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Matters Arising - Implications of Pioneer Status Incentives on SMEs

Proshare

Wednesday, August 16 2017, 4.02PM/ Proshare Research

Preamble
In reaction to public concern generated from the persistent abuse of the pioneer status incentive (PSI) framework. The Ministry of Industry, Trade and Investment reviewed the pioneer status framework and  made available on 7th August 2017.


One fundamental change is the addition of 27 industries to the gazette consisting of industries that qualify for the pioneer status incentive. The new development ensures that 71 industries qualify for pioneer status, reflective of wider industrial coverage by the new framework.


While the new framework jacked up the asset base criteria from N10million to N100 million, to justify the qualification for any firm. The new framework vividly made it clear that only firms in their first year of operation are eligible for such tax’s savings. Therefore, underlining the existing firms, which are already in operation are not eligible for such incentive.


Evidently, the review of Pioneer status initiative is a welcomed development as it rid the initiative from abuse, at the same time ensures that such waivers do not just reach economic agents that are in dire need of it. More importantly, they are used appropriately to achieve the right purpose and stir growth.


Certainly, the widening of the coverage by the administration does not only    increase the value chain but also fall in line with its diversification mantra.


Recent inclusion of industries such as music production, motion pictures, electronic commerce and software development show a more favourable disposition by the administration to the service sector and a more knowledge based economy.


Obviously, the structural flaw of the new pioneer status initiative framework is also not to hard pass. Limiting fiscal waivers to new entries reduces the number of firms that can qualify for such waivers. The very fact that such firms are already hard pressed by growing operational cost and rising leverage burden puts them in dire need of such tax’s holiday in the first place.


The earlier initiative was established in 2014, with an asset base qualification of N10 million. The recent uptick from N10 million in asset base to a N100 million in a fragile recovery does make a smack of reasoning.  Such new criteria completely made it impossible for a large chunk of small and medium enterprises to qualify for such waiver.


The newly admitted industries to the gazette, such as motion pictures, music production and software development, which have relatively lower asset base than N 100 million, are left uncatered for by the new framework.   Indirectly, government has withdrawn its support in creating value both at base and the middle of the pyramid.


We have consistently clamoured for foreign direct investments and has advocated on several occasions  that a robust improvement in  foreign direct investments will reduce the  vagary experience by the nation in its  aggregate  foreign inflow, gradually help to restore the slow biasness of the Naira and provide stronger real asset.


It is encouraging to see a more vigorous attempt by the administration in attracting foreign direct investment. Regardless, we must be careful not to create an imbalance which supports the formation of foreign capital ahead of domestic capital and how?


The new asset criteria fused with only new entry favours more of foreign direct investment as it clearly  eliminates a  large chunk of small and medium scale  enterprises. The policy creates an unfair playing turf, which crowds out Small and medium scale enterprises at the expense of foreign capital.  It is not surprising there has been an alignment on such position across board.


Conclusion

Obviously, this initiative undermines the on-going backward integration plan of the government and if not addressed might affect capacity utilization.  As domestic firms find it harder to compete with foreign investors and are eventually forced to close shop.


Therefore, it is imperative that a fair turf, which is made of a reduced asset base and waivers are not limited to new entries only but extended to existing businesses as well.


Most importantly developmental economics have shown countries that hewed small and medium enterprises properly have reduced inequality better off. After all they are more resilient against country specific risk compared to foreign direct investments.


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