Yomi Olugbenro, Partner and Head of Tax, Deloitte Nigeria: Viewpoint

Viewpoint: Yomi Olugbenro

Micro-, small and medium-sized enterprises (MSMEs) are the driving force for economic activity and innovation. They contribute to growth through job creation, investments, exports and taxation. In Nigeria the economy is largely dominated by MSMEs, with an estimated 96% of all businesses falling in this category. MSMEs account for 84% of the country’s workforce and contribute approximately 48.5% to GDP. However, despite the vital role that MSMEs play in the economy, getting them into the tax net has been a major challenge. The majority of MSMEs operate in the informal sector, where visibility by authorities is often very low.

The federal government – through a number of fiscal and monetary policies – has indicated interest in the development of MSMEs by implementing programmes, such as the Central Bank of Nigeria’s intervention fund, which is managed and administered by the Bank of Industry and set up to refinance and restructure bank loans to MSMEs. However, there is a growing consensus that the current fiscal and business environment is stifling the development of small businesses.

In the 2016 federal budget speech, there was a promise to reduce tax rates for smaller businesses in order to drive job creation in the country, but this has yet to materialise. The provision of the Companies Income Tax Act that grants a reduced tax rate of 20% to MSMEs still has a N1m ($3530) turnover limit, and thereby provides almost no incentives. Under the value-added tax (VAT) regime, there is currently no minimum threshold for registration and filing, which would have helped protect micro-businesses from the rigorous monthly compliance burden. Moreover, the review to pioneer status incentives in August 2017 raised the capital investment for eligibility from N10m ($35,300) to N100m ($353,000) putting the tax holiday out of reach for smaller businesses.

Nigeria seems to have appropriately recognised the need for the private sector to lead job creation, with MSMEs in the front seat. However, the absence of well-thought-out fiscal incentives and coordinated fiscal policies for MSMEs creates challenges that discourage them from transitioning to the formal sector and serving as the real catalysts for economic growth. One major problem with the current laws is the compliance cost of taxation. Evidence indicates that MSMEs are disproportionately affected by compliance costs, which ultimately serve as a deterrent, with costs relatively large for smaller businesses.

The frustration that the government faces in bringing MSMEs into the tax net indicates the level of disconnection with the formal economy. The government may tackle this by creating a simplified presumptive tax regime. Under this structure, the size of MSMEs – unlike larger businesses – would not be directly measured, but rather inferred from simple indicators, such as turnover, assets, farm size, shop size and so on.

In recognition of these challenges, the new national tax policy (NTP) has focused on legislative amendments to reduce the tax burden on MSMEs. Additionally, the NTP proposes a further reduction in the income tax rate for small businesses to encourage compliance, as well as inclusion of a minimum threshold for VAT registration in order to protect MSMEs.

Judging from provisions of the NTP, it appears that the government understands the importance of tax policies directed at MSMEs. However, there seem to be challenges to fomenting the required political will necessary for implementation. The reality is that the government has struggled to carry out concrete actions, as opposed to proposals, to support MSMEs through tax policies. There have been no significant changes or updates to the extant tax laws. The time lag for lawmaking can be incredibly long and tortuous.

The economic potential of MSMEs makes a compelling case for the government to develop well-articulated tax laws, as the current one-size-fits-all approach has failed to address many needs and concerns of small businesses. The time for an inclusive policy is now.