FINANCE ACT 2019: CLARIFYING THREE MISCONCEPTIONS
Written by: Busola Omolara Aboyeji
On Monday, 13th January 2020, President Muhammadu Buhari signed into law, the Finance Act 2019 (“the Act”). Naturally, the publicity that accompanied the Presidential assent to the Act, came with a few misconceptions and misinterpretations of some salient provisions of the Act that directly affect Companies and Individuals.
What are these misconceptions and how does the Finance Act 2019 affect your business?
- Tax Identification Number
The Tax Identification Number is a unique code with which a taxpayers’ payment of tax can be tracked. Business Names (Sole Proprietorship, Partnerships, etc) and Companies are mandated by law to have one in order to be able to open and operate a corporate account.
Following the enactment of the Finance Act 2019, some people misinterpreted Section 30 of the Act to mean that the requirement of the unique code now extends to every individual, as a pre-requisite for opening and operating an account (something akin to the BVN). This interpretation is erroneous.
Section 30 of the Act amended Section 49 the Personal Income Tax Act to include the following:
“A person engaged in banking shall require that a person intending to open a bank account for the purposes of its business operations shall provide a tax identification number as a precondition for opening or continue operating of such bank account”.
It is clear from the above that Tax Identification Number is only required for the opening and operation of accounts designated for business operations. For example, salary earners do not need a Tax Identification Number to operate their personal accounts into which their salaries are paid, but their employer who is liable to remit Personal Income Tax after deducting same at source, Companies Income Tax, Withholding Tax, Value Added Tax and other taxes is required to have a Tax Identification Number for the operations of the business account. This position remains the same even if the employer is a sole-proprietorship operating as an individual.
- Small Companies’ Exemption from Tax
The general euphoria that greeted the impression that Small Companies are now exempted from tax is bound to be short-lived. With the number of SMEs springing up in the Country, government can only reduce the tax burden on Companies and not totally extinguish it. Hence there is no basis for thinking that Small Companies are exempted from paying tax.
The Act only exempts Small Companies from paying Companies Income Tax in the relevant year of assessment upon the occurrence of a certain event, that is to say, if the Company does not achieve a gross turn-over of N25,000,000 in the year of assessment.
Consequently, every Company, including Small Companies remains liable to remit (Withholding tax) on dividend, interest, rent or royalty, Stamp Duties, and other applicable taxes. The Act includes a proviso to this effect in paragraph (n) of Section 23(1) of the Companies Income tax which provides as follows:
“Nothing in this section shall be construed to exempt from deduction at source, the tax which a company making payments is to deduct under sections 78, 79 or 80 of this Act, shall apply to a dividend, interest, rent or royalty paid by a company exempted from tax under subsection 1 (a) to (e), (h) to (i), (o), (q), (r) and (t) of this Section”.
- What is a Small Company for the purpose of Tax Assessment?
Contrary to some understanding in some quarters, the profit made by a Company in a year is not taken into account in determining whether it qualifies as a Small Company for the purpose of the applicable exemption.
A Company is regarded as a Small Company in any year of assessment if the gross turn-over of the Company is N25,000,000 or less. See Section 23 of the Act which amends Section 105(1) of the Companies Income Tax Act.
The operative word is ‘gross turn-over’ which is the gross inflow of economic benefits (cash, receivables, other assets) arising from the ordinary operating activities of a company, including sales of goods, supply of services, receipt of interest, rents, royalties or dividend (Section 105 (1) of the Companies Income Tax Act (As amended).
A Company’s gross turn-over in a year may be the sum of N26,000,000 from the sale of its products while the profit of that same Company in a year, after deduction of the cost of production, rent, taxes, rates, etc may be less than N1,000,000. Such a Company is liable to pay Companies Income Tax having crossed the threshold of N25,000,000. However, the tax is only calculable on the profit of N1,000,000 and not on the gross turn-over.
Conversely, a Company with a gross turn-over of N24,500,000 in the year of assessment is not liable to pay Companies Income Tax even if the profit for that years is as high as N24,000,000
While the Finance Act 2019 is another milestone in the Federal Government’s revenue drive, the Act has also considered the interest of small enterprises. This is evident in the exemption given to small companies, which no doubt is a huge relief to budding entrepreneurs and existing business.