Understanding Minimum Tax in Nigeria for Companies: Old vs. New Rules

 

Alright, let’s talk taxes! We’re examining the world of minimum tax in Nigeria for companies—the law that ensures businesses still contribute their fair share even if they make a loss or don’t have much profit to show.

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The Old Minimum Tax: Section 33 of the CITA

Before the Finance Act 2019 came, businesses in Nigeria followed the Company Income Tax Act (CITA) when it came to paying taxes—even if they were not making any profits. The idea was simple: Even if your business isn't exactly ‘buoyant’, you should still pay something in taxes, right?

Here’s the recap of what the old law (Section 33 of CITA) had to say:

1.       When Does Minimum Tax Apply?

Minimum tax comes into play when:

a.      A company makes a loss in a given year (so no taxable profits).

b.      A company’s tax liability is less than the minimum tax set by the government.

In both cases, businesses were still required to cough up some tax, no matter what.

2.       How Much Was Minimum Tax?

Now, this is where things get interesting. The old law laid out a bunch of different ways to calculate minimum tax, depending on the size and success of your company:

- If your turnover (aka your company’s total revenue) was N500,000 or less, and you’ve been in business for at least 4 years, you’d pay:

a. 0.5% of gross profit, OR

b. 0.5% of net assets, OR

c. 0.25% of paid-up capital, OR

d. 0.25% of your turnover for the year—whichever was higher!

  Sounds like a lot of percentages, right? But wait, it gets better.

- If your turnover was more than N500,000, you paid the same as the options above, PLUS a little extra. That extra was calculated as 50% of the rate from the 0.25% turnover tax mentioned above. So yeah, you paid a little more for being a bigger fish in the sea.

       3. Who Was Exempt from Minimum Tax?

But wait—before you think every company had to pay minimum tax, there were some exceptions:

a. Agricultural companies were off the hook (because, you know, food is important).

b. Companies with at least 25% imported equity capital also got a pass.

c. Startups in their first four years of business didn’t have to pay it either.

Got all that? Great! Now, let’s fast-forward to the Finance Act 2019, where things got a bit more streamlined and less percentage-crazy.

The New Minimum Tax: As Per the Finance Act 2019

So, the Finance Act 2019 decided it was time for a little tax reform, specifically with how minimum tax was calculated. The goal? To simplify things, especially for smaller businesses, and make the tax system more modern and fairer. Let’s take a look at how the new law compares to the old one.

What Changed?

1. New Formula for Minimum Tax Calculation

   Say goodbye to all those different percentages based on net assets, gross profit, and paid-up capital. The new law keeps things straightforward: The minimum tax is now 0.5% of the company’s gross turnover, less franked investment income.

   That’s it! No more juggling multiple percentages—just a flat 0.5% on your company’s revenue (minus any income that’s already been taxed elsewhere).

   Think about it like this: Instead of digging through spreadsheets and calculators, now you just look at your company’s total sales and slap on that 0.5% rate. Easy, right?

2. Updated Exemptions

   The new law also tweaked who’s exempt from paying minimum tax. Before, we had exemptions for agricultural businesses, startups, and companies with 25% imported equity. Now, there’s a new exemption:

   - If your company makes less than N25 million in gross turnover for the year, you don’t have to pay minimum tax at all.

   Yes, smaller businesses—those making under N25 million—get a free pass. That’s a big win for startups and small enterprises who might not have had the cash flow to cover minimum tax in previous years.

What’s the Deal with Franked Investment Income?

If you’re wondering what “franked investment income” is, it’s basically income that’s already been taxed at the source—like dividends that have already had withholding tax applied. The new law lets you deduct this from your gross turnover before calculating your minimum tax. Fair enough, right? After all, why pay taxes twice on the same money?

Why the Change?

You might be thinking, “Why did they change the law in the first place?” Well, a few reasons come to mind:

 

1. Simplification

   Let’s be honest—the old system was complicated! Multiple percentages, different ways to calculate taxes based on assets or profit… it was a lot to keep track of. The new law simplifies everything by focusing on just one thing: gross turnover. That’s a number every business has easy access to, so there’s no confusion or need for complex calculations.

2. Encouraging Small Businesses

   By exempting companies that make less than N25 million, the new law gives smaller businesses breathing room. When you’re just starting out, every naira counts, and having to pay taxes—especially when you’re not making big profits—can be tough. This exemption is a way of saying, “Hey, we’ve got your back while you grow.”

3. Fairness

   The Finance Act 2019 aimed to make the tax system more equitable. The old law’s minimum tax structure could sometimes feel like it penalized businesses for not being big enough or profitable enough. With the new system, companies with modest turnover aren’t weighed down by excessive tax obligations, allowing them to focus on growth and sustainability.

What Does This Mean for Your Business?

If you’re a business owner or planning to start one, this change is great news! The new law is clearer, simpler, and more lenient for small businesses. Here’s what you need to keep in mind:

- If your business earns more than N25 million in turnover and you’re making losses, you’ll be paying 0.5% of that amount in minimum tax, minus any franked investment income. Straightforward, right?

- If your business earns less than N25 million, congrats! You’re exempt from minimum tax. This means you can invest that extra cash back into your business, whether it’s for marketing, operations, or growth.

- The new law takes the guesswork out of tax planning, making it easier for you to stay compliant without needing to hire a team of accountants to figure it all out.

The Final Verdict: Old Law vs. New Law

In summary, the old minimum tax law under Section 33 of the CITA was like a complex math problem, where you had to juggle different percentages and compare which one was higher. It was especially tough on small businesses, with its exemption threshold being much lower than today’s.

 

The new rule under the Finance Act 2019 simplifies the process, slaps a clear 0.5% tax on your gross turnover, and gives smaller businesses (those earning less than N25 million) a well-deserved break. It’s fairer, easier to understand, and way less stressful for everyone involved.

Conclusion

And there you have it! Minimum tax laws don’t have to be a mystery. Whether you’re running a big business or a small startup, understanding the evolution from the old Section 33 of the CITA to the new rules in the Finance Act 2019 helps you plan better, save money, and stay on the right side of the law.

So next time you’re thinking about your company’s tax obligations, just remember: The new law is all about making things simpler, and giving you the tools to grow without worrying too much about complicated tax percentages. Now, go forth and run your business with confidence—you’ve got this!