Tax Policy on SMEs in Nigeria – How Fair?


Sunday, December 24, 2017 1:50PM / Ani Chizoba, Tax & Regulatory Service, Deloitte 

Small and medium enterprises (SMEs) are the bedrock of the Nigerian economy. They serve as an important source of employment generation, economic dynamism, competition and innovation; thus contributing to national growth and poverty alleviation. In order for SMEs to thrive, there is need to create a favourable business and regulatory environment. Most large companies have their roots in SMEs. In other words, the future large corporations in developing countries like Nigeria, are present day SMEs that need to be nurtured.

The significance of contributions of SMEs to economic growth is seen in more developed climes where their potentials have been successfully harnessed. For instance, SMEs accounted for about 20% of patents (a measure of innovation), in biotechnology-related fields in Europe in 2014. SMEs are also known to account for over 95% of businesses, 60-70% of employment, 55% of gross domestic product (GDP) and generate the lion’s share of new employment.

Also, there are evidences to support the contributions of SMEs to economic development in many developing countries. However, the Nigerian government tends to focus more on larger corporations, with foreign investments, to the detriment of SMEs, whose activities are wrongly perceived to have insignificant impact on the economy. This perception had since been debunked by evidence from antecedents of OECD countries, suggesting that SMEs have a high propensity to transform a country’s economy if a conducive environment is created for them to grow through appropriate regulation and tax policies.

In Nigeria, SMEs are subjected to multiple taxes by the different tiers of government, each with its own rigorous process and significant compliance cost. Considering the size of their operations, the absence of harmonized tax regime increases the strain on cash-flow and other limited resources of SMEs when compared to large corporations. SMEs are also regulated by several government agencies; thereby leading to significant regulatory compliance cost, which in most cases are duplicated.

Though, there are numerous incentives and support facilities available to SMEs in Nigeria (e.g. the Federal Government Special Intervention Fund for MSMEs, Bank of Industry and the Central Bank of Nigeria’s Intervention Fund, etc.), access by SMEs to such incentives and facilities seems to have been hampered by bottlenecks. Also, lack of awareness of these government funds, absence of supportive environment and poor access to finance have reduced the competitiveness of SMEs in Nigeria.

The main objective of the new National Tax Policy (NTP) is to establish a robust and efficient tax system in Nigeria with focus on legislative amendments to reduce the tax burden on MSMEs. The NTP also proposed reduction of corporate tax rates and introduction of tax registration thresholds as an incentive to encourage compliance and protect MSMEs. However, taxes still appear to be a major constraint to the development of these SMEs in Nigeria.

For instance, businesses that make profits are usually subjected to multiple taxation in their first three years of commencement due to the rules for taxation of a new business; thereby increasing the risk of failure of SMEs within the first few years of business. Also, 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 the case of SMEs. In the same vein, a good number of SMEs are not able to adequately benefit from tax incentives due to the small size of their operations.

The challenges highlighted above raise some important questions about the policy direction vis-à-vis the reality of SMEs in Nigeria; such as;
• Does the tax policy encourage investment by SMEs?

• How well can the current tax policy encourage successful transition from the informal to the formal sector?

• Are basic public services (healthcare, infrastructure, security, etc.) provided to these SMEs and their employees despite the taxes collected from them?

• Is the Nigerian Government prepared to consider increasing tax incentives and exemptions, that will not only attract investors who are potential taxpayers but also encourage voluntary compliance, which would ultimately lead to expansion of existing business interests of the SMEs in Nigeria?

In an attempt to provide answer to the above questions, some stakeholders have suggested the need for special and preferential tax regimes for SMEs in view of the difficulties in raising finance, inherent 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 push them to grow. For instance, provision of finance for SMEs may be encouraged by granting exemptions from business tax for financial institutions that provide guarantee for loans to SMEs.

Policies can also be implemented to ensure that businesses in the informal sector regularize their tax status to have access to finances and tax incentives. This way, business owners are able to see the gains of moving from the informal sector to formal sector. This would also translate to a much wider pool of taxpayers for the government.

There is no gainsaying that the current NTP is well intended to support and protect the interest of SMEs.

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1.  Research Journal of Finance and Accounting Vol. 2, No 2, 2011 – Tax Policy and the Growth of SMEs: Implications for the Nigerian Economy

2.  Eurostat (2014), Patent Statistics at Eurostat. Mapping the contribution of SMEs in EU patenting. Eurostat Manuals and Guidelines, Luxembourg, http://ec.europa. eu/eurostat/documents/3859598/6064260/ KS-GQ-14-009-EN-N.pdf/caa6f467-11f8- 43f9-ba76-eb3ccb6fab6d

3.   Mediterranean Journal of Social Sciences, Vol 5 No 7, May 2014

Organisation for Economic Cooperation and Development

Micro, small and medium enterprises

Revised in February 2017

A lot of SMEs are believed to fall under this  category


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