(Greenwich Merchant Bank): On December 31, 2020, President Muhammadu Buhari signed into law the 2020 Finance bill, alongside the 2021 Appropriation Bill. The Finance Act which came into effect on January 1, 2021, provided an executive backing to loads of amendments made on some salient laws that govern the business and economic sphere.
The Finance Act 2020 amended certain provisions in the Capital Gains Tax Act, Companies Income Tax Act, Customs and Excise Tariff, Value Added Tax Act, Companies and Allied Matters Act, Stamp Duties Act, among others.
Notwithstanding the flurry of adjustments, a key provision is the exemption of minimum wage earners (at NGN30,000) or less from Personal Income Tax. A Crisis Intervention Fund was also set up by the Act to house NGN500bn or any amount authorized by the National Assembly. In a bid to meet any crisis-related expenditure, the Crisis Intervention Fund will be deployed and will have a sub-fund called an Unclaimed Funds Trust Fund.
Hence, unclaimed dividends of any listed company quoted on the Nigerian Stock Exchange (NSE) and any unutilized sum left in dormant accounts with Deposit Money Banks for 6 years and more will be transferred to the Unclaimed Funds Trust Fund.
The unclaimed dividend or monies in dormant accounts would be a special debt owed by the FG and repayable with yields on call. Another important adjustment made is that the compensation for loss of office up to NGN10mn will not be chargeable gains and subject to tax. The excess amount above NGN10mn is however expected to be taxed.
Furthermore, the minimum tax for companies was slashed to 0.25% of gross turnover from 0.5% less franked investment income for tax returns prepared and filed for the accounting period starting 1st January 2020 through 31st December 2021. SMEs in the primary agricultural production business is also expected to enjoy a 4-year tax-free period, which could be extended by an additional two years, according to the Act.
Under “Customs and Excise Tariff (Consolidation) Act”, telecommunication services provided in Nigeria should be subject to excise duties, while duty on tractors (35% to 5%), motor vehicles for the transport of more than 10 persons (35% to 10%), a levy on motor vehicles for the transport of persons (Cars) (30% to 5%) and duty on those for the transport of goods (35% to 10%) were all lowered.
The concept of the finance bill has been most prominent and increasingly recognised to consolidate macro-economic effects, even though much progress has not been recorded in that regard. The 2020 finance bill seeks to provide more tax incentives to smaller businesses to mitigate the effect of a rather stringent operating environment, worsened by the covid-19 pandemic.
While stand-out policies like the reduction on import duty and levies on motor vehicles, the cutback on minimum taxes, and further tax reliefs granted to companies that donated Covid-19 relief funds, should augur well for the business terrain, others like the FG’s intent to borrow from unclaimed dividend and dormant bank account balances have left the financial space unsettled.
We believe this poses a challenge for the banking industry, together with the stiffer regulatory actions and lower-yielding environment, that have impaired growth in the industry. Hence, we expect more pressure on the banks’ balance sheets, as they utilize their available resources and leverage on their distinctive competencies to shore up their bottom-lines and maintain capital requirements. In addition, we envisage credit expended to the real sector will slow, with more credence given to big-ticket players in the sector.
On another note, with unclaimed dividends estimated at NGN168.44bn, and funds from dormant account projected at a significant balance (based on bank deposits pegged at c. NGN50trn), we believe this will provide some level relief for the fiscal authorities in the face of the country’s projected deficit of NGN5.71trn and its huge debt obligations which stands at NGN32.22trn, as of Q3:2020.
While we await more clarity along these lines, there is a need to secure more sustainable avenues to shore up the limp stature of revenue and dampen social tensions in the economy. On the other hand, with import duty for used cars reliant on protectionist trade policy, considering its high duty of 35%, we opine that a modification to this duty would ease the burden on the masses, at least till the industry can scale up production to narrow the demand gap, and hence lower the importation of used cars.