Taxes: In Nigeria, all persons in employment – individuals who own a business, non-residents who derive income from Nigeria as well as companies that operate in the country – are liable to pay tax. Tax remittance will be a key aspect of your business compliance obligations and understanding the tax system in Nigeria and your state of residence will be important for the success of your business.
It is important for you to know that some taxes are payable to the federal government through the Federal Inland Revenue Service (FIRS), while others are through the state or local government.
Here is a list of taxes you should be aware of before you start your business.
Companies Income Tax (CIT)
Companies Income Tax (CIT) is a tax on the profits of incorporated entities in Nigeria. It also includes the tax on the profits of non-resident companies carrying on business in Nigeria. The tax is paid by public limited liability companies, registered ventures and partnerships.
CIT is administered and collected by the Federal Inland Revenue Service (FIRS) and contributes significantly to the revenue profile of the service.
In filing for CIT, audited financial statements are statutorily required. This requires the services of external auditors to prepare and/or certify the accounts to be submitted.
Stamp Duty Tax
Stamp duty is tax paid to the federal or state governments on documents such as conveyances on sale, bills of exchange, promissory notes, agreements, contracts or even documents such as letters and certificates of admission, instruments of apprenticeship, insurance policies, etc.
You will also be required to pay this tax when registering your company. The legal effect of a document which is duly stamped according to S.19 of the Stamp Duties Act is basically that it will be admissible as evidence in a court of Law.
The federal government has the sole authority to impose charge and collect stamp duties in respect of documents relating to matters between a company and an individual, group or body of individuals. While, the state government, on the other hand, has authority to collect stamp duty in respect of documents executed between individuals or persons at such rates imposed or agreed with the federal government.
This is tax chargeable on all companies registered in Nigeria from chargeable profits as contribution to the Education Tax Fund. All registered companies in Nigeria are required to pay a percentage of their assessable profit into an Education Tax Fund. This tax is charged at 2% of chargeable profits.
Personal Income Tax
This is taxed charged on incomes of persons (which covers individuals, sole proprietorships, communities and families). If you are going to start any type of business, you shall pay tax for each year of assessment of the aggregate amount from every source of your income for the year. This includes profits from your trade or business.
You will be required to register with the State Board Internal Revenue to obtain a Tax Identification Number (TIN) which will enable you remit this tax.
A TIN is an identification number for the person which is used by the Internal Revenue Service in the administration of Tax. A TIN must be furnished on returns, statement and other tax related documents.
Pay As You Earn (PAYE)
If you have staff working for you, they will be required to pay Personal Income Tax through the PAYE system. Under this system, you as the employer will deduct the prescribed tax from your workers’ monthly salaries and pay directly to the Internal Revenue Service through designated banks on behalf of the employee.
The State Board of Internal Revenue and FIRS collect PAYE.
Value Added Tax (VAT)
All small and big businesses that deal with taxable products or services in Nigeria have to pay VAT. It is a consumption tax payable on goods and services consumed by any person, whether government agencies, businesses or individuals. It can also be defined as a tax on spending/consumption levied at every stage of a transaction but eventually borne by the final consumer of such goods and services. It is levied at the rate of 5%.
The VAT system is invoice based and not cash based.
VAT is primarily collected by the seller when any taxable item or service is sold. The seller then nets off the VAT and submits it to FIRS through a designated bank. The bank will immediately issue an e-ticket as evidence of payment.
To collect your original e-receipt, you will be required to present the e-ticket and bank teller as evidence of payment at the tax office.
Withholding Tax (WHT)
This is an advance and indirect source of taxation deducted at source from the invoices of the tax payer. Its main purpose is to capture as many tax payers that may have evaded tax into the tax net.
If your business or company supplies goods or services to another company an invoice will usually be issued as evidence of a transaction. The purchaser is also obligated to obtain evidence of remittance in the form of a WHT credit note on behalf of a supplier.
A WHT credit note will include the following:
- Credit Number
- The name of the tax payer (Purchaser of your goods or services who deducted the tax and remitted on your behalf)
- The name of the beneficiary (Your company or business)
- The deal and nature of the transaction
WHT rates are usually between 5-10%, depending on the type of transaction. Also, the collecting authority for this tax is the FIRS or State Inland Revenue Service.
