Tax system in Nigeria

For the purpose of this research/article, “tax” is any compulsory payment to the government, imposed by law without direct benefit or return of value or service whether it is called a tax or not.

The Nigerian tax regulation affects any Nigerian resident (someone living for more than 6 months a year.) A foreigner holding a Nigerian residence permit (CERPAC) is also deemed to be a tax resident. For more context, individual residents in Nigeria are taxable on their income wherever it comes from, whereas a non-resident is only taxable on the income earned from business activities performed in Nigeria.

Who Collects Nigerian Taxes

Taxes in Nigeria are all collected by both the federal and state government depending on the type of tax in question. Each state has a tax collection board, but rates are not equivalent fir instance, Lagos state’s tax collection office is LIRS — Lagos Internal revenue service while Rivers states has RIVERSBIRS. The federal government tax collection arm is the national Federal Inland Revenue Service (FIRS). Summarily, what each board collects defines them. We will dive into which what the federal and each state revenue boards collects.

Taxes You Must Be Aware Of

Withholding Tax — Collected by FIRS

Withholding Tax (WHT) is an advance payment of income tax. There are varying rates of WHT ranging from 2.5% to 10% for companies and 5% to 10% for individuals depending on the transaction. For instance, if you employ the service of a painter (10 Naira) when you are carrying out your office renovation, you are meant to deduct 5% of the 10 Naira, hence you will pay the painter 9.5 Naira.

Remittance of WHT is on or before the 21st day of the month following the month in which the deductions were made. For collection purpose, all companies making payments to suppliers of goods and services are required to make deductions of Withholding Tax and remit to the Tax Authority as payments are being made to suppliers/vendors.

Documents you need to file for WHT after payment:

1. Evidence of payments such as bank teller, e-ticket, e-acknowledgement you received from the collection center you used.
2. A Schedule (document) of WHT you have deducted indicating the following details:
3. Name of supplier/vendor,
4. Taxpayer Identification Number (TIN) of company or individual (supplier/vendor) from which the tax was withheld and the related amount.

Personal Income Tax (PIT)

Personal Income Tax (PIT) is a compulsory tax charged on the income earned by an individual. The rate of tax payable is not a fixed sum, depending on the gross income of the taxable employee, and the tax relief granted to him under Personal Income Tax Act (PITA).

Each state has its State Internal Revenue Service that handles tax administration, while Federal Inland Revenue Service administers PITA in the Federal Capital Territory.

Tax Income Rates

The rate of Personal Income Tax payable depends on the amount of ‘taxable income’ which the person is liable for. Taxable income refers to the base upon which the income tax system imposes and decides on how much tax a person is to pay in a given calendar year. Generally, it includes some or all items of income less expenses and other deductions.

The scale is from a minimum percentage of 7% of taxable income to a maximum of 24%.

Personal Income Tax are paid in 2 ways:

Pay-As-You-Earn (PAYE) — this is how people in paid employment pay their taxes. The employer deducts the tax at source. As an employer, utilizing an accounting software with payroll feature is the way to go. Your payment processes become super easy without error.

Self assessment by self employed persons — if self-employed, you assess your taxes, and pay the amount directly to the relevant tax authorities. A great way to skip doing the math by yourself is getting an accounting software that allows you includes taxes on your charges and automatically adds them up when the time is right to remit those taxes.

PAYE Documents to be submitted to Relevant Tax Authorities.

The following are the PAYE documents to be submitted to the State Board of Internal Revenue (SBIR) by the employer after receiving relevant input from its employees:

Form A — Annual Declaration of Income and Claims for Allowances and Reliefs Form: Income tax for return of income and claims for allowances and reliefs. This is required to reflect the personal details and income expected to be earned by the employee for the current year of assessment. It is filed by employer on behalf of the employee. Taxpayers are required to prepare and file their Form A within 3 months from the beginning of each Calendar year.

