The 2021 Finance Bill signed into law by President Muhammadu Buhari in December 2021 finally took effect from January 1st, 2022. The Act was aimed at meeting certain government objectives including the promotion of fiscal equity, aligning domestic laws with global practices and increasing the contribution of tax revenue to government pockets.
“What this implies is that educational institutions, e.g. schools or universities belonging to churches, that previously registered as charities would now be assessed as for profit entities and would have 30% and 2.5% of their assessable profits subjected to both company income tax and education tax respectively”.
We have curated a list of the key changes introduced in the 2021 Finance Act and how they affect you and your businesses.
1. Investors who sell their shares on the Nigerian Exchange Limited platform (Previously Nigerian Stock Exchange) for N100 million or more are now liable to a 10% capital gains tax unless they reinvest the full proceeds in another company’s shares or the same company’s shares within the same year. This law also extends to those selling shares of unquoted companies on the NASD OTC exchange including the sales of shares by private equity and venture capitalists that have invested in startups.
Before this Act, the only tax chargeable on the sale of securities is the Withholding Tax which is deducted at source. However, an area that has solidified retail investors participation in the Nigerian equities market is the zero capital gains tax when compared to other countries like the United States of America, United Kingdom and South Africa where investors proceeds on shares sold are subject to capital gains tax.
Based on our conversation with a Lagos based equity analyst, we noted that the recent introduction of capital gains could affect the level of investors participating in the stock market as well as prevent the attainment of the 95% Central Bank of Nigeria (CBN) overall financial inclusion target set for 2024. Also, the capital gains tax could trigger additional business costs for corporates owing to the need to either acquire or upgrade their enterprise resource management software to allow for the computation and documentation of tax liabilities.
2. The 2% education tax charged on Assessable Profit of Nigerian companies has now been increased to 2.5% of assessable profits under the new Finance Act. This provision implies that companies are now subjected to pay more taxes in addition to the company income tax (CIT) set at 30%.
While we welcome the FGN’s decision to increase infrastructural funding to the educational sector, we do not expect the additional 0.5 percent will have such a significant impact on a company’s bottom line that it will limit the amount available for dividend payout to shareholders.
3. As stated in the 2021 Finance Act, the Federal Government of Nigeria intends to charge a 6% tax on the revenue of foreign companies providing digital services to customers in Nigeria. According to the Minister of Finance and National Planning, the companies include e-commerce platforms, online advertising, apps, high-frequency trading platforms, electronic data storage and online advertising firms etc.
In case, you notice non-resident companies like Bamboo, Chaka, Netflix, Uber, Bolt, Paystack and others who provide services directly to Nigerians raising their pricing, you now know why. Aside from the FGN’s digital taxes, a major area of concern is that Uber and Bolt customers could experience an abnormal surge in ride fares as the Lagos state government introduces new taxes on ride-hailing services. The new Lagos regulation on e-hailing taxi services requires Uber and Bolt to pay NGN25 million per annum to the state government per 1,001 vehicles for operational licenses, NGN10 million for the renewal of the operational license on every 1,001 cars and a 10% service tax on each transaction paid by passengers to the operators.
With all these numbers flying around, perhaps it is time for us to return to our local taxis and Okada ! Although other analysts we spoke with agreed with the FG’s plan to establish digital taxes since they believe the digital economy is a low-hanging fruit that should be exploited to boost the government’s coffers. However, we believe that the newly enacted digital taxes could hurt consumers purchasing power as these companies pass the tax burden to them by raising the price of their services.
4. The imposition of excise duty of N10 per litre on non-alcoholic, carbonated and sweetened beverages like Cocacola, Fanta, 7up among others. According to the Fiscal Authority, the sugar tax would serve dual purposes – one, to raise revenue for health-related expenditure in the budget and two, to discourage Nigerians from consumption of excessive sugar via beverages. However, the Manufacturers Association of Nigeria (MAN) stated that the new duty would cause a 0.43 per cent contraction in output and a 40 per cent drop in total industry revenue in the next five years. In a similar note, tax leading expert “Taiwo Oyedele” noted in a blog post that the newly imposed excise tax could translate to an increase in the retail price of these products by up to 5% with lower-end products bearing a higher burden.
Also Read: IMF Says Nigeria’s Tax Collection Amongst “Lowest in the World”
While the government is aggressively seeking the means of mopping revenue into its coffers, we believe that the new tax on carbonated/soft drinks will hurt the economy in two folds. Firstly, the revenue generated by the government through company income tax could decline as the affected companies might face a shift in demand as some consumers switch to more affordable substitutes like fruit juices. Secondly, a price increase further reduces the purchasing power of citizens, especially in hot areas where carbonated drinks are considered an important refreshment. Rather, the government should direct its energy to the right places by increasing taxes on imported luxury items and providing support to local manufactures thereby reducing the demand for FX.
5. The act also states that companies engaged in educational activities are now subjected to corporate income of 30% and 2.5% of their profits. What this implies is that those companies that previously registered their business name under educational activities would now be assessed as a normal company and would have 30% and 2.5% of their assessable profits subjected to both company income tax and education tax respectively.
Why is the government suddenly big on taxes?
Source: 2022 Budget, Federal Ministry of Finance, Budget and National Planning
Going by the 2022 budget recently signed by President Muhammadu Buhari, the FGN is expected to spend NGN 17.13 trillion, which is approximately 18% higher than the 2021 budget. On the income side, FG projected an aggregate revenue of N10.74 trillion in 2022, although this is 32% higher than the 2021 projection, but it is not enough to fund the estimated expenses of N17.13 trillion – hence, leaving FG with a shortfall of N6.39 trillion as a deficit.
On aggregate, 35% of the proposed revenue is expected to be sourced from oil-related sources while 65% is to be earned from the non-oil sector, which largely comprises taxes.
Also, It is estimated that the recently published 2021-2025 National Development Plan requires an investment of N49.7 trillion in government capital expenditure to attain the objectives of the plan. We believe that these events explain the reasons for FG’s aggressive tax drive.
Click here to download the 2021 Finance Act
