N25m Tax Break For Small Businesses, And Matters Related

President Muhammadu Buhari presented Finance Bill 2019 to the National Assembly, along with the 2019 Budget. The National Assembly has forwarded it to President Buhari for assent. The President has sent the bill to Ministries, Departments and Agencies to double-check its provisions.

In line with the ease of doing business reforms, the bill aims to, among other objectives, reduce the tax burden on micro, small and medium enterprises (MSMEs) and stimulate their growth towards boosting the Gross Domestic Product of the nation.

For the Small Business Owner, the bill will fundamentally affect micro, small and medium enterprises, and related matters. What changes are likely to come with the signing into law of Finance Bill 2019? Here are some highlights:

1. Companies Income Tax: Businesses with turnover of less than N25 million in the year of assessment will no longer pay Companies Income Tax. Every company now pays 30 percent of its profit to the Federal Government as Companies Income Tax. Some other proposed changes in Companies Income Tax include:

  • Company Income Tax rate of 20 percent will apply to medium-sized businesses with turnover between N25 million and N100 million.
  • Company Income Tax rate of 30 percent will apply to companies that earn over N100 million.
  • Minimum tax provisions will be 0.5 percent of turnover, and exemption will only apply to small companies with turnover of less than 25 million.
  • Tax presence for non-residents regarding imported technical and management services will be at a withholding tax rate of 10 percent.
  • Expenses incurred while earning tax-exempt income will not be deductible against other taxable income.
  • Penalty of N50,000.00 for failure to file within approved time for first month of default and N25,000.00 for each subsequent month.
  • Early payment of Company Income Tax incentivised with deduction of two percent of tax payable by medium-sized businesses and one percent of tax payable by large companies, for payments up to 90 days before the due date.
  • Individuals to produce Tax Identification Numbers (TIN) to open new, or operate existing, bank accounts.
  • Cancellation of personal income tax reliefs by individuals in respect of children and dependent adults.
  • Acceptance of email for conduct of official correspondence between businesses and tax institutions.

2. Value Added Tax: Registration threshold of N25 million turnover in a calendar year, meaning that businesses with annual turnover of less than N25 million will be exempted from registering for, and filing, VAT returns. Other VAT-related provisions include, but are not limited to, the following:

  • Increase in Value Added Tax from five percent to 7.5 percent.
  • Reverse charge of Value Added Tax on imported services.
  • Remittance of Value Added Tax on cash basis, as difference between amount collected and amount paid in the preceding month.
  • Penalty of N50,000.00 for failure to file returns within approved time, for first month of default and N25,000.00 for each subsequent month.
  • Expansion of list of products exempted from VAT to include flour, starch, fruits, live or raw meat, poultry, milk, nuts, roots, salt, vegetables, water and locally produced sanitary towels.

3. Petroleum Profits Tax: Withholding tax of 10 percent on dividends paid from profits of businesses engaged in petroleum operations. Will effectively remove tax exemption granted by the Petroleum Tax Act in respect of such income or dividends.

4. Capital Gains Tax: Exemption from capital gains tax granted to businesses in respect of transfer of assets between related parties in a restructuring exercise. Will also impose capital gains tax on compensations for loss of employment that exceed N10,000,000.00.

5. Stamp Duties: To cover electronic documents. Will be a one-off charge of N50 on bank transfers of amounts of N10,000.00 and above. Transfers between owners’ accounts in the same bank will be free of charge.

The Finance Bill 2019 will significantly change such tax laws like the Companies Income Tax, Personal Income Tax, Petroleum Profit Tax, Capital Gains Tax, Value Added Tax, Withholding Tax, and Stamp Duties. Signing it into law will greatly improve the enabling environment for most small businesses to survive and thrive. They will not have to pay taxes on their profits or make VAT returns until they achieve yearly turnovers of N25 million or higher. They will be able to re-invest more of their profits, strengthen their manpower base and increase their productivity. The Small Business Owner may be heading into the golden age of entrepreneurship!

Do you need help to manage the tax obligations of your business? Contact Us Now or email ted.iwere@smefinance.org.

Flipside Of CBN’s LDR Directive: Breeding Bankable SMEs

CBN's LDR

The Central Bank of Nigeria (CBN), in its circular of July 10, 2019, requires banks to maintain a minimum Loan-to-Deposit Ratio (LDR) of 60 percent by the end of September 2019. The directive also requires that, effective from the next day, banks’ daily placements above N2 billion would no longer earn interest. Prior to that, banks earned interest from the CBN on deposits up to N7.5 billion.

