What is the Nigerian tax system all about? Also, what are the tax laws in Nigeria? Sit back and let’s do some detailed explanation here.
The Nigerian tax system is used to represent a set of rules and regulations and the aggregation of tax arrangements, institutions and agents that interact with each other and the rest of the economy to generate revenue for the government.
Government business (either in form of policies, programmes, activities or functions) is run in accordance with laid-down formalities.
There are 3 major constituents of the Nigerian tax system namely;
- The tax policy;
- Tax laws in Nigeria and;
- The tax administration.
Tax Policy In Nigeria Overview
Policy means a course of action adopted. In this case, a line of action is adopted by the government in respect of taxation in Nigeria.
As we all know that taxation is one of the core sources of income of the Federal Government, such income is used to finance or run public utilities and perform other social responsibilities
For any tax to be legal, there must be a creation of its laws as no citizen would want to pay any imposition which is not backed by law.
Hence, there’s need to review the tax laws from time to time and amendments should be made to the original acts.
This is usually done through the Annual Governments Budget delivered by the Nigerian president.
In a military government, the President’s budget speech and other pronouncements have the force of law even though not formally backed up by any Decree.
Hence tax policies announced in a budget speech becomes legally operational on the first day of January every year.
Aims of Tax Policies
The policy objectives of any government’s tax system are aimed at achieving the following:
- To create a fair and equitable society
- To reduce tax evasion and avoidance, and encourage voluntary compliance.
- Ensuring an economic society free of distortion to investment decisions
- To reduce the complexity of the tax system both for the tax administrators and tax payers
- Encourage a fair collection of savings among investment opportunities.
- To attract foreign investments or at least, avoid capital flight to countries with lower taxes.
- To create incentive to work or for risk taking in business in case of companies.
The assessment year runs from the 1st of January to 31st December of the same year.
Also check: The taxation of special companies in Nigeria
The basic taxation principle applicable to the trading income of individuals are also applicable to companies, i.e. profits or gains are taxed while losses are allowed to be relieved against profit of the other years with the four years carry forward time limitation.
The exception for agricultural business where there is no time limit for set-off of losses is also applicable to companies.
All income accruing to a company are taxed on preceding year basis rule, none is taxed on actual basis except when the commencement or cessation provision are being applied.
In the case of personal income however, salary, pension, commission and allowances are taxed on current year basis.
On the other hand, rent, dividend, interest and business profits are taxed on preceding year basis.
Tax Laws In Nigeria Overview
The legal formalities in the area of government finance include laws, rules and regulations.
The laws made during the tenure of a democratically elected government at the Federal level are referred to as Acts, and the same is the case at the state level.
Under the military rule however, the tax laws at the federal level are called Decrees while those at the state levels are called Edicts.
Acts are laws of the Federal legislation passed after 1st October 1954, before the Nigeria independence day. In other words, they are laws passed by the Federal parliarment during the Civilian regime.
Decrees are enactments of the Federal Military government. It constitute the supreme law of the land during the military era.
They can only have the force of the law if they are signed into law by the President and Commander in Chief of the armed forces.
Ordinances are the enactments of the Federal Legislature and these were passed during the colonial era and are still made applicable in Nigeria.
They are laws passed before October 1st, 1954
Now, every tax imposed by the government must be backed by legislation. Below are the various tax laws and legislation imposing taxes on individuals and corporate bodies in Nigeria:
- The Personal Income Tax Decree 104 of 1993 which replaced:
(a) Income Tax Management Act Cap 173 LFN 1990
(b) Income Tax (Armed Forces and Other Persons) Special Provision (Act Cap. 174 LFN 1990
(c) Personal Income Tax (Lagos) Act
- The Companies Income Tax Act Cap. 60 LFN 1990 (formally CITA 1979)
- The Petroleum Profit Tax Act Cap. 354 LFN 1990
- The Industrial Development (Income Tax Relief) Act 1971
- Capital Gains Tax Act 1967
- The Stamp Duties Ordinance 1958
- Value Added Tax Decree No 102 (1993)
The types of taxes covered by these legislation include the following:
1. Personal Income Tax Decree (Decree 104 of 1993)
This tax law regulates personal taxation in Nigeria. That is, it regulates the assessment and collection procedures for the individuals or body of individuals.
