President Buhari has signed the finance bill into law. This comes days after assenting to the 2020 budget. The new law amends a number of extant tax laws including the Company Income Tax (CIT), Value Added Tax (VAT), Petroleum Profit Tax, customs and excise tariff, Personal Income Tax, Stamp Duties Tax and the Capital Gains Tax.
The main objective of the finance bill is:
- To promote fiscal equity
- Reform the domestic tax laws to align with global best practices
- Introduce tax incentives for investments in infrastructure and capital markets
- Support MSMEs
- Increase Government revenues
- VAT to increase to 7.5% from 5%
- Companies with a turnover of less than N25 million pa are tax-exempt from CIT (Progressive tax)
- Companies that earn between N25 million – N100 million annually will pay 20% of their profit as CIT
- Companies with annual income in excess of N100 million annually will pay 30% of their profit as CIT
- To avoid double taxation, tax on dividends is no longer applicable
- Tax Identification Number (TIN) is a prerequisite for operating a bank account
- The threshold for stamp duty on online transactions increased to N10,000 from N1,000
- Stamp duty removed for bank transfers below N10,000 9. Goods and services redefined to cover intangible items
The introduction of a bill that amends various tax laws is a welcome development in the tax system. This could boost the economy by stimulating the growth of small and medium scale enterprises and increase foreign direct investments into the country.
In addition, the VAT increase is expected to help fund the minimum wage implementation by state governments. State and local governments will receive 85% of the revenue while the federal government will receive 15%.
It is no news that consumer demand has been relatively weak, the revised VAT would have a knock-on effect on consumer disposable income due to the additional 2.5% VAT on most consumer goods. The wage increase and higher VAT will exacerbate inflationary pressures.
Inflation has increased consecutively since September 2019 and an increase in consumer price inflation is imminent. If the higher VAT leads to a spike in inflation in January, the MPC would be left with no alternative but to commence a tightening cycle and raise the MPR.
Finally, the onus is on the government to address tax revenue shortfalls, eliminate leakages and improve transparency in expending the collected revenue.
Financial Derivatives Company (FDC)