How Tax Break Can Help SMEs Boost Nigeria’s Economy More Meaningfully

By Victor Ogiemwonyi

Small and Medium scale Enterprises (SMEs) constitute the bulk of businesses that provide the most jobs in any economy while producing goods and offering services, creating innovation, competition, and opening new markets.

SMEs are known to create between 60 – 70% of all employment in most economies, besides being also an avenue for lowering Income disparities and promoting the development of skills.

However, the National Bureau of Statistics (NBS) says the country’s SMEs constitute an even more significant 97% of businesses in Nigeria. The 18 million SMEs in Nigeria, it continues, contribute over 50% of employment, which may even be more giving the nation’s huge informal sector, most of which operate off the radar and away from prying eyes. SMEs also account for over 50% of the country’s GDP, 50% of industrial jobs, and 90% of manufacturing, providing local jobs and services. Moreso, they are close to customers, and are also very flexible in responding to the needs of their clients. All these make them the major drivers of Nigeria’s economic growth.

One of the best ways to get this all-important sector to contribute more to the economy is to free it from unnecessary burdens or distractions that inhibit its growth by making the operating environment more enabling. Every SME operator you talk to will tell you tales about the unstable environment, compounded by regulatory burdens, especially multiple levies and taxes which remain the major challenge.

The general complaints of under developed infrastructure and particularly the near absence or poor public power supply, maybe problems SMEs are able to wade through if they are relieved of the other stifling burdens that make life unbearable for them, hindering their effective and more meaningful contributions to the economy.

It is unfortunate that whenever the problems of SMEs are highlighted the immediate response of successive government has been to throw money at them, without seeking to understand the problems, and how well they can be approached aimed with the appropriate solutions.

In my view, one of the most effective and equitable tools to address the challenges facing SMEs is tax as it will help SMES reduce their daily burdens and ensure more money in their pockets to solve immediate problems like paying for the increased cost of diesel used to power their plants and trucks. It will also reduce the impact of the increased cost of raw materials arising from the Naira devaluation, hire more hands and increase their ability to pay the increased transportation cost, resulting from hike in the price of fuel, as well as the wear and tear arising from the very deplorable road network infrastructure.

All these, will be done simply by exempting SMES with N50m or less in turnover, from paying Company Income Taxes (CIT).

This is justified given the high inflationary environment that has made the operating cost of SMES sky rocket exponentially, making the chances of their survival even more difficult.

Such increase from the current tax exemption threshold of N20m will help in no small measure to ease some of the pains borne by SMES, and even go a long way to Lessen their burden and make them more productive.

In particular, this has become necessary, given the increases we have seen in the cost of living and the increased electricity and fuel cost alone in recent times. This relief will make even more sense instead of throwing money at SMEs with no proper way to measure success, or expected results. This single policy change will make SMEs increase their growth rate raise their output, while creating more employment and contributing more meaningfully to the economy.

The other benefits of this policy will include a more focused Federal Internal Revenue Service (FIRS) capable of using its limited resources more productively in the collection of taxes, especially in areas with potential to yield more tax revenues.

The current system of a wide net for collecting taxes that yields very little should be redirected to focus on where taxes can actually come from.

We can already see the results of exempting SMES with N20m or less in turnover. FIRS is reporting higher collection of Revenues in the current year despite the harsh economic environment and the many businesses that have shutdown. This is an indication that the lower threshold of paying CIT by SMES, has not affected its revenue collection. If anything, it has enhanced collection.

Any careful study of the cost-benefit analysis of FIRS collection of SMES taxes will show that very little is collected from this segment in CIT, and that the cost of collection may even be more than what it actually gets at the end of the day.

The less burdensome administration of taxes helps the government at the end of the day, just as streamlining collection of CIT will unleash capacities for SMES that we have never seen before. It is a widely held view in Economics that money in the hands of entrepreneurs who create it is more productive than handing it over in the form of taxes to government to reallocate.

It will be a more effective tax collection strategy and more equitable because it affects all SMES, even as the benefits can only go to businesses that created it in the first place.

No government agency is required to administer this relief when granted, as it is also not money from government directly to be given at the discretion of any agency. It will be money created by each SME for itself.

The relief to SMES will be quick and effective. It will also lead to more taxes for government in the form of Value Added Taxes coming from the larger productive activities of SMES.

As the SMES grow their businesses and create more goods and services to meet customer needs, collectable VAT will grow and may even compensate for the taxes government had to forgo in the higher taxable bracket that comes with raising the SMEs taxable threshold to N50m and above.

The implementation of this policy will also progressively lead to formalization of the many informal businesses that have kept their records to themselves because of the fear of disproportionate taxes that are often forced on them.

This policy should be a priority now given the pain in the economy and the very high cost imposed on SMEs because of policy changes that may not have been properly evaluated, especially its impact on the economy before implementation.

Doing this, I believe, will be effective, equitable and the right thing to do now.

Ogiemwonyi, is a retired Investment Banker, and writes from Ikoyi, Lagos.