The development of any nation depends on the amount of revenue generated by the government for the provision of infrastructural facilities. Taxation is the key to unlocking the resources required for public investment and infrastructure growth.
Taxation and tax management is a stressful activity for everyone, especially for business owners and entrepreneurs. If you’re selling taxable goods or services in any state in Nigeria or you earn some income from working in the country, you almost always have tax obligations. This means you are legally required to collect, file and remit sales and use tax.
History of taxation in Nigeria.
History of taxation in Nigeria dates back to even when the name Nigeria wasn’t coined. During this time, the tax administrators then were the traditional chiefs tax agents. At this time, it most farm produce and other primary goods.
The modern taxing system by the Federal Government of Nigeria under it taxation arm; Federal Board of Inland Revenue (FBIR) could be traced back to the year 1939 when the Companies Income Tax Ordinance was created.
After the creation of this first taxation body, it had always changed, in response to the changes made to the tax law which are caused by several other factors. In 1978, the Task Force on Tax Administration under the leadership of Alhaji Shehu Musa formed the Federal Inland Revenue Service (FIRS) as the operational arm of Federal Board of Inland Revenue (FBIR).
Why do we pay taxes in Nigeria?
In the smallest of nutshells, taxes are paid because the state or federal governments implement tax laws. Taxpayers’ money pays for government services of all kinds.
Although taxes are considered as a legal requirement, paying taxes is also considered a civic duty. If you neglect to pay, the mediating body that oversees taxes (the Federal Inland Revenue Service) will require that you do so, otherwise, you might face penalties such as large fines or jail time.
In 2015, the federal government of Nigeria collected over 3.7 trillion Naira in taxes. This could come from several sources such as Personal Income Tax, Payroll Tax, Corporate Tax, Tariffs and many more.
The government requires these funds to discharge its numerous responsibilities for the development of the country, betterment of society as a whole and other non-developmental but essential obligations to the citizens of the country.
Common types of taxes in Nigeria.
Tax types in Nigeria is what many Nigerians are not aware of. This is in spite of the fact that ignorance is not an excuse of the law. As an individual or a business in Nigeria, you are liable to the payment of any tax and you fail to pay it, ignorance of the law cannot be used as a genuine excuse for such act of omission.
This is the reason we shall try to do justice to explaining each type of taxes in Nigeria.
1. Companies Income Tax (CIT): Under Companies Income Tax Act you have to pay Companies Income tax if you are a resident or non-resident company incorporated in Nigeria.
2. Petroleum Profit Tax (PPT): The Petroleum Profit Tax is subject to any resident company or person in charge of a non-resident company who are exploring for petroleum or producing it in Nigeria.
3. Value Added Tax (VAT): Any person or individual, corporate sole, organizations who consumes or buys any taxable product or service will have to pay a tax levy known as Value Added Tax (VAT) in Nigeria.
4. Personal Income Tax (PIT): The Personal Income Tax (PIT) is the most common tax type in the country. A Personal Income Tax is a tax imposed on individuals or entities (taxpayers) that varies with respective income or profits (taxable income). Personal Income Tax generally is computed as the product of a tax rate times taxable income.
5. Withholding Tax (WHT): The Withholding Tax deductions are regarded as advance payments (or payments on account) of the relevant tax liability that will arise from the tax returns of the period concerned.
6. Educational Tax (EDT): Stamp Duties (STD): Items or persons subject to Stamp Duties tax are written documents relating things between individuals or companies or group of soles. Stamp Duties may include instruments such as financial transaction, article of association between companies, statements, deals, bonds etc.
7. Capital Gains Tax (CGT): All the companies registered in Nigeria which earn any capital gains are liable to Capital Gains Tax. Capital Gains Tax is calculated and submitted with Companies Income Tax to FIRS through Designated Bank.
Tax administration in Nigeria.
The administration of tax is vested in various tax authorities depending on the type of tax under consideration. In Nigeria, there are three (3) authorities namely;
(a) Federal Board of Inland Revenue.
The Federal Government collects taxes through the Federal Board of Inland Revenue; the agency administers Revenue laws that deal with taxes paid by the residents of the Federal Capital Territory and taxes that are paid by corporate bodies (Limited Liability Companies). They are responsible for accounting for the Federal Government for all taxes collected.
(b) State Inland Revenue Board.
The State Governments collect taxes through the State Board of Internal Revenue; the agency primarily administers the Personal Income Tax Act, and however, some states of the federation have instituted additional revenue statutes, which they administer. They are responsible for accounting to the State Government for all revenue collected.
(c) Local Government Revenue authorities.
The Local Government collects taxes through the Local Government Revenue Committee; they are responsible for the assessment and collection of all taxes, fines, and rates under its jurisdiction and account for all revenue collected to the chairman of the Local Government.
Tax Rates In Nigeria.
Not all nairas earned are equal as far as the taxman is concerned. Nigerian tax rates vary according to the amount of income you earn, and you pay different rates on different portions of your income.
A. Corporate Tax.
Nigerian Companies pay 30 percent of their worldwide profit while foreign companies pay 30 percent of only the profit made in Nigeria. The educational charge is pegged at 2 percent of the assessable profit while a 10 percent withholding tax is deducted from dividend payments to companies and individuals.
B. Individual Tax.
Nigerians under the law are to pay 25% of their total worldwide income while foreign individuals are to pay 25% of the profit made in Nigeria only.
Tax Identification Number (TIN)
In Nigeria, every citizen of Nigeria working with the Government, the private sector or owns a business in operation or with an intent to start up one is expected to obtain a Tax Identification Number (TIN). A TIN must be furnished on Returns, Statement, and other Tax related documents.
The TIN number is a unique number issued and allocated to individuals or companies to identify them as registered taxpayers in Nigeria. Some companies like to use fully-verified service, to help verify and protect your identity.
All taxable persons or businesses are required to prepare and submit annual self-assessment tax returns within 90 days from the commencement of every year and include the amount of tax payable. For each year of assessment, you are required to file a return of income with the relevant Tax authority where the taxable person or business is deemed to be resident.
This is why the Nigerian government recently launched Voluntary Assets and Income Declaration Scheme (VAIDS). Voluntary Asset and Income Declaration Scheme (VAIDS) is a time-limited opportunity for taxpayers to regularize their tax status relating to previous tax periods and pay any taxes due.