Introduction

Taxation is one of the major sources of revenue for any government. The history of taxation in Nigeria dates back to when the name Nigeria was not even coined. It was the practice of imposing levies on members of the community for the development of the community.[1] Modern day system of tax follows the same pattern and ultimately the same purpose. This article is an introduction to taxation principles in Nigeria and will discuss what taxation is, how it works, the types of tax, the regulatory bodies and laws that govern taxation.  The principles of tax evasion and avoidance, incentives and exemptions available to tax payers will also be discussed.   

Concept of Taxation in Nigeria

Taxation has been defined by several authors as a machinery or process in which society and communities or group of individuals are contributing into an agreed sum which is important for the resolution, development and administration of the public.[2] A compulsory contribution to the support of government levied on persons, property, income, commodities, transactions etc. now at a fixed rate mostly proportionate to the amount on which the contribution is levied.[3]

It important that tax be distinguished from charge or fee imposed by government or public authority, fees are paid by those who consume the service(s) in respect of which the charge or fee is collected. Tax on the other hand is imposed for public purpose without reference to a particular benefit to be enjoyed by the tax payer.[4]

While the Nigerian tax statute is silent about a definition of tax, the characteristics of a tax can be highlighted thus:

• Tax is an imposition by a public authority be it federal or state government. Any other levy other than by the government cannot be called tax stricto sensu.
• Tax is mandatory and not conditional. Once a citizen falls under the category of taxable persons, the payment becomes compulsory and failure to do so is an offence. This is irrespective of the fact that a citizen may or may not enjoy a direct benefit.
• Tax is usually the payment of money particularly cash or cheque. The tax system in most governments does not allow for payment in kind or set off but a direct payment.
• Tax is usually imposed by a sovereign within his jurisdiction. And so for example Nigeria cannot impose tax on Gambian citizens and vice versa.[5]

Types of Taxes, Regulatory Law and Body

Tax in Nigeria is under two major categories Federal and State government taxes. The authority of the Federal and State government to impose these taxes is derived from the Constitution of the Federal Republic of Nigeria.[6] Taxes payable to the Federal Government are administered by the Federal Inland Revenue Service (FIRS), while those payable to the State Governments are administered by the State Boards of Internal Revenue (SBIRs) of the thirty- six states of the Federation.[7]

There are several taxes payable by taxable entities in Nigeria, some will be discussed below:

Company Income Tax:

Company Income Tax is governed by Companies Income Tax Act (CITA), 2007(as amended). It is tax imposed on a company from profit of all sources at 30% for companies with turnover of over N100 Million, and 20% for companies with a turnover between N25 Million and N100 Million, while Companies with turnover of less than N25 Million are exempted.^[8] It is administered by the FIRS.  The act provides certain exemptions to qualified tax payers.

Withholding Tax:

Withholding Tax is a system used to collect Income Tax in advance. It is an advanced payment of income tax deducted at source of specific transactions. A withholding tax is paid to the government by the payer of the income rather than by the receiver of the income[9]. It is either remitted to the FIRS or State Inland Revenue Service.

Value Added Tax:

Value Added Tax is governed by Value Added Tax Act, 2007 (as amended). VAT is a consumption tax paid when goods are purchased and services rendered.  It is a multi-stage tax and is borne by the final consumer.

Petroleum Profits Tax:

Petroleum Profits Tax is imposed on income of companies in petroleum operations (Upstream). The tax is governed by the Petroleum Profits Tax Act, Cap P13 LFN 2004 (as amended).

Personal Income Tax:

Personal Income Tax is governed by the Personal Income Tax Act, 2011(as amended). The tax is administered by FCT/States Internal Revenue Service (IRS) in respect of their residents.  The tax is imposed on income of Individuals, Corporate sole or body Communities, Families and Trustees or Executors of any settlement.

Stamp Duties:

Stamp Duty is governed by Stamp Duties Act, CAP S8, LFN 2004 (as amended). It is administered on written documents only by FIRS and FCT/ States Internal Revenue Service (IRS). FIRS assesses and collects duties on documents executed between a company and an individual, group or body of individuals while FCT and States Internal Revenue Service(IRS) assess and collect duties on documents executed between persons or individuals. They are charged at a fixed rate or ad-valorem.

