A lot has been said about the Finance Act 2020 and more needs to be said especially with regards
to the practical application of the law to businesses (existing, about to be registered and about to
be liquidated). This article aims at doing a comprehensive analysis of the Act so as to help small
and mid-size entrepreneurs (SMEs) in particular to gain practical insights on its application.
The Finance Act has five distinct objectives which distinguishes it from the old tax laws:
- To promote fiscal equity by mitigating instances of regressive taxation
- To reform domestic tax laws to align with global best practices
- To introduce tax incentives in infrastructure and capital markets
- To support small businesses in line with the ongoing ease of doing business reforms; and
- To raise revenues for the government by various fiscal measures including increase in
VAT rate.
The Act is fairer to SMEs as it affords them the avenue to grow and focus on their businesses
with little tax payment and compliances. Below are some of the strategic topics covered by the
Act:
1. Requirement for Tax Identification Number:
The Act mandates banks and other financial institutions to include the production of Tax
Identification Number (TIN) as a precondition to opening a new business account or
operating an existing business account. The requirement for TIN is contained in both the
Personal Income Tax Act and The Companies Income Tax Act. The basis for which TIN
was made a requirement under the Personal Income Tax Act is because taxation of profit
from business name owners is charged under the Personal Income Tax and not the
Companies Income Tax. Furthermore, it is no news that individuals now open and
operate corporate/business account for their business names upon registration with the
Corporate Affairs Commission. It should therefore be noted that the TIN requirement is
mandatory for individual business operations and bank opening for such business
purposes. In essence, those who have a private account do not need to visit FIRS office to
obtain TIN. Application for TIN used to be a hectic exercise and it still is (especially
when the FIRS does not automatically generate TIN upon company registration).
However, entrepreneurs can now compel the FIRS to generate TIN via email addressed to
the Agency (helpdesk@firs.gov.ng)
1. Adjustment of Value Added Tax: It is no news that vat rate has been increased from 5%
to 7.5% which is a 50% increase. However, some classes of business might not have to
deal with VAT in their business operation. The old VAT law mandates all suppliers of
goods and services to charge 5% as VAT for every supply of goods and services
irrespective of the size of business or the class of goods and services except on goods and
services expressly exempted from VAT. The new Act introduces THRESHOLDS by
classifying businesses in levels thereby protecting the most vulnerable from exposure to
being a VAT collection agent. Under the new VAT regime, only a business owner who,
in the course of business, has made taxable supplies or expects to make taxable supplies
to the value of #25,000,000 either singularly or cumulatively is liable to remit VAT to the
commission on or before the 21 st day of every month in which the threshold is achieved.

If your business does not make a total supply to the value of #25 million, you are
exempted from charging and remitting VAT to FIRS. You are also exempted from
registering your business with FIRS for VAT purposes and consequently exempted from
penalty for not registering, penalty for not charging vat on your invoice, penalty for not
filing vat returns and penalty for late filing.
The fact that the list of items which are VAT-free was further streamlined in the new Act
stands as a measure to cushion the impact of the increase in VAT rates on the population.
There is good news for Investors and stakeholders in the Finance sector, services of
microfinance banks are now expressly exempt from VAT, as such, that industry will be
more attractive to investors who are interested in micro-banking and business owners can
take advantage of benefiting from VAT free transactions.
The VAT law also expanded the definition of goods it has exempted from VAT such as
food items that are VAT free. For instance, locally produced sanitary towel and tuition
for primary, secondary, and tertiary institution have been added to the list of goods and
services exempt from VAT.
2. Establishment of Thresholds for Companies Income Tax Compliances
One of the laudable provisions of the Finance Act is that it groups companies according
to their financial capacity and then uses that standard to establish company income tax
(CIT) obligations. The old tax law in its regressive nature imposed 30% of Companies
Income as taxable profits, even though it had a provision that allowed manufacturing and
agricultural businesses in their first 5-7 years to pay tax at a reduced rate of 20%, this
incentive did not apply to start-ups, Small Enterprises and Medium-sized Companies, it
placed all companies on the same pedestal. The newly signed Finance Act however
introduces a progressive tax rate for companies; this is in line with the Federal
Government of Nigeria’s commitment to encourage growth and development of small
companies thereby projecting the goals of the umbrella of ease of doing business reforms.
Companies have been classified into three for tax purposes. They are:
Small Companies Companies with turnover
not more than 25 million
naira

0% Complete exemption from
paying companies income
tax subject to timely filing
of companies income tax
returns
Medium Sized Companies Companies with turnover
above 25 million Naira but
less than 100 million Naira

20%

Large Companies Every other company with
annual gross turnover above
One Hundred Million Naira. 30%

The only obligation of companies exempted from Companies Income Tax is to promptly file
their CIT returns to the FIRS, comply with other statutory duties such as tax registration, failure
of which penalties will apply for non-compliance. While the small companies are completely
exempted from registering, charging and filing VAT returns, the companies. Income Tax Act
only exempts from payment of companies income tax on the profits of the company.
Companies therefore still have a duty to register for TIN because they have to file their annual
returns every accounting year, and where the company files at a later date, penalties may be
levied for late filing. Notably too, business carried on in the digital space are now specifically
covered under the Tax laws. Most especially companies that do not have physical presence in
Nigeria.
On a general note, the Act also provides for industry specific benefits including the following:
1. Companies in Agricultural production now have a clearly defined tax incentive of 5years
which can be extended for another 3 years subject to satisfactory performance of such
business. Way to go is to apply to the appropriate authority for tax exemption (i.e. apply
to Nigeria Investment Promotion Council through the office of the Minister of Industry,
Trade and Investment”.
2. Withholding Tax chargeable for construction projects is now capped at 2.5% in place of
the extant 5%. This no doubt will make that industry to be more attractive to investors so
that profit margin is more guaranteed with ease.
3. The new Act now extends applicability of the Excise duties to cover excisable goods
manufactured outside Nigeria (i.e. imported). Importers are to account for the duty to the
Nigeria Customs Service. “Excise duty” is a tax charged sometimes to
regulate/discourage consumption. Sometimes, it is also charged for economic balance
too. It is charged on production of goods at the place of production and paid by the
producer before goods enter market (i.e. not imposed on distribution).

In conclusion, while business owners are enjoined to carefully arrange their business affairs in
line with the Finance Act, they are also enjoined to seek counsel from professionals on how best
they can comply with the tax laws and its effect on their businesses.