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Spurring market growth with appropriate tax incentives


Arriving at a tax regime that would be investment-friendly in the country would in no small measure spur activities in the nation’s bourse and ultimately trigger resurgence of Initial Public Offering (IPO). Capital market operators have underscored the need for some taxes on capital market activities to be reduced or removed. Tax policies of the Federal Government are of particular interest to the Nigerian Stock Exchange (NSE) and its members, with regards to growth and development of the capital market.

There is no gain-saying that a reduction of some taxes on capital market activities and the abolition of others would enhance investment in the country. This is in the believe that tax revenue foregone through lowered tax rates, for instance, would lead to more savings, higher employment and boost in Gross Domestic Product, resulting ultimately in the expansion of the national tax base.

The Nigerian capital market has not been quite comfortable with the existing tax regime for transactions in the market. The market already carries more than it’s fair share of the tax burden. The market is inundated with a plethora of tax requirements that discourage investments and threaten the achievement of national economic objective through the capital market. Following the reintroduction of the Value Added Tax (VAT) recently, dealing members are being pressured to pay VAT on their brokerage commission in a situation the market believes is uncalled for.


The former Finance Minister and Coordinator of the Economy, Dr. Ngozi Okonjo-Iweala, in approving the elimination of stamp duties and VAT on market transactions, said they were panacea to reviving the Nigerian bourse, which then struggled after its crash during the global recession in 2009.

Okonjo-Iweala had noted that a vibrant capital market is, essential to the government’s Economic Transformation Agenda, especially in terms of raising the much-needed long-term financing for critical infrastructure and the housing sector.She had said: “Research (by the IMF and the World Bank) has shown that solid economic growth in any country is closely linked to the joint development of the banking sector and the capital markets. While the banking sector has already been cleaned-up, the capital market needs some intervention.

“Taxes on stock exchange transactions fees are as high as 12 percent (five per cent in VAT and up to seven per cent in stamp duties) – much higher than in other jurisdictions, and these constitute a major disincentive to invest in the Nigerian capital market. I will like to announce that the Federal Government has consented to: Waive the 0.075 per cent stamp duties payable on stock exchange transaction fees; and,“Exempt from VAT, commissions: (a) earned on traded values of shares, (b) payable to the Securities and Exchange Commission (SEC), and (c) payable to the Nigerian Stock Exchange (NSE), and the Central Securities Clearing System (CSCS); by including these commissions in the list of VAT-exempt goods and services.”

Against this backdrop, stakeholders urged the Federal Government to, as a matter of urgency, abolish the withholding tax, VAT, and contract stamp from the market to enable it contribute meaningfully to capital formation. Beyond being a disincentive to stockbroking firms, if all the profits are taxed away, there would be no more incentive for enterprises.

The tax regime in the capital market is an important consideration in decision making in the market. It has profit implications for companies and impacts on the cost of transactions in the secondary market. Essentially, the tax regime can promote or undermine the growth of capital markets. An equitable, reasonable tax regime is an incentive for increased productivity for quoted companies.


Succour returned to the capital market last week when the federal government submitted a Finance Bill to the National Assembly, to amend various tax laws in Nigeria. The Bill is aimed at promoting fiscal equity; reforming domestic tax laws to align with global best practices; introducing tax incentives for investments in infrastructure and capital markets; • Supporting MSMEs; and raising revenues for government

Quite significantly, the Finance Bill seeks to introduce sweeping changes to the tax laws covering seven different tax laws. Many of the changes are expected to have positive impacts on investments and ease of paying taxes especially for MSMEs.For instance, under tax on dividend distribution (excess dividend tax), companies currently are charged to tax at 30% on their dividend distributions where such dividends exceed the taxable profits for the year notwithstanding that profits being distributed may have been taxed in prior years, exempt from tax, or taxed under a different tax law.

This particularly affects holding companies on dividends received from their subsidiaries thereby making Nigeria unattractive as a headquarters or group holding company location. The Finance Bill proposes changes to limit the application of the tax only to untaxed profits that are not exempt from tax

For tax on interim dividend, currently, companies that declare and pay interim dividends are required to remit income tax at 30% on such dividends to the FIRS. There is a proposal to repeal this provision (which also specifies that WHT should not be applied on dividends that are not paid in money) in the Finance Bill. While the repeal will address the intended exemption of advance tax on interim dividend, it may also imply that WHT should be applied on bonus shares or dividend-in-specie.

The bill seeks to amend the contentious commencement and cessation rules in CITA. The effect of these rules is that companies suffer tax twice on profits of at least 12 months, when they commence business. Conversely, on cessation of business, a period of up to 12 months escapes tax. The removal of these rules is considered a welcome development.PWC Professional Services argued that the bill is also expected to bring about a significant increase in investments and stimulate activities in the capital market.

“Overall, we expect the general changes being introduced by the Finance Bill and the specific amendments targeted at the banking sector and the capital market to have a positive impact especially in the medium to long term. “The clarifications provide better certainty around taxation for companies operating in the sectors. It is also expected to bring about a significant increase in investments and stimulate activities in the capital market.

The Publicity Secretary of Independent Shareholders Association, Moses Igbrude said noted that taxes and other incentives are increasingly dictating the direction of cross border investment flow. He pointed out that tax incentives need to be used together with other measures in order to attract companies to list on the stock exchange.He pointed out that an efficient, well-regulated financial market; coupled with innovative financial instruments and conducive tax environment, play crucial role in influencing both local and international investors.

He added that achieving right tax incentive would significantly encourage investment within the Nigerian economy, and assist job creation, which will lead to higher economic growth and capital market development.He noted that the major obstacle to issues of equity and debt is double taxation, describing it as a disincentive for companies to make public issues.

“This reduce the attractiveness of such securities to investors while on the demand side, the capital gains tax and the double taxation of dividends constitute disincentives to investing in securities.”Reacting on the finance bill, he said: “Nigeria finance bill has the provisions to reduce or remove taxes from some class of investment instruments in the capital market with hope of stimulating and encouraging the growth of the market.


“The growth of the Capital Market depends not only on taxes but on other factors like infrastructures, cost of finance as well as security. So if government is really serious to grow the economy, they must have the will to implement this tax policy, along side other favorable policies to encourage the private sector and grow the market.”The Head of Research, FSL Securities Limited, Victor Chiazor, said the finance bill is expected to improve the revenue base of the government and support SMEs if properly implemented

According to him, the expected increase in government revenue, which should arise from the increase in VAT and improved tax collection is expected to increase government spending and spur economic activities. “On the back of this position, we expect the capital market to eventually benefit from the increased capital spending over the medium to long term as funds are expected to flow towards that direction.

“However, the proposed amendment which limits minimum tax computation to 0.5 per cent of turnover and companies with turnover of less than NGN25 million to be exempted from minimum tax payment an a tax rate of 20 per cent which will now apply to small businesses with a turnover of between N25 million and N100 million may not benefit the companies listed on the capital market as most of them currently report revenues far above the N100 million level. “Furthermore, he added that the increase in VAT is also expected to reduce consumer disposable income which may slightly affect the consumers ability to invest in the capital market further reducing activities in the market.


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Ngozi Okonjo-IwealaNSE
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