Capital Gains Tax:

Capital Gains Tax is governed by Capital Gains Tax Act, Cap C1 LFN 2004 (as amended) CGT is charged at a flat rate of 10% of chargeable gains. Chargeable assets include all forms of property whether or not situated in Nigeria.

Tax Evasion and Avoidance

There is a fine distinction between tax evasion and tax avoidance, at times intertwined with one another. Tax evasion is an illegal act of intentionally reducing accrual taxes or completely skipping the payment of such taxes by under reporting income, overstating expenditures, deductions or exemptions. Tax avoidance arises in a situation where the taxpayer arranges his financial affairs in a way that would make him pay the least possible amount of tax without infringing the legal rules. It denotes those various devices which have been adopted with the aim of saving tax and thus sheltering the taxpayer’s income from greater liability which would have been otherwise incurred.[10]

Tax evasion usually involves the use of deception, dishonesty, concealment and other illegal means to escape liability to tax, while tax avoidance involves the open use of legitimate devices to avoid such liability. [11] Tax avoidance is no more than selecting a means of transaction which is least costly in tax. Taking advantage of every possible incentive put in place by government.[12]

The causes of tax evasion could range from social, economic, political or religious reasons. Unfair distribution of facilities (amenities), poor management and misuse of tax collected, lack of essence of civic responsibility and taxpayer inaccessibility to government services[13] to mention a few. In Nigeria particularly, the verbose tax laws and complicated computation method, that limit the lay individual.

Factors that enable tax evasion could be problems of assessment, collection, and enforcement.^[14] Though, the introduction of the program called Unique Taxpayer Identification Number (U-TIN) is one of the basic steps set in the tax administration process to have a data base of all registered taxpayers in the country for ease of collection, encourage voluntary tax compliance, accountability among others[15] serves as a step forward in tax regulation in Nigeria.

The most common form of tax evasion in Nigeria is through failure to render tax returns to the relevant tax authority. A tax evader may be charged to court for criminal offences with the consequent fines, penalties and at times imprisonment being levied on him for evading tax.[16]

Tax Exemption and Incentive

Tax Exemptions and incentives are measures taken by the government to encourage industries to improve their level of productivity as well as encourage voluntary compliance with tax legislations. It is a deliberate reduction in (or total exemption of) tax liability granted in order to encourage a particular economic sector to act in some desirable way (e.g., to invest more, produce more, employ more, pollute less etc.) [17] They are intended to encourage investments in key areas of the economy. Tax incentives and exemptions are considered as a tool that is used to accelerate economic growth and even development.

The regulating law usually make provisions for the various incentives and exemptions e.g. reliefs, credits, exemptions, allowances, breaks/holidays, drawbacks, etc. Some of these incentives include:

• Tax credit allowable against tax payable on income derived from outside Nigeria provided in section 11 PITA.[18]
• Tax exemption on gain arising from take-overs, absorption or merger in Section 32 Capital Gains Tax Act (CGTA) and Tax exemption on proceeds reinvested provided in section 33 of CGTA among others as an exception to the rule that all chargeable assets are subject to Capital Gain Tax.
• Pioneer status incentive – Under the Industrial Development Income Tax Relief Act (IDITRA), companies engaged in industries/products approved as ‘pioneer industries/products’ are granted several incentives which include: (1)Income tax relief granted for a period of three years, which can be extended for a period of one year and thereafter another one year, or for one period of two years,[19] (2)exempted from paying tax on dividends paid by the pioneer company during the pioneer period to the extent that they are paid out of income exempted from tax. [20]
• Section 11(2) of Company Income Tax Act provides exemption from tax interest on any loan granted by a bank to a company engaged in agricultural trade or business; or the fabrication of any local plant and machinery; or providing working capital for any cottage industry. Some profits are exempted from CIT provided they are not derived from trade or business activities carried out by the company e.g. Cooperative society.
• Sections 2 and 3 First Schedule of Value Added Tax Actlist the goods and services exempted from VAT. Some include: All medical and pharmaceutical products, basic food items, books and educational materials, baby products, all export and exported services etc.
• Processing of agricultural produce is a pioneer industry; consequently, there is 100% tax-free period for 5 years or projects into processing of agricultural produce.[21]

There are also sector-based incentives, tariff incentives, export incentives, special economic zone incentives etc.

