Micro, small and medium-sized enterprises (MSMEs) are the driving force for economic activity and innovation.  They contribute to growth through job creation, investments, exports and taxation. In Nigeria, the economy is largely dominated by MSMEs, with an estimated 96% of all businesses falling in this category. MSMEs account for 84% of the country’s workforce and contribute approximately 48.5% to GDP. However, despite the vital role that MSMEs play in the economy, getting them under the tax net has been a major challenge. Majority of MSMEs operate in the informal sector, where visibility by the authorities is often very low.

The federal government – through a number of fiscal and monetary policies – has indicated interest in the development of MSMEs by implementing programmes, such as the Central Bank of Nigeria’s intervention fund, which is managed and administered by the Bank of Industry and set up to refinance and restructure bank loans to MSMEs. However, there is a growing consensus that the current fiscal and business environment is stifling the development of small businesses.

In the 2016 federal budget speech, there was a promise to reduce tax rates for smaller businesses in order to drive job creation in the country, but this has yet to materialise. The provision in the Companies Income Tax Act, which grants reduced tax rate of 20% to MSMEs, has a N1m ($3530) turnover limit, thereby providing almost no incentives. Under the value-added tax (VAT) regime, there is currently no minimum threshold for registration and filing, which would have helped to protect microbusinesses from the rigorous monthly compliance burden. Moreover, the review to pioneer status incentives in August 2017 raised the capital investment for eligibility from N10m ($35,340) to N100m ($353,400) putting the tax holiday outside of reach for smaller businesses.

Nigeria seems to have appropriately recognised the need for job creation to be led by the private sector with MSMEs in the front seat. However, the absence of well-thought-out fiscal incentives and coordinated fiscal policies for MSMEs create challenges which discourage them from transiting to the formal sector and serving as the real catalysts for economic revival and growth. One major problem with the current laws is the compliance cost of taxation. Evidence indicates that MSMEs are affected disproportionately by compliance costs, which ultimately serve as a deterrent with costs relatively too large for smaller businesses.

The frustration that government is faced with in bringing most MSMEs into the tax net is an indication of the level of disconnect with the formal economy. Perhaps, an option for tackling this may be simplification through a presumptive tax regime. Under this type of structure, the desired tax base is not strictly and directly measured – as is the case for larger businesses – but is inferred from some simple indicators, such as turnover, assets, farm size, shop size and so on. In recognition of these challenges, the new national tax policy (NTP) has focused on legislative amendments to reduce the tax burden on MSMEs. Additionally, the NTP proposes a further reduction in the income tax rate for small businesses to encourage compliance, as well as inclusion of a minimum threshold for VAT registration in order to protect MSMEs.

Judging from NTP’s provisions, it appears government understand the importance of tax policies directed at MSMEs. However, there seems to be challenges with the required political will that is needed for implementation. The reality is that government has struggled with concrete actions in the area of tax policies required to support MSMEs. There has been no significant changes or updates to the extant tax laws. The time lag for lawmaking is incredibly long and tortuous.

The economic potential of MSMEs makes a compelling case for government to develop well-articulated tax policies and laws, as the current one-size-fits-all approach has failed to address the needs and concerns of small businesses. The time for an inclusive policy is now.