UNDERSTANDING THE TAX STRUCTURE IN NIGERIA: A COMPREHENSIVE GUIDE FOR BUSINESSES AND INDIVIDUALS

Taxation plays a vital role in national development, providing governments with the financial resources required to fund infrastructure, maintain public institutions, and stimulate economic growth. Nigeria, like many developing countries, operates a multifaceted and evolving tax regime that affects both individuals and corporate entities. This article explores the major types of taxes in Nigeria, their statutory basis, implications, and how businesses and individuals can navigate compliance under this system.

At the core of individual taxation in Nigeria is the Personal Income Tax, regulated by the Personal Income Tax Act (PITA) 2004 (as amended). This tax is levied on the income of individuals, partnerships, and trustees. Structured progressively, the tax imposes higher rates on higher income brackets, with rates ranging from 7% to 24%. The tax regime also allows for several reliefs and deductions aimed at cushioning the burden on low- and middle-income earners. It is administered by the various State Boards of Internal Revenue, except in the Federal Capital Territory and for federal government employees, where the Federal Inland Revenue Service (FIRS) takes charge. Foreign individuals earning income from Nigeria are not exempt, as Nigerian-source income is subject to tax regardless of residency.

For corporate entities, the Company Income Tax (CIT) regime, governed by the Companies Income Tax Act (CITA), is central to business taxation. Administered by the FIRS, CIT is imposed on the profits of companies operating in Nigeria. The applicable rate depends on the turnover of the company. While companies earning below NGN 25 million in annual turnover are exempt, medium-sized businesses (NGN 25 million to NGN 100 million) are taxed at 20%, and large companies exceeding NGN 100 million pay 30%. This structure reflects efforts to ease the tax burden on small and growing enterprises.

Another key area of taxation is the Value Added Tax (VAT), which is imposed on the supply of goods and services. The VAT system, guided by the VAT Act and enforced by the FIRS, operates as a consumption tax with a standard rate of 7.5%, increased from 5% in 2020. It is collected at multiple stages of the value chain, and businesses essentially act as agents of the government in collecting and remitting this tax. Certain basic goods and services are exempt or zero-rated to ensure affordability for the most essential needs of the populace.

Petroleum-based taxation is governed by both the Petroleum Profit Tax Act (PPTA) and the newer Petroleum Industry Act (PIA) of 2021, which introduced structural changes in how upstream oil and gas operations are taxed. The PIA restructured the tax applicable to oil prospecting and production, replacing the previous high-rate PPT (65.75%–85%) with lower and more strategic tax rates: 30% for Petroleum Mining Leases (PML) in shallow waters and 15% for holders of Petroleum Prospecting Licenses (PPL). This change reflects the government's goal of attracting investment while optimizing revenue.

Withholding Tax (WHT) serves as an advance payment of income tax. It is deducted at source from payments such as contracts, rents, dividends, and royalties. WHT rates vary depending on the nature of the transaction and the recipient’s legal personality. This mechanism enables tax authorities to secure income tax payments in advance, especially from those who might otherwise underreport earnings.

Capital Gains Tax (CGT), governed by the Capital Gains Tax Act, is another crucial component of the tax regime. It is charged at 10% on the profits realized from the disposal of capital assets. The law distinguishes between gains made by companies and individuals, assigning collection responsibilities to either the FIRS or state revenue boards depending on the taxpayer’s nature. Exemptions exist for certain assets, such as gains on government bonds or property transferred by way of inheritance.

The education sector benefits from the Tertiary Education Tax (popularly known as Education Tax), which is imposed at a rate of 2% on the assessable profits of Nigerian companies. This tax, collected by the FIRS, supports infrastructure and research in tertiary institutions and is remitted to the Tertiary Education Trust Fund (TETFund) for onward distribution and utilization in public universities, polytechnics, and colleges of education.

Stamp Duties, regulated by the Stamp Duties Act, apply to written instruments including contracts, share transfers, property transactions, and receipts. Depending on the nature of the transaction, the duties may be fixed or ad valorem (based on transaction value). Recent reforms have brought electronic transactions under the ambit of stamp duty, further broadening its scope.

Customs and Excise Duties are imposed on goods imported into or manufactured in Nigeria. These duties are assessed and collected by the Nigeria Customs Service under the authority of the Customs and Excise Management Act. They serve dual purposes—revenue generation and trade regulation—often protecting local industries by imposing higher tariffs on certain imported goods.

There are also sector-specific levies like the Industrial Training Fund (ITF) contribution, which applies to companies with at least five employees or annual turnover exceeding NGN 50 million. The contribution, at a rate of 1% of the company’s annual payroll, supports vocational training and workforce development. Similarly, businesses are subject to Business Premises Levies charged by state governments based on the location and nature of their business facilities.

In the digital space, although Nigeria does not impose a separate Information Technology Tax, it strongly encourages electronic filing and compliance, making the use of technology integral to modern tax administration. Taxpayers are expected to use the FIRS TaxProMax and other e-platforms for timely submissions and remittances, reflecting Nigeria's drive toward digital governance.

In conclusion, the Nigerian tax system is broad and complex, requiring awareness and diligence on the part of taxpayers. While efforts at reform—through instruments like the Finance Acts and the PIA—have attempted to simplify and modernize the system, businesses and individuals must engage professionals to navigate the intricacies of tax compliance. Accurate record-keeping, timely filing, and a clear understanding of applicable obligations remain crucial for avoiding penalties and optimizing tax positions.

By O.I.D. Legal ConsultReliable Legal Guidance for Tax, Business, and Compliance Matters📧 Email: oidlegalconsult@outlook.com

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