In a 1789 letter, Benjamin Franklin once wrote, “…but in this world, nothing can be said to be certain, except death and taxes.” He was right. Every living thing, be it, man, animal, plants, and even the bacteria in yogurt would face an end someday. However, only man will have the burden of paying tax, and that is permanence in our lives today.
Countries develop based on the amount of revenue generated by the government, and in Nigeria, it is no different. Every citizen working with the government or the private sector, those who own a business in operation, and the potential entrepreneurs with the intent to start up a business, are all required to pay taxes.
The law mandates companies operating in and registered with the Corporate Affairs Commission to pay different taxes to various levels of government through the Federal Inland Revenue Service and the states’ revenue services. The common types of taxes in Nigeria include: Companies Income Tax, Petroleum Profit Tax, Value Added Tax, Personal Income Tax, Withholding Tax, Educational Tax, Capital Gains Tax, etc.
Despite the legislation in place, there has been low regulatory compliance from the citizens. As of December 2017, the erstwhile Minister of Finance, Kemi Adeosun, revealed that only 19 million out of 65 million economically active adults pay tax, and 13% of the active taxpayers have their taxes deducted through the PAYE category. Despite a tax revenue of ₦4.3trn, as of October 2018, Nigeria is reputed to be among the countries in the world with the lowest tax compliance rate of 6%. In fact, the government is said to be losing around ₦1trn from the small business sector alone through billable and unremitted VAT.
According to the World Bank’s Ease of Doing Business Report (2019), the country ranked at 157 out of 190 in the “Paying Taxes” category, which recorded the tax a medium-sized company pays, the administrative burden of paying such and complying with post-filing procedures. Here, it was shown that 48 tax payments had to be made annually, from the Corporate Income Tax (which is a 30% tax on profits of resident and non-resident companies incorporated in Nigeria) to the Value Added Tax (which is a 5% levy on taxable products or services). Moreso, it could be seen that the time taken to prepare accounting books, complete tax returns, file with agencies and arrange payment of just the 3 major taxes to cover 353 hours (or almost 15 working days) per year. That’s more than half of the working days in a month every year devoted to the entire tax payment cycle of only the VAT, CIT and the Social Security Contributions.
Taxes in Nigeria are of 2 categories: federal taxes and state taxes. Federal taxes include: Companies Income Tax, Value Added Tax, Education Tax, etc. State taxes, on the other hand, include: Personal Income Tax, Business Premises Tax, Development levy, etc.
The most relevant to startups and small businesses are:
- Companies Income Tax (CIT): This is a 30% annual tax on profits of resident and non-resident companies incorporated in Nigeria. However, small businesses in the manufacturing sector, as well as those that are export-oriented, with a turnover of less than ₦1,000,000, pay 20% instead. To file, audited financial statements are required.
- Value Added Tax (VAT): This is a 5% tax imposed on the supply of goods and services. Companies do not pay VAT but are mandated to collect it from customers and remit all collections to the Federal Inland Revenue Service (FIRS) before the 21st day of the succeeding month.
- Personal Income Tax (PIT): This is a tax on all working individuals in Nigeria, be it, a farmer, tailor, civil servant, lawyer and even members of the armed forces. The rate varies and is dependent on the taxable income. The taxable income is what remains from the annual gross income (total salaries and allowances earned each year) after you deduct:
- Contribution to the Nigerian Pension Fund (8% of income);
- Contribution to the National Health Insurance Scheme (5% of income);
- Contribution to the National Housing Fund (2.5% of income);
- Consolidated relief allowance (1% of gross income or ₦200,000+1% of earned income);
- Gratuities; life assurance payments; rent and business expenses; bad debt recovered; and, dividends and interests from quoted companies.
Now, whatever remains as the taxable income, for the first ₦300,000 or less, the tax rate is 7%. For the next ₦300,000 earned, the rate is 11%. Subsequently, the rate increases to 15% for the next ₦500,000 and if an extra ₦500,000 is earned, the deductible rate is 19%. For the next ₦1,600,000, the rate is 21%, and if the person earns anything more than that (above ₦3,200,000), the rate is 24%.
