OVERVIEW OF TAXATION AND NIGERIAN TAX SYSTEM

INTRODUCTION TO TAX AND TAX ADMINISTRATION

Tax has been defined by many scholars in the past, it is a compulsory levy imposed by the government
on the income of individuals and cooperation to generate revenue for running the activities of the
government. Taxation is described it as a compulsory contribution by the government and he concluded
that even though taxpayers may receive nothing identifiable in return for their contribution, they
nevertheless have the benefit of living in a relatively educated, healthy and safe society. However, the
government ought to use this contribution to provide for a relatively safe and secure environment for
the citizens Nightingale, (1997). In other words, he defined taxation as a levy imposed by the
government on the income profit of the individual, partnership and corporate organization. Taxation is
defined as an enforceable contribution of money enacted pursuant to legislative authority. If there is no
valid status by which it is imposed. A CHARGE IS NOT TAX. Taxation is targeted towards alleviation and
social welfare. Purposes/ Objectives of Taxation From the definition above, taxes are paid to the
government for different purposes; some of these are highlighted as follows;

1. Revenue Generation: the primary objective of tax is the generation of revenue to help the
government to run the administration and provide basic facilities for the citizens of the country that is
finance ever-increasing public-sector expenditure.

2. Provision of Merit goods: Merit goods include health and education. This must not be left entirely
private hands though private participation should be encourage

3. Control the level of inflation: this is function is performed in situation where people are taxed heavily,
their disposable income will be reduced, and they will have less purchasing power, therefore reducing
the level of inflation

4. Redistribution of income: Tax system is a means of ensuring the redistribution of income and wealth
in order to reduce poverty and promote social welfare. This can be achieved whereby people earning
more will pay higher tax than those earning less.

5. To solve Balance of payments problems: Where the import is more than the export, the government
can raise taxes to take care of the deficit that arises as such.

6. To discourage businesses and consumption of “harmful Goods: Taxes can be used to discourage
businesses that are harmful to the growth of the economy of the country and also consumption of
harmful goods such as cigarette and alcohol, by imposing heavy taxes on them.

Principles of Taxation Adam Smith in 1776 sets out the canon or principle of taxation in his work “The
Wealth of Nations”. These are principles otherwise called characteristics imperative for every
government to put in place to ensure an efficient, effective, just and equitable tax system. These are:
1. Canon of Equity: this principle sates that those in the same income bracket should pay the same tax.
This can be horizontal equity or vertical equity. Horizontal equity refers to people in the same income
group to pay the same/ equal amount of tax while vertical equity refers to people with different income
to pay different tax.

2. Canon of certainty: this principle states that the scope of the tax must be clear and ascertainable that
is actual tax to be paid, how it was computed, when and where to pay it.

3. Canon of convenience: this states that the timing and modality of tax payment must be convenient to
the taxpayer.

4. Canon of neutrality: it states that the tax system must be neutral as not to affect work, savings and
investments negatively.

5. Canon of Economy: it states that the administrative costs of collecting tax should be reasonable
enough as to contribute meaningfully to the revenue pool of the government.

6. Canon of flexibility: this principle states that the tax system must not be static but should be subject
to change, so as to suit what obtains at any moment of time

7. Canon of simplicity: This states that tax should not be too complex where tax laws are implied ones
and subject to different interpretation. Also its computation must be simple to understand by the tax
payer and others.

Structure/ Classification of Tax System CLASSIFICATION OF TAXATION

TAX BASE TAX SUBJECT TAX BURDEN
This class is subdivided to three forms of tax. These are: -

1. Proportion Tax: -it has a fixed rate that is applied to a tax payer’s assessable income to obtain
the tax liability. The tax payable is proportional to the taxpayers’ income.
2. Progressive Tax: This applies higher tax rates as income increases. Its sole objective is to
redistribute income in the economy. It is also called “Pay as you earn”. 3.
3. Regressive Tax: Formerly used in Britain, the concept is the higher you earn, the lower the tax
you pay.

