Knocks for Govt’s Plan to Exempt Firms from Tax

tax relief
  • Knocks for Govt’s Plan to Exempt Firms from Tax

The Federal Government’s plan to exempt 27 industries from paying companies’ income tax for three years, with an extension for one or more years, has been faulted by financial pundits and investment firms.

The FBN Capital, the investment and research arm of FBN Holdings, said the Federal Government’s initiatives, which include tax exemption for targeted firms, may have a negative impact on revenue collection. The government is also interested in developing economic plans for six special economic zones (SEZs) – one for each geo-political zone.

According to the firm, the authorities can argue that an initial sacrifice will yield far greater fiscal benefits over time. However, the government is under fiscal pressure, judging from the Central Bank of Nigeria (CBN) Governor’s recent statement that the deficit in the first-half of this year was a provisional N2.51 trillion, compared with the full-year target of N2.36 trillion.

In these circumstances, the firm believes the government may want to redouble its efforts to scrutinise the tax exemptions granted by the previous administration.

In a report titled: “The FGN’s pursuit of Investment”, the research firm said the government has already named 27 industries as eligible for pioneer status incentives.

It said their principal benefit is exemption from companies’ income tax for three years, with a possible extension for one or two years. Also, it believed that monitoring of the scheme would be the responsibility of the Nigerian Investment Promotion Council, which will maintain a list of qualifying companies on its website. The FGN is also developing its plans for six special economic zones (SEZs) – one for each geopolitical zone.

“The two initiatives are driven by the FGN’s determination to attract investment. Nigeria has some catching up to do. Investment amounted to just 14.8 per cent of Gross Domestic Product (GDP) in 2015. We recall an old donor rule-of-thumb estimate that a steady investment ratio of 25 per cent generates about five per cent GDP growth. Nigeria requires rather higher growth, not least because its population is said to be growing by 2.8 per cent yearly,” it said.

It added that an industry or company may be designated pioneer if its development is viewed to be in the public interest, and urged government that such plan should not be interpreted as an invitation to push national prestige projects.

The FBN Capital said an opportunity has emerged for Nigeria and other low-wage economies. “An estimated 85 million manufacturing jobs are being relocated from China due to rising labour costs including 20 million in textiles and clothing. The textile worker in China is paid $700 per month, rather more than the proposed national minimum wage in Nigeria of N45,000 ($150) per month,” it said.

It however, said that free zones have delivered some impressive results. In the 1980s there was Mauritius, and much more recently Ethiopia.

“In June Nigerian government advisors witnessed the opening of the country’s fifth zone, reserved for textiles and clothing and set to create 65,000 jobs. The example of China is Ethiopia writ large, and it is no coincidence that investors from the first are prominent in the Ethiopian zones. The first four zones were established in south-east China in the 1980s.

According to data cited by the Abuja Chamber of Commerce and Industry, zones accounted for 22 per cent of Chinese GDP and 50 per cent of its Foreign Direct Investment in 2007,” it said.

About the Author

Samed Olukoya
CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and, with over a decade long experience in the global financial market. Contact Samed on Twitter: @sameolukoya; Email: [email protected]

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