On 13 of January 2020, the President signed the Finance Act 2019 ('the Act") into law. The implementation of the Act commenced in February 2020, as announced by the Federal Ministry of Finance. The Act amended seven existing tax laws but most of the changes where in the Companies' Income Tax Act (CITA) and Value Added Tax Act (VATA). The new changes have generated several reactions from taxpayers and other stakeholders in various industries.

This article examines the impact of these changes on the manufacturing industry and how the affected companies can seek to drive compliance going forward.


Introduction of turnover threshold

In order to improve the ease of doing business and stimulate economic growth, the Act introduced a progressive tax system. Under the new tax regime, a general corporate tax exemption is allowed for small companies with turnover of less than ₦25 million in a year, while medium sized companies with a turnover of between ₦25 million and ₦100 million are to pay CIT at a lower rate of 20%. Large companies with turnover more than ₦100 million will continue to pay CIT at 30%.

The above amendment introduced by the Act will help improve profitability for small and medium scale manufacturing companies as the tax savings resulting from the reduced tax rate can be ploughed back into the business for expansion.

Elimination of risk of excess dividend tax

The Finance Act amended the Excess Dividend Tax (EDT) provision in Section 19 of the CITA. Specifically, Section 19 of the CIT provides for the imposition of CIT on dividends paid by a company, where the company has no tax payable or the dividends paid exceeds the CIT payable. The interpretation of this Section has led to several disputes between taxpayers and the tax authorities.

While most taxpayers were of the view that the Section should not cover dividends declared from retained earnings or franked investment income which has already suffered tax, the tax authorities took a more aggressive position that the source of the dividends declared is irrelevant for this purpose. The FIRS' position was upheld by the Judgment of the Federal High Court in Oando PLC v FIRS (Appeal No: FHC/L/6A/2014) and by the Tax Appeal Tribunal in Actis Africa (Nigeria) Limited v FIRS (Appeal No: TAT/LZ/ EDT/014/2017.

Many manufacturing companies were caught in this web as dividends declared from prior year profits (which were already taxed) and exempted profits were potentially exposed to additional income taxes under Section 19 as interpreted by the FIRS and the Courts. This had an adverse economic impact on investments in the sector.

The Finance Act has addressed the above concerns by specifically exempting dividends paid out of retained earnings which had been subjected to tax in prior years from additional tax. In addition, Section 19 will no longer apply to dividends paid from franked investment income and those paid out of income exempted from tax by the CITA or any other legislation.

Elimination of commencement and cessation rules

The provisions of the CITA prior to the amendment by the Finance Act had special provisions for the taxation of companies commencing and ceasing business operations in Nigeria (referred to as commencement and cessation rules). Based on the provisions, the basis for computation of tax payable could be different from the actual financial results for the relevant tax year and companies were also subjected to double taxation risk in first two or three years of operations.

Coupled with the infrastructural challenges that many manufacturing companies have to face operating in Nigeria, many small manufacturing companies groaned under the adverse impact of the above provisions. Hence, the amendment introduced by the Finance Act, eliminating the risk of double taxation associated with the commencement and cessation rules was a welcome development. Affected companies are now required to prepare their tax computations based on actual year financial results.

In addition to the above, all companies (including) manufacturing companies can now carry forward prior year losses (to offset future profits) indefinitely. The restriction on the carry forward of tax losses beyond the first four years of commencement of business has been expunged.

Modification of minimum tax provision

The Act amended Section 33 of CITA with the deletion of the previous basis for computing minimum tax which made companies susceptible to tax on the value of net assets and paid-up capital as opposed to operational profits.

The new basis has been simplified to be 0.5% of the company's gross turnover less any franked investment income. It is worthy of note that the Finance Act defines gross turnover as gross inflow of economic benefits arising from operational activities including sale of goods, supply of services, receipts of interest, rents, royalties or dividend.

In order to ensure a level playing ground for wholly owned Nigerian companies, the exemption from minimum tax provided to companies with at least 25% imported equity capital has been expunged. Only companies with less than ₦25 million turnover, those within the first four years of commencement of business and those involved in agricultural trade of business are exempted.

Exemption of export proceeds

The Act also amended Section 23(1)(i) of CITA which allows for exemption of the profits derived by a Nigerian company from goods exported out of Nigeria. Based on the Act, where the total export proceeds is not used for the purchase of raw materials, plant, equipment and spare parts, the exemption will be directly proportional to the re-investment made.

Also, the repatriation of the export proceeds is no longer a pre-condition for exemption of profits from export for tax purposes. This is a welcome development as the condition was an additional layer of compliance burden to manufacturing companies that sought to benefit from the incentive.