Capital Gains Tax
Capital Gains Tax (CGT) is a tax on the profit obtained from the disposal or exchange of certain kinds of assets.
All companies registered in Nigeria that earn from the exchange or disposal of any form of assets whether in Nigeria or outside are liable to CGT.
CGT is 10% of the profits from sales of the qualifying assets.
Hotel Occupancy and Restaurants Consumption Tax
If you decide to go into the hotel or restaurant business or you operate an event centre, you should be aware of this tax. Any such establishment is expected to pay 5% tax on goods and services consumed by customers.
This tax is paid only to the state government.
It is advisable for you to hire a tax consultant/accountant who understands all the tax requirements to help you correctly prepare returns and calculate payments. This will save you the stress of dealing with tax authorities and paying huge sums in penalties which will may erode your business profit or run the risk of the tax authorities shutting down your business.
What SME’s need other than Intervention loans
Since access to finance is a key constraint to SME growth, funding it has become paramount.
Small and Medium Enterprises (SMEs) play a major role in most economies, particularly in developing countries. According to the World Bank, they represent about 90% of businesses and more than 50% of employment worldwide. Formal SMEs contribute up to 40% of national income (GDP) in emerging economies and these numbers are significantly higher when informal SMEs are included. The World Bank predicts that “600 million jobs will be needed by 2030 to absorb the growing global workforce, which makes SME development a high priority for many governments around the world.
Since access to finance is a key constraint to SME growth, funding it has become paramount. This has birthed a myriad of programs ranging from incubators to accelerators both locally and internationally giving out loans, grants, and other resources to ensure that the sector is equipped to create jobs and stimulate the overall economy. There have also been federal grants and other forms of support given to SMEs. Since the outbreak of the Covid-19 pandemic, SMEs have been prioritized as recipients to loans and other stimulus packages. The CBN’s N50 billion Targeted Credit Facility (TCF) geared towards supporting SMEs and households whose economic activities have been disrupted by the COVID-19 pandemic, is just one of the different packages that have been put in place to cater specifically to it.
While there is data to back the impact SMEs have on our economy, it is true that even though small businesses help the economy, not all small businesses will contribute to the dream – or even survive past its early years. According to The Better Africa report, by Weetracker, an African digital media company, the top 5 countries that experienced the highest shutdown rates among start-ups between 2010 and 2018 were Ethiopia at 75%, Rwanda at 75%, Ghana at 73.91%, Zimbabwe at 66.7%, and The Democratic Republic of the Congo (66.7%). Failure rate for start-ups in Nigeria averaged 61% over the same period. What this means is that if small business loans are being given to businesses at random in Nigeria, 61% of those businesses are bound to fail and the monies given, completely lost.
The small business loans being offered by the CBN is a good step in the right direction. However, determining whether it ends up in the hands of the startups that are viable enough to scale and create the jobs or the larger percentage that will fail, depends to a large extent on how they are selected. In disbursing the loans, there must be clear methods of choosing the recipients. CBN’s N50 billion Covid-19 intervention fund for SMEs in conjunction with NIRSAL Microfinance Bank, simply noted that it would appraise and conduct due diligence applications before sending them to the applications to the CBN for final approval, to CBN for review. The results will tell their story.
Why the economy needs more than loans
The CBN giving out intervention loans is just one part of finding the solution – and this too does not say much about the amount in loans being given and their effect on the economy at large. If it’s too little to make any real difference, then it might only buy many of these businesses a few more months of dogged survival, after which all will be lost.
The overall operating environment must be able to stimulate growth either through favourable tax incentives for specific industries, moratorium on other forms of loans, or just the provision of basic infrastructures like electricity and speedy internet services.
Another important thing is to ensure there is a ready market for businesses within the country. Even with the right federal loans, a business having no ready market will sink its funds into inefficient marketing. This ready market, however, has a lot to do with the ease of local production to ensure competitive pricing, further curtailing the proliferation of imported items, and more.
In other words, economy will benefit even more from its overall development. The loans might help but, overall, there is unlikely to be sustainable exponential growth until the things that should be in place to expedite the development process exists.
How Nigerian SMEs can survive high mortality rate
SMEs are a very important economic catalyst in developing and industrialized countries.