The CBN also directs that any bank that fails to meet the 60 percent LDR will pay an additional cash reserve requirement equal to 50 percent of its lending shortfall.

This reduced capping of banks’ interest-bearing deposits at the apex bank marks the latest in a series of measures to improve market liquidity, encourage banks to increase lending to small businesses, retail, mortgage and consumers, with a view to invigorate the nation’s tottering economy. Now, the banks must lend more or face more stringent cash reserve requirements.

The new CBN directive creates additional loanable funds estimated at between
N750 billion and N1 trillion. United Bank for Africa Plc and Union Bank are expected to increase their loan portfolios by a combined N230 billion to meet the new requirement!

Given that bank revenues accrue largely from interests, treasury securities, fees and commissions, given that their income from deposits with the CBN is negligible, one question arises: Can the CBN directive force or cajole the banks into growing their lending portfolios?

The expectation is that banks are more likely to direct the additional liquidity into the inter-bank market and other secure investments rather than lend to small businesses and consumers, contrary to the intention of the CBN. The explanation is that, notwithstanding the CBN directive, it may remain difficult for Small Business Owners to secure funding through banks, for a variety of reasons, which include, but are not limited to, the following:

  1. Cash Flow: Banks prefer lending to businesses that have steady revenue streams, with consistent cash flowing in every month. Small businesses are hardly able to demonstrate this consistency, hence they are usually denied loans by banks.
  1. Collateral as Security: Small businesses either lack, or have inadequate, collateral to secure their credit. This makes it difficult, if not impossible, for them to obtain financing. Bank loan applications usually require collateral to secure the credit.
  1. Personal Guarantee: A personal guarantees from the Small Business Owner, which makes him or her personally responsible for repaying the loan, is almost always a requirement of the banks. This is often a tough call for a Small Business Owner with little or no assets and locked in a daily struggle to keep up with the expenses of running a business.
  1. Limited Track Record: Banks are more comfortable lending to businesses with long operating history. They are wary about funding businesses just starting out and lack a record of success. Banks want to see a business with a track record of profits over a specific period before they approve funding for it. A small business unable to show that is an unlikely candidate for a bank loan.
  1. Management Team: A small business that doesn’t have a strong management team, with a clear chain of command, will have great difficulty in securing credit from a bank. Banks look for proofs of sound corporate governance and signs of long-term success of a business.
  1. Accurate Bookkeeping: The accounting books of a business give a clear overview of the past, present and, possibly, the future of a business. A business that does not keep its books, or does not keep them accurately, stands a zero chance of securing a bank loan. For example, an astute lender can make a lending decision by simply looking at the bank statements of a business over a period of time!

It is known that banks don’t lend enough. It is also known that banks barely lend to individuals and Small and Medium Enterprises (SME). It is therefore understandable that the CBN wants banks to lend more, and to lend to individual consumers and SMEs which, together, are prime movers in economic development.

Will the banks heed the CBN directive? Or take the punishment of non-compliance? If the banks try to comply with the CBN directive to give out more loans, will there be effective demand from quality and bankable borrowers for banks to meet their targets?

The answer to this question rests with the CBN and the Bankers Committee
which should jointly address the underlying conditions that make it unattractive for banks to lend to small businesses.

For now, the CBN’s LDR Directive addresses the supply side of the problem, by creating a pool of loanable funds for small businesses and consumers. It, however, does not address the demand side, that is, the shortage of bankable small businesses.

For the CBN to achieve its objective of improving access of small businesses to credit, it must address both sides of the problem. The CBN and the banks need to fashion and implement a systematic and institutionalised framework for producing a pipeline of bankable small businesses with the absorptive capacity to access and leverage available loanable funds. Until this happens, the banks will continue parking their cash with the CBN for free or for a fee, or continue investing in risk-free government securities instead of lending to businesses or consumers.

Even worse, the banks will devise a thousand and one ways to circumvent the CBN directive, rather than lower their credit controls and suffer the consequent rise in non-performing loans, which will be akin to standing on Third Main Mainland Bridge and pouring their monies into the Lagoon.

The CBN must evaluate its entrepreneurship development programmes and ensure that they serve the purpose of breeding bankable entrepreneurs. Small Business Owners must help their businesses, by making their businesses, projects or proposals bankable; by assuring sufficient collateral, future cash flow, good probability of success, and is acceptable to lenders for financing.

