Hmm, taxation in Nigeria, pay your tax! That’s what the government and organs of tax administration in Nigeria keep saying.
But what is Taxation in Nigeria? I mean, how is the Nigerian tax system structured? Why should you and I pay tax and what are the benefits of paying taxes?
I’ve decided to create a series of articles that explains taxation in Nigeria. So let’s take it from the very beginning.
What is Tax – Definition & Meaning
A tax is a compulsory levy on income, consumption, and production of goods and services as provided for by legislation.
Such levies are, for example, made on personal income (consisting of salaries, business profits, interest, dividend, royalties, etc.); companies profits, petroleum profits, capital gains, and capital transfers.
The 3 Bitter Truths About Tax are:
- Payment of tax is compulsory because the government has the force of law and can coerce people to pay it.
- Non-payment of tax usually carries penalties
- It is only the government that can levy taxes and this is done through various government agencies like the Federal Inland Revenue Division, Internal Revenue Department, Customs and Excise Department, etc.
These bitter truths above forms the key characteristic features of a tax.
Tax is a compulsory contribution imposed by the government on the people residing within the country, any persons who refuses to pay is liable to punishment.
Also, tax is not levied in return for any specific service rendered by the government to the taxpayer.
That is, an individual cannot ask for any special benefit from the state in return for the tax pad by him.
I’m sure you’re wondering; but why do we pay tax in Nigeria?
Taxation in Nigeria – Reasons Why We Pay Tax
As imposed by the government of any country, there are reasons why citizens pay tax
- We pay tax for the government to generate revenue. For example, the Federal Inland Revenue Service (FIRS) said it generated N4.3 trillion as tax revenue between January and October in 2018.
- These taxes paid will help the government to meet social, economic, and political obligations such as constructing roads, building schools and hospitals, providing power supply and other amenities.
- Another reason why we pay tax is that it helps to redistribute income in the society.
- In societies where there’s a great disparity in income distribution, the government can pursue a tax system that imposes a heavy burden on people within high-income brackets and use the tax revenue to provide subsidy on goods normally consumed by the low-income earners.
- Taxes are used to discourage the consumption of goods that are considered socially undesirable such as goods that are inimical to health.
- On the other hand, taxes are used to stimulate growth and development in an economy. Tax policies like tax concessions, tax holidays, could be used for rapid industrialization.
- The government use tax to control inflation through fiscal measures.
- Taxes are also used to promote export. A reduction in tax put on export goods will be an additional incentive to exporters and will create room for more export.
- Tax is also used to protect infant industries in the country.
Historical Background of Taxation in Nigeria
How did taxation start in Nigeria?
Before 1930 there was nothing like a formal tax system or taxation in Nigeria. Traditional rulers like kings and queens were the ones who collected some sort of levies (ishakorle) back in those days.
These levies were paid by market men and women, farmers, etc. and the levies were used to improve the economy of their lands.
As events unfolded, before the colonization period in Nigeria, the tax system was traced to the Northern parts of the country.
The Emirs created a system of taxes throughout the north. The basis for the taxation was the Islamic Religion.
At that time, when it comes to being organized, the Southern part of the country was not as organized as the North. Therefore, the South did not have the centralized system of taxation.
Based on historic-data, regions in Nigeria that were under the Islam taxation had several forms of taxes:
- Zakat – it`s an obligatory tax presented by all representatives of the Islamic religion. It was gathered for educational, religious and spiritual purposes. –
- Kudin-Kasa – it was a tax for land utilization;
- Shuka-Shuka – it was a tax for cattle rearers;
- Isha-Kole – this tax was to be paid to community leaders or chiefs;
- Owo-Ori – this tax was paid to the country for services provided by individuals;
- Community tax – this tax was obligatory for all adult members of the community.
During the Colonization, one person whose name can never be forgotten in the history of Nigeria contributed to the formation of taxation in Nigera.
In the second half of the 19th century, the British were mainly interested in opening markets in Nigeria.
Slave trade was one of the major markets and several colonies made the move to implement their taxation rates on traders.
Long story short, the British Empire eventually secured Nigeria and started to implement its own taxes.
The formal British administration in Nigeria began in 1861. In that time, Lagos was named the crown colony of the region. Even with the formal administration, taxation was not centralized.
Lord Lugard was a British colonial administrator in Nigeria. He tried to harmonize and centralize the tax system in Nigeria.
