So, you’ve read our detailed post on taxation in Nigeria and Nigerian tax system, right? Now, you want info on the different types of taxes in Nigeria.
As one of the principles of taxation in Nigeria is the principle of convenience, the taxpayer must not experience great cost or inconvenience simply because he wants to comply with the tax obligation.
Also, equity is paramount when paying any of these types of tax. People in the same income level should pay the same tax.
Also Read: Over 200 Business terms you should know
Types of Taxes in Nigeria
There are two broad types of taxes namely;
- Direct tax and;
- Indirect tax
A. What Are Direct Taxes?
A direct tax is a type of tax imposed on incomes of a taxpayer and the incidence of such tax falls directly on the payer since it is not possible for the person who pays the tax to shift the burden to someone else.
Simply put, they are called direct taxes because they involve a degree of personal relationship between the tax authority and the taxpayers.
Examples of direct taxes are: Personal Income tax, capital gains tax, capital transfer tax, companies profit tax and petroleum profit tax.
Each of these taxes will be explained shortly in this post. But NOTE that Direct taxes are subdivided into 3 different forms.
1. Progressive Tax System
Under progressive tax system, the higher the tax base, the higher the tax rate. The rate of taxation is graduated progressively as income increases.
Progressive tax reduces inequality of income and increases aggregate demand. Also, it is non-inflationary and would yield more revenue to the govt than regressive or neutral tax.
However, progressive tax may lead to disincentive to effort as people pay exorbitant taxes on their additional income after certain level.
2. Regressive Tax System
Under this type of tax system, the tax rate reduces as income level or tax base increase so that low rate of taxes is aid at high levels of income.
The main advantage is that, it creates incentives to effort. However, it has the following demerits:
- It may lead to the widening of inequality of income in the society
- Aggregate demand may fall because the extra income that accrues to the rich man is saved rather than spent and this will discourage investment in the economy.
3. Neutral (or Proportional) Tax System
Under the Neutral or proportional tax system, tax is proportional to the tax base or income at a constant rate.
In other words, it does not take cognizance of the economic situation of the payer. The advantage is that it is impartial and does not lead to disincentive to effort.
Funny enough, it does not provide incentive either. Its disadvantage is that it is insensitive to the economic situations and it is also against the spirit of social equity.
List of Taxes in The Direct Tax Category
The following are types of taxes in the Direct tax category; Personal Income tax, capital gains tax, capital transfer tax, companies profit tax and petroleum profit tax.
You can learn more about establishment and introduction of each types of taxes in this post on tax laws in Nigeria tax system.
Now, let’s take it one after the other.
i. Personal Income Tax [PIT]
Personal Income Tax (PIT) can be described as income tax payable for any year of assessment upon the chargeable income of an individual.
The chargeable person is the person on whom certain tax is imposed. A chargeable person is an individual or body of individuals having any income chargeable to tax in a year of investment.
The tax law regulating taxation of individuals in Nigeria is the Income Tax Management Act (ITMA) of 1961 which was replaced with the Personal Income Tax Decree (PITD) 104 of 1993.
The Section 112 of the decree provide for the taxation of the following person;
- Employee,
- Sole traders,
- partnerships,
- Trustees, executives or settlers,
Persons employed in the Nigeria air force, Nigeria Navy, Nigeria army, Nigeria Police forces, residents of Abuja FCT, officers of the Nigeria Foreign Services and any person resident outside Nigeria who derives income or profit in Nigeria.
Note: Any Individual deriving his income from employment pay tax under the Pay as You Earn (PAYEE) tax system.
You can learn more about the Personal Income Tax in this post.
You’ll understand the determination of residence, ascertainment of income, income exempted from tax, tax relief and more.
ii. Capital Gains Tax [CGT]
Capital Gains are gains accruing to any person on the disposal of a chargeable asset. It was introduced by (Decree) Act No. 44 of 1967.
Tax imposed on capital gains is known as capital gains tax. Losses are not relieved and there’s no distinction between long term and short term gains.
The rate of 20% of the capital gains accruing within the Federal Government Territory.
This is chargeable at 20% on capital gains arising from the disposal of assets and is governed by the provisions of capital gains tax asset of 1968
iii. Petroleum Profit Tax [PPT]
Petroleum profit tax is the tax imposed on the profit from mining petroleum in Nigeria, to provide for assessment and collection thereof and for the purposes connected therewith by the virtue of petroleum profit tax Act No. 15 of 1959
Learn more about Petroleum Profit Tax In this Detailed Post
iv. Companies Income Tax [CIT]
Companies income tax is one of the popular types of taxes in Nigeria. In simple terms, it is the tax levied on the profits of all resident and non-resident incorporated companies in Nigeria.
