An SME tax break more meaningful for economy

VICTOR OGIEMWONYI 

Victor Ogiemwonyi, a retired investment banker, is a former Governing Council member of the Nigerian Stock Exchange (NSE), now Nigerian Exchange Group (NGX Group). He sent this contribution from Ikoyi, Lagos. He can be reached via comment@businessamlive.com 

Globally, small and medium scale enterprises (SMEs) constitute the bulk of the businesses that provide the most jobs, contribute to goods and services, create innovation, competition, and new markets for every economy.

They create 60 to 70 percent of all employment in most economies. They are also an avenue for lowering income disparities and also promote the development of skills.

The Nigerian Bureau of Statistics, (NBS), says SMEs constitute 97 percent of businesses in Nigeria. The 18 million SMEs in Nigeria, contribute over 50 percent of employment, and may even be more, giving the large informal sector of the Nigerian economy. They also contribute over 50 percent of the country’s GDP, 50 percent of industrial jobs, and 90 percent of manufacturing. They provide local jobs and services; are close to customers, and are also very flexible in responding to their needs. All these make them the major driver of our economic growth. 

One of the best ways to get the SME sector to contribute more to the economy is to free it from burdens that inhibit its growth and make the operating environment more enabling. Every SME you talk to, will tell you that the unstable environment, compounded by regulatory burdens, multiple levies and taxes are its main problems.

The general complaints of underdeveloped infrastructure and, particularly, lack of electricity, may be problematic, but SMEs will be able to navigate through it if relieved of the other stifling burdens that make life impossible for them, to contribute more meaningfully to the economy. 

Whenever the problems of SMEs are highlighted, every government’s immediate solution is to throw money at it, without seeking to understand the problems and how well it can be approached with more feasible solutions.

In my view, one of the most effective and equitable means is to use taxation solutions that allow SMEs reduce the burdens that they face daily, put more money in their pockets that will help them solve immediate problems, like paying for the increased cost of diesel, increased cost of raw materials, hiring more hands and increasing their ability to pay for increased transportation cost, resulting from increased fuel prices and the very deplorable road infrastructure network.

All these can be done simply by exempting SMEs with N50 million or less in turnover from paying company income tax (CIT). This is justified, given the high inflationary environment that has made SMEs’ operating costs to skyrocket, and made their survival even more difficult.

This increase from the current exemption threshold of N20 million will help in no small measure to ease some of the pains for SMEs. This will go a long way to lessen their burden, and make them more productive. This is especially so given the increases we have seen in the cost living and the increased electricity and fuel costs in recent times. This relief will make even more sense, instead of money being thrown at SMEs that have no proper measurement for success or accountable results. This single policy change will make SMEs increase their growth rate, increase their productivity and create employment for many, and contribute more meaningfully to the economy. 

The other benefits of this policy will include a more focused Federal Internal Revenue Service (FIRS), which will use its limited resources more productively, to properly collect taxes where there is potential to get more tax revenues. The current system of a wide net for collecting taxes that catches very little should be redirected to focus on where taxes can actually come from.

We can already see the results of exempting SMEs with N20 million or less in turnover. FIRS is reporting higher collection of revenues in the current year, despite the harsh economic environment and the many businesses that have closed down, indicating that the lower threshold of paying company income tax by SMEs has not affected its revenue collection. If anything, it has enhanced its collection. Any careful study of the cost benefit analysis of FIRS collection of SMEs’ taxes will show that very little is realised from this segment of company income tax (CIT) collection, and the cost of collecting these taxes might even be more than what it actually gets at the end of the day. 

The less burdensome administration of taxes helps the government at the end of the day. A streamlined collection of CITs will unleash capacities for SMEs that we have never seen before. It is a widely held view, in economics, that money in the hands of entrepreneurs who create it, is more productive than handing it over, in the form of taxes, to the government to reallocate. It will be a more effective tax collection strategy, and more equitable, because it affects all SMEs, and its benefits can only go to businesses that created it in the first place. 

No government agency is required to administer this relief, when granted. It is also not money from the government directly, to be given at the discretion of any government agency. It will be money created by each SME for itself. The relief to SMEs will be quick and effective. It will also lead to more taxes for the government in the form of value added taxes (VATs), coming from the increased productive activities of the SMEs. 

As the SMES grow their businesses and create more goods and services to sell to customers, VATs will grow to be collected. This may even pay for itself and compensate for the taxes that the government has forgiven, in the higher taxable bracket that comes with raising the SME taxable threshold to N50 million and above. 

The implementation of this policy will also progressively lead to formalisation of the many informal businesses that have kept their records to themselves, because of the fear of the burden of taxes that may be forced on them to pay. 

This policy should be a priority now, given the pain in the economy and the very high cost that has been imposed on SMEs because of policy changes that may not have been properly evaluated for its impact on the economy before its implementation. 

Doing this will be effective and equitable. And it is the right thing to do NOW! 

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