Nigeria’s new tax policy on ‘vatting’ microfinance banks’ services seen promoting financial exclusion

Analysts and operators are challenging the applicability of value added tax on services rendered by microfinance banks as contained in the new national tax policy, saying the move counters government and the central bank of Nigeria efforts at financial inclusion.

Businessamlive learnt that the primary aim of the new National Tax Policy is to introduce new strategies that will enable government achieve its objectives of creating an enabling environment for businesses to thrive while simplifying the tax system.

However, the tax laws as relating to the banking sector seem to have some controversies, one of which is the applicability of value added tax (VAT) to financial services rendered by microfinance banks.

According to the new tax laws, the Federal Inland Revenue Service (FIRS) expects microfinance banks to charge VAT on services rendered to their customers based on relevant provisions of the Value Added Tax Act, Cap V1, LFN 2007, as amended (VATA or the Act).

However, many microfinance banks are challenging FIRS’ position on the grounds of alternate interpretation of VATA that supports exempting VAT on services rendered by these institutions.

Taiwo S. Okunade, Senior Manager, Tax & Regulatory Services, Deloitte Nigeria, in an article titled “Microfinance banks and the VAT legislation: Is there a case for exemption?” argues that from legislative sequence of events, the services provided by microfinance banks (or at least, those licensed to operate as “unit banks”) should be clearly exempt from VAT.

He argues further that the original legislation, VAT Decree No. 102 of 1993, includes services rendered by community banks, People’s Bank and mortgage institutions as exempt services, and at the time the legislation was promulgated, Nigeria used to have community banks and People’s Bank but not microfinance banks.

Okunade, stressed that though there have been amendments to VATA post-2005, failure to replace community banks and People’s Bank with microfinance banks on the list of exempt services was a clear oversight.

“As the successor in title to erstwhile community banks, with the transition necessitated by legislation (i.e. the CBN Policy), microfinance banks should naturally enjoy the VAT exemptions that community banks and People’s Bank enjoyed,” he said.

Specifically, he cited a working definition in Paragraph 6.0 of the CBN Policy, which refers to community banks as microfinance banks licensed to operate as unit banks, saying that given that operations of unit banks are required to be community-based, it could be argued that the provisions of VATA relating to community banks are also applicable to microfinance banks licensed to operate as unit banks.

According to him, the CBN Policy provided a framework for certain fiscal and regulatory incentives to be granted to microfinance banks that emerged as a consequence of CBN’s directive of December 2005, including exemption from VAT.

He quoted paragraph 12.1 of the CBN Policy, which states that “CBN shall collaborate with appropriate fiscal authorities in providing favourable tax treatment of microfinance banks’ financial transactions including exemption from VAT on lending and tax on interest income and revenue,” adding that there is no evidence that CBN and FIRS have collaborated in implementing this policy.

He recommended that the FIRS may consider issuing a circular or guideline to provide clarity to stakeholders in this regard. Also, there may be need to update the list of exempt services in Part II of First Schedule to VATA by replacing the term “Community Banks” with “Microfinance Banks”.

Other analysts say ‘vatting’ services rendered by microfinance banks may further exclude many poor and lower income groups from financial services.