Effective Government Policies and Incentives

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By: Site Engineer, Staff

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Having realized the importance of small and medium scale enterprises in national accelerated industrialization as well as the promotion of initiative and entrepreneurship, development of exports and generation of employment, a set of public policies were introduced. The first effort to promote small and medium-scale enterprises came in the early fifties with the creation of the Colony Development Loans Board by the colonial administration. The Federal Loans Board on the attainment of political independence succeeded that body. The Federal Loans Board was replaced with the Revolving Loan Fund for an industry which came as part of the technical assistance from United Kingdom (UK) for the small-Scale Industrial Credit Scheme (SSICs). The SSIC which relied on matching funds from the state governments became the official machinery employed by both the federal and state governments to allocate substantial sums of money for on-lending to small entrepreneurs.

The government policy on SMEs was first spelled out during the Second National Development Plan 1970. In that document, it was stated that: “In furtherance of government efforts to increase rapidly the present level of indigenous ownership and participation in manufacturing active support will be given to the development of small-scale industries”. Till then every successive government of Nigeria still maintain a public policy of promoting small-scale industries.

Policy Objectives

The objectives of government industrial policy shall be to achieve an accelerated pace of industrial development. In this regard, the industrial sector would become the prime mover of the economy.

The elements of this objective include:

Employment Generation

The social and political consequences of a high rate of unemployment make it imperative that the industrial sector should aim at creating job opportunities. This vital role has become even more crucial to the economy in view of a large number of trained and technical manpower for which the industrial sector is yet to find gainful employment.

Increased Export of Manufacturing Goods

To diversify the nation’s foreign exchange earnings base and strengthen the manufacturing sector through exposure to international competition government will actively encourage a more export-oriented approach by the manufacturing sector. As a substantial part of our foreign exchange earnings is used up by the industrial sector it is expected that the industry should try to contribute more to foreign exchange earnings. This represents an important policy shift.

Promotion of Nationwide Industrial Development Through Industrial Dispersal

To discourage over-concentration of industries in a few industrial centers and to promote national integration, the nation needs rational dispersal of industries. As a corollary, rural areas and other hitherto neglected areas of the country will increasingly begin to feel the positive impact of industrial development.

Improving Technological Skills

To create and maintain a modern industrial society the average level of technical competence of the Nigerian population needs to be significantly raised.

The quality and availability of technical education and industrial training the content and level of industrial research being undertaken in the nation’s industries and research institutes will all contribute to the achievement of this vital objective.

Increased Local Content

This will be achieved mainly through increased of local raw materials and further backward integration by existing industries. Clearly, as local content industrial output increases, this will affect the general level of economic activity and open up employment opportunities across all sectors.

Attracting Foreign Capital

Attracting foreign capital into the manufacturing sector is crucial to the attainment of many of the policy goals of government. Indeed, the government hopes that the restructuring of the economy through laudable economic and other measures taken would make the country more attractive to foreign capital.

Increased Private Sector Participation

The realization of the government objective of accelerated industrial development hinges critically on increased private sector participation in the manufacturing sector. Declining government financial resources, ever-increasing population, and past experience many public sector industrial projects have all combined to make increased private participation an important policy objective.

Strategies and Policy Measures

In pursuit of the central objectives of accelerated industrial development, the government shall take a number of steps involving:

  • Encouraging increased private sector participation in the industrial sector, and privatizing and commercializing holdings in certain industrial enterprises
  • Playing a catalytic role in establishing new core industries
  • Providing and improving infrastructure facilities
  • Improving the regulatory environment
  • Improving the investment climate prevailing in the country
  • Establishing a clear set of industrial priorities and
  • Harmonizing industrial policies at Federal, State and Local Government levels

Incentives to Industry industry

In order to induce greater support for the industrial development objectives as earlier outlined of this document and considering the need to promote a dynamic efficient and balanced manufacturing sector government has approved a package of incentives. These incentives are designed to promote investment, employment, product mix and various other aspects of the industry. In addition, the nature and application of these incentives have been considerably simplified. In general, the package of incentives can be grouped into five.

These are:

  • Fiscal measures on taxation and interest rates
  • Effective protection with an import tariff
  • Export promotion of Nigerian products
  • Foreign currency facility for international trade
  • Development banking

Fiscal Measures on Taxation

Fiscal measures have been fashioned out to provide for deductions and allowances in the determination of taxes payable by manufacturing enterprises. The fiscal measures targeted at aspects of industrial activity are as follows:

1. Pioneer Status

By the provisions of the Income Tax Relief Act 1958 (Amendment Decree No. 22 of 1971), public companies are granted specific tax holiday on corporate income. The objective of the Decree is to encourage the establishment of such industries that the government considers beneficial to Nigeria. During the period of the exemption, the companies are expected to achieve a reasonable level of profitability. To benefit from the Decree, the relevant company (or the dedicated a pioneer industry or pioneer product). The Act is applicable to both public and private limited liability companies.