To make payment as a resident company/organization, companies must provide their annual self assessment tax returns for assessment, according to the FIRS specification.
Non-resident organizations or companies make their tax payment through remittance. Their tax is deducted at the source and deposited to designated banks..
Related: Types of banks in Nigeria Explained in Detail
v. Capital Transfer Tax [CTT]
This is a type of tax paid on the value of all property or wealth received from another person, whether such person is dead or still alive.
In some other counties, CTT is called the Inheritance Tax. It is imposed on the total value of gifts and property transferred during a donor’s lifetime or after his or her death.
B. Indirect Taxes
This is a tax imposed on the consumption and production of goods and services, such as purchase tax, import and excise duty, entertainment tax, value-added tax, etc.
Each of these types of taxes in the indirect category will be explained later in this post.
In the Case of an indirect tax, it is possible to shift the tax incidence (either partly or wholly) to someone else.
Example of this is import duty, when an importer pays tax (import duty) on goods imported, the tax will be added to the cost so that it is the buyer of the imported commodity who ultimately pays the tax i.e, the buyer pays the tax indirectly through the importer.
Indirect taxes can be avoided because it is payable only if one buys the commodity on which the tax is imposed.
For example, if you do not buy imported commodities, you will not pay any import duty. This distinguishes it from some direct taxes like personal income tax, which affects all income earners.
Types of Indirect Taxes Explained
Import and excise duty, entertainment tax, value-added tax, etc. are popular indirect taxes in Nigeria.
vi. Import & Excise Duty
Import duty is a levee imposed on goods imported into the country. Export duty is the tax paid on goods sent to another country.
When an importer pays tax on goods imported, the tax will be added to the cost so that is is the buyer of the imported commodity who ultimately pays the tax.
vii. Value Added Tax [VAT]
Value-added tax known as VAT for short is one of the types of taxes in Nigeria, under the indirect tax category.
Value Added Tax VAT is a tax on spending and it is borne by the final consumer of vat-able goods and services, because it is included in the price paid.
It replaces sales tax, which was characterized by a lot of lapses, inadequacies and restrictive coverage.
Learn more about Value Added Tax in this detailed post
Let’s talk about other types of taxes in Nigeria.
viii. Withholding Tax
Withholding tax is an advance payment of tax, deductible at the point of payment or when credit is effected, whichever comes before the other for the activities or services effected.
It should not be believed that withholding tax is an additional cost of the contract, but an advancement of tax.
It is reclaimable, after assessment, from future tax liability. Withholding tax is suffered at source and the liability is spread over series of activities.
Learn more about withholding tax in this detailed post.
ix. Education Tax [ET]
Education tax is a form of tax introduced by the military government on 1st January 1993 to assist in funding the Education sector.
The assessment and collection of the tax were the sole responsibilities of FBIR. The fund so collected is being managed by the Board of Trustee established for that purpose.
Learn more about the Education tax in this post, the board of trustees, functions of the board, uses of the education tax fund and penalties.
Also, learn more about stamp duty in this post.
Direct and Indirect Taxes Compared
Here are 6 differences between direct taxes and indirect taxes below:
1. Collection
Direct taxes are very difficult, while indirect taxes appear easier to collect.
For example, it is difficult to know the income of professionals, petty traders and other self-employed who do not keep an account and their tax bases become grossly under-estimated in real life.
Indirect taxes, on the other hand, are easier to collect. For example, import duties must be paid before goods are released t the importer.
2. Tax Incidence
In the case of indirect taxes, the incidence can be shifted and therefore people are more willing to pay.
Incidence of direct taxes cannot be shifted and there’s reluctance in paying them. Tax evasion and avoidance are therefore more common in direct taxes than indirect taxes.
3. Effectiveness
Indirect taxes are more effective than direct taxes as fiscal measures depending upon the objective being pursued and the responsiveness of quantity demanded to price changes.
4. Flexibility
Indirect taxes are more flexible as people are more sensitive about increase in direct taxes because of the direct effects on their disposable income.
5. Administrative Cost
Indirect taxes involve little administrative costs than direct taxes. For example, quite a sizable number of able-bodied men will have to be employed to chase personal income tax defaulters.
The personnel and paper work involved in collecting tax from people paying under the pay as you earn system are also substantial.
One last thing is,
In countries where there’s much of international trade, indirect taxes will be much remunerative than direct taxes. In Nigeria, however, the advent of petroleum profit tax has reversed this trend.
Summary Notes on Types of Taxes In Nigeria
Now you have the list of taxes in Nigeria. The question is, which do you find more interesting?
As you’ve seen, indirect taxes are easier to collect by the Federal Inland Revenue Service and other tax authorities, while direct taxes are not so easy to collect.
What do you think of each of these types of taxes in Nigeria? Let’s have your comments.
