General Overview of Taxation
There is currently no accepted universal definition for the term Tax, but judicial and literal definitions have been able to provide a sufficient outlook on the subject matter. The National Tax Policy for Nigeria provided that “tax is a monetary charge on a person’s entity or income, property, or transaction, and is usually collected by a defined authority at the federal and state level”. Government and society gain greatly from taxes in many ways, including the creation of revenue, economic growth, price stability, control over the production of certain commodities and services, income redistribution, and regulation of consumption behaviours and patterns.
A tax can be direct or indirect, it may be proportional, progressive, or regressive, it can be levied either on a person (natural or artificial), goods or service, or capital and finally the rate of the tax can be specific or ad valorem.
SMALL AND MEDIUM ENTERPRISES (SMEs)
Small and Medium-sized businesses (SMEs) form the backbone of the Nigerian economy (SMEs). They contribute significantly to economic dynamism, innovation, competition, and the creation of jobs, all of which help to foster national growth and combat poverty. SMEs account for the majority of businesses worldwide and are important contributors to job creation and global economic development. A 2017 national survey by the Nigeria Bureau of Statistics and the Small and Medium Enterprises Development Agency of Nigeria revealed there are about 41.5m Small and Medium Enterprises (SMEs) in Nigeria. According to PwC, SMEs in Nigeria account for 96% of businesses, and 84% of employment, and contribute 48% of the national GDP.
However, a 2017 survey by Business Day found that 80% of small businesses are not paying regular taxes to the government. While some SMEs pay taxes to local, state, and federal government agencies, many avoid paying structured taxes such as corporate and personal taxes. The result of which is a Treasury deprived of billions of naira per year in revenues.
LEGAL AND REGULATORY FRAMEWORK FOR TAXATION OF SMES IN NIGERIA
SMEs in Nigeria are liable to pay Personal Income Tax, Value Added Tax, and Withholding Tax in Nigeria. Formerly, they were subject to Company Income Tax; however, this has changed due to the amendment from the Finance Act 2019, which exempts small businesses from paying tax. Most SMEs are taxed based on presumptive taxation, due to the difficulty of accessing their income for want of proper documentation. Presumptive taxation permits the authorities to access the taxpayer based on a perceived income. The criteria set for the perceived income are based on the occupation or business activity (standard assessment); net wealth and asset; profession, level of economic activity, location (estimate assessment), and minimum taxes. Presumption taxation is regulated by the Presumptive Tax Regulation 2018. At the state level, SMEs are also subject to presumptive taxation.