B. Classification by Incidence/ Tax Subject: this is further divided into two. These are: -

1. Direct Tax: this is assessable directly on the taxpayer who is required to pay tax on his property,
income or profit. Direct taxes include: Personal income tax, Companies Income Tax, Capital Gains
Tax, Petroleum Profit Tax, Education Tax.

2. Indirect tax: indirect taxes are imposed on commodities before they reach the consumer, and are
paid by those upon whom they ultimately fall. They are paid as part of the selling price of the
commodity. Examples are: Customs and excise duties, Value Added Tax, Stamp Duties, Import and
Export duties

Export duties

C. Classification by Perspective of Tax Base: Taxes can also be classified according to what is being
taxed. In Nigeria, the following bases are in use

- Capital base - This include Capital Gains Tax. This is on the sale of capital goods (noncurrent asset).
- Income base-This include: Personal Income Tax, petroleum income tax and Company Income Tax
as the name implies the income of the government is being taxed upon.

- Consumption base - The examples of the case of consumption are value added tax, stamp duties
and excise duties.

Tax Laws The Nigeria tax system is a tree tier system made up of the Federal, State and Local
Government. Section 4 & 150 item D of part II of the second schedule of the Nigerian 1999
Constitution, gives the government the right to levy taxes on individuals and organizations. For tax
to be effective, it must be backed by the law passed by the legislator or the parliament (A.G of Ogun
State v. Aberuagba, 1985). Decree No.21 of 1998 Law of the Federation of Nigeria (LFN), contains
the Federal Government approved the list of Taxes and Levies that could be collected by the three
tiers of the Government. The purpose of which was to avoid duplication of taxes or conflict among
the three tiers of Government (Agbonika, Agbonike, & Mohammed, 2018). The approved list was
further harmonized/amended in year 2015 via the schedule to the Taxes and Levies (Approved List
for Collection) (Act amendment) Order, 2015. Tax Laws in Nigeria There exist various tax laws in
Nigeria,

Company Income Tax Act (CITA) The Company Income Tax Act; Cap C 21 Volume 3 Law of the
Federation (LFN) 2004 (as amended), provides legal backing to the imposition of Income tax on
companies in Nigeria. Section 9(1) of the act provide that Company Income Tax (CIT) is an annual
tax, and for each year of assessment the tax shall be payable at the rate contained under Section 40
of the Act upon the profits of company accruing in, derived from, brought into, or received in,
Nigeria. Tax rate The rate for Companies Income Tax as provided under section 40(1) of CITA is thirty
Kobo for every naira (i.e. 30%) of a company’s assessible profit. Section 29 of the Act provides the
basis of computing assesseble profit of a company. Companies that have been in operation for at
least 4 calender years are subjected to the minmum tax rule, except those specifcally exempted by
the law. Section 33(1) of Act provides that the Minmum tax rule comes into play when:

(i) a company has made a tax loss;

(ii) total profits result in no tax payable or tax payable is less than the minimum tax. In line with
Section 33(2) of the Act, minimum tax that shall be computed/payable as follow;
a) If the turnover of the company is NGN500,000 or below and the company has been in
business for at least 4 calender years
i) 0.5% of gross profit
 ii) 05.% of net assets
iii) 0.25% of paid up capital
iv) 0.25% of turnover (not exceeding NGN 500,000)
b) Where the turnover exceeds NGN 500,000 the minimum tax is the sum of the highest of
a above plus 0.125% of turnover in exess of NGN 500,000 Residency Profits of a Nigerian
company as provided under Section 13(1) of the Act shall be viewed as been made in
Nigeria irrespective of where the profit might have arose and wether such profit have been
brought into or received in Nigeria or not.
Section 13 (2) of the act addresses the issue of residency of a non-Nigerian company as
regards its exposure to CIT in Nigeria. A non-Nigerian company is a company or corporation
that is not registered or incorporated in Nigeria, but which derives income or profits from
Nigeria. It could also be referred to as a foreign company and it means any company
established under any law in force in a territory or country outside Nigeria (Section 105 CITA
2004). Profits of a non-Nigerian Company as captured under Section 13(2)(a)-(d) of the Act
shall be deemed to be derived from Nigeria for purpose of tax if.
i) The company has a fixed base in Nigeria to the extent that the profit is attributable
to the fixed base.
ii) The company does not have a fixed base in Nigeria but habitually operate a trade
or business through a person or some other company authorized to act on its
behalf.
iii) That trade or business or activities involve a single contract for surveys, deliveries,
installations or construction
iv) Where the trade or business or activities is between the company and another
person controlled by it or which has a controlling interest in it to the extent that
artificial or fictious

