Ojo: Tax Evasion Inimical to Startup Business
Founder/CEO of Taxmingo, Mr. Richard Ojo, speaks about the implication of tax evasion and how startups and small businesses can be tax compliant and still remain competitive in business in today’s digital era. Emma Okonji presents the excerpts:
What is your view about the new Finance Act and the Nigerian tax system, and how do they affect startups and other small businesses in Nigeria?
Former President Muhammadu Buhari signed the new Finance Act into law in January 2021. The law was an amendment of an existing law and the amendment favoured startups and small businesses operating in Nigeria. For instance, the old law mandates all businesses to pay as much as 30 per cent of their annual income as tax, but with the new Finance Act, it categorised the different sizes of small businesses that must pay tax, thereby not making it mandatory for certain size of businesses with less than N25 million turn-over per annum, to pay taxes to government. In other words, startups and small businesses with less than N25 million turn-over annually, are exempted from paying tax.
The new Finance Act also categorised medium size organisations and made provision for such category of companies to pay only 20 per cent of their annual profit as tax. Such medium organisations have annual turn-over above N25 million and less than N100 million. The new Finance Act made it clear that only businesses that have annual turn-over above N100 million, are mandated to pay 30 per cent of their annual turn-over proft as tax. What was obtainable with the old tax law was that every business irrespective of size was mandated to pay company income tax of 30 per cent of their annual profit as tax. So the new Finance Act has simplified tax payment in Nigeria. Again the new Finance Act offers bonus payment to organisations, whose annual turn-over is less than N100 million, and who pay their tax promptly.
In 2022, former President Muhammadu Buhari also signed into law, the Nigerian Startup Act, which offers a lot of support and considerations for startup businesses in Nigeria. The Startup Act also exempts businesses that fall within the category of startups, from paying company income tax for the first five years of their business. To qualify to be a startup doing business in Nigeria, such organisation must be registered with the relevant government agency as a limited liability company and not as an enterprise.
Many startups are still bootstrapping, and most are running without proper structure because they are yet to validate their ideas. Why should such startups worry about taxes?
Startups should see payment of tax as an obligation and not something that is optional. As they strategise on how to grow their business, they should also worry and think about their tax remittances to government because it is a statutory duty and a law that they must abide to. As long as the business is located in Nigeria and the business is generating taxable income, then the business owner has an obligation to pay tax. Since it is a law to pay tax, any attempt to breach the law, makes it an illegality and government frowns at such illegality and there is a penalty for that. Apart from it being a law, it is also the civic responsibility for small and big businesses to pay tax. Failure to pay tax can expose businesses to future liability that may turn out to be huge burden for them to bear. Government is serious about taxes because it a source of revenue for government.
Aside small businesses, a lot of big organisations evade taxes. What is government doing about such big organisations that evade taxes?
No doubt, Nigeria is faced with tax evasion from several organisations, amounting to revenue loss on the part of government, even though tax evasion is not peculiar to Nigeria as a country. So many factors may be responsible for tax evasion in Nigeria and corruption is one of them. People have created several loopholes for financial leakages and they are adversely affecting revenue generation from taxes. Most times, the channels through which taxes are collected from businesses, create room for leakages. Some organisations even deduct taxes from employees and never remit same to government and the government is losing huge sums of money to such organisations, even though government is trying to tackle that challenge now. The current tax reform system in the country is trying to bring all the channels for tax collection under one umbrella body, called the Federal Inland Revenue Services (FIRS). When that is achieved, it will help to reduce tax leakages in Nigeria.
In your estimation, what percentage of SMEs and Startups in Nigeria comply with their tax obligations?
There was a report from the National Bureau of Statistics (NBS) in 2021, which stated that 80 per cent of small businesses in Nigeria do not pay tax, and these set of small business account for about 96 per cent of businesses in Nigeria and also account for about 84 per cent of businesses that provide employment opportunities in Nigeria. This simply means that only 20 per cent of small businesses in Nigeria comply with tax law.
What do you think is the current tax revenue potential of Nigerian Startups/SMEs and how can the number improve?
The same NBS report stated that the number of registered small businesses in Nigeria was 42 million in 2021 and what this implies is that only 20 per cent of 42 million small businesses pay tax, which goes to show that small businesses in Nigeria have the potential to generate huge revenue for government through taxes but they are not paying, which amounts to huge revenue loss to government. What government can do to improve the number of businesses that pay tax, is to build trust among Nigerian business owners by ensuring that revenues from taxes are used for the provision of social amenities for the people like roads, electricity, schools, hospital, recreational centres among others. Most Nigerians believe that the revenues from taxes are not judiciously spent, and this has created some forms of distrust on the part of the citizens against the government. So government needs to quickly correct that notion and build trust among the citizens by judiciously spending revenues generated from taxes. Again, government needs to create awareness among small businesses by educating them. Government should consider coming up with periodic education programmes that will benefit small businesses and also deepen their knowledge about government policies and their impact on businesses. Citizens and business owners strongly believe that there are multiple of taxes paid by businesses, with some amounting to double taxation. So government needs to educate business owners who are tax payers on the different purposes of the taxes and why such taxes are collected in the first place. If they have a better knowledge about taxes, they would be encouraged to pay their taxes without hesitation. They should be made to understand what personal income tax is all about, which is Pay As You Earn (PAYE) tax and how it is different from company income tax, withholding tax and Value Added Tax (VAT). For instance, withholding tax and Value Added Tax are not actual taxes that are paid by businesses from their profits. What businesses do with those kind of taxes, is to assist government in collecting such taxes as collecting agents of government. So businesses need to understand what exactly to pay from their profits as taxes.