Furthermore, the relief covers a non-renewable period of five years for pioneer industries and seven years for such industries located in economically disadvantages areas.

Additional tax concessions are available to industrialists who take initiative in the following areas:

  • Local raw materials development
  • Local value added.
  • Labor intensive processes.
  • Export-oriented activities.
  • In plant training
  • Investment in economically disadvantaged areas.

Additional tax concessions are available to industrialists who take initiative in the following areas:

  • Local raw materials development
  • Local value added.
  • Labor intensive processes.
  • Export-oriented activities.
  • In plant training
  • Investment in economically disadvantaged areas.

2. Tax Relief for Research and Development

Industrial establishments are expected to engage in research and development (R&D) for the improvement of their processes and products. Up to 120% of expenses on R&D are taxes deductible, provided that such R&D activities are carried out in Nigeria and are connected with the business from which income or profit is derived. For the purpose of R&D on local raw materials, 140% of expenses are allowed. Where the research is long-term, it will be regarded as a capital expenditure and will be written off against profits. In administering this tax relief, the Federal Ministry of Finance shall consult the Federal Ministry of Science and Technology to determine the genuineness of such R&D activities. The results of such research could be patented and protected in accordance with internationally accepted industrial property rights.

3. Companies Income Tax Act

This act has been amended in order to encourage potential and existing investors and entrepreneurs. Henceforth, the following relieves and regulations shall apply:

  • Corporate Tax Rate is 40% from 1987.
  • The penalty for failure to pay on due date is 10% per annum of the outstanding amount.
  • Section 49(3) of the companies income tax act requires companies to submit detailed tax computations along with their returns and audited accounts and industrial inspectorate department acceptance certificate.
  • When a taxpayer wants to appeal against a court decision, the disputed tax shall be paid. The bodies of Appeal Commissioners, as well as the courts, have been empowered to impose a penalty of 10% where an appeal proves to be frivolous or groundless.
  • Power to obtain information by a tax authority on banks’ customers that has been provided on the income tax management act is also applicable to the company’s income tax act 1979.

4. Tax-Free Dividends

An individual or a company deriving dividends from any company as from 1987 shall enjoy tax-free dividends for a period of 3 years if:

  • The company paying the dividends is incorporated in Nigeria.
  • The equity participation is imported into the country between 1st January 1987 and 31st December 1992, and
  • The recipient’s equity in the company constitutes, at least, 10% of the share capital of the company.

In addition (a), (b) and (c) above, if the company paying the dividends is engaged in agricultural production within Nigeria other production of petrol chemicals or liquefied natural gas, the tax-free period shall be 5 years.

5. Tax Relief for Investments in Economically Disadvantaged Local Government Areas

An entrepreneur who invests in economically disadvantaged local government areas is entitled to special income tax and other concessions.

These include:

  • Seven years of income tax concessions under the pioneer status scheme.
  • Special concessions by relevant state governments.
  • Additional 5% over and above the initial capital depreciation allowance under the company income tax act (accelerated capital depreciation). Less industrially and economically developed local government areas are defined in terms of inadequate:
    • Industrial production in gross and per capita basis available.
    • Social and economic infrastructures.
    • Level of labor market development.

Double Taxation (Income Tax Act 1979)

By Decree No. 4 1985 (miscellaneous taxation provisions) the income tax act of 1979 was amended. The effect of the amendment was to eliminate double taxation investment income.

1. Group of Companies Taxation

Companies can now pay interim company dividends without any double taxation since the amendment on franked investment income came into effect on 1st January 1985.

2. Tariff

Through various tariff levels were designed to provide protection against imports some may not provide the total effect anticipated. The government, therefore, put in place other measures, as indicated below to ensure that locally produced goods are competitive in both domestic and export markets.

  • Customs and Excise Regime: Pursuant to the trade liberalization policies of the government, a new custom and excise tariff (consolidated) decree has been politicized taking effect from 1st January 1988. The decree, which repeals those of 1984, makes provisions for the imposition of customs and excise duties payable on goods imported into Nigeria basing its classification on the new Harmonized System of Customs Tariff. The essence of the review is to give effective protection to local industries and to promote further investments, competition, and efficiency. Rather than outright prohibition, the new dispensation favors the use of tariff for the purpose of effectively protecting loyal industries, enhancing revenue generation combating smuggling and encouraging exports.
  • Dumped and Subsidized Goods: The customs duties (Dumped and Subsidized Goods) Act of 1958 permits when necessary, the imposition of a special duty on any goods which are dumped in Nigeria or subsidized by any government or authority outside Nigeria.

