A major source of revenue for the governments around the world is Tax. It is no surprise why governments are keen about the safety and productivity of their citizens, as this translates to more taxable persons. The same applies to companies and businesses, because the more the businesses, the higher the source of revenue for the government.
On the other hand, especially in a situation like Nigeria where people perceive the government is not upholding its obligations; citizens do not enjoy paying taxes. It is always hard to just give your hard earned money away to a government; well maybe you have a point.
The truth however is that paying taxes is not an issue of morality that can be done by choice, rather it is a compulsory legal obligation, failure to remit taxes attracts severe penalties. So, whether the government is useful or not, taxes have to be paid by all taxable persons or businesses.
For you not to be found guilty in the eye of the law, below are some popular and must pay taxes that apply to almost all businesses in Nigeria, except those enjoying tax holidays or businesses that fall into the tax exemption category.
COMPANY INCOME TAX:
This tax, as the name suggest apply to companies, and it is calculated on the profit of the company. Now we know that profit in its most simplistic meaning is expenses subtracted from income. This is why it is said that revenue isn’t the same thing as profit, it is important for every business to know the difference. However for the purpose of taxes, there is taxable income, because to the taxman, it is not every expense that is acceptable. The rate of a company’s income tax is fixed at 30% of taxable income (a major quality of taxes, they are always fixed at a certain rate or percentage).
This Tax is remitted to the Federal Inland Revenue Service, and it is payable on a preceding year basis. It is very important that business owners secure the help of an accountant to help prepare accounting books so as to have a clear picture of the tax liability for each year, or whatever accounting period used by the company.
Companies in the oil and gas field do not pay Company Income Tax, rather they pay Petroluem Profit Tax
For those who attended Federal Universities or institutions in recent years, (no not you from the first republic). Those of this generation will be familiar with many buildings in these institutions having inscription such as ‘Education Trust Fund 2009’. This fund is made available to the Federal government by the companies, and no, it is not a voluntary contribution. It is fixed at 2% of the assessable income; you can see this isn’t taxable income. The tax man has a way of arriving at different profits, so you should also always seek tax advice.
VALUE ADDED TAX (VAT):
arguably the most popular tax in Nigeria. This tax is paid irrespective of whether you are a company or an individual. This tax is placed on goods and services; the burden of the tax is borne by the final consumer. The way this tax works is such that, for every good sold, or service rendered, it is compulsory to add a VAT at the rate of 5% of sale price. So for example if a good is being sold for N 200, with VAT added it would be eventually sold for N 210. The VAT of N 10 cannot be calculated as a profit to the seller or its business, but would be recorded as VAT to be remitted to the FIRS. VAT is paid by the final consumer, collected by the seller, and remitted to the FIRS. A failure to include VAT, or not declare it is an offense that attracts serious fines and severe punishments.
VAT filing is monthly, and always due on the 21st day of the subsequent month.
There are however some goods that are exempt from VAT, an example is educational materials like books.
You may require an expert to guide you on how to balance VAT output and VAT input for your business, as these determine your final VAT liability.
A withholding Tax is not a tax you pay, it is just another type of tax you help the tax man secure. This type of tax like the name suggests is withheld by the person paying for a service to the service provider. For example, if Mr A provides a service to Mr B, Mr B pays Mr A his money less 10% of the agreed sum. Mr B remits that 10% to the FIRS, and Mr A gets a credit note as a receipt to show that he has paid part of his tax liability for the year, and a total of the Tax withheld shall be deducted from his payable tax for that year.
It is a means of ensuring that people pay taxes, so it is an advance form of tax payment.
PAY AS YOU EARN (P.A.Y.E):
this is a scheme by the Taxman to ensure that employees pay their taxes, and puts the duty on the employer to deduct the tax liability of the employees at source, thus the employees are paid their net salary, The employer on monthly basis remits the tax to the State’s Internal Revenue Service, a tax clearance for that month covers all employees of the company.
The PAYE becomes applicable to a business or company with 4 or more employees.
CAPITAL GAIN TAX:
This is not an everyday Tax, it is payable by companies or individuals. This is a tax paid on the sale of an asset. CGT is always fixed at 10% on the profit of the sale. Emphasis on profit, not sale price, so it is important that you learn how to calculate a CGT or employ the service of a person who can guide you.
PERSONAL INCOME TAX:
This tax is payable by individuals or unincorporated businesses. Therefore this type of tax applies to employees, traders, sole proprietors, partners in a partnership, and businesses not registered as companies. It is calculated by what is regarded as direct assessment, and like the company income tax, the tax man allows for some reliefs, but not all expenses, so it is always important to approach a tax expert in computing your tax liabilities.
This is the rate of calculating personal income tax;
- First N300,000 of income @7%
- Next N300,000 of income @ 11%
- Next N500,000 of income @ 15%
- Next N500,000 of income @19%
- Next N1,600,000 of income @ 21%
- Above N3, 200,000 of income @ 24%.
This is a tax payable when a company does not make a profit in a year, or where the tax on profit when computed is lower than the minimum tax that would have been payable by the company. Where the turnover of the company is NGN 500,000 or below, minimum tax is computed as;
The highest of:
- 0.5% of gross profits
- 0.5% of net assets
- 0.25% of paid-up capital, or
- 0.25% of turnover of the company for the year.
Where the turnover is higher than NGN 500,000, minimum tax is the highest of the calculations listed above plus 0.125% of turnover in excess of NGN 500,000.
It is evident that many start-ups will opt for the minimum tax.
LOCAL GOVERNMENT LEVY:
Now this is can be a real thorn in the flesh, as the local governments can come up with many ridiculous levies and charges like Television and Radio License fee. While the local governments usually pay attention to petty traders and small shops, they sometimes reach out to the Small and Medium –sized enterprises.
As stated earlier, these tax liabilities are mandatory, and many have a period which they must be filed, else you find yourself in default and subject to heavy fines.
There is good news for Tax defaulters; the Federal government has recently introduced the Voluntary Assets and Income Declaration Scheme as a tax amnesty for those who have been in default of many years to pay the default taxes without any liability of the fines or punishment. This scheme has however been declared as valid for a limited period.
You can always contact us at legitng.com if you need more guidance on how to go about paying your taxes, ensuring you file at the proper time, and how to explore the lacuna and provisions of the law to reduce your tax liability.
Written by: LegitNG , a startup aiming to improve access to legal services and content by leveraging on the advantage of technology to make Nigerian legal information and services available.