The Taxman is on the Loose; What You Need to Know
By Bashir Olanrewaju and Sahabi Abdul
Nigerians were recently warned by the Finance Minister Zainab Ahmed to gird their loins for more taxes next year. A cast of taxes, levies, duties and tariffs will be unleashed by President Muhammadu Buhari’s government, she foretold.
With oil revenue, the main source of government funding in the past five decades, dwindling steadily in recent years, the state has rediscovered taxation as a source of income.
The federal and state governments are ever more desperate to increase tax rates and expand their collection in a bid to fill now gaping spending holes.
In recent times officials have been quick to retort that Nigeria has one of the lowest tax-to-GDP ratios globally, boasting only about 8 percent, when more serious countries are in the range of 30 to 40 percent. They rarely mention the social contract implicit in governance and democracy that requires the government to apply the taxpayers’ money in the development of infrastructure, provision of basic services and looking after the welfare of the citizens.
Decades of reliance on oil revenue has entrenched an attitude of brigandage in governance, where public office holders perceive their role as that of plunderers of wealth owned by no one, where nothing is sacred, even pension funds. The net effect is that the social contract implicit in taxation, governance and democracy was never respected by those in power, with the result that the country now suffers a severe deficit of all the things a government should do for its people.
The country is littered with bad roads, health and hospital services are nothing to speak of, there’s poor electricity, hardly any water supply, lack of investment in human capital development, including education and skills. Is it any wonder that the country is engulfed in a violent social crisis?
Public officers who constitute less than 2 percent of the population are consuming 80 percent of government revenue in the form of recurrent expenditure, giving themselves generous emoluments and stealing the rest. Nigerian lawmakers are the highest paid in the world, earning more than U.S. presidents. They have continued to take home those humongous salaries despite the country’s slide in economic fortunes and two recessions in four years. There have been recent newspaper reports that FIRS officials spent 45 million nairaweb on a five-day stay at the Abuja Hilton Hotel in 2016. All these are signs of callous, predatory behaviour by custodians of the commonwealth.
At a time both Buhari’s federal government and the 36 states are harrying citizens to pay more taxes, it may be worth recalling the observation of Akinwumi Adesina, president of the African Development Bank that Nigerians pay one of the highest implicit tax rates globally.
“Truth be told, Nigerians pay one of the highest implicit tax rates in the world — way higher than developed countries,” Adesina said at an event ironically organized by FIRS at Abuja in January to persuade Nigerians to pay more tax. “Think of it: they provide electricity for themselves via generators; they repair roads to their neighborhoods, if they can afford to; there are no social security systems; they provide security for their own safety; and they provide boreholes for drinking water with their own monies. That is incredulous in itself.”
In sum, it’s about time for Nigerians to ask the hard question: “What is the purpose of government? The answer can’t be stealing.
Below we list and briefly discuss the various direct and indirect taxes charged in Nigeria.
DIRECT TAXATION
There are two state institutions in Nigeria that deal with matters concerning direct taxation in Nigeria. These are the Federal Inland Revenue Service and the State Interna Revenue Services (including the FCT Inland Revenue Service).
Listed below are direct taxes organizations and individuals are required to pay in Nigeria:
The Personal Income Tax. This is perhaps the most widely applicable tax that every adult who earns a regular income isobliged to pay. It is charged on the income of individuals, with rates ranging from 7 percent to 24 percent. The applicable administrator is determined by the individual’s place of residence, with states administering those within their jurisdiction. Most employees pay their income tax through the Pay as You Earn system, which entails direct deduction of the tax at source for onward transfer to the relevant tax authorities. Only those earning the minimum wage or less are exempt from the personal income tax. Those liable are required to file their returns by March 31 every year.
Companies Income Tax
Corporate organizations are required to pay tax on their profits. The only exceptions are companies with a turnover of less than 25 million a year. Large companies with more than 100 million a year in turnover pay a 30 percent rate, while smaller ones pay 20 percent. This tax is administered by FIRS.
Tertiary Education Tax charges all companies in Nigeria 2 percent of their profit as education tax to help fund higher education and human capital development. Administered by FIRS, exemptions include non-resident companies, unincorporated entities and companies with less than 25 million a year in gross revenue.
The Withholding Tax. This is a type of income taxation that seeks to deduct right at the point of receipt. Individuals as well as companies are required to withholding tax. Both the federal and state tax authorities are administrators in line with their respective areas of jurisdiction. Vendors are required to sign up with tax authorities, make due deductions and send on their collections within 21 days.