In Nigeria where unemployment is a serious issue, the local businesses have a special position in the industrial sector because it has created employment and has been able to utilise labour. The local businesses, otherwise known as SMEs which means, Small And Medium Enterprise are everywhere, found on every street and corner as they surround us.
There is however no universal definition of SMEs that is widely accepted as it differs and varies from countries, but this is usually based on employment, assets or combination of the two. Institutions and organizations define SMEs in different ways depending on the purpose and the objective. Take for example, according to Organization for Economic Co-operation and Development OECD (2005) SMEs are considered to be independent firms that employ less than a given number of employees. However, SMEs were classified in terms of size, and financial assets.
The Small and Medium Industries and Equity Investment Scheme (SMIEIs), defined SME as an enterprise with a 200 million naira maximum asset base, with the exclusion of land and working capital and with a workforce of not less than 10 employees and not more than 300 employees. Akabueze,(2002).
The Third National Development plan of Nigeria (1975 – 1980) defined a small scale business as a manufacturing firm that employs less than ten people, or whose machinery and cost of equipment does not exceed N600,000
The Federal Government Small Scale Industry Development Plan of 1980 defined a small scale business in Nigeria as any manufacturing process or service industry, with a capital not exceeding N150, 000 in manufacturing and equipment alone.
These definitions give a clearer explanation as to how the meaning of SMEs differs and varies. However, just to give you a clearer understanding of what local businesses or SMEs mean, they are independently owned organisations that require less capital and less workforce and less or no machinery. They are ideally suited to operate on a small scale to serve a local community and to provide profits to the business owners.
Most enterprises in Nigeria, most of which are in the commercial sector are categorized as small businesses. The role of the small and medium enterprises towards the development of Nigeria is of great importance as it has contributed greatly to the country in terms of growth and development and also in providing employment opportunities.
From seminars to workshop initiatives for SMEs both locally and internationally, a lot is being said about SMEs all over the World.
According to the Central Bank of Nigeria report (2003), SMEs are a very important economic catalyst in developing and industrialized countries.
According to the United Nations Industrial Development Organization (UNIDO), developing countries can conquer poverty and inequality by democratizing, deregulating, and liberalizing the integration of the global economy. Recent studies have shown that SMEs contribute to over 55% of GDP and over 65% of total employment in high-income countries also that SMEs and informal enterprises account for over 60% of GDP and over 70%of total employment in middle-income countries (OECD, 2004).
However, considering the term “small”, there’s a whole lot of enormous challenges that come with it. In Nigeria, the factors working against the development and growth of local businesses are quite numerous, some of which include:
1. The issue of funding is a major problem with SMEs in Nigeria. However, the problem is not how to source it but the accessibility to either short or long term loans.
2. Lack of infrastructural facilities is a serious impediment to the performance of SMEs. The problem of inadequate infrastructural facilities includes electricity, good road network, availability of potable water, and solid waste management. These infrastructures are left to the business owners to provide themselves.
- Poor Management and Low Entrepreneurial Skill Base is a serious clog in the survival of small businesses as there is a lack of essential and required expertise in business which leads to wrong and costly decisions and mismanagement.
- Entrepreneurs often blame their failures on inadequate sales. However, the problem lies with poor marketing skills that could help promote their sales.
- Most entrepreneurs go into business without proper planning by taking a realistic view of what their strengths and weaknesses are, let alone giving careful consideration and analyzing the economic trends or business conditions in that particular sector of activity, which sometimes leads to mishandling when the business starts to expand.
- The root of most employee problems in Nigeria is poor personnel management. They put aside personnel matters till crises set in. Such crises usually pose serious threats to the firm’s survival if they are not promptly looked into.
- The harsh deteriorating macroeconomic environment in Nigeria has adversely affected the performance of small business enterprises and has posed as a major challenge to their survival and growth. Most small business enterprises are struggling with the problem of uncertainty caused by the unstabilized macroeconomic environment and policy shifts.
With all of this ongoings, some of the solutions preferred to ease these challenges include:
1. The need for government, and non-governmental organizations to create Seminars and workshops initiatives and other forums, to establish a platform for the interaction of SMEs owners/managers with others which can help to improve on their management capabilities.
2. Government should also provide the necessary infrastructures in order to ease the burdens and thereby encourage and promote rural industrialization.