It includes a family, any corporation, sole, trustee or executor having any income which is chargeable with tax under the provisions of the Decree.
The provisions of the Decree are to apply throughout the Federation except as there in provided.
In reflecting the constitutional provision which places the taxation of income and profits in the exclusive legislative list, Income Tax Management Act Cap 173 LFN 1990 and the Income Tax (Armed Forces and Other Persons) (Special Provisions) Act (Cap 174 LFN) 1990 have been merged with Personal Income Tax Act (PITA). Thus references to the three Acts hereafter will be Personal Income Tax Act (PITA).
2. Companies Income Tax Act Cap 60 LFN 1990 (CITA 1979)
This tax law regulates the assessment and collection procedures for the taxation of all corporate bodies other than those in the production of crude oil or gas.
This latter class of corporate bodies is taxed under the Petroleum Profits Tax Act. 354 LFN 1990
3. The Petroleum Profits Tax Act Cap 354 LFN 1990
This tax law or Act regulates the taxation of all top oil producing companies including the NNPC.
The oil producing companies are in some cases in Joint Venture with NNPC to produce crude oil for sale.
This tax law regulates the assessment and collection of petroleum profits tax which accounts for over 80% of the tax collection of the Board.
4. Industrial Development (Income Tax Relief) Act 1979
This is one of the tax laws that does not impose tax, but provides for industrial incentives by way of exemption from tax for all companies that might be accorded pioneer status, by the Industrial Development Coordination Committee of Ministers.
5. Capital Gains Tax 1967
This is one of the tax laws in Nigeria that imposes tax on profits derived from the sale of capital items e.g property, shares in companies, etc.
The rate of tax is 20% of the net gain after deducting the original cos or asset, and the expenses of the sale.
6. Stamp Duties Ordinance 1958
This tax law regulates transactions which are subject to advalorem duties to give them legal backing for purpose of revenue.
Under this Ordinance, those matters over which the States had no tax collection jurisdictions are stamped by Federal Inland Revenue Service e.g Stamp Duties for the registration of capital of new companies are collected by the Federal Inland Revenue Service.
Stamp duty on a legal transaction involving individuals only is payable to the state. The Act is now being reviewed to streamline the various rates with a view to having uniform rates.
7. The Capital Transfer Tax Act 1979
This tax law is intended to tax capital being transferred from one person to another other than by outright sale.
Capital is deemed to be transferred to another person when the owner dies, or by way of gratuitous gift and the transferee bears the tax.
Gifts of property from father to children during his life time are deemed to be capital transfer liable to tax because the law was designed to catch those who are really wealthy, property less than N100,000 are not chargeable.
States which are supposed to implement this legislation, have continued to shy away from implementing the law and no one is known to have been assessed under the law.
8. Value Added Tax Decree No. 102 (1993)
This is a consumption tax law. It is a tax on the supply of goods and services.
It is collected on behalf of the government by those who supply the goods and services and paid for by the buyer and/or the consumer of the goods and services.
In practice, Value Added Tax is normally included in the invoice which must be issued for every transaction. The present rate of VAT is 5%
Learn more about Value Added Tax in Nigeria right here in this post, learn how to pay, who pays, etc.
Tax Laws in Nigeria Summary
It is obvious that tax laws in Nigeria are put in place to ensure that business owners, personal income earners, companies, etc. pay taxes when due.
The tax authority in Nigeria, FIRS is responsible under the law to impose the tax through its operative arms.
The Personal income tax for example, is administered by the State Governments, except the PIT coming within the Income Tax Armed Forces and Other Persons (Special provision) Decree 1972
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