3. Export Promotion

A variety of measures ranging from export insurance to outright grant to export-oriented industries are applicable to manufacturers producing for export. These have been articulated in Decree No. of 11th July 1986.

  • Import Duty Draw-back: Under the customs (Duty Draw-back), Regulations of 1959 importers can claim repayment of import duty paid for materials used in producing export goods. Repayment will be made in full in respect of materials that are imported for use in the production of goods that are meant solely for exportation. In the case of certain composite goods which contain wholly or partly duty-paid ingredients, the Custom and Excise Department may grant bona fide applicants a “fixed rate” drawback on proof of exportation of such goods or their disposal in an approved manner. The objective of the duty draw-back is to encourage non-oil export development and to enable exporters to compete effectively on international markets.
  • Export License Waiver: No export license is required for the export of manufactured or processed products. Also, exports have been exempted from excise.
  • Export Credit Guarantee and Insurance Scheme: In order to make Nigerian products compete effectively in the international market as well as to ensure genuine exporters against some political and other risks, including default in payment government, has approved the establishment of an export credit guarantee and insurance scheme. Exporters will also be in a position to grant their customers some credit facilities.
  • Export Development Fund: The export Development Fund provides financial assistance to private exporting companies to cover part of their initial expenses in respect of export promotion activities.
  • Export Expansion Fund: The Export Expansion Fund provides cash inducement of exporters who have exported a minimum of N50,000 worth of semi-manufactured or manufactured products.
  • Export Adjustment Scheme Fund: The Export Adjustment Scheme Fund has been established to serve as a supplementary export subsidy. Proceeds will be used to compensate exports for:
    • The high cost of production arising from infrastructural deficiencies.
    • Purchase commodities at prices higher than prevailing world market price but fixed by government and
    • Other factors beyond the control of the exporter.
  • Re-discounting of Short Term Bill for Export: This facility will enable all exporters to rediscount their short term bills under a scheme provided for in the Central Bank of Nigeria (CBN) Amendment Act of 1967.
  • Capital Allowance: Additional annual capital allowance of 5% on plant and machinery for “manufacturing exporters” (those that export at least 50% of their annual turnover), provided that the product has at least 40% local raw materials content or 35% value added.
  • Tax Relief on Inference: The companies Income Tax Act 1979 has also been amended to grant relief on interest accruing from any loans granted to aid investment in export-oriented industries.

4. Foreign Currency Facility

A new trade and exchange rate regime has been adopted by the government to ensure efficient and competitive local production. Adjustment in the exchange rate regime will provide greater access to external markets than before to industries relying extensively on local resource raw material. The facility also provides for easier movement of investible funds, goods, and services in and out of the country.

  • Foreign Exchange Market: The foreign exchange market came into operation in September 1986 resulting in the abrogation of import levy an import license. The market also provides manufacturers with easy access to foreign exchange.
  • Repatriation of Import Capital: An approved “status” permit for imported capital investment is conferred on companies with non-resident investment in cases where the original investment was imported in the form of equity either by way of cash and or plant and machinery. The purpose of this “status” is to facilitate timely repatriation of remittances or other capital claims.
  • Payment of Technology Fees: In order to ensure effective assimilation and diffusion of foreign technology within a specific time frame at a fair and equitable contractual and payment terms, the rate for payments in technology transfer transactions have been reviewed. Fees for technical services are based on net sales (rather than profit before tax).
  • Foreign Currency Domiciliary Account: Banking regulations in the country make it possible for exporters’ of non-oil products to retain the proceeds of export in bank accounts denominated in foreign currency for external transactions or conversion to naira but in accordance with existing Central Bank of Nigeria guidelines.
  • Development Banking: Industrial development banks have been set up at both federal and state levels to offer specialized services to industry; paramount among these services is the provision of soft loans and advances to large-medium and small-scale and cottage type industries on concessionary terms. These concessions are reviewed regularly in line with the policy objectives of governments. Development Banks include among others Nigerian Bank for Commerce and Industry (NBCI) and the Nigerian Industrial Development Bank (NIDB) state investment corporation etc.

In addition to these policy objectives, strategies and incentives put in by the government have also established some vital institutional framework for effective initiation, execution, and sustenance of indigenous industries.

 

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