BASIC GUIDELINES OF TAXATION IN NIGERIAJuly 1, 2022 2022-07-01 16:39
BASIC GUIDELINES OF TAXATION IN NIGERIA
Taxes are established by law in Nigeria by enacting relevant statutes (Act, By-law, decree among others). The tax law specifies its tax jurisdiction and establishes the administrative body. The tax structure in Nigeria is tailored towards the Nigerian governance hierarchy (Federal, State, and Local Government).
As a matter of obligation, every person, whether resident or non-resident in Nigeria, individuals in businesses or paid employment, or individuals who generate their income from Nigeria, including companies that operate in Nigeria, are all liable to pay tax.
Failure to pay taxes of any kind or failure to deduct and remit tax as the case may attract penalties and punitive fines.
Similar to other countries, the primary function of the Nigerian tax system is to derive revenue for the running of the government at all levels and provide good infrastructure to the general public.
A more efficient tax structure is achieved than a rough effective tax system and tax administration reforms. These elements also help build a tax culture and reduce the occurrence of corruption and tax evasion.
Table of Content
- Nigerian Tax Laws
- Taxes and Tax Laws in Nigeria
- The Present Regime for Tax Administration in Nigeria
- Watch Understanding Taxation In Nigeria
- Frequently Asked Questions
Nigerian Tax Laws
Taxes are enacted by law in Nigeria. The tax law sets up the administrative body and details its tax jurisdiction. The tax laws impose tax at a preplanned rate on certain income, gain, profit, and value of transactions of taxable individuals.
These laws are amended regularly because of current economic conditions, welfare, the complexity of the financial transaction, and social needs.
Structure of the Nigerian Tax System
Nigeria regulates a decentralised tax system where every level of government is independently responsible for managing taxes within its jurisdiction.
The Nigeria tax structure is established towards the Nigerian governance hierarchy (federal, state, & local government).
Nigeria derives revenue used to fund the government expenditure through various taxes from each level of government. A body is responsible for taxes due to each level of government.
The Federal Inland Revenue Services (FIRS) is the authority responsible for managing taxes that are due to the Government of the federation.
The different state boards of internal revenue manage taxes due to the state governments, whereas the local government revenue committees manage taxes due to the local governments.
But, the joint tax board is focused solely on advisory, harmonising double taxation, and proposing amendments.
Taxes and Tax Laws in Nigeria
Various tax laws in Nigeria, over the years, have made provision for several other taxes. The main taxes managed by FIRS are education tax, custom duties, companies income tax, stamp duties, value added tax, excise duties, and withholding tax.
The state board of internal revenue primarily manages withholding and personal income taxes, whereas the local government primarily manages levies.
Let’s review the various tax laws to gain an insight into the different taxes in Nigeria.
Personal Income Tax (PIT):
This tax is imposed on the income of employees, communities, corporate sole or body of individuals, trustees or families or executors of any settlement. It also covers taxation of partnership assessment, sole traders, and taxation of estates.
PIT is regulated by the personal income tax act cap P8 LFN 2004 (as amended). The necessary tax authority responsible under the law to administer this type of tax may range from the FIRS to the different State Boards of Internal Revenue.
Capital Gains Tax (CGT):
This type of tax is charged when there is a disposal of assets. Any capital amount is generated from a lease, assignment, sale, transfer, compulsory acquisition or any disposition of assets classified as chargeable assets.
The capital gains tax act regulates CGT, Laws of the Federation CAP C1 LFN, 2004 (as amended). It is usually charged at a flat rate of 10% on chargeable assets.
Capital gains tax does not apply to educational or charitable institutions of public character. It may not also be charged from assets that do not have any connection with any trade carried out by an organisation.
Companies Income Tax (CIT):
This type of tax is imposed on the revenue of a company from all sources. It is among the primary taxes administered and collected by the Federal Inland Revenue Service (FIRS).
It is a tax paid on the profit of incorporated companies. CIT is regulated by the Companies Income Tax Act (CITA), Cap.C21, LFN 2004 (as amended).
The rate on this type of tax is 30% of a company’s total income minus all expenses for the period which an organization reasonably incurred in deriving the taxable profit.
Value Added Tax (VAT):
This tax is charged on the sale of specified products and services at the rate of 5%. It is also called a consumption tax and it is mostly generated by the final consumer. The FIRS has the power to administer and manage VAT in Nigeria.
It is regulated by the VAT (amended) Act and VAT Act 2007. Currently, the Federal Government of Nigeria has approved a 50% increase in VAT for the supply of products and services, that is from 5% to 7.5%. The new rate took effect in 2020.
The stamp duties are regulated by the Stamp Duties Act CAP S8 LFN 2004 (as amended) in Nigeria. Stamp duties tax from individuals is paid to the respective state government, whereas corporate bodies pay theirs to the federal government.
