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Tax! Let’s talk about it.
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, face prosecution or are unable to bid for contracts because they do not have tax clearance certificates.
It need not be like this!
Understanding how tax matters affect your business and complying with the provisions will save you many hassles. In this post, I shall try to explain those tax matters that every entrepreneur must know and apply in order to operate his/her business responsibly, peacefully and free from the taxman troubles.
WHAT IS TAX?
Tax is a compulsory levy imposed by the government of a country on its citizens.
Two operating words or phrases can be gleaned from this definition, namely compulsory levy and citizenship. Payment of Tax is a compulsory obligation every citizen owes to the state as this is the primary source of revenue to the government. Citizen here encompasses both natural and corporate persons.
The moment you register your business, you have created a corporate citizen with the rights and obligations of natural persons, including the right to own property, the right to sue and be sued and hence the obligations to pay taxes to the state.
Being a compulsory obligation, failure to pay tax is a financial crime which may attract prosecution.
TWO WAYS OF LOOKING AT FAILURE TO PAY TAX.
There two ways the taxman considers the failure to pay tax by taxable persons. These are tax evasion and tax avoidance.
Tax evasion is a deliberate misrepresentation of material facts about income in order not to pay tax at all or pay little. Such acts will include but not limited to concealment of income, under-declaration of income, manipulation of accounts, falsification of expenses and deliberately classifying personal expenses as business expenses in the financial statements.
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 arrangement of a taxpayer’s financial affairs in order to minimize his tax liability by exploiting the provisions of the law. Examples of tax avoidance making maximum claims for allowable expenses or claiming for additional life insurance policy and such other legitimate arrangement.
Thus, tax avoidance is a not an illegal activity.
WHO DO YOU PAY TAX TO?
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 Company Income Taxes, Withholding Tax (for companies), Petroleum Profit Tax (for companies operating in oil exploration), Value Added Tax, Education Tax, Capital Gains Tax (for companies), and the National Information Technology Development Fund(NITDF) Levy. The Federal Inland Revenue Service (FIRS) also collect Personal Income Tax on members of the Armed Forces, members of the Police Force, residents of the Federal Capital Territory, Abuja; staff of the Federal Ministry of Foreign Affairs and non-resident individuals and 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), 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 also charged with the responsibilities of collecting local levies. Some of these levies include shop rates, tenement rates, market taxes, signboard and advert permits, etc.
Taxes Every Business/Company In Nigeria Must Pay
Whatever the shape and form, businesses are subjected to the following type of taxes in Nigeria:
#1 Company Income Tax – 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%.
#2 Value Added Tax
Value Added Tax (VAT) is a tax on the supply of goods and services. In Nigeria, the VAT rate is 5%. VAT is paid by the consumer and every business owner is seen as a collector and 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.
#3 Withholding Tax
This tax is applied at 10% on specific transactions such as dividend payment, consultancy services, interest charges, 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.
#4 Education Tax
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.
#5 Capital Gains Tax
This tax is charged at 10% on capital gains (profits) arising from the sales 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.
#6 Petroleum Profit Tax
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.
#7 Personal Income Tax
This is tax charged on the income of a person. A person according to the PIT law include individuals, sole proprietorships, and partnerships.
Personal Income Tax is paid in either of two ways, namely, 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.
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|
PENALTY FOR BREACHING TAX REGULATION
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.
WHAT CONSTITUTE TAX OFFENSES
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, the following can be considered a breach of tax regulations:
- Failure to register and obtain a Taxpayer Identification Number
- Failure to keep proper books of account
- Failure to prepare and file tax returns
- Failure to pay the correct amount of tax
- Engaging the services of touts to transact tax business on your behalf
- Tax Evasion
- Falsification of Tax Clearance Certificate
- Failure to Charge Withholding Tax and VAT
- Failure to remit PAYE on behalf of your employees
- Failure to register and obtain VAT Registration Number
- Allowing third party use of TIN, TCC and other tax documents for the sourcing of contracts, business, jobs, etc.
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) is a unique number issued to an individual or company which identifies that person as a taxpayer. TIN can be obtained by applying on the prescribed form to 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.
Finally, ensure that your tax returns are accurate and are filed timely. By so doing, you will be avoiding penalties.