April 15, 2019 /03:20PM / Deloitte
Messrs. Deloitte takes a look at the National Housing Fund Bill 2018 and interrogates how well it has improved upon the pre-existing Housing Act.
The Bill, which will repeal the National Housing Fund (NHF or the Fund) Act, 2004 after the President’s assent, aims to provide additional sources of funding for effective financing of housing development in Nigeria.
Key highlights of the Bill are presented below:
1. Sustainable Development Levy (SDL or the Levy) will be charged on cement
The Bill introduces a levy on locally produced and imported cement. The Levy is to be paid at the rate of 2.5% of ex-factory price before transportation cost for each bag of 50kg or its equivalent in bulk. SDL would be assessed and collected by Federal Inland Revenue Service (FIRS). The Levy is payable within sixty days of issuance of an assessment notice by FIRS on the manufacturer or importer. The President also reserves the power to amend or substitute the goods and services on which the Levy can be applied as well as the rate applicable, through an Executive Order.
2. Self-employed persons are now obliged to contribute to the Fund
Employees earning the national minimum wage and above in the public and private sectors, and self-employed persons earning equivalent of the minimum wage and above, are required to contribute to the Fund.
3. Contribution base is now total monthly income and no more basic salary
The rate of individual contributions to be made will be 2.5% of the affected individual’s monthly income/salary instead of 2.5% of monthly basic salary currently in the NHF Act of 2004.
4. Contributions will accrue reduced interest
The contributions made to the Fund will accrue interest at 2% per annum or as may be determined by the Federal Mortgage Bank of Nigeria (FMBN or the Bank). This is lower than the 4% interest rate currently specified in the NHF Act of 2004.
5. Pension Fund Administrators (PFAs) are obliged to invest in the Fund
The Bill includes PFAs in the category of organisations required to invest in the Fund. Commercial/merchant banks, insurance companies and PFAs are to invest at least 10% of their profit before tax in the Fund, at an interest rate of 1% above the prevailing interest rate on current bank accounts.
The relevant regulatory bodies of the above organisations may cancel their relevant operational licenses in the event of default.
6. Contributions made will be refunded at some point
Contributors who have attained 60 years of age or 35 years of service and have no outstanding loan with the Bank are entitled to a refund at an interest rate of 2% per annum, within three months of application.
7. Employers and regulators to act as collection agents
Employers are required to deduct NHF contributions and remit the deductions on behalf of their employees to the Fund, while self-employed persons are to contribute directly to the Fund. Central Bank of Nigeria is the agent of collection of the mandatory investments from commercial and merchant banks; National Insurance Commission for insurance companies, while National Pension Commission will act as investment collection agent for PFAs.
8. There would be significant increase in penalties for non-compliance
The Bill imposes a number of penalties for non-compliance. Please see the table below for a summary of penalties for failure to comply with the requirements of the NHF Bill 2018.
General comments and conclusion The Bill raises a number of concerns as discussed below:
1. Potential increase in the cost of cement and building
The SDL imposed on locally produced or imported cement creates additional level of taxation on this product. This potential multiple taxation will likely increase the cost of producing or importing cement and ultimately cost of building and construction in Nigeria, as manufacturers/importers of cement are likely to pass the additional cost to consumers. Therefore, while the SDL will increase the amount of funds available for housing development, this advantage may be eroded by the potential increase in cost of building, thereby defeating the aim of the Bill.
2. Collection of SDL
While the Bill requires FIRS to assess manufacturers and importers of cement to SDL, it is silent on the frequency of issuance of SDL assessments by FIRS. This silence may lead to abuse by the tax authority; SDL assessments may be issued indiscriminately. We expect the final Act to clearly define the frequency of making SDL assessments. More so, given that SDL is imposed on ex-factory cost of cement produced/imported, it may be implied that SDL is collectible at the point of manufacture/import of cement and not upon sale of the cement. Therefore, manufacturers and importers of cement may be on the losing end as this would impact their liquidity and cash flows. Also, the Bill is silent on whether manufacturers/importers of cement have the opportunity to object to demand notices served on them by FIRS, in the event that they disagree with FIRS’ position. We expect that a clarification would be provided on this issue, upon assent by the President.
3. Reduction in disposable income
The new requirement to contribute 2.5% of monthly income rather than the previous 2.5% of monthly basic salary would lead to a reduction in the disposable income available to employees. This is also likely to impose additional pressure on earnings and ultimately reduce spending power of Nigerian workers and self-employed persons.
4. Potential diminution in shareholders’ wealth
The requirement for commercial/merchant banks, insurance companies and PFAs to invest at least 10% of their profit before tax in the Fund may hinder management from maximising shareholders’ wealth, given that they are mandated to invest at least 10% of their profit before tax in the Fund. For instance, the interest rate of 1% above the interest payable by banks on current accounts may be significantly lower than the interest rate obtainable from alternative use of available funds, such as treasury bills, government bonds, loans and advances.
5. Potential application to expatriate staff
The substitution of the phrase “Nigerian worker” in the NHF Act 2004 with “employees” in the Bill appears to suggest that expatriate staff may be required to contribute to the Fund going forward. It is expected that further clarity will be provided on this matter, in due course.
6. Access to interest on contributions and refunds
The Bill provides that the interest on contributions would be payable at 2% per annum. However, it is unclear if the contributors would be able to withdraw the interest on their contributions in cash, and if the interest could be reinvested as part of contributions. Also, the fact that funds contributed would become refundable at some point will create additional administrative burden as there would now be a need to maintain proper accounts for every contributor, the statements of which would have to be made available to the contributors for review and proper reconciliation.
6. Tougher penalties for non-compliance
The penalties appear harsh and overbearing. This is in addition to the already increased cost of compliance and overall cost of doing business. 8. Enforcing compliance with the law That Nigeria does not have a viable and sustainable housing development fund today is not so much due to absence of an effective law but due to low compliance level with respect to the NHF Act 2004. Judging by the fate that met the existing Act, the regulators of this Bill will need to have the political will to enforce the provisions of the Bill for it to stand any chance of achieving the desired objectives, when assented to by the President.
This report has been republished with the permission of Deloitte.