Income tax is a compulsory levy imposed by governments on earnings or profit. In Nigeria, there are broadly 2 types of income tax namely;
- Personal Income Tax and
- Company Income Tax
PERSONAL INCOME TAX (P.I.T.)
This is regulated by the Personal Income Tax Act and the Personal Income Tax (Amendment) Act 2011. It is levied on the income of the following categories of persons:
- Nigerians who are resident in and earning income from Nigeria,
- Persons who live outside the country but earn income from Nigeria and
- Persons whose business is resident in Nigeria.
The place of residence of a taxpayer determines the tax authority that the tax is paid to. For taxpayers resident in any State but the Federal Capital Territory (F.C.T), the State Board of Internal Revenue is responsible for the tax collection. For residents of the F.C.T, Members of the Armed Forces and Police Force, Staff of Foreign Missions and Embassies and Non-Residents (Persons who live outside the country but earn income from Nigeria) the tax accruable is payable to the Federal Inland Revenue Service (FIRS).
Personal Income Tax applies to profits from the business of entrepreneurs and traders as well as employees’ salaries or wages including all allowances, benefits and gains of any kind with the exception of contributions made on the employee’s behalf by their employers to the following:
- National Housing Fund Contribution;
- National Health Insurance Scheme;
- Life Assurance Premium;
- National Pension Scheme and
The tax deducted from employee’s salaries and wages is commonly referred to by the acronym, P.A.Y.E. meaning Pay As You Earn. It is deducted from source by the employer before the balance of the salary is paid to the employee and afterwards remitted to the relevant tax authority by the employer.
To reduce the tax burden on an employee, the Personal
Income Tax (Amendment) Act provides for a Consolidated Relief Allowance (C.R.A)
N200,000.00 from the employees
annual salary or a minimum of 1% of the employee’s annual salary whichever of
the two amounts is higher plus 20% of the employee’s annual salary. This C.R.A sum
is not subject to tax.
The P.I.T. rates range from 7-24% of an individual’s annual salary. These rates will however, only be applied on the remainder of the salary after the C.R.A and the exempted contributions mentioned above have been catered for. The higher a person’s salary is after taking into consideration the necessary deductions, the higher the P.I.T. that will be imposed.
Personal Income Tax Act applies to Partnership Profits i.e. income generated by a partnership. This income is not taxable as a whole but when divided amongst the business partners (taking into consideration the sharing ratio), it becomes taxable in the hands of the individual.
It also applies to incomes due to a trustee or executor of a deceased’s estate, the estate itself and incomes due to a community. These are payable to the tax authority in whose territory the estate or community exists.
COMPANY INCOME TAX (CIT)
This is regulated by the Companies Income Tax Act and is levied on the profits of trade, investments or business of the following:
- All companies incorporated in Nigeria excluding Petroleum companies;
- All companies limited by guarantee (i.e. companies set up to promote charitable causes such as N.G.O’s, Churches etc.) who engage in profit making activities other than their primary objects;
- All foreign (non-resident) companies that earn income from Nigeria;
Company Income Tax is paid to the FIRS irrespective of what State the company is located. With the exception of foreign companies, all other companies listed above prepare and submit self-assessment tax returns as specified by FIRS alongside the evidence of payment of the tax or an installment of it. On the other hand, foreign companies are subject to Withholding Tax (WHT) deductions on the income earned from Nigeria which becomes their tax when their tax returns are filed.
Company Income Tax applies to 30% of the profit made by the company after all Attributable Expenses, Capital Allowances, Allowable deductions have been accounted for. Dividends of company shareholders are also liable to C.I.T of 10% which is deducted at source. This is with exception to bonus issues.