For the tax payment process, it is important to remember that a Tax Identification Number (TIN) is assigned to registered companies. For federal taxes, which are paid to the FIRS, logon to the Remita website, fill the details required and the kind of tax about to be paid. After a code is generated, head to a bank to complete the process or pay on the Remita website with ATM card details. To pay state taxes, walk into any bank with the TIN and request for a tax payment teller. After payment, take financial statements and other documents to the state tax agency.
ith SMEs accounting for over 90% of businesses in Nigeria, the government has tried to lessen the taxation burden on them through a variety of procedures: Reduced the taxes on SMEs from 20% to 15%; implemented a new tax law reform to remove obsolete provisions in law and simplify the tax-paying process; provide an 18 months tax-exempt window after registration; and even, ramp up compliance through the Voluntary Assets and Income Declaration Scheme (VAIDS). Regardless, of all these efforts, tax compliance has remained low, especially among startups and small businesses.
For one, the complexity of the entire tax process is a big issue. Many SMEs in Nigeria are owned by uneducated Nigerians and those living in the suburban and rural areas of the country. These individuals do not have 15 days a year to spare to prepare and file their taxes and neither can they understand many of the tax terminology or afford the services of a tax consultant charging ₦20,000-30,000 a month, given the nature of their businesses. To file taxes, the taxpayer has to fill lengthy and sometimes, incomprehensible forms and then take it to the bank, where there is either a long queue or network problem in accessing the Remita platform. Despite digitization and the improved preference for cheques over the years, this has not been able to achieve its desired aim with the majority of this class, given that they form the over 65% of Nigerians without a smartphone. As such, this cumbersome process leads to low or none payment of taxes.
Another problem startups face in Nigeria that hinders their business growth is high and multiple taxations. Over the course of a year, as outlined above, a business is expected to make 48 tax payments. Given their slim profit margins, these entrepreneurs cannot afford to remit such amounts, which are about ₦108,594/annum on the average, as of 2014. Many barely have enough to eat or keep their businesses afloat, hence why studies from UNIDO have shown that only 20% of businesses manage to survive in Nigeria, and social security schemes like TraderMoni, providing minimal amounts to these individuals, have become exceedingly popular.
Now, tax is a legal obligation and default is criminal under both Federal and State Laws and can lead to the assets of the defaulter being seized and/or auctioned. But as highlighted, it is a problematic endeavor for startups and small business owners.
So, how can the government assist these people to ensure higher compliance rates?
The OECD made it clear that “if taxpayers do not understand what their obligations are, any intervention to enforce compliance will be perceived as unfair”. In lay terms, for people to want to pay tax, the process has to be simple enough. The time taken throughout the entire tax lifecycle needs to be cut down drastically, from accessing the tax-related information to filing paperwork and making the appropriate payments through a proper digitization scheme. The FIRS needs to reduce the number of payments made from 48 down to an OECD high-income country average of 11.2, or even as low as Singapore’s 3. Less number of taxes will shorten the process for these small businesses, remove unnecessary levies and reduce the amount payable, thus boosting compliance.
Besides this, the agency needs to improve its sensitization policy. Nigeria has a large number of business owners who are not tax literates. To reach this set of people and increase MSME contribution to tax collection from its current 6.9%, these individuals need to know why they should pay taxes and what these taxes are being used for, through advertisements on TV and radio stations, market outreaches and even online promotions. A proactive sensitization policy by the FIRS will lead to an increased sense of civic responsibility.
Lastly, for entrepreneurship in Nigeria and tax compliance to grow, tax holidays and exemptions need to be provided to SMEs. There are about 37 million enterprises in Nigeria, accounting for 84% of employment in the country. To keep them alive, they would require some support from the government in the form of holidays and exemptions. SMEDAN is advocating for a 10-year tax holiday for SMEs, but if the government can pass a law similar to that of the Industrial Development Act (2018) that can provide incentives for these SMEs and holidays for up to 5 years, more entrepreneurs will be willing to pay their taxes.
The government needs to find a way to re-engage startups and small businesses, who contribute 48.5% to the GDP, in the area of tax compliance. Only with a simplified process, a proactive sensitization policy, and an SME-friendly environment with tax holidays and exemptions would they be able to achieve that.