- December 20, 2019
- Posted by: matogconsulting
- Category: Tax
Taxes MSME’s or Small Business should Pay in Nigeria
In this article, we want to discuss lucidly the federal government taxes every business owner should know. This will help prevent the case of tax evasion and even tax avoidance. To really get it down with this topic, we will discuss and define TAXATION as seen by different scholars, dictionary, and corporate bodies.
Taxation is a means by which governments finance their expenditure by imposing charges on citizens and corporate entities. Governments use taxation to encourage or discourage certain economic decisions. For example, reduction in taxable personal (or household) income by the amount paid as interest on home mortgage loans results in greater construction activity, and generates more jobs. This was according to the online business dictionary.
Britinica publication defined Taxation as an imposition of compulsory levies on individuals or entities by governments. Taxes are levied in almost every country of the world, primarily to raise revenue for government expenditures, although they serve other purposes as well.
It is very important to discussed that in contemporary or recent economies taxes are the most significant source for government to get money. Taxes vary from other springs of revenue in that they are essential levies and are unreturned that is, they are commonly not paid in return for some definite thing, such as a specific public service, or the giving of public debt. Whereas taxes are apparently received for the wellbeing of taxpayers as a whole, the individual taxpayer’s liability is sovereign of any specific advantage received.
The wikibook also treated the taxation as a topic and it says Taxation is principal method by which a government gains revenue into its budget. That revenue goes into a vast number of items, from paying debt, booming the potential for implementing certain policies to paying for public services and welfare benefits and the military, etc. There are many methods by which tax revenue can be gained, and different definitions and structures to taxation which are outlined below. Also, conflicts in choosing methods and forms of taxation occur, pitting priorities such as reducing iniquity of income against maximizing incentive for economic growth. Taxes can also help to structure all sort of economic transactions, in a way that the state can exert influence in all participants even over the currency used.
The development of any nation depends on the amount of revenue generated by the government for the provision of infrastructural facilities. Taxation is the key to unlocking the resources required for public investment and infrastructure growth.
Taxation and tax management is a stressful activity for everyone, especially for business owners and entrepreneurs. If you’re selling taxable goods or services in any state in Nigeria or you earn some income from working in the country, you almost always have tax obligations. This means you are legally required to collect, file and remit sales and use tax.
Principles of Taxation
- Efficient– Efficiency as one of the principles of tax indicates that a good tax system must derive vast revenue to sponsor the government project and also be there for the expenses by government in taking care of tax payers.
- Understandable– The system ought not to be unintelligible to the common man on the street, or should it be understandable to the average and high-class citizen. It must by all standard appear to be just and coherent.
- Equitable– tax must be ruled on people who have ability to pay. In this sense the tax system to be adapted by the country must be fair, just and equal in the sight of all the citizen in which the tax law will be bound.
- Benefit Principle– We should make sure that every body using the public service should pay when they enjoy the public product or service so that it will better serve the other principles of tax earlier stated.
In Nigeria, the Federal Inland Revenue service is empowered by section 2 and schedule 1 of Federal Inland Revenue Service Act, 2007 to control and gather remittance on the following taxes:
- Company Income Tax (Amended) Act, 2007
- Personal Income Tax (Amended) Act, 2011
- Value Added Tax Act, 2007.
- Capital Gains Tax Act Cap. C1 LFN, 2004
- Petroleum Profits Tax (Amended) Act, 2007
- Stamp Duty Act Cap. S8 LFN, 2004.
- Taxes and Levies (Approved List for Collection) Act Cap T2 LFN, 2004
- Education tax
Direct and indirect taxes
Considering tax generally in the world, it is sub divided into two meaning the aspect to which the tax is hitting the tax payer. Taxes are most commonly classified as either direct or indirect. Most of the time, economists and professional tax practitioners often debate on the criterial which should be used to distinguish between the two. They look tax such as corporate income tax or property tax. It is usually said that a direct tax is one that cannot be shifted by the taxpayer to someone else, whereas an indirect tax can be.
Direct taxes are best described as the tax levied on individual which tax burden can’t be shifted to another person. It is tax that is administered based on the tax payers ability to pay. They are taxes that government through their tax agencies impose directly on individuals and businesses.
The followings are example of direct tax.
Income tax is an example which is also known as personal income tax (PIT). It is a kind of tax that levied on the income made by a person said to be taxable by law. He will pay a certain percentage of his income to the government as tax. Company Income tax is another example etc.
Indirect taxes are levied directly on goods and services sold or bought in the country at a particular point in time.
To really look at this aspect of tax, there are examples which includes all sorts of consumption tax. They are Value added tax, withholding Tax etc.
It is a tax that tax both the poor and the rich at the same rate, because the poor pays the same amount for the same amount for the same goods as others who have more resources at their disposal.
No country has adopted a tax with the base of the flat tax, although many have income taxes with only one rate. Here are the different tax system employed by different countries.
Individuals that earns low income pays a higher amount of their revenues in taxes compared to individuals that earns higher revenues under a regressive tax system because the government administer tax as a percentage of the value of the asset that a taxpayer purchases or owns. This type of tax has no connection with an individual’s earnings or income level.
In a proportional tax system, government administers equal tax rate to everyone not minding their income or wealth. It’s meant to create equality between marginal tax rates and average tax rates paid. It can also be referred to as a flat tax system.
A progressive tax system sees that taxable amount of person’s income is based on their what they earn. They go through an up-shooting mode, it indicates that the more a taxable person earns is the much he or she will pay. The overall outcome is that higher earners pay a higher percentage of taxes and more money in taxes than do lower-income earners.