When small businesses become bankable, they mitigate the lending risks of banks, and banks will begin to fall over each other to advance credit to them.

When bankable small businesses are available to effectively utilise loanable funds, then, the chemistry is right!

CBN and MSME Funding: So Much Motion, So Little Movement

CBN and MSME Funding

The Central Bank of Nigeria (CBN), in pursuit of its objective of promoting economic development, in recognition of the significant contributions that Micro, Small and Medium Enterprises (MSMEs) are making to the growth of the economy, has been launching a growing range of initiatives aimed at addressing the financing gap in this sub-sector.

The CBN, in line with its pivotal role in the nation’s financial ecosystem, launched the Micro, Small and Medium Enterprises Development Fund (MSMEDF) on August 15, 2013 with a share capital of N220 billion. The Fund aims to enhance the access of MSMEs to financial services, by channelling single-digit loans at Nine percent interest rate to them, through the Primary Finance Institutions (PFIs).

Amidst cries that end users are finding it impossible to access this facility, one reason being the shortage of collateral among Small Business Owners, the CBN introduced the National Collateral Registry (NCR), to ease delivery of affordable loans to small businesses. Initiated in 2015, a movable asset in this register, with the Bank Verification Number (BVN) of the potential borrower, is expected to stand as collateral for a loan to a Small Business Owner.

Granted that bank executives and fund managers would rather not lend to Micro, Small and Medium Enterprises, because they are high-risk borrowers, this CBN-inspired NCR scheme provides a window for mitigating the risks of lending to them.

In yet another initiative, announced in December 2018, the CBN decided to transform the tottering Nigerian Postal Service (NIPOST) into a National Microfinance Bank.

Reasons: Non-disbursement of intervention funds to MSMEs, and high and “outrageous” interest rates charged by existing microfinance banks.

Under the plan, the Bankers’ Committee will invest N5 billion in equity from its N60 billion Agricultural Small and Medium Enterprises Investment Scheme (AGSMEIS) Fund and NIPOST will contribute its offices in the 774 local governments across Nigeria.

This plan by the CBN to transform NIPOST into a microfinance bank received a new spin on March 6, 2019 when CBN Governor, Godwin Emefiele, at the Gwagwalada Post Office in Abuja, announced that NIRSAL (working with the CBN, Bankers’ Committee and NIPOST) will establish a N5 billion microfinance bank that will have branches in the 774 Local Government Areas in Nigeria, and will offer collateral-free loans with seven-year tenor and two-year moratorium at five percent interest rate.

According to Emefiele, NIRSAL Microfinance Bank now has seven branches, and plans to open 50 in the next phase. “Before the end of this year, we would have moved substantially in making sure that they are set up and able to provide finance to small businesses,” Emefiele said.

NIRSAL, launched in 2011 and incorporated in 2013, by the Central Bank of Nigeria (CBN), the Bankers Committee and the Federal Ministry of Agriculture and Rural Development, is the Nigeria Incentive-Based Risk Sharing System for Agricultural Lending. It de-risks the agriculture value chain, and enables banks to lend to the sector at rates of between 7.5 to 10.5 percent.

Sadly, in spite of this flurry of initiatives, despite these and other interventions by the Central Bank of Nigeria, the funding of MSMEs remains an issue. In fact, the CBN Governor recently estimated the financing gap for MSMEs at N48.3 trillion!

According to estimates, less than five percent of the 37.07 million Micro, Small and Medium Enterprises (MSME) in Nigeria have been able to access loans or overdrafts from financial institutions.

Furthermore, Central Bank of Nigeria figures show that out of aggregate loans of N135.9 trillion disbursed to the economy between 2011 and 2015, only N159.75 billion, representing 0.1 percent, went to SMEs.

Ironically, these are happening at a time when the widening basket of funds earmarked for Micro, Small and Medium Enterprises, across various segments, currently amount to N3 trillion.

Even more worrisome is the case of the N220 billion MSME Fund. This scheme, designed by the CBN to assist MSMEs does not seem to be working as planned. Instead, it has become a subject of altercation.

While a recent CBN count indicates that the MSME Fund, heading into its sixth year, has disbursed N170 billion, leaving N50 billion on the table, the supposed end users dispute the claim, and are demanding for publication of the list of MSMEs that have benefitted from the Fund to date.

With the myriad of complaints coming from the target beneficiaries of the Fund, it is clear that its objectives are far from being achieved, and the expected benefits are dreams deferred.