The stamp duties rates established by FIRS are in two types; ad valorem charges and flat rate charges. According to the Federal Inland Revenue Service (Establishment) Act, FIRS has the power to administer taxes for stamp duties listed in the first schedule in the Act.
This tax is also administered by the respective States Internal Revenue Services (IRS).
Withholding Tax (WHT):
This is a disbursement due to a taxable person or corporation, or an advance tax payment deduction made on any income, for continuous remittance to the relevant government agency.
When this tax is deducted from the source, it is subsequently remitted to the related tax authorities. In Nigeria, WHT varies and can be between 2.5 to 10% for companies and 5 to 10% for individuals depending on the type of transaction.
Section 78 of the Companies’ income tax act (as amended) says that where a company makes a payment to another company or individual, either as rent, interest (with interbank deposit and royalty included), dividend, etc. such company shall at the time of making the payment deduct an advance tax of 10% of the gross amount that is paid and remit such deducted and withheld tax to the FIRS immediately.
This tax is administered by the FIRS and regulated by the Education Tax Act, CAP E4, Laws of the Federation of Nigeria, 2004. This tax is also governed by Tertiary Education Trust Fund (Establishment, Etc.) Act 2011.
EDT is imposed on all organizations registered in Nigeria and has a tax rate of 2% of assessable profit. The total amount in the Fund is distributed between Polytechnics, Universities and Colleges of Education in the ratio 1:2:1 respectively.
Custom and Excise Duties:
These are the taxes imposed at Nigeria’s Port of Entry on specific imported goods. It is generally collected and administered by the Nigerian Customs Service under the Customs and Excise Management Act.
There are two forms of taxes charged at the Nigeria Port of Entry; one is on some exported goods, and the other is on specific imported goods. As a result, custom and excise taxes are imposed on goods either to discourage consumption of such products or for revenue purposes.
This is the reason why it is sometimes referred to as consumption tax.
Petroleum Profit Tax (PPT):
This type of tax is imposed on the revenue of companies in petroleum operations (Upstream). The tax is regulated by the Petroleums Profits Tax Act, Cap P13 LFN 2004 (as amended). Organizations liable to PPT are not answerable to CIT (companies income tax) on the same income.
These laws are administered based on the assessment, collection and accounting for revenues accrued to the federal government.
The Present Regime for Tax Administration in Nigeria
Tax administration is the implementation of the different tax laws in a country to achieve its objectives. In Nigeria, tax administration is executed by the three tiers of government: the Federal Government, the thirty-six states of the federation plus the federal capital territory and the different Local Governments, through the authorities created by the respective governments.
At the federal level, the FIRS is the body statutorily permitted to administer and enforce the different tax laws in Nigeria. The States’ Governments regulate tax through the different state boards of internal revenue, while the local government revenue committee of each state regulates taxes at the local government level.
The FIRS was created by the Federal Inland Revenue (Establishment) Act, 2017. It is created to regulate the different Federal taxes as recognized by the related laws. They are empowered to assess, collect and account for revenues accrued to the Federal Government.
Under section (8) (1) (a)(b) and (c) of the Act the main functions of the FIRS include;
- To assess, collect, account and enforce payment of taxes that is due to the government or any of its agencies
- To assess persons including companies, business enterprises chargeable with tax
- To collect, recover and pay to the designated account any tax under the provision of this Act or any other law or enactment.
We also have the Joint Tax Board (JTB) which was created from the Personal Income Tax Act. It comprises officers of the state and federal tax authorities. It functions as a big umbrella covering all other tax authorities in Nigeria. The official role of the JTB is still solely advisory.
Watch Understanding Taxation In Nigeria
Frequently Asked Questions
What are the types of tax in Nigeria?
- Value-Added Taxes
- Companies Income Taxes
- Personal Income Taxes
- Withholding Taxes
- Stamp Duties
- Capital Gains Taxes
- And others
What are the 5 principles of taxation?
The five principles of taxation include efficiency, flexibility, neutrality, effectiveness and fairness, as well as certainty and simplicity.
What is the importance of taxation?
The importance of taxation lies mainly in its capacity to raise capital formation for the growth and development of the economy as well as helping in the regulation of consumption patterns leading to economic stabilization and efficient redistribution of income (ICAN, 2009).
Who is a taxable person in Nigeria?
An individual is considered a resident in Nigeria if he/she resides in Nigeria for 183 days in a 12-month period. But, persons in diaspora holding residence permits are also liable to pay tax i12 months if they reside in the country not up to 183 days in any 12-month period.
Does everyone pay tax in Nigeria?
The Chairman of the Federal Inland Revenue Service (FIRS), Nestoil Muhammad Nami, confirmed that only 41 million Nigerians pay taxes out of the over 200 million population in the country.
Originally posted 2022-02-06 21:52:17.