Earlier this month, Nigeria’s Finance Act 2019 was signed into law, drawing net positive commentary from key stakeholders.
I believe the Finance Act is the best thing to happen for Nigerian startups in a long time. It is a bold attempt at fashioning fiscal policy while updating and clarifying problematic provisions of existing tax laws.
I will be writing a comprehensive piece about the many ways the Act will affect startups soon but this article is about the impending tax turf war, between the federal and state governments, that has been set in motion as a result of this new Act.
One of the first decisions a business has to make is about structure. In Nigeria, a business has to choose roughly between two categories of business structures: (x) corporate entities like companies, and (y) non-incorporated entities like partnerships and enterprises.
A combination of the Nigerian constitution and tax laws provide that companies pay taxes to the federal government while non-incorporated businesses pay taxes to the state governments where they operate.
Because of this, state tax offices with strong revenue drives will often push small businesses to register instead as enterprises, in a bid to push state internally generated revenue. This causes some rivalry between federal tax services and state tax services. With the passing of the Finance Act, the rivalry is about to get intense.
The new Finance exempts companies with less than ₦25m ($68,900) annual turnover from payment of income tax, while companies with annual turnover within the range of ₦25m to ₦100m ($277,000) will now pay 20% as income tax rather than 30%. Because the Finance Act is a law of the federal government, this is great news for small businesses registered as companies compared to their counterparts registered as enterprises whose obligation is to the state government.
I envisage a resulting spike in company registrations following the implementation of this law, as it means a business enterprise with less than ₦25m annual turnover will have to pay income tax to its state government, while a company of a similar size is exempted by the Act from paying income tax to the federal government.
Asides the fact that this is great news for startups and small businesses, it is great to see the federal government play the long fiscal game by trying to increase revenue through tax incentives to small companies.
It will also be interesting to see how state governments react to the potential loss in internal generated revenue. Will we be seeing bullying tactics from state revenue collectors or new incentives to bring more busineses within their tax nets?
If businesses get more favourable tax burdens because governments at different levels are offering them more concessions, I say, LET THE TUSSLE BEGIN.
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Nigerian startups raised $377m in 2019, more than twice what they did in 2018. Find out more when you download the full report.
Enyioma Madubuike is a legal consultant with experience in providing support to companies in Africa, Europe and the Middle East. He assists Nigerian based companies with becoming GDPR/NDPR compliant and is a senior consultant at Johan Consulting Limited, an IT advisory firm and licensed Data protection Compliance Organisation (DPCO). You can reach him via email at [email protected].