay CIT at applicable rates (0%, 20%, or 30%, based on company size).
- 26. How WHT AffectsSMEs & Consultancy Firms Cash Flow Impact Consultancy businesses face a 5- 10% deduction from invoices. SMEs may have revenue tied up in WHT deductions until a tax credit is claimed. Tax Credit & Recovery WHT is an advance tax payment; businesses can claim the deducted amount as a tax credit when filing annual tax returns. Compliance Requirement SMEs and consultants must register for a Tax Identification Number (TIN) to receive WHT credit notes.
- 27. How VAT AffectsSMEs and Consultancy Businesses VAT Collection Obligation VAT-registered SMEs and consultants must charge 7.5% VAT on invoices and file VAT returns monthly. 1 VAT Input & Output Tax Adjustment Businesses can deduct VAT paid on purchases (input VAT) from VAT collected on sales (output VAT). 2 Impact on Business Pricing VAT increases the cost of services and goods, which can make small businesses less competitive. 3
- 28. Service Type WHTRate for Individuals (%) WHT Rate for Companies (%) Professional / Consultancy Services 5% 10% Rent (Commercial Property) 10% 10% Advertising Services 5% 10% Building and Construction 5% 5% Supply of Goods 5% 5% Applicable WHT Rates for Consultancy Businesses & SMEs Annual Turnover (₦) Tax Rate (%) Applicable to Below 25 million 0% Small businesses 25 – 100 million 20% Medium-sized companies Above 100 million 30% Large companies CIT Rates Annual Income (₦) Tax Rate (%) First 300,000 7% Next 300,000 11% Next 500,000 15% Next 500,000 19% Next 1,600,000 21% Above 3,200,000 24% Personal Income Tax (PIT)
- 29. Tax Type WHT(Withholding Tax) VAT (Value Added Tax) Nature of Tax Advance income tax deduction Consumption tax on goods/services Who Pays? Deducted from payments made to businesses Collected from customers and remitted to FIRS Who Remits? The client or contracting company deducts and remits WHT The SME or consultancy firm collects and remits VAT Effect on Cash Flow Reduces upfront revenue (5-10% withheld) Increases cost of goods/services (7.5% added to price) Refundability Can be claimed as a tax credit Excess VAT input can be refunded or carried forward Compliance Requirement Register for TIN, obtain WHT credit notes, include WHT in tax returns Register for VAT if turnover > 25 ₦ million, file monthly returns Penalties for Non- Compliance 200% of tax due + interest ₦50,000 fine for late registration, 10% penalty for late remittance Summary of WHT vs. VAT Impact on SMEs & Consultancy Firms
- 30. Criteria Federal TaxesState Taxes Local Taxes Authority Federal Government (FIRS/NRS, Customs) State Government (SIRS) Local Government Authorities Coverage Nationwide Within each state Within each local government area Who Pays? Businesses, federal employees, corporations Employees, self- employed individuals, property owners Market traders, transport operators, local residents Common Examples CIT, VAT, PPT, WHT, CGT PIT, Property Tax, Business Premises Tax Tenement Rate, Market Fees, Park Fees Usage of Revenue National infrastructure, defense, education, healthcare State-level projects like schools, roads, hospitals Local sanitation, waste management, grassroots development Differences between Federal, State, and Local Government Taxes
- 31. Criteria PAYE (Employees) Self-Assessment (Self- Employed) Payroll Taxes(Employers & Employees) Who Pays? Employer deducts and remits Individual calculates and pays Employers & Employees Filing Frequency Monthly (by the 10th) Annually (by March 31st) Monthly/Annually Applicable To Salaried workers Freelancers, entrepreneurs, rental earners All employees & businesses Penalties for Non- Compliance Employer fined + interest Taxpayer fined 50,000 ₦ Employer fined & subject to audits Key Differences between PAYE, Self-Assessment, and Payroll Taxes
- 32. Conclusion The Nigerian taxsystem's reforms aim to enhance efficiency and broaden the tax base, but their impact on SMEs is a concern. SMEs are vulnerable to financial and administrative burdens associated with tax compliance. Effective tax administration should balance revenue generation with a business-friendly environment. Policy adjustments, stakeholder engagement, and capacity-building are necessary to ensure tax reforms support SMEs. By addressing these concerns, Nigeria can foster an inclusive economic landscape where taxation serves as a tool for development rather than a constraint on business growth.
- 33. Prof. Godwin EmmanuelOyedokun Professor of Accounting & Financial Development Lead City University, Ibadan, Nigeria Principal Partner; Oyedokun Godwin Emmanuel & Co (Accountants, Tax Practitioners & Forensic Auditors) [email protected]; [email protected] +2348033737184 & 2348055863944