3. The SME owners/managers should strive to develop effective marketing strategies in order to boost business operations which will become profitable.
4. It is important for SMEs to develop good personnel management policies to avoid crises that could affect their business.
5. Local business owners should take to proper planning, realizing his strengths and weaknesses before diverting into any business to avoid mishandling.
6. Goverments should help create a macroeconomic environment that is stable as it will enable these local businesses to make reasonable forecasts on costs, turnover, and return on investment.
7. The government should help in making funds easily accessible to SME owners/managers, be it short or long term loans that could help to encourage them to execute their business plan.
8. SMEs operators should also develop their competences in managing and sustaining their businesses by constantly engaging in training, research and development.
Emergency Fund: Can you raise N50,000 cash tomorrow?
Focus on building up your emergency funds before building a portfolio of assets.
Can you raise N50,000 cash tomorrow? Yes cash, without selling any asset of yours; Can you? This is a very important question you need to ask yourself. One generally accepted lesson from the 2020 economic downturn for both corporations and individuals is to always have an emergency fund (EF). So, what is an Emergency Fund? How is it set up? How is it used? Let us explore.
What is Emergency Fund
An EF is a savings account set up to pool and hold a minimum of three months of calculated Non-Discretionary Income (NDI). The EF is advised as the first activity any investors should undertake. Specifically, before even investing a cent, set up and maintain an EF because this fund acts as an “insurance” or stop-gap for your income or investment portfolio.
How is an Emergency Fund set up?
An EF captures a minimum of three months of Non-Discretionary Income (NDI). What is NDI? These are expenses incurred that must be settled irrespective of income. For instance, rent must be paid, groceries must be paid, we cannot simply stop paying utility bills because we lost our job and thus income.
Once we decide on an investment plan, the first thing to do is to list out all expenses we will incur and attach a cost to them per month or annual basis but corresponding to the period of payment. We do this to identify the necessary expenses which we refer to as the NDE.
List of expenses
- Rent N1,500
- School fees N500
- Camping/Holiday N300
- Go to Movies N100
- Groceries N400
- Cable TV N200
- Gas for cars N200
- Phone Bill N300
- Eating out Dinner N200
Total expenses for the month are 3,500
Next, decide which of the expenses listed above are Non-Discretionary. In other words, which of these expenses must be settled irrespective of income? Let us assume our client chooses the following as NDE:
- Rent N1,500
- School fees N500
- Groceries N400
- Gas for car N200
- Phone bills N300
These expenses above come to a monthly NDE of 2,900, with a three months minimum of 8,700. This minimum sum means that should the client lose his job or suffer any other income interruption, these necessary expenses will be paid from the emergency fund, without the need to sell down investment assets at fire-sale prices just to raise income.
How is it used?
The Emergency Fund is simply a piggy bank. Once it is set up, you can increase the minimum saving from 3 to 4 and as high as you want to go. What is does is insulate your investment portfolio from losing any compounding or dissipation in principal because you must sell. So, if there is income interruption due to job loss or you simply want to take a long holiday and write a book, you can do so and still meet your expenses from these savings.
An EF is not only for downturns, as it is also good for opportunities. A friend of mine bought an almost brand new car from a work colleague that was emigrating abroad because he could pay cash immediately in short notice. Cash is always king when you are in a tight negotiation with a seller.
Your Emergency Fund should be kept in cash or near cash investments. Return on investment for the EF is secondary to access to those savings. Also, you want your EF in an investment class with fixed income with no variation in returns. this means in practical terms do not invest your EF portfolio in equities that pay a variable return or even any asset which may need documentation and visits before you can access your funds. I am also wary of a commodity like gold, which does hold value, but cannot easily be converted to cash. The recommended asset classes to invest your EF are:
- Call or Fixed Deposit in Banks
- Sovereign Treasury bills, they are easily discounted and converted to cash
- Certificates of Deposit with bank
If the asset call cannot be converted to cash in one activity should be avoided. Also, ask the institution if they charge fees for early withdrawal and what those fees are.
What can I do tomorrow?
- Start an emergency fund immediately. Do the expense exercise, determine your Non-Distortionary Expenses, start to build up a savings pot.
- Focus on building up your emergency funds before building a portfolio of assets.