Viewpoint: Peter N Orizu, Nkwachi Abuka
MSMEs are critical to the development of any nation due to their numerous contributions to the economy. MSMEs are perceived to be the engine of growth and catalyst for socio-economic transformation of any country because of their significant contribution to the advancement of new product development and processes, and employment generation. In developing countries like Nigeria, MSMEs play the role of a major investment vehicle, as the sector accounts for over 90% of the country’s firms. Furthermore, MSMEs contribute significantly to GDP, as available statistics from the Small and Medium Enterprises Development Agency of Nigeria quotes the contribution of MSMEs to GDP at 47.8%, while export earnings stand at 7.2% and employed persons at 59m.
Despite their contributions, MSMEs still face multiple taxation issues. This occurs when tax is levied on the same income by more than one level of government, or the same income is taxed multiple times.
The Federal Inland Revenue Service (FIRS) and various state revenue services are currently focusing more effort on tax collection. However, multiple taxation can hinder growth, especially early in MSMEs’ life cycles. Early on, most companies generate losses, and imposing several taxes on profits at different levels of government can foreclose their survival.
The value-added tax (VAT), which is a 5% consumption tax administered by the FIRS on goods and services, is the same as the sales tax collected in some of Nigeria’s states. While consumption taxes, such as VAT, are not strictly business taxes, companies are collection agents of the tax from all of their customers. The collection of these taxes and filing of monthly returns further impose compliance and administrative costs on business entities. The government can further encourage additional growth and investment by eliminating all of the forms of multiple taxation, freeing up cash for investment purposes and increasing investor returns in the sector.
MSMEs do not have the same amount of cash resources that large corporations have, and therefore deserve to be treated differently when it comes to payment of income taxes. Presently, a company’s income tax is assessed generally at 30%, with a stated lower rate of 20% for companies whose turnover does not exceed N1m ($3230), a threshold created decades ago when the amount truly represented a high hurdle for most companies. With the naira’s depreciation, and the consequent general upwards trend in prices over decades, it is difficult to imagine that most companies trading for 12 months would achieve less than N1m ($3230) in annual revenue. The implication is that the vast majority of otherwise eligible MSMEs are locked out of accessing the needed benefit of the reduced tax rate. This threshold needs to be reviewed in line with present day realities. We believe that this measure will inject some much-needed vibrancy into MSMEs and enhance job creation, innovation and the country’s employment rate, which will in turn have a multiplier effect of enhancing individual and company tax revenue in the long run. This will also improve the inflow of foreign direct investment, as entrepreneurs are generally attracted to business-friendly environments.
New companies are usually taxed in their first three years of operation based on the commencement rule, which often leads to the odd effect of taxing the income of a new business more than once during its teething years. This understandably has posed very grave cash flow challenges to new companies among MSMEs, and has contributed immensely to the low survival rate of such businesses within the country. Expunging the commencement rule and other out-of-date provisions from our tax laws will amount to a breath of fresh air for the MSMEs. We believe that one-off taxes on actual profits will be perceived as fairer by the taxpayers and encourage compliance in the drive towards a new national tax policy.
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