Tax is a much-dreaded topic in many quarters in Nigeria. However, it is an important topic that cannot be brushed under the carpet. This article provides you with relevant information on the tax system in Nigeria.
The development of any nation and the enjoyment of its people depends on the amount of revenue the government is able to generate. This will determine factors such as the provision of infrastructural facilities and basic amenities. Taxation is the major key to generating wealth for the government to function properly.
You do not have to be a business owner to understand the tax system in Nigeria, even a civil servant or private worker needs to understand it too. As long as you earn some income from working in Nigeria or you are selling taxable goods or services, you are obliged to pay taxes to the Nigerian federal government.
Why do we pay taxes in Nigeria?
Taxes are paid both as a legal requirement and as a civic duty. This means that if one does not pay taxes, he or she commits a legal crime that is punishable by law through the Federal Inland Revenue Service. The relevant tax authority is required to ensure Nigerian citizens pay their taxes. Penalties imposed if one refuses to pay his or her taxes include large fines or jail time.
The taxes received by the federal government are from several sources such as Personal Income Tax, Payroll Tax, Corporate Tax, Tariffs and many more. The government needs these funds to be able to discharge its numerous responsibilities for the development of the country.
History of taxation in Nigeria
The history of taxation in Nigeria can be traced back to the time before the nation ‘Nigeria’ came to being. In pre-colonial time, the tax administrators were the traditional chiefs who collected mostly farm produce as taxes.
The modern taxing system in Nigeria can be traced back to the year 1939 when the Companies Income Tax Ordinance was created. The taxation arm of the Federal Government of Nigeria is the Federal Board of Inland Revenue (FBIR).
Over the years, changes have often been made to the tax law. In 1978, the Task Force on Tax Administration formed the Federal Inland Revenue Service (FIRS) as the operational arm of the Federal Board of Inland Revenue (FBIR).
Tax Rates in Nigeria
Tax rates simply imply that the amount of tax paid by each taxpayer (individual or company) vary according to the amount of income earned. The higher you earn, the more you pay.
Corporate Tax
Nigerian companies are obliged to pay 30 percent of their gross or total profit. Non-resident companies are obliged to pay 30 percent of the profit they make from Nigeria. The educational charge is 2 percent of the assessable profit of a company while withholding tax is 10 percent deducted from dividend payments to companies and individuals.
Individual Tax
Nigerians are obliged to pay 25% of their gross income. Non- resident individuals are required to pay 25% of the profit they make in Nigeria only.
Common types of taxes in Nigeria
Many Nigerians are not aware of the types of taxes in Nigeria. Bear in mind that as an individual or a business in Nigeria, you are obliged to pay taxes. Failure to pay taxes due to ignorance of the law cannot be used as a genuine excuse in the Nigerian court of law.
Below is an explanation of the type of taxes in Nigeria.
Companies Income Tax (CIT)
Under Nigerian law, a resident or non-resident company has to pay the Companies Income tax. The Company Income Tax is currently charged at the rate of 30% for companies with a gross turnover of over N100 Million Naira. Companies with a turnover between N25 Million and N100 Million are charged at the rate of 20%.
Petroleum Profit Tax (PPT)
Any company (resident or non-resident) who explore or produce petroleum in Nigeria are obliged to pay a Petroleum Profit Tax (PPT0. The PPT rates vary from 50% for petroleum operations with the Nigerian National Petroleum Corporation (NNPC), 65.75% (in the first five years) for companies not under production sharing contracts and 85% after the first five years.
Value Added Tax (VAT)
Any person or individual, corporate sole, organizations who consumes or buys any taxable product or service is obliged to pay a tax levy known as Value Added Tax (VAT) in Nigeria. The current rate of VAT in Nigeria is 7.5 percent of the total value of the goods or services purchased.
Personal Income Tax (PIT)
This is the most common type of tax in the country. Personal Income Tax is imposed on individuals. It also varies according to each individual’s income and profits (taxable income). The range is from 7% to 10%
Withholding Tax (WHT)
The Withholding Tax are regarded as advance payment of income tax. The standard rate is 5%.
Stamp Duties (STD)
Stamp duty is a government (Federal or State) levy on written or electronic transaction documents. Persons obliged to pay Stamp Duties tax are those who use items such as written documents for businesses between individuals or companies. Stamp duties may include financial transaction, article of association between companies, statements, deals, bonds etc. Stamp duty is chargeable either at fixed rates or in proportion to the value of the consideration.
Capital Gains Tax (CGT)
All the companies registered in Nigeria and who earn any form of capital gains are obliged to pay the Capital Gains Tax. Capital Gains Tax is calculated at a flat rate of 10% of chargeable gains. Ideally, it is submitted with the Companies Income Tax to FIRS through a designated bank.
Tax Identification Number (TIN)
Every citizen of Nigeria whether working with the government, the private sector, or who is a business owner is expected to obtain a Tax Identification Number (TIN). The Tax Identification Number is usually printed on returns, statement, and other tax-related documents.
The TIN number is a unique number specially allocated to individuals or companies to identify them as registered taxpayers in Nigeria.