The primary objective of the Finance Act 2020 is to ensure that taxpayers are brought into the tax net by the government. The Act brought a lot of changes into the tax laws as it relates to direct taxes in Nigeria.
Direct taxes are those taxes imposed on the income of taxpayers, the incidence of which falls directly on the taxpayers. In this case, it is impossible for the tax payers to shift the burden to another person.
TYPES OF DIRECT TAXES
Taxes that fall under direct taxes are as follows:
PERSONAL INCOME TAX– This is an income tax payable for any year of assessment on the chargeable income of individuals.
Under the personal income tax, earned incomes are those incomes derived by an individual from trade, business, vocation or employment as well as income derived from a previous employment by way of pensions.
Unearned incomes however, include incomes from investments made by an individual such as rents, dividends, interests, lease premium etc.
COMPANY INCOME TAX– This is a tax imposed on every company engaged in commercial business transactions in which such company renders a return of its transactions for each year of assessment to the relevant tax authorities for the purpose of assessment to tax.
These returns are to be adjusted in line with the provisions of the company income tax act as amended before an assessment is raised.
CAPITAL GAINS TAX– Capital gains tax is defined as a government fee on the profit made from selling certain types of assets. These include stock investments or real estate property. A capital gain is calculated as the total sale price minus the original cost of an asset.
STAMP DUTIES– These are taxes on documents and not on transactions or persons. The tax is relatively cheap to administer and easy to collect. However, the Finance Act 2020 has replaced stamp duty with electronic transfer levy (ETL) on bank transfers. Consequently, stamp duties previously charged on electronic bank transfer transactions would no longer apply. The EMT Levy is a singular and one-off charge of N50 on electronic receipt or transfer of money deposited in any deposit money bank or financial institution on any type of account on sums of N10,000 or more.
PETROLEUM PROFIT TAX– Companies that engage in oil prospecting and mining business in the petroleum oil industry are assessed to tax under the provisions of the Petroleum Profits Tax Act 1959 as amended.
IMPACT AND EFFECT OF THE FINANCE ACT 2020
Having explained briefly the types of direct taxes, it is worthy of note that the implementation of the Act has brought significant changes in the direct taxes which are highlighted as follows:
Exemption of small businesses from preparing audited financial statements
Specific exemption from Tertiary Education Tax (TET) for small companies with gross turnover below N25,000,000.00 (Twenty-Five Million naira).
Exemption of minimum wages earners from Pay as You Earn (PAYE).
Payment of capital gains tax (CGT) on compensation for loss of employment in excess of N
Reduction of minimum tax from 0.5% to 0.25%
25 provides Deduction of Covid-19 donations.
The various changes introduced by the Finance Act 2020 will impact positively on both the government and the taxpayers.
Exemption of small companies from submission of audited accounts will encourage business owners to be tax compliant at minimum or no cost to them.
Deduction of covid-19 donations subject to certain requirements of the act will increase the Net profit of the company through a reduction in tax liability.
Reduction of minimum tax from 0.5% to 0.25% of the turnover will ultimately lead to profit increase to taxpayers.
By Moses Durosaro, CEO, Mosaug Consulting
About Mosaug Consulting
MOSAUG CONSULTING is a Lagos based consulting firm specializing in Forensic Accounting, Tax, Auditing, and Industrial Training Fund and Advisory Services. The firm is committed to delivering strategic solutions and services to businesses, large and small, using bespoke and back and front–end fact gathering.