Government also needs to work on the ambiguity of tax laws in Nigeria and ensure seamless methods of paying taxes.
From your experience, which areas do you think that most startups struggle with the most when it comes to tax compliance?
They struggle the most with the ambiguity in our tax system, and this has to be addressed. The tax law appears ambiguous to them and they do not seem to understand the tax law in Nigeria, which means that government must simplify the tax law system in Nigeria and make it a lot more seamless and less cumbersome. Small businesess, for instance, fear that they are meant to pay all taxes, but do not understand the tax law properly, which actually exempts them from paying certain types of taxes. From experience, it is obvious that small businesses are willing to comply with the tax law, but most of them are having the challenges with cost of compliance because they do not understand the tax law. So they need a professional consultant to educate them on what to pay as tax and what not to pay as tax, but they are afraid of seeking the services of a consultant because of the perceived high fee that professional consultants do charge and in the process, they are discouraged from paying their taxes.
So what is the way forward in all of these fears and challenges faced by small businesses, and what should they do to address the fears?
It is simple. Small businesses and startups must comply with tax law, and to do that, they must begin the process of compliance by registering their businesses with the relevant tax authorities like the Federal Inland Revenue Service (FIRS), the State Inland Revenue Service where the business is located. For instance, if the business is located in Lagos State, the business owner must also register the business with the Lagos State Inland Revenue Service (LIRS). So the journey of tax compliance for small businesses and startups begins with registration of the business with the relevant federal and state tax authorities. If the business has employees, the law mandates the business owner to deduct certain percentage of money from their employees as tax every month, when paying salaries, and to remit same to the tax authority where the staff resides. That tax is known as Pay As You Earn (PAYE). Other government taxes like Value Added Tax (VAT), Withholding Tax that was deducted from limited liability companies that do businesses with the startup business, must be remitted to the federal tax authority, known as Federal Inland Revenue Service. Aside registration and remittances of taxes to government, the startup business owner must ensure that all business transactions are properly documented. Business owners must also adhere to the principles of filing monthly and annual returns.
However, as the business grows and expands, the owner will need to employ the services of professionals like accountants that will help manage the financial transactions of the business, because at that point where the business has grown beyond the startup level, the owner will not be able to manage the financial transactions alone, but will need the services of professionals. This will enable the business owner to concentrate on the core business for further growth and expansion.
How is Taxmingo helping Startups and SMEs navigate these issues and to also remain tax-compliant?
Taxmingo was launched in 2021 to help small businesses and startups manage their businesses and to remain tax compliant. The idea behind Taxmingo is basically to help small businesses and startups grow and remain competitive in business. Over the years, we observed that most small businesses and startups actually want to comply with the tax laws in Nigeria, but they do not know how to begin, because the tax law in Nigeria appears ambiguous to majority of them. We also observed that majority of the small businesses and startups are running away from professional consultants for the fear that it will increase their running cost to such a level that they will not be able to cope with. It is for this reasons that Taxmingo was established, to help small businesses and startups cut down on excessive running cost, while still remain tax complaint. Taxmingo is the first online consulting firm in Nigeria that combines professional consulting with technology to assist small businesses and startups. With Taxmingo, they have easy access to professional consulting at an affordable rate. At Taxmingo, we have various plans for all categories of businesses, ranging from solo business to medium, enterprise and basic, and with just N6,000 monthly payment, small businesses can have unrestricted access to professionals like Chartered Accountants that will help manage all financial transactions of the business. What businesses need do is to sign up on our platform, and they are good to go and will not have any worries about taxes.
What do you think the tax authorities should do to improve tax compliance among Startups and SMEs?
Government should regularly educate tax payers on the need to pay tax and how to pay tax seamlessly. Government should also try to demystify the processes of tax collection, in order to make tax payment very easy. Government should also carry out periodic assessment on businesses to ensure that the actual amount of money deducted from salaries as taxes, is the same amount that is remitted to government.
What is the vision of Taxmingo in assisting small businesses and Startups to comply with tax payment?
Our vision for small businesses and Startups is to assist them comply with tax payment. Government is beginning to take tax collection very seriously because the revenue from oil is fast depleting and government had since discovered that it could generate huge amount of money from taxes. Very soon, the issue of tax evasion will be addressed by government and all businesses that are taxable will begin to pay their taxes as at when due. So our vision is to ensure that small businesses pay their tax with ease and also remain competitive in business.
