What is Tax?
Tax is a compulsory and involuntary levy by a higher authority, usually the government, on its citizens, residents or corporations.
Taxation by the government on its citizens is usually compulsory, involuntary and enforced. Tax is a civil obligation. Failure of a citizen to pay his or her tax is usually met with punishment. A person who fails to pay taxes is often said to be evading tax.
Taxes can be levied on various things. Examples include:
- Workers’ salaries
- Wages or income
- Profits of businesses operating in a state
Who administers and regulates taxes in Nigeria?
Taxes in Nigeria is administered at two levels: Federal level and state level.
The Federal Inland Revenue Services (FIRS) is saddled with the responsibility of administering tax in Nigeria at the Federal level. Various states administer taxes through their various agencies at the state level.
For instance, in Lagos State, the Lagos State Inland Revenue Service (LIRS) administer taxes on its residents and business corporations located in Lagos State.
Likewise in Oyo State, the Oyo State Internal Revenue Service (OYOIRS) administers taxes on its residents and business corporations located within Oyo State.
Types of obligatory taxes for Nigerian entrepreneurs
Federal Inland Revenue Service administers taxes in Nigeria is the the federal level. The FIRS is under the supervision and control of the Ministry of Finance.
According to the FIRS, there are 9 types of taxes administered at the federal level and they are:
- Value Added Taxes
- Petroleum Profit Tax
- Personal Income Tax
- Stamp Duties
- Capital Gains Tax
- National Information Technology Development Levy (NITDL)
- Tertiary Education Tax
- Witholding Tax
- Companies Income Tax
Also note that all these taxes are to be paid by entrepreneurs depending on the line of businesses being conducted. For instance, an entrepreneur whose services includes selling of food cannot be expected to pay the Petroleum Profit Tax.
Let us quickly run through the types of obligatory taxes for Nigerian entrepreneurs
1. Value added tax
It is a consumption tax. That means that it is a tax that is levied on consumables. This tax applies to goods bought or services paid for or rendered. This type of tax can either be levied directly or indirectly.
For instance, when we buy airtime from telecommunication companies (MTN, Globacom etc), there is value added tax on it. This tax is paid by the customer (the person buying the airtime). This is an indirect levying of a value added tax.
A direct levy of a value added tax is applied where a business owner exports a particular good out of the country.
The percentage of tax for a value added tax varies from products to products as it is not a fixed tax.
2. Petroleum profit tax
This specifically applies to the companies in the upstream sector. This tax is levied on their incomes realized within a year. The percentage for this type of tax is fixed.
3. Personal income tax
This type of tax applies to incomes of individuals and business owners. For a salary earner, he is entitled to pay his personal income tax yearly. For a business owner, Personal income tax is to be paid on the profits realized in a year.
Personal income tax is one of the most important taxes you need to be aware of. This is because it applies to almost every citizen who is making money either through salaried employment or self-employment.
If your annual gross income is below ₦300,000.00, you might only need to pay 1% as personal income tax. PIT is usually administered by state inland revenue services in respect of their residents. If you live in Edo State for instance, your PIT would be payable to the state inland revenue service in Edo State.
In many other cases, PIT is administered by the FIRS. You can find more information about PIT on FIRS website.
4. Stamp duties
This type of tax is administered on documents. Examples include:
- Certificate of occupancy
- Bills of exchange
- Deed of assignment, etc
Stamp duties is being administered in two (2) forms: fixed duties and ad-valorem.
- Fixed stamp duties – the amount to pay as fixed stamp duties are usually fixed regardless of the value of the transaction.
- Ad-valorem stamp duties on the other hand are usually calculated based on the value of the transaction.
5. Capital gains tax
Capital gains tax is usually charged on the difference between the purchase price and the sales price. What this means is that it is charged on the profit made when the purchase price is subtracted from the sales price.
Suppose you bought a property for ₦600,000.00 and sold it for ₦1,000,000.00. This would mean that you have made a profit of ₦400,000.00. You would need to pay capital gains tax on the profit (₦400,000.00) which you have made.
6. National information technology development levy (NITDL).
Once your company’s turnover is above ₦100 Million, you are expected to pay this kind of tax. It is fixed at 1% of profit before tax.
7. Tertiary education tax.
If your company is registered in Nigeria, you are expected to pay this tax. It is fixed at 2% of the profit of the company.
8. Witholding tax
This tax is usually deducted from monies to be paid to suppliers of goods and services. The deducted sum is them remitted to the FIRS. Witholding tax is an advance income tax. The percentage varies in respect of the sum to be paid to suppliers of goods and services.
Where witholding tax is overpaid, providers of goods and services could be entitled to tax refund. Likewise, if enough money was not paid as witholding tax, additional payments may be required.
9. Companies income tax
This is charged on profits made by companies that are registered in Nigeria. It is fixed at 30% of the profits realized by the company. Companies income tax is administered by the FIRS.
An entrepreneur should know the type of tax that applies to his or her business. Knowing the obligatory taxes for Nigerian entrepreneurs will enable you to observe compliance with the law.