Tax is a mandatory financial charge or some other type of levy imposed upon a taxpayer (an individual or other legal entity) by a governmental organization in order to fund various public expenditures. A failure to pay, along with evasion of or resistance to taxation, is punishable by law. In plain terms, taxation has been described as a way of making persons, individuals and companies contribute to growth and development of a country, through payment of money via legalized levies according to their level of income or any other criteria.
The Federal Inland Revenue Service (FIRS) defines tax compliance as obeying provisions of tax laws willingly, without being forced. It also means registering yourself, enterprise, non-governmental organization or a government agency with tax authority and also keeping proper records, preparing tax returns, filing and payment of taxes.
Payment of tax is one aspect that SMEs try to avoid, however when you become a small business owner, you automatically acquire a responsibility for making tax payments. The Nigerian law requires business individuals and companies operating in and registered in the country to pay different taxes. These taxes are paid to different levels of government via the Federal Inland Revenue Service, the State’s Revenue Service and the Local Government.
Types of Tax
Business taxes aren’t just about income taxes. Just like people in general, businesses must pay several different kinds of taxes. If you are just starting your business, you need to know what taxes you are subjected to paying.
1. Companies Income Tax
All businesses must pay tax on their income. This means that a business must pay tax on the profit of the business. Companies Income Tax is a tax chargeable on all companies (other than Companies engaged in petroleum operations) registered in Nigeria. It is an annual taxable profit of 30% made by registered companies, which profits must accrue in, be derived from, brought into, or received in Nigeria. This is done by an annual self-assessment and submission of tax returns according to specifications of the Federal Inland Revenue Service (FIRS). The due date for filing annual returns with FIRS is within six month of the company’s accounting year end for an existing company and for a new company within 18 months from the date of incorporation or 6months after its first accounting period whichever is earlier.
2. Education Tax
This is a tax chargeable on all companies registered in Nigeria at chargeable profits as contribution to the Education Tax Fund. All registered companies in Nigeria are required to pay a percentage of their assessable profit into an Education Tax Fund. The tax is charged at 2%.
3. Value Added Tax
This is a tax placed on a product whenever value is added at a stage of production and at the final sale. VAT is a way of charging tax on the increase in value of goods and services at each stage they are produced, rather than just selling on their final selling price to customers. It is a payable by the consumer at 5%. Companies are mandated by the government to collect VAT from their consumers and then remit to FIRS. The due date for filing VAT is 21st day of every month following month of transaction.
VATable goods are goods manufactured/assembled in or imported into Nigeria, except those specifically exempted under the law. Examples of VATable goods include jewelries, shoes, bags, television etc. The following goods are exempted from VAT liability:
• All medical and pharmaceutical products;
• Basic food item;
• Books and Educational materials;
• Baby products;
• Fertilizer (locally produced), agricultural and veterinary medicine, farming machinery and farming transportation equipment;
• Plant and Machinery imported for use in the Export Processing Zone or Free Trade Zone; provided that 100% production of such company is for export;
• All commercial aircrafts and aircraft spare parts imported for use in Nigeria.
• Amorphous Pet Chips (HS Code 3907.6000.00)
VATable services are services rendered by any person in Nigeria except those specifically exempted under the law. Examples of VATable services are services rendered by lawyers, engineers, accountants, contractors and consultants etc. The following services are exempted from VAT liability:
• Medical services
• Services rendered by Microfinance Banks.
• People’s Bank and Mortgage Institutions.
• Plays and performance conducted by the educational institutions as part of learning.
• All exported services.
4. Personal Income Tax
This is a tax payable by business individuals, registered businesses and partnerships except those registered under Part A of Companies and Allied Matters Act 1990 (incorporated companies). The State Inland Revenue Service administers the tax. Businesses are required to collect personal income tax from their employees’ salaries and wages through deduction at source. The due date for filing PAYE is 10th day of every month following month of deduction.
5. Withholding Tax (WHT)
This is basically an advance payment of income tax which may be used to offset or reduce tax liabilities. It is an advance payment to be applied as tax credit to settle the income tax liability of the years of assessments to which the income that suffered the deduction relates. It is a prepaid tax. Withholding Tax is not a distinct type of tax but mechanism for collection of other taxes that may have been lost through evasion and/or avoidance. Various persons may be subject to WHT to balance their tax liabilities for different types of tax. When a person benefits from any payment and the income is taxable, the Withholding Tax is withheld by the payee. It is then directly remitted to FIRS through a designated Bank. The due date for remitting WHT returns is 21st day of every month following the month in which the deductions were made.
6. Capital Gains Tax (CGT)
This pertains to all gains accruing to a taxpayer from the sale or lease or other transfer of proprietary rights in a chargeable interest which are subject to a CGT of 10%. In simple terms, CGT is a tax on profits obtained from a disposal or exchange of certain kinds of assets.
Importance of Tax Compliance
Taxation is an all pervading subject which affects the lives of nearly everybody. The role of tax cannot be underestimated at all – it is the driving force in most developed economies. It is a well-known fact that the revenue generated from the taxation of individuals and businesses is an important stream of income for government. In an economy like Nigeria’s that is struggling to remain afloat, it is even more important. Tax revenue is the source of funds used for development projects such as the provision of infrastructure like good roads, stable power supply, and a stable water supply; all of which combine to create an enabling environment for businesses – and in turn the economy at large – to grow.
SMEs form the core of majority of the world’s economies. A study carried out by the Federal Office of Statistics shows that in Nigeria, small and medium enterprises make up 97% of the economy. Although smaller in size, they are the most important enterprises in the economy due to the fact that when all the individual effects are aggregated, they surpass that of the larger companies. However, tax compliance among SMEs in Nigeria is poor. Taxation is one aspect that should be of keen interest to any business person as non-compliance with relevant tax laws attract heavy penalty that could cripple the activities of a going concern. Apart from being a civic and constitutional duty, consistent payment of tax by concerned bodies help to maintain steady and sustainable national development by a responsive government.
In conclusion, Nigeria as a country and indeed all socially responsible and law abiding individuals, groups, organizations and corporate citizens will derive valuable benefits from imbibing a culture of tax compliance.
If you have any enquiries about this article or require further information, please contact the writer – eki.durojaiye@lawbrief.org