- The signing of the reform bill into law will amount to a drop of water in an ocean if nothing is done to tackle the general economic downturn
President Bola Tinubu on Thursday signed the tax reform bill into law. The bill has been in the works for over a year and is the most important piece of legislation for his administration. In the early days, the bill encountered some impediments as some aspects and provisions of the bill were opposed by certain individuals from the northern part of the country who believed the bill was not in the region’s interest as it put them at a disadvantage.
After so much bickering and squabbling, a compromise was eventually reached, and controversial aspects of the bill were reworked. In this article, we are going to take a look at the benefits of the bill to subnationals, individuals, households, small business owners and investors and also the factors that can mitigate against the bill having the impact it should have.
SUBNATIONAL GOVERNMENTS
- Federal government to code 5% of VAT revenue to states.
- Transfer of income from the Electronic Money Transfer levy exclusively to states as part of stamp duties.
- Repeal of the obsolete stamp duties law and re-enactment of a simplified law to enhance the revenue for the states.
- States are entitled to the tax on Limited Liability Partnerships.
- Tax exemption for state government bonds to be at par with federal government bonds.
- More equitable model for VAT attribution and distribution.
- Integrated tax administration to provide tax intelligence to states, strengthen capacity development and collaboration, and expand the scope of the Tax Appeal Tribunal to cover taxpayer disputes on state taxes.
- Powers for AGF to deduct taxes unremitted by a government or MDA and pay to the beneficiary government.
- A framework to grant autonomy for states’ internal revenue services and an enhanced Joint Revenue Board to promote collaborative fiscal federalism.
- Legal framework for taxation of lottery and gaming, and introduction of withholding tax for
- BENEFITS FOR HOMES AND INDIVIDUALS
- Complete exemption of low-income earners up to N1m per annum (about N83k per month) from PAYE.
- Reduced PAYE tax for those earning a monthly salary of N1.7m or less.
- Zero (0%) VAT on food, healthcare, education, electricity generation and transmission.
- VAT exemption on transportation, renewable energy, CNG, baby products, sanitary towels, rent and fuel products.
- Tax break for wage award and transport subsidy to low-income earners.
- Tax incentives for employers to hire more people incrementally than in the previous 3 years.
- Exemption of stamp duties on rent below N10m.
- PAYE tax exemption for other ranks and armed forces fighting insecurity.
- Friendly tax rules for remote workers and digital nomads.
- Clarity on taxation of digital assets to avoid double taxation and allow deduction for losses
BENEFITS FOR SMALL BUSINESSES
- Increase in tax exemption threshold for small businesses from an annual turnover of N25m to N50m.
- Exemption from company income tax for small businesses (tax at 0%).
- No withholding tax deduction on the business income of small businesses.
- Exemption from the requirement to deduct and account for tax on payments to vendors.
- Simplified statement of accounts attested to by a small business owner for tax returns in place of audited financial statements.
- Introduction of the Office of Tax Ombud to protect taxpayers against arbitrary tax assessments.
- Tax disputes affecting businesses are to be resolved within 14 days by the Tax Ombud.
- Harmonisation of taxes and repeal of multiple levies.
- Outlaw cash payment and physical roadblocks impose a burden on businesses.
- An attractive tax regime to encourage the formalisation of business and facilitate growth
BENEFITS FOR BUSINESSES AND INVESTMENTS
- 1. Reduction of corporate income tax rate from 30% to 25% and harmonisation of earmarked taxes at a reduced rate.
- Unilateral tax credit for income earned abroad to avoid double taxation, and input VAT credit on assets and services to reduce the cost of production.
- Introduction of economic development incentives for priority sectors.
- Friendly tax regime for business restructuring and reorganisation to improve efficiency.
- Clarity on the 6-year statute of limitation and resolution of objections in favour of the taxpayer if the tax authority fails to respond within 90 days.
- Option to pay taxes and levies on foreign currency-denominated transactions in Naira.
- Faster tax refunds within 90 days (30 days for VAT refunds) with the option of set-off against any tax liability of the taxpayer.
- Request for advance ruling by the taxpayer to be provided by the tax authority within 21 days.
- Expenses incurred by a start-up within 6 years before the commencement of business are tax-deductible.
- Restriction of interest deduction will only apply to related party loans to reduce the cost of finance for businesses.
Looking at the big picture
While the bill has been lauded as transformational and groundbreaking with the president saying it with the president saying it will usher in a “bold new era of economic governance in our country”, the underlying economic issues that will hinder its success have not been addressed. The macroeconomic policies of the government are not coherent and effective.
The country is facing runaway inflation, and people are grappling with an unprecedented cost-of-living crisis. The galloping inflation means high interest rates, which means businesses can’t take loans from banks to fund their business ideas or expand an existing business. The high inflation and cost of living crisis have already decimated the purchasing power of the people, so there is no disposable income to speak of.
If the purchasing power of the people has been severely depleted and they no longer have a disposable income, that means massive consumption needed to stimulate the economy can’t happen, hence affecting production and productivity. If manufacturers can’t sell what they are producing, it affects their entire operation. Goods pile up in the warehouse, putting a strain on their finances, the company start struggling to break even, before long the company start downsizing to stay afloat and cope with its new reality.
For the tax reform to work considerably and achieve the desired outcome, there must be attendant and whole reengineering of the economy. A responsive and appropriate macroeconomic and fiscal policy must be implemented. The rule of law must be prioritised. The signing of the reform bill into law will amount to a drop of water in an ocean if nothing is done to tackle the general economic downturn.