Restriction of deductible interest expense and WHT exemption on interest payment

Although Nigeria does not have a thin capitalization rule, the Act introduced a new rule on deductibility of interest expense. The rule restricts the amount of interest deductible by a taxpayer on foreign related party loan to a maximum of 30% of Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA). This is aimed at moderating the debt to equity ratio of companies and ensure that investors deploy the right mix of debt and equity for the purpose of financing companies in Nigeria. The excess of the interest expense in any year can be carried forward up to a maximum of five years, beyond which the interest expense will be deemed non-deductible for tax purposes.

The Act also modified the withholding tax (WHT) exemption available for interest payment in respect of foreign loan. The 100% WHT exemption was replaced with 70% WHT exemption for loans with repayment period of above seven years and moratorium period of not less than two years. Current agreements structured to take advantage of the previous provision should be revised to reflect the amendments made by the Act.


Increase of VAT rate to 7.5%

The most popular change in the indirect tax is the increment in VAT rate from 5% to 7.5%. This amendment will have a direct impact on the selling price of goods and services consumed by the general populace. However, the consequential increase in price of goods and services should be mitigated by the introduction of compliance threshold and expansion of the VAT exempt list.

Compliance threshold

The Act introduces VAT compliance threshold that exempts companies with less than ₦25 million taxable supplies from charging VAT. Manufacturing companies in this category will no longer have to deal with the compliance burden associated with VAT returns and can focus more on their business. It is important that small manufacturing companies keep relevant accounting records to show that they qualify for this exemption. Failure to do so may lead to additional tax liabilities in the event of a tax audit.

Where a company does not qualify for the exemption above and fails to file VAT returns, the Act provides a penalty of ₦50,000 for the first month and ₦25,000 for the subsequent months. Failure to remit VAT collected will now attract a penalty of 10% of the VAT not remitted plus interest at the prevailing CBN minimum rediscount rate. These penalties can be very significant and may exceed the actual VAT liability where failure to file returns is prolonged.

Expansion of the list of basic food items

Following the controversy around what should be classified as basic food item, the Act provides a specific description and broad categorization of basic food items. It defined basic food item as any agro and aqua based staple food. This includes cereals, nuts, pulses, vegetables, water, locally manufactured sanitary towels, pads and tampons etc. This will go a long way to address the controversies on what qualifies as a basic food item for VAT purposes. It has also laid to rest the erroneous assertion that once any food item has been processed, it is no longer a basic food item.

Accounting for VAT on cash basis

Before now, there have been arguments for and against the cash basis of accounting for VAT that requires payment of VAT to be based on invoices settled and not invoices issued to customers (accrual basis). The Act provides clarification that VAT should be accounted for on cash basis rather than accrual basis. This means that a taxpayer can only recuperate input VAT that has been paid against output VAT that has been received.

Introduction of excise duties on imported products

Excise duties will now apply to excisable goods, such as cigarettes, wines, spirit, beer, stout etc., when they are imported into Nigeria. This is to create a level playing ground for local manufacturers of the product, as the products were previously not excised when imported into Nigeria. However, imported products that are not locally manufactured/ available will not be subject to excise duties.


The changes introduced by the Act, favorable or not, are here to stay and would require a conscious unlearning of the old practices and transitioning to ensure compliance with the amendments. It is important that companies deploy adequate resources to understand the changes and conduct an impact assessment on their business. This will enable them have a clear compliance plan and make the necessary adjustments.

The reduced risk of double taxation, with respect to excess dividends tax and commencement rules is a great respite for taxpayers and is expected to bring about increased investment in the manufacturing industry. Furthermore, the changes to the criteria for exemption from minimum tax invariably means that all manufacturing companies with imported equity are liable to pay CIT based on the higher of 30% of the total profit and the minimum tax computed. Subsequently, the computation of both basis should be included when filing the CIT annual returns.

Subsequent to the amendments to VATA, there is now a paradigm shift from conversations about VAT being liable on processed food items to the definition of basic food items as contained in the Act. Companies involved in the manufacture of food items now have clarity about the classification as a basic food item which determines exemption from VAT.


Although the Act provides clarity to some previously grey areas, it would be of no effect if there is lack of proper understanding of the changes and how it affects the daily operations of businesses. Hence, training and sensitization have become imperative for companies in the manufacturing industry as these are the initial steps towards driving compliance and ensuring a seamless transition to the Finance Act.

The amendments to CITA, VATA and Customs & Excise Tariff Act is expected to encourage small businesses to strive in the manufacturing industry. In the long run, there will be an influx of more players in the sector, leading to a more vibrant and industrialized economy and an overall boost to the Gross Domestic Product.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.