As a result, he implemented the Stamp Duties Proclamation in 1903. This proclamation was followed by the Native Revenue Proclamation in 1906.
The Native Revenue Proclamation was created to harmonize the taxes. It created the four core principles of payment. Therefore, when a person wanted to pay taxes, he/she could just follow these questions:
- What to pay?
- Whom to pay?
- Where to pay?
- When to pay?
This procedure made taxation policy in Nigeria easy to comprehend and also became the first sequence of tax policies in the country.
Types and List of Taxes in Nigeria
There are several types of taxes in Nigeria. We have direct tax and indirect tax, which are broken down into:
- Personal Income Tax (PIT)
- Stamp duties
- Capital Gains Tax (CGT)
- Petroleum Profit Tax (PIT)
- Companies Income Tax (CIT)
- Education Tax (ET)
- Value-added Tax (VAT)
- Withholding Tax (WHT)
- National Information Technology Development Levy (NITDL)
How about checking a dedicated post on each of all the types of taxes in Nigeria?
In there you’ll learn more about Direct tax, different types of direct taxes, Indirect taxes such as import duties, excise duties, value-added tax and more.
Some Terminologies Used in Taxation In Nigeria
What are some popular tax terms?
Below I have about 11 terms used when talking about taxation in Nigeria. Shall we begin?
1. Tax Impact
This is the first point of contact with tax. It is placed on those legally required to make the payment to the authority
2. Tax Shifting
This is the mechanism of adjusting and passing of the tax burden from one economic unit to another.
This shifting is impaired by the degree of elasticity of demand for the underlined goods and services. The higher the tax elasticity, the lesser the burden that can be shifted.
Hence, in a perfectly elastic demand situation, the seller i.e initial payer bears the entire burden but in a perfectly inelastic demand, the buyer bears the entire burden.
3. Tax Effect
This is the resultant response and changes in the economy as a result of tax imposition and collection.
This effect can be negative or positive which can be a change in pattern of production, employment, savings, investment, inflation or any other variable.
4. Tax Elasticity
Is the resultant change in tax yield due to a change (extension or otherwise) in tax coverage or review (upward or downward) in tax rate, e.g. including earlier excluded item in tax coverage.
5. Tax Buoyancy
This is the resultant increase in tax revenue due to growth in tax base. For instance, an increase in units produced , all things being equal will definitely increase tax revenue.
6. Tax Evasion
This is the criminal attempt to escape tax liability (whole or partly) by breaking the law. It results from inefficiency in tax administration.
7. Tax Avoidance
This is an attempt to escape tax liability by circumventing the tax law, i.e. by capitalizing on the loopholes in tax laws.
Hence, it is not a criminal act, it only shows inefficiency in tax system and nobody can be blamed for it, be it taxpayer or tax authority.
8. Tax Delinquency/Default
This is an attempt by tax payer to refuse, for reasons whatsoever; to pay his assessed tax in full and/or in time.
Note that a tax avoider or evader can only be delinquent if he refuses to pay assessed tax fully or refuses to pay within required period.
9. Tax Base
This is the actual object on which tax is levied or charged. It may be the gross amount of income received by the taxpayer or the gross amount of gain om productive activities, the gross value of asset owned or property acquired.
10. Tax Rate
This is the percentage of the gross amount received as income, profit or value of property or asset owned.
The rate of percentage is fixed by government and it is usually subjected to review periodically.
11. Tax Yield
The total amount generated as income or revenue as a result of imposition of tax. The tax yield depends on the volume of tax base and the tax rate charged.
Effective collection of tax being paid will determine the total amount generated. It is the multiplication of tax rate with the base.
Tax Rates in Nigeria
The Nigerian tax rate is one of the things every citizen want to know.
Tax rates in Nigeria are at variance with respect to the amount of income earned and different rates is paid on different portions of your income.
For a tax collector he sees every Naira earned differently.
A. Corporate Tax
Companies in Nigeria pay 30 percent of their worldwide profit while foreign companies pay 30 percent of only the profit made in Nigeria.
The educational charge is pegged at 2 percent of the assessable profit while a 10 percent withholding tax is deducted from dividend payments to companies and individuals.
B. Individual Tax
Nigerians under the law are to pay 25% of their total worldwide income while foreign individuals are to pay 25% of the profit made in Nigeria only
But what are the problems of taxation in Nigeria?