Assessable Profit
Section 24 & 28 of CITA covers expenses and incomes that shall not be included in
the computation of assessable profit for the purpose of tax, they include: Loss
Relief; Capital allowance, Balancing Allowance and Balancing Charges. Section 24 of
CITA allows for expenses which are “wholly, exclusively, necessarily and
reasonably” incurred of running the company, such expenses are to be deducted or
set-off while computing the assessable profit of companies. Section 25 covers
deductible donations while section 26 covers deduction for research and
development. Section 27 of CITA on the other hand covers those deduction that are
disallowed from profit. Section 31 of CITA covers the ascertainment/calculation of
total profit. The total profits of any company shall be the amount of its total
assessable profits from all sources for the year together with any addition made or
allowed in accordance with the provision of section 31, 32 and the schedule to
CITA.
Tax Returns
Section 55 to 60 of CITA covers the submission of returns to the tax authority. A
newly incorporated companies is to file its CIT within 18 months from date of
incorporation or not later than 6 months after end of its accounting period,
whichever is earlier. Existing companies are required to file their CIT returns within
6 months from the end of their accounting year.

Education Tax Act (EDTA)

Education Tax Act; CAP. E 4 Volume 17 LFN, 2004 and Education Tax Fund
(Amedment) Act No.17, 2003, is now governed by the Tertiary Education Trust Fund
(TETFUND) (Established, Etc) Act 2011. Funds realised from the Education Tax are
applied to the rehabilition, restoration and consolidation of tertiary education in
Nigeria by TETFUND. The funds are distributed between Universities, Polytecnics
and Colleges of Education in the ratio of 2:1:1 respectively.

Tax Rate
The act requires every company incoporated in Nigeria to pay 2% of its assessible
profit as Education Tax (EDT). The law is applicable under the Company Income Tax
Act (CITA) as well as the Petroleum Profit Tax Act (PITA). EDT is a deductable tax for
the purpose of determing the assessible profis of companies engaged in petroleum
operation (upstream) as provided under Section 1(3) of the Act.

Tax Returns
The due date of filing Education Tax Returns is same as that of CIT and PPT. As
provided by Section 11 of the TETFund (Establishment, ETC) Act, first offence
against the Act is liable upon conviction to a fine of N1,0000,000 or a term of 6
months improsonment or both. Second and subsequent offences attract a fine of
NGN 2,000,000 or a term of 12 months or both.

Petroleum Profit Tax Act (PPT)

The Petroleum Profit Tax Act; Cap P13 Volume 13 LFN 2004 (as amended) governs
the taxation of companies enguaged in the core activities of exploration and
production of oil and gas under the ground or sea bed (i.e. upstream operations) in
Nigeria.
Tax Rate
Section 21(1) of the Act imposes 85% tax rate on the chargeable profit of an
upstream company that had been in operation for more than five (5) years. For
those in operation for less than 5 years, their tax rate shall be 65.75% as contained
under Section 21(2) of the Act. Section 22(2) also puts the tax rate for Companies
under production sharing contract at 50% of their chargeable profit for the contract
period. Companies dealing in downstream petroleum sector are however charged
30% on their profits. Aside the above taxes, as provided under section 1 of the
Education Tax Act 2004 (as amended), all such companies are as well to pay 2% EDT
on their chargeable profit. The EDT is however a deductable expense in computing
the assessable profits of upstream petroleum companies.