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We are pleased to bring you another social media discussion. Today, we shall be discussing the tax liabilities of SMEs in Nigeria.
Before we begin, here's the background to today's discussion.
The Federal Government of Nigeria has, in recent times, rolled out favourable policies for the registration of business names in Nigeria.
An example of one of these policies is the reduction of the amount for registration of a new business name from NGN 10,000 to NGN 5,000
This policy has no doubt led to the formal registration of business names in their thousands across the 36 states and the FCT of the Federation
It is important to note that most SMEs in Nigeria are registered as business names
The implication of this policy for SMEs is that this leads to their growth, increases the opportunities for access to capital/funding, operation of corporate accounts with banks etc.
This boost for SMEs also has the potential to boost revenue growth through taxation. This is due to the fact that with registration comes the formal recognition of these businesses.
With formal recognition comes the widening of the tax net for the tax authorities and the access to SMEs who previously operated in the informal sector.
In today’s episode, we shall be dealing with the tax liability of business names (SMEs) under Nigerian law and how this can boost revenue growth in the Country.
An analysis of the tax liability of business names is basically the tax liability of the individual(s) who own/manage the business
This is simply because, unlike companies, business names do not have a distinct legal personality from the individuals who own/manage the business
For ease in tax administration, all proprietors are to obtain a Tax Identification Number ('TIN') from the tax authority to ease the payment of taxes such as PIT, VAT, etc.
Since the business names do not have/enjoy legal personality, it is the proprietors that will be issued the TIN and not the businesses
Thus, our first point of call is the liability of business names under the Personal Income Tax Act. This Act seeks to tax the personal income of all individuals.
It is usually paid to the state revenue authority where the individual is resident. This tax is also paid on a progressive basis.
What this means is that unlike other taxes where the tax is basically a percentage of a particular figure the personal income tax has a scale with different rates applicable to the different income classes.
Therefore, the higher the income of the individual from the business, the higher the applicable tax rate for the individual
One interesting feature of this tax for the purpose of entrepreneurs is that the tax will be paid on all income sources and not just the income derived from the SME
For clarity, the applicable rate is as follows: First 300,000 at 7%; Next NGN300,000 at 11%; Next NGN500,000 at 15%
Next NGN500,000 at 19%; Next NGN1,6000,000 at 21%; Above NGN3, 200,000 at 24%
As with all other taxes, before the tax liability of an individual will be computed for the purpose of this tax, it is important that the allowable deductions be made.
The deductions to be made are contained in the Personal Income Tax Act, and for the purpose of clarity, it is important that you speak to your tax lawyers
It is also important to note that before the deductions can be allowed by the relevant state tax authority, such deductions must have been presented and approved
The assessment of taxable income is usually done for the period of January – December of the previous year
However, where it is a new trade, a different form of assessment is done, it is important that you speak to your tax lawyers for advice in this regards.
This tax can be administered through a voluntary self-assessment by the taxpayer or through the PAYE (Pay As You Earn) deduction.
Where an individual fails to make his self-assessment, the relevant state tax authority would access his tax liabilities and demand payment of same through a notice of assessment.
An individual who is dissatisfied with the amount of tax liabilities payable by him as stated in the notice of assessment, can request in writing for a review of the assessment by the relevant tax authorities. The service of a tax legal practitioner is required in this regard.
The Act gives a bonus of 1% on taxes to be paid, once same is paid timeously.
A Tax Clearance Certificate is issued to a taxpayer upon request which evidences payment of taxes for 3 (three) consecutive years.
It is also important to note that the Act exempts individuals with taxable income of less than NGN30,000 from filing a return.
A tax clearance certificate (TCC) usually states the chargeable income, tax payable, tax paid and tax outstanding or alternatively a statement to the effect that no tax is due.
The TCC is used in an application for Government loan for industry or business, registration of motor vehicle, application for certificate of occupancy, application for transfer of real property, appointment or election into public office, amongst others.
Another important type of tax that is payable by the entrepreneur or owner/operator of the Business name is the Value Added Tax (VAT)
The VAT is payable by the entrepreneur for the supply of goods and services at a fixed rate of 5 (five) percent. This tax is to be paid on a monthly basis.
However, not all goods and services are subject to the VAT. The Value Added Tax (VAT) Act exempts certain goods from the scope of the VAT
Some of these goods and services exempted are; medical and pharmaceutical products, basic food items, books and educational materials, tractors, plough, etc.
The VAT is administered by the Federal Revenue authority known as the Federal Inland Revenue Service (FIRS). It handles both the collection and registration
All taxable persons are required to register with the FIRS within six months of the commencement of business operations
Failure to do so by the entrepreneur attracts a fine of NGN 10,000 for the first month of the failure and NGN5,000 for subsequent months in addition to sealing up of business premises
All registered businesses are expected to register and have a VAT registration certificate.
They are also required to boldly display their VAT registration number on all invoices issued.
Furthermore, a Business Name is required to remit this tax and it is usually withheld at source except the customer provides a withholding tax credit note to this effect.
For the purpose of VAT, there are two distinct types of taxes known as the input and the output tax.
The input tax is tax payable by a taxable person to the supplier on taxable goods and services purchased by or supplied to him.
While, the output tax is the tax collected by the taxable person on supplying taxable goods or services to his accredited distributor, agent, client, or consumer.
If the output tax exceeds the input tax, the taxpayer remits the excess to the FIRS, however, where the input tax exceeds the output tax, the taxpayer would be entitled to a receive a refund of the excess tax from the FIRS on production of relevant documents to support his claim
The VAT returns is to be filed by the taxable person on or before the 30th day of the month in which the supply or purchase was made.
Furthermore, the best of judgment principle applies in the administration of the VAT by the tax authorities.
Thus where a person fails to render returns or renders incomplete/inaccurate returns, the FIRS shall to the best of its judgement, issue the amount of tax due on the goods/services
There are stipulated offences for tax evasion, furnishing of false documents to the FIRS, failure to collect the tax as required under the Act.
Where a person furnishes false documents and/or statement to the FIRS, in respect of taxes to be paid, such a person is liable upon conviction to a fine of twice the amount under-declared.
A person who evades payment of VAT for himself or another person is liable on conviction to a fine of N30,000 or two times the amount of the tax being evaded, whichever is greater, or to imprisonment for a term not exceeding three years.
A taxable person, who fails to collect VAT is liable to pay as penalty 150% of the amount not collected as well as 5% interest above the Central Bank of Nigeria rediscount rate.
The next category of tax that is payable by the Business Names in the country is the Capital Gains Tax (CGT) which is regulated by the Capital Gains Tax Act
The CGT is payable on any profit or gain derived from the disposal of an asset by the business owner in the year of assessment
The CGT is payable by all taxable persons under the Personal Income Tax Act and it is payable at the rate of 10 per cent of the profits from the disposal of the asset.
In the computation of the CGT, the CGT Act allows the deduction of certain amounts which were incurred in relation to the property
It is important to note that the proliferation of business names in Nigeria will have the effect of increasing the revenue generated from taxes remitted into the treasury of the Federal Government.
This will play an important part in helping boost the revenue from the non-oil economy and increasing the diversification of the economy of Nigeria.
This brings today's social media discussion to an end. It's been a pleasure discussing the taxation of SMEs in Nigeria. See you in a fortnight for another explosive edition!
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