How about we round up this article with some challenges faced in the taxation processes in Nigeria and probable solution?
How to Pay Tax In Nigeria
The Federal Inland Revenue Service FIRS has automated the tax administration process through an Integrated Tax Aministration System ITAS.
Tax payers can now file and pay taxes online. But how?
See the video below and follow every step. You’ll get a document number which is unique to each tax payer, tax type, tax office and tax period.
Problems of Taxation In Nigeria
Taxation in Nigeria has it’s own series of challenges. Let’s talk about 5 problems of Nigerian tax systems.
1. Non availability of Tax Statistics
Taxation has been the oldest governmental activity since Nigeria’s amalgamation in 1914, so one would expect tax statistics to be readily available.
This expectation, however, is misplaced. With the exception of the states of Delta, Lagos, Kaduna and Katsina, the Nigeria Customs Services, other agencies of the states and relevant federal tax offices have serious failures in data management.
Moreover, there are no efforts to have the limited data that are readily collated or analyzed on a routine basis, not to mention, having it stored, or made more easily assessable or retrievable.
This situation does not provide much input to policy process and could even discourage tax payment by individuals.
2. Inability to Prioritize Tax Effort
The political economy of revenue allocation in Nigeria does not prioritize tax efforts.
It is, instead, anchored on such factors as equality of states (40 percent), pollution (30 percent) landmass and terrain (10 percent), social development needs (10 percent), and internal revenue effort (10 percent).
The approach, discourages a proactive revenue drive, particularly for internally generated revenue, makes all government tiers heavily reliant on unstable oil revenues which are affected by the volatility of the international oil markets.
Aside from the national syndrome of ‘cake sharing’, the instability and volatility of oil revenue should have created an opportunity for improved tax efforts within the provisions on taxation ratified in the 1999 constitution.
Although some state governments have initiated measures to enhance their tax generation attempts, the outcome has not reflected any level of serious effort.
3. Poor Tax Administration
Tax administration and individual agencies suffer from limitations in manpower, money, tools, and machinery to meet the ever-increasing challenges and difficulties.
In fact, the negative attitude of most tax collectors toward taxpayers can be linked to poor remuneration and motivation.
The paucity of administrative capacity is one of the major impediment to the government in its attempts to raise revenue in Nigeria.
As of March 2003, the federal inland revenue service (FIRS) had 7,643 staff members throughout the country; of these, a mere 12.6 percent (645 employees), were tax professionals/officers.
The predominance of support staff in a professionally inclined agency like the FIRS does not augur well for the country. The situation at the local government level is more precarious.
Anecdotal evidence shows that staffs are not provided with regular training to keep them abreast of developments in tax-related matters.
This makes the administration of taxes in terms of total coverage and accurate assessment very weak.
4. Multiplicity of Tax
A major problem facing the country is the multiplicity of taxes. Individuals and corporate bodies complain about the ripple effects associated with the duplication of tax.
This problem arose from the states’ complaints about the mismatch between their fiscal responsibilities and fiscal powers or jurisdiction.
To compensate, some states took the initiative of levying certain taxes, which has led to arbitrariness, harassment.
5. Structural Problems in the Economy
Since the early 1990s, Nigeria has been moving away from direct to the indirect tax considered to be less distortionary.
VAT, for instance, is less distortionary because it is applicable to the value-added contents of imports and of domestically produced goods.
The potential for maximizing the benefits of this taxation from, however, is constrained by structural problems in the economy.
The predominance of the informal sector, constituting more than 50 percent of the country’s economy, enables most domestic production to circumvent VAT.
Income tax also faces the same risk. Since operations in the informal sector are rudimentary, without adequate record keeping, tax assessments are difficult to make.
Often tax administration resorts to estimates that are prone to a wide margin of error or open up tax evasion opportunities.
See this video for tax due dates in Nigeria.
Taxation in Nigeria (Summary)
There you have it; an overview of taxation in Nigeria, history, terms and tax policies, problems, and tax rate.
Obviously, everything about the Nigerian taxation cannot be covered in this article, so try to click the links provided on certain text to get a wider scope and explanation.
When we talk about administration of tax in Nigeria, you’ll agree that this process is not yet at peak performance.
The use of technology, transparency and accountability by the government, and public enlightenment will definitely inspire every citizen to pay taxes.
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