2024 Revenue Reform Bills and their benefit to Nigeria (2)

Continued from last week

Capital gain tax will no longer be paid on compensation paid to individuals for personal injuries like physical disability, loss of employment, defamation of character, libel, slander, etc, according to Section 50 of the bill, once the amount is less than or is N50 million. If the amount is more than N50 million, capital gain tax will only be paid on the excess of N50 million. The current capital gain tax regime stipulates that capital gain tax should be charged on above N10 million at 10 percent.

Benefits of NTB to business organisations

The bill aims to strengthen ease of doing business which is a challenge according to various World Bank reports on Nigeria. Businesses, particularly small and medium enterprises (SMEs), have traditionally struggled with the myriad of challenges of tax compliance. By fusing tax regulations, the Nigeria Tax Bill 2024 will ease compliance, enabling businesses to focus more on innovation, invention and expansion rather than struggling to pay different taxes.

Section 20(1)(a) – (l) of the bill also indirectly reduces the taxable income of corporate organisations by increasing the deductions allowed from the company’s gross earnings before ascertaining the company’s profit, which is eventually taxed. The bill also eliminates a minimum income tax of around one percent of gross earnings hitherto imposed on companies that did not declare profit. For corporate entities, the NTB pursuant to Section 56 provides for a reduction of the current 30 percent rate for corporate income tax (CIT), and proposes 27.5 percent in 2025 and 25 percent in 2026, while completely exempting small enterprises.  This CIT of 25 percent proposed as from 2026 will conform to CIT in Ghana, Cote D’Ivoire and UK. CIT must be competitive and it is the reason for America’s 22 percent rate. This significantly reduces the tax obligation of corporate bodies, and according to surveys, is rather conservative compared to 27 percent in South Africa, and 30 percent rates in Cameroon and Kenya. Additionally, the NTB raises the threshold for corporate tax exemption from 25 million naira to 50 million naira in annual turnover, thereby exempting many small businesses from corporate tax. The NTB harmonizes multiple levels of taxes of corporate bodies and introduces a 4% development levy which will be reduced to 2% by 2030.

The bill went further in Section 59 to fuse all the special deductions on companies’ profit (different from the profit tax) into a single development levy that is expected to progressively decline from a rate of 4% in 2025 and 2026 assessment years to just 2% from 2030. The three direct annual deductions on companies’ profit consolidated into one-off development levy by the bill include:

a. Tertiary Education Tax – as of today, companies are required by the Tertiary Education Trust Fund (TETFUND) Act 2011 to pay 2% of their annual assessable profit as tertiary education tax into TETFUND;

b. NASENI Levy – apart from the deduction of 3% of the total revenue accruing to the Federation Account, the National Agency for Science & Engineering Infrastructure (NASENI) Act 2014 also mandates the FIRS to collect 0.25% of the turnover of companies and firms with income or turnover of N4,000,000 (Four Million Naira) and above; and

c. Information Technology Tax requires companies with an annual turnover of N100 million or more which are engaged in banking and other financial activities; insurance activities; pension fund administration; GSM service providers and telecommunications, as well as cyber and internet service providers, according to National Information Technology Development Agency (NITDA) Act, to pay 1% of their profit before company income tax (CIT) as information technology tax annually to the NITDA Nigeria Fund (NITDF).

The primary funding source of the Nigerian Education Loan Fund (NELF) is through the deduction of 1% of all taxes, levies and duties collected by FIRS. However, in the NTB, the NELF is the greatest beneficiary of the development levy. According to section 59(2), the development levy to be collected by NRS (currently FIRS) at progressively declining rates from 2025 shall be distributed as follows:

a. Tertiary Education Trust Fund (TETFUND) will receive 50 percent of the total development levy in 2025 and 2026 (at the rate of 4%). In 2027, 2028 and 2029, TETFUND will receive 66 percent of the total development levy collected (the levy rate declines to 3%). From 2030 and above, TETFUND will cease to receive any share of the development levy.

b. The Student Education Loan Fund will receive 25 percent of the development levy in 2025 and 2026, 33 percent in 2027, 2028, and 2029, and 100 percent from 2030 onwards. This would now be 2% of the assessable profits of all companies (except small companies and non-resident companies).

c. The National Information Technology Development Fund will receive 20 percent of the development levy in 2025 and 2026 and 0% from 2027 onwards.

d. The National Agency for Science and Engineering Infrastructure (NASENI) will receive 5% of the development levy in 2025 and 2026, which will stop in 2027.

The NTB is coming to harmonise the taxes of most companies into a maximum of two (income tax and development levy) with a maximum total rate of 27 percent (25% profit tax and 2% development levy) for the biggest companies from 2030 instead of a top rate of 33.25 percent they currently pay, which is a relief for businesses.

Also, the NTB effectively handed over the revenue collection duty of the Nigeria Upstream Petroleum Regulatory Commission (NUPRC) to the NRS (currently FIRS). The Seventh Schedule of the Nigeria Tax Bill prescribed that royalties of all production of petroleum (from inland basin, onshore, offshore and deep water) would be collected on behalf of the Federation by the NRS (FIRS) with the royalties so collected by the NRS administered in accordance with the provisions of the Nigeria Tax Administration Bill (Act).

Benefits of NBT to state governments

Based on the 60 percent Value Added Tax (VAT) derivation model in the NTB, states that contribute more in VAT revenue will earn more while states that contribute less will earn significantly less. This is equity! According to Section 77 of the Nigerian Tax Administration Bill, the new sharing formula has the States and Local Governments receiving the bulk of the VAT revenue, thereby reducing the existing quota accruable to the federal government. Precisely, 55 percent and 35 percent of the VAT revenue is accruable to the State and Local Governments respectively, while 10 percent goes to the federal government. This sharing formula represents fiscal federalism. The VAT sharing formula presently in use redistributes VAT revenues amongst state governments equitably and incurs significant losses to some state governments.

Conclusion

The NTB aims to provide a better and conducive environment for industrial development. It also has provisions that will motivate states which hitherto wait for federal government allocation to think outside the box and look inward for revenue generation.