Agusto & Co. Economic Note: The 2019 Finance Act – Creating a New Beginning

Agusto & Co. Economic Note: The 2019 Finance Act – Creating a New Beginning

The 2019 Finance Bill was signed by President Buhari on the 13th of January 2020 as part of his administration’s new fiscal reform measures. The Bill proposed new fiscal measures to support the 2020 Budget which has a projected expenditure and revenue of ₦10.59 trillion and ₦8.4 trillion respectively resulting in a budget deficit of ₦2.18 trillion, a figure analysts consider overtly bullish. Consequently, new fiscal reforms are being pursued to increase the government’s revenue, reduce the budget deficit and diversify the revenue of government by improving on the contribution of the non-oil revenue which is projected to be a fifth of the budgeted revenue for 2020.

Hence, the Finance Act proposes key fiscal changes with extensive tax implications for the country. The Act seeks to promote fiscal equity by paring back on regressive taxation, aligning the tax laws with global best standards, providing an incentive for growth of small businesses and raising the revenue of the government.

The Finance Act proposed changes to the administration of several taxes including Value Added Tax (VAT), Companies Income Tax (CIT), Personal Income Tax (PIT), Capital Gains Tax (CGT), Petroleum Profits Tax (PPT), Stamp Duties, Customs and Excise Tariffs etc. (Consolidation) Act. Overall, about 98 reforms were introduced to the Nigerian tax rule books and we considered some of the amendments introduced by the Finance Act and the possible impact on the Nigerian economy.


The Value Added Tax in Nigeria at 5% was one of the lowest in sub-Saharan Africa. The upward adjustment of the VAT to 7.5% was one of the new fiscal measures by the government to increase the revenue from the non-oil sector, albeit with only 15% of this revenue accruing to the Central Government. The Federal Government estimates that the upward review of the VAT will lead to additional revenue of ₦898 billion in 2020.

The increase in the VAT rate has largely been driven by the need to bolster the fiscal positions of the subnationals in the Nigerian federation particularly after the increase in the national minimum wage. Several state governments are yet to comply with the new wage structure -thus increasing sociopolitical risks as labour unions threaten industrial actions – on account of inadequate funding to finance the new minimum wage. In our opinion, the increase in the VAT rate will significantly strengthen the revenue of the state governments. With 85% of the VAT receipts going to the subnationals (which is split between the state and the local governments in a proportion of 50% and 35% respectively), these sub-nationals could receive an additional ₦763 billion in 2020 alone.

The increase in the VAT rate has led to increased concerns around its impact on consumption. These concerns are further heightened by the weak postrecession economic recovery. However, to address some of these fears, the VAT exempt list has been expanded to include basic food items such as bread, cereals, cooking oil, milk, meat vegetables etc. Another significant measure aimed at ringfencing consumption from the VAT increase is the VAT registration threshold. The VAT registration threshold exempts small businesses with an annual revenue of below ₦25 million from VAT payments.
We note positively the inclusion of basic food items in the VAT exempt list as well as the increase in the VAT registration threshold. Consequently, Small and Medium Enterprises (SMEs) will be able to charge relatively lower prices on products which in our opinion will result in greater demand and consumption.

However, we believe that the increase in the VAT registration threshold will prevent SMEs below the threshold from recovering the input VAT expended on these products. Nonetheless, we note that not all input VAT is recoverable. Overall, the increase in VAT will have an adverse impact on the disposable income of consumers.


The Finance Act also amended the administration of stamp duty on electronic receipts and transfer of funds. Prior to the reform, a ₦50-stamp duty charge was imposed on electronic receipts and transfers of funds by customers, irrespective of the transaction value. We are of the opinion that this charge could have threatened the recent progress made on the cashless initiatives as customers resort to cash transactions to avoid this tax. The stamp duty charge could have also halted some of the growth recorded in the digital banking space and agency banking as some of the gains recorded by these market segments over the last decade could easily have been eroded.

The Finance Act revised the transaction limit for stamp duty charge upwards to ₦10,000. Thus electronic transactions below this limit will be exempted from the stamp duty charge of ₦50. In addition, electronic transfers between the accounts of the same owner maintained in the same bank, shares transfers and payments made in a Regulated Securities Lending (RSL) transaction are excluded from the stamp duty.

Petroleum Profit Tax

In a deliberate attempt by the government to expand the tax base, amendments were also made to the Petroleum Profit Taxes. Section 60 of the Petroleum Profit Taxes Act (PPTA) had previously exempted all forms of taxation in respect of any income and dividend paid from any profit under the PPTA. However, this section was repealed and earnings in these categories will be subjected to a 10% withholding tax. We believe the amendment to the Act is a fiscal reform aimed at improving the revenue position of the government. However, the reform will place an additional tax burden on players in the upstream oil and gas industry who are currently charged a petroleum profit tax of 85% for joint ventures (JV) and 50% for production sharing contracts (PSC).

