The minimum tax is an income tax that was introduced by the Finance Act, 2020. This will apply to all businesses at a rate of 1% on gross turnover or receipts.
According to the Act, the minimum tax is to be paid in four installments per annum payable on the 20th of the 4th, 6th, 9th, and 12th month of the year of income.
The minimum tax will be an alternative tax of the installment tax in that;
- Where installment tax payable is higher than the minimum tax, then installment tax shall be payable
- Where installment tax shall be less than the minimum tax, then minimum tax shall be payable.
The minimum tax shall not be applicable to persons under;
- Employment income
- Residential income tax
- Turn over Tax
- Income under CGT
- Extractive Sectors tax
- Those exempted under the Income Tax Act
The minimum tax will be effective starting 1st January 2021. Being a new provision, Minimum tax comes with its impacts on the taxpayers.
On the positive side, Minimum Tax enhances the equity canon among all taxpayers. It will ensure that all contribute to the tax base despite being loss-making or profit-making businesses.
The downside of minimum tax is that for capital and labor-intensive companies with high turnover and small profit margins, it’s likely to cause cash flow problems. For companies that have lower turnover but high-profit margins will have the lowest impact felt from the additional obligation of minimum tax.
The law is also not clear whether it will be an advance tax or the final tax. In regards to the former provisions, should minimum tax be treated as final tax, companies that are in tax losses for prolonged periods would bear an additional burden since the tax would be an additional expense that cannot be set off against future tax liabilities. On the other hand, if treated as an advance tax, the credit would be available to set off to the extent that the tax payable under the normal regime is higher than the minimum tax.
We anticipate that the government will make further amendments and issue the necessary clarifications before the effective date. We also look forward to new regulations for the administration of the minimum tax being introduced to enhance compliance among the taxpayers.