It is a given that 2020 has been one of the most trying years for business owners and entrepreneurs. Some businesses have been crushed completely, with some left barely breathing.
The year started with the announcement of the increased VAT rates, moved on to the coronavirus pandemic and its attendant challenges, the global oil crisis and its implications on national revenue, and just after the easing of the lockdown, the recent increase in fuel price. What do all these connote for Micro, Small, and Medium Enterprises that were already groaning under stiff economic policies and trying to survive the hard days? Your guess is as good as mine.
Taxation in the middle of a pandemic
Amid all of these challenges, the government (through its agencies) trying to widen its tax net and improve revenue, with more duties and tax options being imposed on Nigerians. Just recently, as courier and logistics business operators were still trying to grapple with the implications of the increased NIPOST license fees, when NIPOST and FIRS went on a social media war of words over which agency is constitutionally justified to collect the Stamp Duties.
There is also the recent rental tax announced by the government, a move still being protested by unions who have argued that this pandemic period is a time for the government to give out palliatives, not widen its tax net.
What do the multiple changes and challenges in 2020 mean for MSMEs?
In a recent tweet on his handle, Partner & Chief Economist at PwC Nigeria, Andrew Nevin (Ph.D.) noted that the current circumstances will stifle the entire economy and constrain MSMEs from growing, as it is quite difficult to grow in an economy that is not growing.
“… The complexity and cost of governance and the fiscal crisis is leading to a situation where successful companies in the tax net are subject to more and more taxes, which means they cannot grow and some companies in the formal economy will try to move back to the informal economy, further compounding the issue,” Nevin tweeted.
… the complexity and cost of governance, and the fiscal crisis is leading to a situation where successful companies in the tax net are subject to more and more taxes, which means they cannot grow …
— Andrew S. Nevin, PhD (@nevinomics) August 7, 2020
Nevin also noted that even though the SMEs employ over 80% of the country’s workforce, the startups in Nigeria hardly get to the point where they are valued at over $1 billion. And this is because the uncertainties of doing business in Nigeria are quite high. Gokada, for instance, had a thriving business environment and was set to break even when the new policy was introduced banning motorcycles across major routes in Lagos. This, he said, shows the uncertainty of the business environment in Nigeria.
… a very good example is GoKada … they invested heavily in Lagos, and the Governor was supportive .. then for perhaps very good reasons security requires that the business is banned … and the GoKada investment has been lost …
— Andrew S. Nevin, PhD (@nevinomics) August 7, 2020
In addition, attracting global capital to scale a unicorn requires more money than are readily available for risky companies in Nigeria. The challenging business environment and the ‘reputation’ associated with the Nigerian flag makes it very hard to get sufficient external capital.
According to him, SMEs entering the formal sector means higher productivity and monitored payment of taxes. Yet, entry into the formal sector is still a choice most small businesses do not want to embrace due to the economic environment.
“… if the cost and complexity of entering the formal sector is too high, then the SME will elect to stay in the informal sector with all the attendant issues, including that they can be subject to harassment by the authorities,” he said.
He noted that the large SME sector arises partly from unemployment and people rushing into entrepreneurship as a means of livelihood; as well as the difficulties to grow a large and strong business.
“These type of statistics always tell us the sector is huge but it is huge because it is too difficult to grow big companies, so this is not a sign of strength. The best structure for the economy is to have strong large companies that then create room for SMEs to be part of their ecosystem.
“Large companies raise standards (look at quality of Dangote companies for example) and raise productivity and create opportunities for others so large SME sector is sign that business is too difficult because if Nigeria was functioning correctly, we would have 100+ Dangotes in the Economy,” Nevin tweeted.
Explaining the challenges of MSMEs in Nigeria, Chairman and Managing Partner at Ofuani Maidoh & Co, Clement Ofuani, noted that small businesses in Nigeria have more pressing challenges to deal with than the government-imposed fiscal burdens.
Ofuani told Nairametrics in an interview, that the harsh and hostile operating environment makes for a more serious challenge for small businesses.
“Epileptic electricity power supply, inefficient transportation system and insecurity impose more operating costs on MSMEs than the fiscal taxes listed,” he stated.
Ofuani, who served as Senior Special Assistant to President Umaru Musa Yar’Adua on Policy, explained that the Finance Act waives income tax for companies with turnover below N25 million, thus granting fiscal reliefs to most small businesses.
“The stamp duty on rental agreements and other agreements are additional burdens as is the increase of VAT to 7.5% but the below-the-table taxes paid by MSMEs in form of unreceipted ‘taxes’ to the security personnel along the transportation corridors, and to bureaucrats for normal government services are the greatest frustrations that make Nigeria uncompetitive in global commerce and as an investment destination,” Ofuani stated.
Amid all of these formal and informal challenges, it becomes very difficult for the small start-up to grow beyond its startup stage and become a big company.
The on-going pandemic and recent policies have done little or nothing to address these challenges and despite the palliatives, loans, and support schemes being launched by the government at various levels, most of these small businesses will still find their growth stunted by some of these “unreceipted taxes”.