Tax implication on Small and medium enterprises (SMEs)

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The implication of Tax on SMEs has been an important question by business owners in recent times,

Firstly what are small and medium enterprises?

Small and medium-sized enterprises (SMEs) are an independent organization which employs less than a given number of employees. This number varies across countries.

In Nigeria, SME staff strength ranges from 5-250 employees.   Small and medium enterprises (SMEs) make up the majority of businesses operating around the world.

Studies carried out by International Finance Corporation (IFC) show that approx. 96% of Nigerian businesses are SMEs compared to 53% in the US and 65% in Europe.

Although small in size, they are the most important business venture in the Nigerian economy because when all the individual output is aggregated, they exceed that of the larger companies.

Nigeria happens to be one of the few economies with a growing desire to build a civilized nation with a strong and sound economy.

Demonstration of such a desire is seen in the latest Tax Drive (generation of individual tax identification number with BVN), which it has embarked on to increase revenue. However, some citizens see it as the government’s exploitation when the desired growth to tax ratio is not seen effectively.

Taxation and SME’S

Proceeds generated from tax happen to be a major source of Government revenue in Nigeria, which makes it a paramount tool in developing her economy.

Every nation’s tax policy is related, especially with businesses and ventures in that country.

  Whether SME or not, any registered business is expected to remit one form of tax or another to the relevant statutory bodies upon registration as a company with the Corporate Affairs Commission (CAC) and commencement of business.

FIRS is in charge of collecting every registered business Tax in Nigeria, at least by the share of 32% of its annual profit.  

Though not limited to the below mentioned, the following are some forms of Taxes to be paid to the relevant authority by Small Businesses:

  • Company Income Tax: CIT is paid only by registered companies in Nigeria. It is a 30% charge on profit made by the registered companies. Remitted to (FIRS) federal Inland Revenue Service.
  • Withholding Taxes (WHT): Withholding tax is an income tax paid to the government by the payer of the income rather than by the income receiver. The rate for WHT ranges from 5% to 10%, depending on the transaction. The collecting authority for this tax is the FIRS or State Inland Revenue Service.
  • Value Added Tax: Value Added Tax (VAT) is a consumption tax paid on purchased products or services. Companies do not pay VAT, but the government mandates them to collect VAT from consumers, then remit to the relevant tax body (FIRS).
  • Educational Tax: All registered companies in Nigeria must pay a percentage of their assessable profit into an Education Tax Fund. The tax is charged at 2% of the assessable income.
  • Personal Income Tax: This tax is levied on the income of individuals. The rate ranges from 7% to 24%, depending on the amount of chargeable income.

Tax implication on Small and medium enterprises (SMEs)

Generally, tax is a compulsory financial charge imposed on a taxpayer (an individual or Companies) by a country’s government to fund government spending and various public expenditures. Since the tax is back up by law, the effective way to manage it is to comply.

 The best use of all available allowances, deductions, exemptions, etc., are the legal means, as only a skinny line exists between tax avoidance and tax evasion. 

Many SMEs fail to remit their taxes, thereby incurring tax penalties and interest in addition to taxes unpaid, which can be avoided through adequate tax planning.

 

Well-planned business practice and good corporate governance demand that business owners and operators conduct their business to avoid negligence.

That is why a proper understanding of the tax policy and compliance issues should be known before starting a new business or venturing into any project.

The saying goes that a successful and finance-healthy business environment is the result of an economy that makes favorable tax policies. As businesses do well, the economy flourishes as well.

Tax implication on Small and medium enterprises (SMEs)

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

Considering the size of their operations (Finance, staff strength, etc.), the absence of a harmonized tax regime increases the strain on SMEs’ cash-flow compared to large corporations. Payment of taxes shouldn’t be made to look like stifling the SMEs in the country. Still, it should serve as a means whereby a government can reciprocate by creating areas of benefit for some of the businesses to bring about growth and development.

It should be noted that SMEs are also regulated by several government agencies, which leads to several regulatory compliance costs, which in most cases are duplicated.

 

Businesses that make profits are usually subjected to multiple taxations in their first three years of commencement due to the rules for taxation of a new business, thereby increasing the risk of SMEs’ failure within the first few years of business. Also, the exemption of companies with at least 25% 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 SMEs’ case. In the same vein, a good number of SMEs cannot adequately benefit from tax incentives due to the small size of their operations.

The challenges highlighted above raise some important questions about the Tax policy direction vis-à-vis the reality of SMEs in Nigeria; such as;

  • Does the tax policy encourage investment by SMEs?
  • Are basic public services (healthcare, infrastructure, security, etc.) provided to these SMEs and their employees despite their taxes?
  • Is the Nigerian Government prepared to consider increasing tax incentives and exemptions that will attract investors who are potential taxpayers and encourage voluntary compliance, which would ultimately lead to the expansion of existing business interests of the SMEs in Nigeria?

In an attempt to answer the above questions, special and preferential tax regimes should be provided for SMEs given the difficulties in raising finance, naturally disadvantaged tax system, and high costs of tax and regulatory compliance. Tax policies should be designed in such a way that they do not only directly affect SMEs but also indirectly makes them grow. Provision of finance for SMEs may be encouraged by granting exemptions from business tax for financial institutions that provide loans to SMEs.

Policies can also be implemented to ensure that businesses that are individually owned (mostly not registered to regularize their tax status) have access to finances and tax incentives. This way, business owners can see the gains in registering their business. This would also translate to a much wider pool of taxpayers for the government.

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