Capital Gains Tax

The amendments made by the Act seek to protect businesses from the Capital Gains Tax (CGT) that may arise from related party transfer of assets. Hence, the Finance Act exempts the transfer of assets among related parties from CGT. However, this expemption comes with a caveat that seeks to prevent businesses from taking advantage of this provision to evade taxation. Hence, the assets will be subjected to CGT if such assets are transferred to a third party less than 365 days from the transaction date.

Capital Income Tax

The Finance Act introduced about nine reforms to the Company Income Tax (CIT) framework. The first major amendment introduced by the Act to the administration of CIT is a graduating scale company income tax rate. The Act seeks to provide tax protection to businesses with revenue of less than ₦25 million by exempting these businesses from company income taxes. Businesses with revenue between ₦25 million and ₦100 million are subjected to a CIT rate of 20% while a CIT rate of 30% applies to companies with revenue above ₦100 million. We note positively that the reform is aimed at reducing the tax burden of SMEs while also creating incentives for improved tax transparency. We believe this reform will also create an incentive for informal business set-ups to transition into formal business organisations.

Secondly, the provision of the excess dividend tax (EDT) was revised and the dividend paid in excess of taxable profits will no longer be subjected to CIT. Prior to the signing of the Act, the excess dividend paid from the retained earnings of entities was subjected to taxation at 30%. However, this amounted to double taxation as the retained earnings would have been previously subjected to taxation in the year(s) that the profit was made. We believe the reform will curb the instance of double taxation on corporates in the country.

Thirdly, banks will now have to request for the Tax Identification Number (TIN) before opening a business account for corporate customers, while existing business accounts are required to update their records with their TINs in order to keep accounts operational. We believe that the inclusion of TIN as a requirement for operating a business bank account in Nigeria will enable appropriate tracking and forensic investigation of funds when required. However, we are concerned that the account holders may be subjected to taxation based on the inflow into accounts rather than on profitability of the underlying businesses. The inflows into the account may not necessarily be income for the various account holders and we believe this may translate into over-taxation of account holders.

Insurance Business Support

On account of the below-par financial performance by majority of the players in the insurance industry, reforms were made to provide fair taxation for players in the industry. Thus, the inhibitive rule which only allows insurers to carry forward loss for a maximum of four years was amended and insurance companies are now allowed to carry forward loss arising from operations indefinitely. Also, the Act restricts the taxable investment income to only the portion derived from the investment of shareholders’ funds.

Accordingly, income accruing to the insurance companies from the insurance fund will no longer be subjected to taxation. We believe that the reform will ease the tax burden on the operators in the insurance industry.

Other amendments of the bill to the company income tax include:


  • Expanding the tax base to include nonresident companies
  • Expanding the categories of exempt income
  • Expanding the categories of allowable deductions
  • Introduction of new commencement and cessation rules
  • Introduction of early tax payment bonus

Personal Income Tax


The Finance Act also amended the personal income tax administration with private contributions to pension funds and other private schemes being considered as allowable deductions for tax purpose. Such deductions for tax purpose were previously subject to the approval of the state revenue authorities.

Other germane reforms in the Act include the acceptance of electronic correspondence between the taxpayers and the tax authorities. Most industries in the country have adopted email as a formal form of communication. However, the tax authority had previously maintained that the filing of tax return has to be done either in person or by an agent, resulting in an arduous bureaucratic process in the filing of tax returns. We note positively the introduction of email as a form of communication between taxpayers and tax authorities as this will improve the level of tax compliance in the country through increased efficiencies in the bureaucracy.


Overall, we believe the Finance Act will ensure sustainable income generation for the government through taxation. Agusto & Co. has long argued that the rhetoric around economic diversification in Nigeria should focus primarily on two principal subjects. The first being the government’s revenue (which is the focus of this economic note) and secondly, inflows into the current account. To truly diversify government’s revenue away from oil, it will be germane to focus on non-oil taxes.

To achieve this, we will need to ponder on the unwritten social contract between the Nigerian government and its citizenry, where the former haunted by a lack of transparency in public accountability has a weak moral right to tax the citizenry. On the other end of the social contract, is a citizenry who demands public services from the government, without the burden of taxation. This is the Nigerian Tax Dilemma. The 2019 Finance Act could help create a new beginning to resolve this dilemma

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