Tax seen major constraint on SMEs growth in Nigeria

Nigeria’s current rules for taxation, which subject profit-making companies to multiple taxations in their first three years of commencement, are increasing the risk of failures of small and medium enterprises, according to Ani Chizoba, manager tax & regulatory services at Deloitte & Touche

In an article “Tax policy on SMEs in Nigeria – How fair?” published in Deloitte’s newsletter, December 2017, Ani argued that the exemption of companies with at least 25 percent imported equity from minimum tax is discriminatory to Nigerian owned businesses.

“More notably, it discourages investment and increases the risk of failure for companies in periods of little or no profitability in the case of SMEs. In the same vein, a good number of SMEs are not able to adequately benefit from tax incentives due to the small size of their operations,” she stated.

Ani, maintained that small and medium enterprises (SMEs) are the bedrock of the Nigerian economy and there is need to create a favourable business and regulatory environment for them to thrive.

“In order for SMEs to thrive, there is need to create a favourable business and regulatory environment. Most large companies have their roots in SMEs. In other words, the future large corporations in developing countries like Nigeria are present day SMEs that need to be nurtured.”

She noted that the absence of harmonized tax regime increases the strain on cash flow and other limited resources of SMEs when compared to large corporations.

“In Nigeria, SMEs are subjected to multiple taxes by the different tiers of government, each with its own rigorous process and significant compliance cost.

“Considering the size of their operations, the absence of harmonized tax regime increases the strain on cash flow and other limited resources of SMEs when compared to large corporations,” she pointed out, adding that SMEs are also regulated by several government agencies; thereby leading to significant regulatory compliance cost, which in most cases are duplicated.

She, however, highlighted that though, there are numerous incentives and support facilities available to SMEs in Nigeria (e.g. the Federal Government Special Intervention Fund for MSMEs, Bank of Industry and the Central Bank of Nigeria’s Intervention Fund, etc.), access by SMEs to such incentives and facilities seems to have been hampered by bottlenecks.

She also maintained that lack of awareness of these government funds and absence of supportive environment, as well as poor access to finance, have reduced the competitiveness of SMEs in Nigeria.

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She recommends that tax policies should be designed in such a way that they do not only directly affect SMEs but also indirectly push them to grow.

Giving an instance, she said the provision of finance for SMEs could be encouraged by granting exemptions from business tax for financial institutions that provide the guarantee for loans to SMEs.

“Policies can also be implemented to ensure that businesses in the informal sector regularize their tax status to have access to finances and tax incentives,” she stressed, adding that this way, business owners are able to see the gains of moving from the informal sector to formal sector. This would also translate to a much wider pool of taxpayers for the government.

Ani, highlighted that SMEs accounted for about 20 percent of patents (a measure of innovation), in biotechnology-related fields in Europe in 2014. SMEs are also known to account for over 95 percent of businesses, 60-70 percent of employment, 55 percent of gross domestic product (GDP) and generate the lion’s share of new employment.