Form H1 — Employers Annual Declaration & Certificate: This contains the names, gross income and taxes paid by employees who were in the Company’s employment for the immediate preceding tax year. The Revenue relies on the information on this Form to determine if accurate taxes have been paid. Where the Revenue determines that taxes have been underpaid, additional assessment including penalty (10%) and interest (21%) of the amount underpaid, will be raised. Until the underpayment is settled / resolved, the Company’s employees will not be issued Tax Clearance Certificate. The deadline for the filing of annual return is 31 January of the following year. The penalty for non-compliance by an individual and a corporate body is N50,000 and N500,000 respectively.

Form G — Employers‟ Remittance Card: This should be completed with details of the Revenue receipt obtained evidencing remittance of PAYE tax liability during the year of assessment. The total tax paid per the receipt should equal that stated on the Form H1. Copies of the receipt should be attached to the Form G.

Other Statutory Deductions:

These are contributions made by employees to statutory bodies set up by the Federal Government. The duty to deduct and pay over to the relevant institutions rests with the employer.

Currently, the following schemes to which contributions are made are as follows:

Contributory Pension Scheme: This was established by the Pension Reform Act (PRA), as amended. The Act requires every employee to contribute a minimum of 8% and employer to contribute and remit a minimum of 10% respectively of employee monthly emolument (i.e. basic, housing and transport allowance), towards the scheme. The employee / employer may decide to contribute an amount higher than what is stipulated in the law.

National Housing Fund (NHF): The National Housing Fund Act, 2007, is the legal basis for the operation of the NHF in Nigeria. The Act requires employees to contribute 2.5% of their basic salary to the Fund, which should be remitted on a monthly basis.

Value Added Tax (VAT)

Value Added Tax (VAT) is a tax levied on consumption of goods and services. In Nigeria, some goods/services are VAT exempted. The VAT Act CAP.VI LFN 2014 requires that you pay VAT on all goods manufactured /assembled in or imported into Nigeria, and all services rendered by any person in Nigeria except those specifically exempted under the law as follows: basic (raw) food items, baby products, medical services and services rendered by Community Banks etc. This law has also been reviewed by the recent Finance Bill 2020. Read about it here to see more list of items and services that are tax exempted.

VAT rate is 7.5%. Both individual and businesses are expected to register for VAT payment and filing in Nigeria, so long as they are trading in goods and services. To register, open an account with the FIRS by completing Taxpayer Registration Input Form, few documents will be asked from you such as identification documents. Once you complete the form filling and submissions, a Taxpayer Identification Number (TIN) will be issued to you meaning you are authorized to collect VAT. Most recently TIN numbers now come automatically with business registration.

Every business owner is expected to fill their VAT returns on or before the 21st day of the month following the month of transaction. On or before the 21st day of the month following the month of transaction. There are penalties for not complying with the VAT tac remittance and filing. A penalty of N10,000 for the first month in which the failure occurs and N5,000 for each subsequent month for defaulted businesses that did not register for VAT. If such business still doesn’t fie, the business premises will be sealed up after a considered reasonable period. If any business default remittances, a penalty of a sum equal to 5% per annum plus interest at a commercial rate payable within 30 days of notification by the Tax Authority can be placed upon such a business.

Other Taxes collected by the FIRS includes:

1. Petroleum Profits Tax (PPT)
2. Companies Income Tax (CIT)
3. Personal Income Tax (PIT): for non-residents, members of Armed Forces, Police and Officers of Nigerian Foreign Service.
4. Tertiary Education Tax (EDT).
5. Capital Gains Tax (CGT).
6. National Information Technology Development Levy (NITDL).
7. Stamp Duties (SD).
8. Pre-operation Levy (POL)

Limitations and Challenges of Nigeria Tax Systems

Despite the potentials of taxation as a dynamic tool for sustainable national development, Nigeria tax system is facing so many challenges some of which are:

• Failure by tax authorities to honor refund obligations to taxpayers.
• Use of aggressive and unorthodox methods by tax collectors (also called foot tax foot soldiers) for tax collection.
• Poor accountability for tax revenue.
• Inordinate drive by all tiers of government to grow internally generated revenue which has led to the arbitrary exercise of regulatory powers for revenue purpose