 Conclusion

The core of this paper was to introduce the taxpayer and tax enthusiast to the system of taxation in Nigeria. Taxation as a concept is still developing in Nigeria, the tax laws in Nigeria are so verbose and are not written for the understanding of the tax payers, making it difficult for them to understand the incentives put in place to encourage business or the tax laws they may be evading. For tax laws to fulfill the primary purpose of being a source of revenue for the government and the people, it should be construed in a manner that would arouse the interest of tax payer.

REFERENCES

[1] “Taxation in Nigeria: A Beginner’s Guide to Nigeria’s Tax System.” Invoice, invoice.ng/blog/taxation-in-nigeria/. Accessed 30 Oct. 2020.

[2] Zakariya’u G, Dr. Muzainah B. M. and Abdurrahman A.P. “Tax Evasion and Nigeria Tax System: An Overview”, Research Journal of Finance and Accounting Vol.6, No.8, 2015. www.iiste.org Accessed 30 Oct, 2020.

[3] Abdulrazaq, M. T. “Judicial and Legislative Approaches to Tax Evasion and Avoidance in Nigeria.” Journal of African Law, vol. 29, no. 1, 1985. JSTOR, www.jstor.org/stable/745660. Accessed 30 Oct. 2020.

[4] Sani A.N.  “Journal of Law, Policy and Globalization”  Vol.34, 2015 www.iiste.org Accesed 30 Oct, 2020

[5] Ibid

[6] Vested by Secton 4(2) of the 1999 Constitution as amended to legislate on item 58 and 59 of the second schedule part I. The Second Schedule Part II Paragraph 7 & 9 also delegates power to house of assembly.

[7] Local Governments also administer rates and levies collectible by them through their various councils.

[8] Section 23 of the Finance Act 2020

[9] Adebayo R. “Taxes you should be aware of before starting a business in Nigeria”, Nairametrics, 10 Jan, 2020. nairametrics.com/2020/01/13/taxes-you-should-be-aware-of-before-starting-a-business-in-nigeria Accessed 30 Oct, 2020.

[10] Onyeka V.N. and Nwakwo C. “The Effect of Tax Evasion and Avoidance on Nigeria’s Economic Growth.” European Journal of Business Management, vol. 8, no. 24, 2016 www.iiste.org. Accessed 30 Oct, 2020.

[11] Abdulrazaq, M. T. “Judicial and Legislative Approaches to Tax Evasion and Avoidance in Nigeria.” Journal of African Law, vol. 29, no. 1, 1985. JSTOR, www.jstor.org/stable/745660. Accessed 30 Oct. 2020.

[12] Onyeka V.N. and Nwakwo C. “The Effect of Tax Evasion and Avoidance on Nigeria’s Economic Growth.” European Journal of Business Management, vol. 8, no. 24, 2016 www.iiste.org. Accessed 30 Oct, 2020.

[13] Zakariya’u G, Dr. Muzainah B. M. and Abdurrahman A.P. “Tax Evasion and Nigeria Tax System: An Overview”, Research Journal of Finance and Accounting Vol.6, No.8, 2015. www.iiste.org Accessed 30 Oct, 2020.

[14] Abdulrazaq, M. T. “Judicial and Legislative Approaches to Tax Evasion and Avoidance in Nigeria.” Journal of African Law, vol. 29, no. 1, 1985. JSTOR, www.jstor.org/stable/745660. Accessed 30 Oct. 2020.

[15] Zakariya’u G, Dr. Muzainah B. M. and Abdurrahman A.P. “Tax Evasion and Nigeria Tax System: An Overview”, Research Journal of Finance and Accounting Vol.6, No.8, 2015. www.iiste.org Accessed 30 Oct, 2020.

[16] Ibid

[17] Kabiel B.D. “Corporate Tax Incentives in Nigeria”, The Asian Economic Review, July 2011. www.researchgate.net/publication/265790426. Accessed 2 November, 2020

[18] Section 19(1) Personal Income Tax Act, 2011 specifies several incomes that are exempted from tax, in the third schedule to the Act.

[19] Section 10(2)(a)(b) IDITRA

[20] Section 17(3) IDITRA

[21] Section 10 Industrial Development (Income Tax Relief) Act (IDITRA)