The Capital Gains Tax. This refers to a tax on profit made from the sale of assets, with a flat tax rate of 10 percent of the value ofvthe sold item. Administered by FIRS, both individuals and companies are obliged to pay the capital gains tax. Payments are expected either by the end of June or December in the year of sale.
Assets spared from capital gains tax include the sale of shares owned in a company, Nigerian government securities (such as bonds and treasury bills), compensation for injuries and wrongs to an individual, decorations awarded for valour or gallantry, sale of one’s dwelling place, life insurance policies and gains related to the takeover of a business.
Property Tax. Property owners are required to pay an annual property tax. In Lagos State, for instance, this takes the form of governor’s consent to the Certificate of Occupancy, land registration fees and other sundry charges coming to about 3 percent of land value. Taxes on property vary by location, with local governments charging tenement rates and right of occupancy fees in some states.
Inheritance Tax. While there are no dpecifically named I heritance taxes in Nigeria, an estate tax of 10 percent of value is expected to be paid to state governments that have jurisdiction once a letter of administration is approved by the Probate Registry.
INDIRECT TAXATION
Indirect taxes come in various disguises, bearing names such as value-added tax, duties, excise, tariffs, levies and others. The institutions administering these indirect taxes range from the same institutions responsible for direct taxes to others such as the Customs Service.
The Value-Added Tax or VAT. This is a consumption tax chargeable on all goods and services purchased within the country. Originally charged at 5 percent of the value of the good or service at inception in 1993, it was raised to 7.5 percent to under the present government.
VAT is currently administered by FIRS, a role with nebulous origins, currently being challenged by Rivers and Lagos states, the country’s top VAT-earners, in the courts. They argue that the taxes should stay where they’re collected.
Both individuals and organizations are liable to pay VAT in their transactions. However, companies with annual turnover of less than 25 million naira are exempt from collecting the tax. Goods such as medical and pharmaceutical items, exports, books and educational materials as well expenses on tuition and renewable energy, among others.
Import Duties. These are charges placed on imported goods, which range from 5 percent to 60 percent in Nigeria but even out at an average of 12 percent. Imports also attract a 7 percent surcharge and payment of VAT, now at 7.5 percent.
Excise Duties. These duties are imposed on specific products, often those that the authorities want to control their consumption or regulate their use, such as alcoholic and tobacco products as well as petroleum or other energy products. Excise duties tend to be aimed at items produced withinba country, but are equally applicable to imported products already classified as excisable.
Stamp Duties. Under Nigeria’s Stamp Duty Act these are supposed to be applicable to agreements or transactions that bear the appearance of one. Applicable instruments are supposed to be affixed with stamps to the value of the required duty to the agreement. A stamp duty of 0.75 of value us supposed to be charged on the authorized share capital of a newly incorporated company or on the addition of new shares.
These duties could be fixed or charged according to the value under consideration. The Central Bank of Nigeria directed banks in 2019 to charge stamp duties of 50 naira each on electronic fund transfers above 10,000 naira. Exceptions were made for transfers to accounts owned by one person in the same bank. A modification in the 2020 Finance Act ended the application of stamp duties to bank transfers in the face of protests and instead introduced a 50 naira levy on electronic transfers exceeding 10,000 naira.
Tariffs and Levies. There are quite a number of additional payments, often in the form of levies, that raise Nigeria effective rates of tariff in some cases to between 50 and 80 percent. These are mostly luxury items including expensive cars at 75 percent, alcohol at 75 percent and above, yachts and motorboats at 75 percent, and tobacco and its products at 95 percent. To encourage local production imports of wheat, sugar, rice and salt earn tariffs starting from 70 percent. Tomato paste gets 50 percent, while cement gets 55 percent.
The Information Technology Levy. This requires companies with gross earnings of more than 100 million a year to pay 1 percent of ofvprofit before tax as a technology tax. This counts ultimately toward the company income tax.
Companies obliged to pay range from those in banking and finance to telecommunications and information technology.
Oil Contracts Levy. Under the Nigerian Content Development Act that came into effect in 2010, 1 percent of the value of every contract awarded for oil and gas exploration and production for the purpose of funding the law’s mandate.
All of these and more are sources of non-oil revenue for the government, which now are of increasing importance as the contribution of oil recedes.
The Finance Minister said at least five of the tax laws will be reformed and amended to streamline the administrative processes related to them and improve the efficiency of collection.