The plain truth is that the funds already set aside and/or said to be available are not translating to their being accessible to the target end users, and MSMEs continue to face the challenges of poor access to finance and high cost of borrowing.

One thinks that getting current schemes to deliver on their mandates should be the focus of the CBN, not the introduction of new schemes that may suffer the fate of earlier ones that were either badly planned or being implemented poorly.

What Do Small Business Owners Want The Next President To Do For Small Business?

It is election time. Come 2019, Nigerians will decide, whether to approve the first four years of President Muhammadu Buhari and urge him on, or choose any one of the many contenders who are contesting the position with him.

As Small Business Owner, you cannot be an innocent bystander in this contest for the Office of the Chief Executive Officer of the Federal Republic of Nigeria.

As we often say, small businesses are the engine rooms of the economy, and Small Business Owners are the prime movers at the helm of these enterprises. But, because Small Business Owners rarely leverage the appropriate platforms to voice their concerns and needs, they are usually over-burdened or all-together ignored by the powers that be. Which is why, as we approach the 2019 Presidential elections, I have polled the views of my network of business owners, experts and entrepreneurs. In response to my request for them to share what they want the next President to do to help Small Business Owners and their small businesses to survive and thrive, here is a listing of their answers in no special order:

  1. Cut-Back On Regulation.

In spite of what we hear and what are being done, it remains difficult to start a small business today, principally because of the overwhelming amount of regulation. As at October this year, Nigeria dropped in the World Bank Ease of Doing Business Ranking. Of the 190 countries ranked, Nigeria is 146, dropping from its 145th position in 2017.

To continue to rank lower and lower on the business scale of the world is cause for hesitation even for the most creative and innovative investor. It signals uncertainty for long-term investors to grow by investing in their businesses, their people and creating jobs. The President must eliminate most of the current regulations and be wary of adding more, unless they have the overarching effect of moving Nigeria up in the Ease of Doing Business Index.

  1. Support Made-in-Nigeria.

Nigeria’s manufacturing industries need presidential support. To help build the economy, government must find ways to help Nigerian industries to compete with foreign manufacturers. Government must subsidise Nigerian manufacturers, to enable them manufacture quality products for less, so that Nigerian goods can compete with anyone, anywhere. The President must support Nigerian manufacturing by offering tax incentives to companies making the investment to grow the Nigerian industrial base and boost the nation’s Gross Domestic Product.

  1. Understand Business Better.

The President, whether the incumbent with a renewed mandate or a successful challenger, must (personally or by delegation) understand and come to terms with what makes business work, especially small business.

The formulation of policies and programmes for Nigerian businesses cannot be left to the administration of bureaucrats and appointees who have never met a payroll, or cannot tell the difference between a business plan and a marketing plan, or don’t understand the language of entrepreneurship and business ownership.

The President must talk entrepreneurship, celebrate small business as a key to growing the economy and translate these into policies that encourage investment in business. The President (and his team) must understand the sacrifice that goes into building a business.

  1. Make Tax Code Small Business-Friendly.

Big businesses have the experts and the resources to make sense of the tax laws and take full advantage of available tax breaks. But these are challenges for Small Business Owners and small businesses. They must comply with new tax requirements and rules, or suffer penalties for non-compliance.

The President must address the tax concerns of small businesses which include, but are not limited to the following:

  • Being subjected to multiple taxes by the different tiers of government, each with its own rigours and compliance costs.
  • Absence of harmonised tax regimes which strain their cash flows and limited resources.
  • Regulation by several government agencies, leading to significant and sometimes duplicated and usually significant compliance costs.
  • Inability to benefit from tax incentives because of the small size of their operations.

More important, because of the difficulties they face in raising finance, the inherent disadvantage of the tax system and the high cost of tax and regulatory compliance, the President must provide special and preferential tax regimes that directly encourage the growth of small businesses. The President should cut taxes on small businesses. Small Business Owners are low net worth individuals. They need low tax rates to grow their enterprises.

  1. National Business Accelerator Programme

Growing evidence indicates that most small businesses are unable to scale their operations. Consequently, their growth plateau, decline and, after a few years, they fail. The President should champion a National Business Acceleration Programme which, in turn, will increase the business success rate and make significant contribution to the Nigerian economy.

  1. Leave Business To Business.

The function of government is to create and nurture the environment for business to thrive, create jobs and grow. It’s not the other way around.

