All over the world, taxation is an essential part of doing business. So in this post, I will highlight 7 types of taxes in Nigeria every entrepreneur must know about.
Not paying attention to these taxes means inviting the tax man’s troubles.
You see, a good number of small and medium business operators do not understand tax matters and how these affect their businesses, hence the high level of noncompliance.
A certain study showed that over 80 percent of small businesses in Nigeria don’t pay taxes. Some only realize the need to pay tax when their business premises are sealed up by the tax officials. Or when they face prosecution for tax related offences.
A large number of others remember to pay tax only when they are unable to bid for contracts because they do not have tax clearance certificates.
It need not be like this!
Understanding how tax issues affect your business and complying with the provisions will save you many hassles.
Tax is a compulsory levy imposed by the government of a country on its citizens.
Two operating words or phrases jumps out if this definition: compulsory levy and citizenship. Payment of Tax is a compulsory obligation every citizen owes to the state. And citizen here encompasses both natural and corporate persons.
The moment you registered your business, you have created a corporate citizen. Companies thus have rights and obligations of natural persons. These rights include: the right to own property, the right to sue and be sued.
They also have obligations as natural persons such as duty to pay taxes. And failure to do so is a financial crime.
There are two ways the tax man views the failure to pay tax . These are tax evasion and tax avoidance.
Tax evasion is a deliberate misrepresentation of material facts about a taxable person’s income in order not to pay tax at all or pay little.
Such acts will include but not limited to:
In other words, tax evasion is a willful violation of the tax laws. And that makes it a financial crime for which an offender can go to jail if convicted.
Tax avoidance, on the other hand, is a legitimate use of the tax laws to minimize tax liability. For example: making maximum claims for allowable expenses. Or claiming for additional life insurance policy and such other legitimate arrangement.
Thus, tax avoidance is not an illegal activity.
There are different bodies in Nigeria charged with the responsibility of collecting different types of taxes and levies.
Federal Taxes are collected by the Federal Inland Revenue Service (FIRS). And some of the taxes that this body collects include:
The Federal Inland Revenue Service (FIRS) also collects Personal Income Tax on members of the Armed Forces and members of the Police Force. Residents of the Federal Capital Territory, Abuja and staff of the Federal Ministry of Foreign Affairs and non-resident individuals pay their taxes to FIRS.
They also collect stamp duties relating to companies.
The State Inland Revenue Service (SIRS) of the different states in Nigeria are charged with the responsibilities of collecting state taxes.
Some of these state taxes include Personal Income Tax (for resident individuals), Capital Gains Tax (for individuals). Others are Business Premises Levy, Hotel Occupancy and Restaurant Levy, stamp duties relating to individuals, etc.
The local government authorities in all the 774 local government areas in Nigeria are for collecting local levies. Some of these levies include shop rates, tenement rates, market taxes, signboard and advert permits, etc.
Whatever the shape and form, businesses are subjected to the following types of taxes in Nigeria:
All businesses must pay tax on the profit derived from operating the business in the financial year preceding the filing of tax returns.
How a business income is taxed is usually dependent on the type and nature of that business. For one man businesses or enterprises, business profits are treated as income to the business owner and taxed under the personal income tax laws.
This is different for limited liability companies which are taxed under the companies income tax laws. Currently, Company Income Tax rate in Nigeria is 30%.
Value Added Tax in Nigeria (VAT) is a tax on the supply of goods and services. The VAT rate is 7.5%. VAT is paid by the consumer and every business owner is seen as a collector, hence is required to register for VAT.
When a business owner sells vatable goods and services, he collects VAT and when he buys vatable goods and services, he pays VAT. Liability arises if the VAT collected is higher than VAT paid.
To ascertain VAT liability, business owners are required to submit VAT returns to the FIRS.
Withholding tax rate is 10%. Transactions that attracts withholding tax in Nigeria include dividend payment, consultancy services and interest charges. Others are rent, directors fees, commissions, construction services, and contracts excluding sales in the ordinary course of business which is usually subject to VAT.
Net Withholding tax paid is deductible from income tax as long as the taxpayer is able to provide evidence of payment, usually described as Withholding Tax Credit Note.
This tax is imposed on every company registered in Nigeria at 2% of the assessable profit of each year of assessment. The tax is levied to get corporate organizations to contribute to the development of the education sector.
This tax is charged at 10% on capital gains or profits arising from the sale or disposal of chargeable assets. Chargeable assets are capital goods that are subject to Capital Gains Tax such as residential properties, cars, investment, and government securities, including options, debts, and foreign currencies.
Petroleum Profit Tax is levied on the profit of companies engaged in upstream oil and gas operations. Upstream operations deal with the exploration, mining, and drilling of crude oil. Current PPT rate is 50% for Production Sharing Contract (PSC) and 85% for Joint Ventures.
This is a tax on the income of a person. A person according to the PIT law include individuals, sole proprietorship, and partnerships.
There are two ways to pay personal income tax: Pay As You Earn (PAYE) or Self Assessment
PAYE is applied to people in paid employment. Their employers deduct a certain amount as tax from their salaries and remit to the relevant tax authorities every month. At the end of the assessable year, the employee is required to file a tax return and obtain a Tax Clearance Certificate.
So as a business owner or entrepreneur, it is a responsibility that you deducts PAYE and remit on behalf of your staff as required.
For self-employed persons, they are required to fill a self-assessment tax return and remit tax accordingly. You can obtain or complete a self assessment tax form online and make payment to the bank.
Personal Income Tax is graduated according to income levels ranging from 7% to a maximum of 24% after making provisions for claims of allowable expenses. For your guide, see the table below:
| Annual Taxable Income | Rate |
| First N300,000 | 7% |
| Next N300,000 | 11% |
| Next N500,000 | 15% |
| Next N500,000 | 19% |
| Next N1,600,000 | 21% |
| Over N3,200,000 | 24% |
As highlighted in earlier paragraphs, tax payment is a compulsory obligation and for business owners, it is important that they understand how to organize their affairs to ensure that they comply with the provisions of tax laws.
Failure to pay tax or comply with tax regulations attract sanctions such as sealing of business premises, auction of goods, or prosecution in the law courts.
It is interesting to note that tax offenses do not just begin and end with the failure to pay tax. Failure to organize your affairs properly for tax purposes may constitute tax offense.
Specifically, failure to do any of the following can breach of tax regulations:
It is also a punishable offence to engage touts and other unapproved contractors to provide you with tax services. In the same a tax payer may not allow a third part to use his tax documents, including TIN and TCC.
Tax evasion and falsification of tax certificates are also serious crimes.
HOW TO ENSURE COMPLIANCE
The steps to ensuring compliance begin with your registration with the tax authorities and obtaining a Taxpayer Identification Number (TIN) for your business.
The Taxpayer Identification Number (TIN) that identifies an individual or company as a taxpayer. You obtain the TIN from the the Federal Inland Revenue Service.
The next step to ensuring compliance is to keep proper book-keeping and accounting records for your business. Fortunately, with the many free accounting tools available online, even a businessman with novice knowledge in bookkeeping can maintain the basic books to help avoid taxman troubles.
And very important is tax planningAMP
Finally, file your tax returns timely and accurately. By so doing, you will be avoiding penalties.
Buchi creates content and leads the Team at Kobotalk Management Services; a business development and investment consultancy firm. He provides strategic advisory to help SME's, small business owners and HNI's grow profitable business and make informed investing decisions.