In case of disagreement or suspected over charging of tax, there is usually a Body of Appeal Commissioners that is a court of first instance to handle Tax appeal cases. There is also a Value Added Tax Tribunal
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ABOUT THE AUTHOR
Razaq Adedamola AYENI is a creative, talented and innovative Accountant with consolidated expertise in Accounting, Strategy, digital marketing and business development. He has worked in different industries and this has added to his wealth of knowledge.
He is a highly motivated and positive minded person, a business development expert. He has demonstrated his competence in leadership and mentoring in Matog Consulting & Matthew Ogagavworia & Co. in Ikeja Lagos where he is a Consulting associate and an Audit junior
The different taxes are as listed below
|S/N||Tax||Applicable law||Rate of tax||Applicable tax office||Period of filing||Penalty to defaulter|
|1||COMPANY INCOME TAX (CIT)||COMPANY INCOME TAX (AMENDED) ACT, 2007 (‘CITA’)||The corporate tax rate is 30% in Nigeria (see sections 19, 30 and 33 of CITA).
It is important to note that new rate has been approved in the 2019 Finance bill for small business not to pay <25m, medium company to pay 20% <100m and big company > 100 pay 30%
|Federal Inland Revenue Service (section 1 of CITA).||Within 6 months after the financial year end (section 13 of CITA).||N25,000 penalty in the first month of failure to file and N5,000 for each month default continues (section 13 of CITA).|
|2||VALUE ADDED TAX (VAT)||VALUE ADDED TAX ACT, 2007 (‘VAT ACT’).||5% on the value of all goods and services (section 4 of VAT Act).
Please note that a new rate of 7.5% has been approved by the 2019 Finance bill to take effect from January 2, 2020. Also more items was removed from the list of goods to be VATed.
|Federal Inland Revenue Service (Section 7 VAT Act)||On or before the 21st day of the following month whether a transaction took place or not. (Section 15 of VAT Act).||For non-remittance of the tax, penalty of 5% per annum (and interest at the commercial rate) of the amount of tax remittable shall be added to the tax (section 19 of VAT Act). Also, failure to file attracts a fine of N5,000 in the first month of failure to file occurred and N5,000 for each month the default continues (section 35 of VAT Act)|
|3||PERSONAL INCOME TAX (PIT)||PERSONAL INCOME TAX (AMENDED) ACT, 2011 (‘PITA’).||The minimum tax rate is 1% of gross income||State Board of Internal Revenue for residents of respective states, and Federal Inland Revenue Service (FIRS) for residents of FCT||Within 90 days of commencement of every year (section 41 of PITA).
|10% per annum of the tax payable shall be added thereto (section 76 of PITA).|
|4||WITHHOLDING TAX (WHT)
Relevant Tax Authority (Section 69(4) of PITA): Federal
|SECTIONS 69-75 OF THE PERSONAL INCOME TAX (AMENDED) ACT, 2011 AND SECTIONS 78 OF THE COMPANY INCOME TAX (AMENDED) ACT, 2007 WITHHOLDING TAX RATE TABLE (Section 69(2) of PITA).||Companies Individuals Dividend, Interest, Rent 10% 10% Royalties 15% 15% Commissions, Consultancy, Professional, Technical & Management Fees 10% 5% Building, Construction & related activities 5% 5% Contract of Supplies & Agency arrangements 5% 5% Director Fees 10% 5%||Federal Inland Revenue Service (FIRS) accounts and States Internal Revenue Services (SIRS) as appropriate
Section 40 of the Federal Inland Revenue Service (Establishment) Act 2007, which imposes a general obligation on agents to deduct and remit taxes in accordance with specific provisions of the various tax laws
|The remittance of WHT should be made monthly.||Section 40 of the Federal Inland Revenue Service (Establishment) Act 2007, which imposes a general obligation on agents to deduct and remit taxes in accordance with specific provisions of the various tax laws to a penalty of 10 percent per annum of the tax withheld or not remitted and interest at the prevailing Central Bank of Nigeria’s minimum rediscount rate and imprisonment for a period of not more than 3 years.|
|5||CAPITAL GAIN TAX||Capital Gains Tax Act Cap C1, LFN 2004||Tax rate is 10% on capital gains.||Federal Inland Revenue service|
|6||EDUCATION TAX (EDT)||Education Tax Act, CAP E4, Laws of the Federation of Nigeria, 2004||Tax rate is 2% on company taxable profit||Federal Inland Revenue service|
|7||PETROLEUM PROFIT TAX (PPT)||Petroleum Profits Tax Act, Cap P13 LFN 2004||50% for petroleum operations under production sharing contracts, 65.75% for non-PSC operations, including joint ventures (JVs), 85% for non-PSC operations after the first five years||Federal Inland Revenue service|
To round up, it should be noted that all taxable individuals or corporate body are mandated to make and give in to FIRS their annual self-assessment tax returns within three months from the beginning of every year and include the amount of tax payable. For each year of assessment, you are expected to file a return of income with the applicable Tax authority where the taxable person or company is considered to be resident.
Nigeria Government recently established the Voluntary Assets and Income Declaration Scheme (VAIDS). Voluntary Asset and Income Declaration Scheme (VAIDS) is a time-limited opportunity for taxpayers to regularize their tax status relating to previous tax periods and pay any taxes due.
In Nigeria, all the people living in Nigeria and working with either the Government, the private sector or is the owner of a business in operation or with an intent to start up one is expected to obtain a Tax Identification Number (TIN) this is done by writing to the Federal Inland Revenues Services. This TIN is used in opening of a corporate account with the bank and other government parastatals demand for TIN when dealing with them. TIN number is a unique number issued and allocated to individuals or companies to identify them as registered taxpayers in Nigeria.