The President must realise that businesses innovate and compete best, locally and globally, when there is minimal regulation and interference by government. Businesses perform optimally when left to operate under open market forces, where consumers and customers, not political directives or interests, hold them accountable.

Bad government policies create uncertainty in the economy. The President should positively impact on small business and entrepreneurship by helping businesses to invest in growth. Businesses, Small or Big, need the confidence that government will support and not penalise their efforts. The President must say this, consistently and continuously, in words and in deeds.

  1. Re-Align the Core Curriculum.

The President should focus on improving the country’s education. The President should constitute an Education Task Force, with the objective of re-aligning and re-orienting the national curriculum to the jobs needed to manage and run today’s economy. New jobs are needed for the new economy, and the nation’s education and training institutions, at all levels, must re-tool to produce the skills and manpower to meet the emerging needs.

If you have something that you want the President to do for small business and it is not included in the list above, please share it with us via ted.iwere@smefinance.org

If you would like to contribute articles to the SME Finance, sign up here:https://smefinance.org

What support can I get from the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN)?

Question: I am a fresh graduate with a Bachelor’s degree in Business Administration, and just completed my National Youth Service Corps (NYSC). I am planning to start a small business. What support can I get from the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN)?

Olusoji Adebowale
Ibadan

Answer: The Small and Medium Enterprises Development Agency of Nigeria (SMEDAN) exists to support aspiring Small Business Owners. Its services are as follows:

(a) It provides information on raw materials, machinery, equipment, market and the activities of such agencies of governments as Standards Organisation of Nigeria (SON), National Agency for Food and Drug Administration and Control (NAFDAC), Corporate Affairs Commission (CAC) and Federal Inland Revenue Service (FIRS).

(b) It provides Training and Capacity Building in Book Keeping and Accounts Management, Preparation of Business Plans, Quality Control and Computer Appreciation.

(c) Access to Finance.

(d) Access to improved work space through Industrial Parks.

(e) Mentoring.

(f) Advisory Services.

(g) Facilitation of linkages and /or co-operation with other enterprises.

For more information, contact SMEDAN via https://smedan.gov.ng

Wanted: A Simple Access To SME Loans

Do you need access to SME loans? Stay tuned

There is a growing range of grants, loans and sundry credits nowadays. These are available to individuals and entities in the Small and Medium Enterprises ecosystem. It is also true that in spite of the growing arsenal of venture monies seemingly waiting for the beck and call of Small Business Owners and Independent Professionals, the recurring refrain is that gaining access to these funds is perhaps as easy as the proverbial camel passing through the eye of the needle!

When the intervening institutions are not asking for collaterals, they are seeking all sorts of personal and/or bank guarantees.

While no one advocates that SME operators should see the start-up or growth funds being advanced to them as their shares of the Nigerian cake, and should therefore not worry about returning the principal and interest to the national treasury, it is important that we do not miss a key reason for the existence of these funding arrangements.

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It’s good to focus on the laws governing the disbursement of these venture monies. Also, we must remember that their existence is driven by the desire to promote the spirit of enterprise. Also, we aim at nurturing a culture of entrepreneurship amongst our people. Even more, we assist them to engage in productive endeavours. Especially nowadays, there is a high level of unemployment, particularly in the ranks of our young and restless youths.

It is in this light that the SME community aligns with the Coordinator of the Presidential Council (PEBEC), Jumoke Oduwole, in advocating that a critical thrust of improving Nigeria’s Ease of Doing Business Index should be a focus on making it easy for Small Business Owners to access credit. Quite re-assuring is the disclosure by the Managing Director, Bank of Industry, Olukayode Pitan, that the bank has commenced discussions with the Small and Medium Enterprise Development Agency of Nigeria (SMEDAN) and the Nigeria Export and Import Bank (NEXIM) with the objective of de-risking its loan portfolios to Small and Medium Enterprises.

According to Pitan, the bank is working with SMEDAN and NEXIM already. They plan to create credit registry data by year end. This will enable it to rate and monitor its borrowers. Even more, it will improve their risk-acceptance criteria for access to SME loans. These are laudable objectives. We urge the Bank of Industry, NEXIM, SMEDAN, its sister agencies in Government and private sector entities with similar values and vision, to follow through with timely execution. Also, they should pursue a simplified process for funding Nigerians who want to start, run and grow their businesses. Never before has the need for a simple procedure of accessing grants been more urgent for Small Business Owners.

 

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