Over the years, tax incentives have been a major policy tool to spur economic development as it can influence economic growth and bring up good opportunities if strategically targeted to the right businesses.
Tax incentives are exclusions, exemptions or deductions from taxes owed to the government and it is offered by the government to help individuals or business owners to invest back in their businesses, make environmentally-sound choices or to support minorities or disadvantaged business owners. But to get a tax incentive, a business has to meet the government’s requirements which might include being part of a specific industry, creating a certain number of jobs and reaching a payroll minimum.
Tax incentives have different purposes according to what the government wants i.e. more private investment, more jobs, more research and development. They might specifically target industries they want to foster and see grow such as information technology, agriculture or biotechnology.
Tax incentives are generally categorized into two: cost-based tax incentives (such as tax credits and accelerated depreciation allowances) and profit-based tax incentives (such as tax holidays or reduced tax rates). The types of incentives that come under these two broad categories can greatly vary based on sector, income type, business size, and business location. The incentives can be temporal or permanent and can offer partial exemption or full-exemption.
However small businesses have access to tax incentives as they have the potential to play a major role in the growth of the country, particularly because of their ability to improve the standard of living in the country through innovation. They create wealth by attracting local and foreign investments, and reducing the rate of unemployment by creating new jobs.
Here are few tax incentives offered by the government to small businesses.
Exemption from Company Income Tax:
Small businesses with an annual turnover of less than 25 million naira, are exempted from paying Companies Income Tax. A lower company income tax rate of 20% is also provided for companies whose yearly turnover is between 25 million to 100 million. Small business find this useful in their early stages.
Tax Exemption for small businesses in the Agricultural Sector:
Eligible small or medium-sized companies in the Agricultural sector with an annual gross turnover of 25 million to 100 million naira, may apply for tax exemption for 4 years and an additional 2 years. This incentive is created under the Finance Act, 2020, which amended the former provision under the Industrial Development (Income Tax Relief) Act.
Tax Holiday of Up to 5 Years: Small businesses who qualify for Pioneer Status in Nigeria can enjoy tax holidays for an initial period of 3 years from their first year of commencement, extendable for an additional 2-year period, as established under the Nigerian Industrial Development (Income Tax Relief) Act. Small businesses in sectors such as e-commerce, waste management, electricity and agriculture may be eligible for pioneer status incentives.
The Importance of Tax Incentive to Small Businesses
Tax incentive makes running the business less expensive, easier and more profitable. It decreases the amount of tax small businesses will have to pay to the government, this helps them to decrease the cost of doing business and be more profitable.
It increases their chances of playing a role in the growth of the economy.
It creates room for employment, as it encourages the business to employ more persons, retain existing employees and offer more benefits such as increase in salaries or wages.
It solves the business cash flow problems.
It encourages and motivates the business to do more, and this aids productivity.
It enables the business to save money on business expenses and expand the business without incurring too much risk.
It help businesses to succeed in achieving strategic objectives.
With all of the tax incentives out there, it can be difficult for businesses to know where to start or their best option. However, you must know that tax incentives can help small businesses to keep thriving and exploring options that enable growth, which at the end develops the business and the economy as well.
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