If you are reading this article, then you are one of the growing numbers of Nigerian business persons and entrepreneurs who are interested in knowing what their tax obligations are, and making sure they are operating their business while paying the right taxes. It might interest you to know that Nigeria Government is embarking on the aggressive pursuit of tax remittance to finance its projects due to its dwindling Government revenue.
On this note, it is imperative for entrepreneurs to understand tax requirements and prepare to comply to avoid entanglement with the law. There are a number of taxes that Entrepreneurs are to pay by Law, these taxes are classified under Federal Inland Revenue Service (FIRS) and State Inland Revenue Service (SIRS) based on the sector they operate.
A tax (from the Latin tax) is a financial charge or other levy imposed upon a taxpayer (an individual or legal entity) by a state or the functional equivalent of a state to fund various public expenditures. It can also be referred to a compulsory contribution to state revenue, levied by the government on workers’ income and business profits, or added to the cost of some goods, services, and transactions.
The followings are the taxes which are relevant to all business in Nigeria;
1. COMPANIES INCOME TAX (CIT)
Company Income Tax is levied on profits accruing in, derived from, brought into or received in Nigeria. The principal law for this Tax is the Companies Income Tax Act (CITA) and it is administered by the Federal Government via the Federal Inland Revenue Service (FIRS).
It is liable to any company doing business in Nigeria, whether resident (registered in Nigeria) or non-resident, (a foreign company registered outside Nigeria), with a General rate of 30%.
Specific Rate of 20% is applicable to:
• Companies with a turnover not more than N500,000 engaged in Agricultural Production/Mining of Solid Minerals
• Companies with turnover of not more than N1,000,000 in the manufacturing and Export promotion sectors
• Companies in their first five years of operations
The basis of assessment for resident and non-resident companies is preceding year basis. This means tax is a charge on profits for the accounting year ending in the preceding year of assessment.
2. TERTIARY EDUCATION TAX (TET)
Tertiary Education Tax is levied on assessable profit, which is tax adjusted profit before capital allowances. The principal law for this tax is the Tertiary Education Trust Fund Act and it is administered by the FIRS.
All Nigerian companies are liable to pay TET while Non-resident companies and all unincorporated entities are exempted from paying TET
Rate: 2% of assessable profits
Compliance requirements:
• As stipulated by the governing Act, TET is payable within sixty (60) days after a company has been served a notice of assessment by the FIRS in respect of the TET return
• In practice, many companies settle their TET liability within two (2) months of the due date of filing their CIT return Penalty for non-compliance:
• Failure to pay after 2 months of service of assessment notice attracts 5% of the tax in addition to the principal tax
• If failure persists after the first penalty has taken its course, the penalty for first-time offenders would be N10, 000 or imprisonment for 3 years and N20, 000 or imprisonment for 5 years or both will apply to second-time offenders.
There is no specific filing requirement for TET. However, the tax is self-assessed and filled together with company income tax (CIT).
3. PERSONAL INCOME TAX (PIT)
The Personal Income Act, Cap P8, LFN, 2007 (as amended by PIT Amendment Act 2011) is the legal basis for the imposition of PIT on the income of individuals in Nigeria. Each State has a State Board of Internal Revenue (SBIR) that administers this tax. They are responsible for assessment and collection of PIT. As a residency based country, personal income tax is paid in the state of residency. PIT operates the Pay-As-You-Earn scheme which applies to employees and the Personal Income Tax scheme which applies to business owners. Even though the same tax rate applies to both schemes, the method of computing differs.
Companies/Individuals liable: Ventures, Partnerships, Sole Proprietorships, employees
Rate: PIT rate is applied on a graduated scale on taxable annual income as follows:
• First N300, 000; 7%
• Next N300, 000; 11%
• Next N500, 000; 15%
• Next N500, 000; 19%
• Next N1, 600, 000; 21%
• Above N3, 200, 000; 24%
Minimum Tax: Minimum tax is computed at 1% of an individual’s gross income. This is applicable where actual tax payable according to the table above is less than 1% of gross income
4. VALUE ADDED TAX (VAT)
Value Added Tax is applicable to all taxable persons and is paid for goods and services purchased, or goods imported into Nigeria. It is administered by the FIRS and is governed by the VAT Act. Nigeria operates a net-off VAT system which is only applicable in two cases:
• You can net-off input VAT which you pay on goods that you bought directly for resale
• You can also net-off VAT on raw and packaging materials as a manufacturer
Input VAT
This VAT is on goods purchased or imported directly for resale and goods which form the stock-in-trade used for the direct production of any new product on which the output VAT is charged. In computing VAT, Input VAT on overheads, services, and general administration should be expensed through the profit and loss account while Input VAT on any capital item and asset should be capitalized together with the cost of the item or asset.
Output VAT
Output VAT is collected by a supplier from its distributor, agent, client or consumer on goods and services supplied to them. Where output VAT exceeds input VAT, the Taxpayer is required to remit the excess to the FIRS but where input VAT exceeds output VAT, the Taxpayer is entitled to a refund from the Tax board.
Rate: 5%
Exemptions: Oil exports, medical and pharmaceutical products, basic food items, books and educational materials, baby products, plant, machinery and goods imported for use in the export processing zone or free trade zone.
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