Independence: Tackling High Cost of Business with New Fiscal Incentives

As Nigerians look forward to new policy outlines from President Bola Tinubu, in his nationwide broadcast to mark the nation’s 64th Independence anniversary on Tuesday, analysts said the federal government should cover the lost grounds with more fiscal incentives instead of tightening the noose on private businesses which are almost at the breaking point due to the rising cost production and burden of tax, among others, writes Festus Akanbi

Nigeria is marking its 64th Independence anniversary on Tuesday and expectations are high that President Bola Tinubu’s administration will unveil some economic policies, including fiscal incentives to ease the pervading tension in the private and business lives of Nigerians.

The Minister of Finance and Coordinating Minister of the Economy, Mr. Wale Edun, who gave the hint last week disclosed that the federal government is looking at granting outright tax breaks to companies employing more staff. Also, he hinted that the federal government will suspend more import duties for certain goods to curb the rise in inflation.

According to the minister, the measures are part of the Inflation Reduction Act to be signed by the President anytime from now, pointing out that the fiscal measures are geared towards reducing the cost of production for businesses which has increased due to the weakness of the exchange rate and other policies introduced by the current administration. “The Inflation Reduction Act will now contain a range of import duties, exemptions, lowering of tariffs, and outright tax breaks for employment. If you employ more people, you will be given a tax break against it. So, a range of fiscal incentives will be laid out in an executive order which Mr. President will in due course sign.” 

Insulating Economy from Hostile Climate

As Nigerians await the introduction of the Inflation Reduction Act, analysts said the time had indeed come to insulate the economy in such a way to withstand the unfavourable climate in which they have found themselves in recent times. 

With the rising cost of production, many companies are either shutting down completely or cutting down production with the attendant job losses. Analysts believed it is unfair to frighten local initiatives with the tax burden, given the pains business owners go through to make ends meet in the face of the near collapse of infrastructure in the country. 

It is in light of this that the Chairman of the Presidential Fiscal Policy and Tax Reforms Committee, Taiwo Oyedele was quoted as saying that the federal government is developing a system to provide tax relief to 95 per cent of Nigeria’s informal sector. According to him, 95% of businesses earning N25 million or less yearly will be exempt from the various taxes. 

“We think that the informal sector comprises people who are trying to earn a legitimate living. We should allow them to be and support them to grow to a point where they can then have the ability to pay taxes”. 

Oyedele confirmed that new tax reforms will target 5% of that sector, the middle class, and the elite and that the committee was drafting legislation to implement the necessary changes to the country’s tax system.

He stated that the new laws will ensure that reviews are upheld by future governments. “We don’t want this whole effort to go down the drain, after one or two years,” he clarified. 

He also emphasised the need to raise the exemption threshold for small businesses and low-income earners, as it will be difficult to pay taxes while struggling to make ends meet. 

Lately, the Nigerian government has been intensifying taxation efforts to generate revenue. In 2020, it increased the VAT rate from 5% to 7.5%. 

The Gains

In his interventions, the Managing Director/Chief Executive Officer of SD&D Capital Management Limited, Mr. Idakolo Gbolade believed that the federal government’s policy of granting outright tax breaks to companies employing more staff and suspending import duties for certain goods would help companies recoup losses due to the harsh economic environment. 

He pointed out that “The high cost of doing business is one of the major drivers of inflation. However, This policy could reduce the government’s projected revenue in the short run but will deepen economic growth in the long run. 

“The present government is projecting a trillion-dollar economy but must expand the economy to the level where it can rise to meet such projections. The government’s tax policies will help businesses and improve the ease of doing business in the country. If these policies are properly implemented it will achieve the desired result,” he said.

Meanwhile, the rising cost of living in Nigeria has an impact on citizens’ well-being. It has steadily increased over time, with notable increases in food and service prices. Inflation, exchange rates, government policies, and production costs all contribute to this.  

In April 2024, the federal government, through the Nigerian Electricity Regulatory Commission (NERC), announced a significant increase in electricity tariffs for customers under the Band A category to N225 per kilowatt-hour (kWh), a 240% surge from the initial N68 per kilowatt-hour (kWh).

Tax Receipts

These tax reforms come at a time of increased corporate tax revenue in Nigeria. According to the National Bureau of Statistics (NBS), corporate tax receipts surged by 150% in the second quarter of 2024, reaching N2.47 trillion ($1.5 billion). This spike is largely due to an 87% increase in contributions from foreign companies, which benefited from the naira’s devaluation following the unification of exchange rates.

Meanwhile, VAT revenue also soared by 99.82% year-on-year, hitting N1.56 trillion ($950 million) in the second quarter of 2024. Despite these gains, many local businesses are still struggling to cope with the country’s economic shocks.

Tax incentives are a vital component of government taxation policies aimed at stimulating specific economic activities by reducing tax obligations. The United Nations Conference on Tax and Development (UNCTAD), defined tax incentive as any measurable advantage accorded to specific enterprises or categories of business by a government, to encourage them to behave in a certain manner. Many nations, particularly developing ones, leverage tax incentives and waivers to attract both domestic and foreign investment in critical sectors of their economies. Nigeria, like many other countries, utilises tax incentives to foster investment, exports, and job creation, and alleviate unemployment.

Infrastructure deficiencies remain a significant hurdle for businesses operating in Nigeria. Inadequate power supply, unreliable transportation networks, and underdeveloped communication systems can increase operational costs and hinder productivity. Businesses are often forced to invest in backup power generators, which add to the overall expenses.

Taxation and regulatory compliance are essential components of any business environment. However, in Nigeria, these factors can become overwhelming burdens. High taxes and unpredictable changes in tax policies can erode profitability and deter potential investors. Moreover, navigating a complex tax system can lead to inadvertent non-compliance, resulting in legal issues and penalties.

It is in this light that economic analysts see the period of independence anniversary as a golden opportunity for the current administration to redeem itself by making life and businesses easy for Nigerians. The policies on fuel subsidy removal, foreign exchange reforms, and frequent tariff reviews in the power sector have combined to add to the people’s woes. 

The rising cost of living which is also taking a toll on food production has added to the frustration in the land with the prices of food items going beyond reach. Analysts therefore advised the government to remove all factors pushing away farmers from farms, insisting that Nigeria can still achieve food self-sufficiency if it gets its acts right. 

In August 2024, the headline inflation rate further eased to 32.15% relative to the July 2024 headline inflation rate of 33.40%. Looking at the movement, the August 2024 headline inflation rate showed a decrease of 1.25% points when compared to the July 2024 headline inflation rate. However, on a year-on-year basis, the headline inflation rate was 6.35% points higher compared to the rate recorded in August 2023 (25.80%).

Experts said that when the government pursues its policies with sincerity and vigour, it won’t be difficult to bring down the nation’s level of inflation and make life easy for the people in no distant future. This is certainly the best independence anniversary gift that will make Nigerians happy.