Personal Income tax in one of the types of taxes in Nigeria that is levied by the Federal Government of Nigeria.
What Is Personal Income Tax In Nigeria?
Personal Income Tax PIT can be described as the income tax payable for any year of assessment upon the chargeable income of an individual (chargeable person).
The chargeable person is a person on whom certain tax is imposed. They are individual or body of individuals having in a year of assessment, any income chargeable to tax.
This, in relation to what they do, where they live or any other issues reconized by the law.
Te tax law regulating taxation of individual 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 fo the taxation of the following persons:
- Sole traders
- Trustees, executer or settlers
Persons employed in the Nigeria air force, Nigeria Navy, Nigeria Army, Nigeria Police Force, Residents of Abuja, Officers of the Nigeria Foreign Services and any person resident outside Nigeria who drives income or profit in Nigeria.
Any individual deriving his income from employment in Nigeria pay tax under the Pay As You Earn (PAYEE) system.
Determination of Residence
The determination of the tax authority to which an individual taxpayer is accountable is a function of his residence. The determination of residence is a vital point to the enforcement or collection of tax.
Only the territory in which the taxpayer is resident can impose income tax. All individuals residing in Nigeria are chargeable to tax on their global income. This means, all income derived from, brought into or received in Nigeria.
A non- resident person is chargeable only on his income derived from Nigeria.
Place of Residence
Place or residence means a place available for an individuals’s domestic use in Nigeria on a relevant day.
Such a palce does not, however, include any hotels, rest house or other places at which he is temporary lodging unless no more place is available for his use on that day.
The significance of the relevant tax authority is premised on the fact that personal income tax is collected and paid on the basis of the place of residence of the tax payer.
Ascertainment of Income
The total income of an individual for any year of assessment shall be the amount of his total assessable income from all sources for that year less any deductions allowed in accordance with the law. (Section 36 PITA)
Sources of Income:
Section 3(1) of PITD 1993 demand that tax shall be paid on the aggregate income of every taxxable person, fo each year, from all sources within or outside Nigeria.
This is, the global income of a individual accruing in, derived from, brought into, or received in Nigeria, in a year of assessment.
Types of Assessable Income
There are two types of assessable income, namely;
- Earned Income and;
- Unearned income
Earned Income is an income derived by an individual via the use of his mental or physical self.
The ITMA 1961 as amended defined earned income, in relation to an individual to mean income derived from a trade, business, profession, vocation or employment carried on or exercised by him and any pension derived by him in respect of any previous employment.
Earned income includes:
A. Incomes from trade or business
For an on going business, incomes from trade are assessed to tax on preceding year basis (PYB), that is, the income of accounting period of a business ending in the preceding year of assessment.
The six features of trader are:
- The subject matter of the realization
- The length of the period of ownership
- The frequency of the transaction
- Supplementary work on the property
- The circumstances responsible for the transaction;
- Motive of profit
This is an occupation usually performed by somebody with specialized skill and training e.g lawyers, architect, engineers, firm of chartered accountant.
Profession is usually carried out by individual and not by company though, professionals can form themselves into partnership.
Vocation is something that one does because one has special ability and talent for doing it, e.g singer, author, etc.
The income of a partnership business is determined according to the normal accounting practice; the appropriation of such profit is made in accordance with the terms of agreement of partners.
A partnership is not assessable to tax on its profit rather, each partner’s share is charged to tax in the hand of the partner. Taxable income, therefore, is the amount of taxable revenue less allowance expenses.
E. Employment Income
This is also an item of earned income accruing to a taxpayer. It is the type of income earned from contract of service that is the return for work done in service to the person that engaged the taxpayer, usually on periodic payments.
Unearned income refers to the income derived form investments made by individuals such as rents, dividends, interest, lease premium etc.
Where such incomes had suffered withholding tax at source, the gross amount should be included in determining the total income.
Dividend, Investment, and Rent/Royalties received by individual are chargeable to tax on preceding year basis.
Pay As You Earn System (PAYE)
The Pay as you earn system is a system whereby an employer deducts tax a source from the monthly income of the employees.
The tax is deducted before the earnings are paid to the workers. That is the tax is deducted at source.
The total amount deducted by the employer from the monthly earnings of the employees is paid over to the relevant tax authority.
This is the most effective way of collecting tax from employees in Nigeria, because tax evasion is completely eliminated since tax is deducted at Source.