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The Legal Framework Governing Taxation in Nigeria

The Legal Framework Governing Taxation in Nigeria
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One of the ways a government secures the means to carry out its budgetary duties is by operating a Taxation system which involves the process of receiving taxes.

One definition of taxes describes them as financial charges or obligations levied on taxpayers who may be individuals or corporate/legal entities by the government for the purpose of government spending & various public expenditures.

This definition goes further to explain Tax compliance as referring to policy actions and individual behaviour aimed at ensuring that appropriate taxes are paid at the right time and the correct tax allowances and reliefs are secured.

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This article will be focused on providing an overview of basic legal aspects & concepts of Taxation in Nigeria, with special attention on the following subtopics :

– Who is liable to pay Tax in Nigeria.

– The aim of Taxation in Nigeria.

– The types of Taxes payable in Nigeria.

– The Regulatory agencies in charge of ensuring compliance with the Legal Framework on Taxation in Nigeria.

– The difference between Tax avoidance and Tax evasion.

What Regulatory agency is charged with Tax compliance and enforcement in Nigeria?

The main government Regulatory agencies charged with ensuring Tax compliance in Nigeria are the Federal Inland Revenue Service (FIRS), a creation of the Federal Inland Revenue Service Act, as well the Internal Revenue Services of various component states in Nigeria.

Who is liable to pay Tax in Nigeria?

Every Nigerian adult citizen in paid employment or business, whether resident in Nigeria or not, and every company operating in Nigeria, as well as foreigners deriving their income from Nigeria, is liable to pay Taxes to the government of Nigeria.

What are the aims of the Taxation System in Nigeria?

The aims of Taxation in Nigeria are :

– the provision of revenue for the purpose of government spending and operation;

– the sourcing if revenue for the provision of needed infrastructure to the public;

– in some cases, the sourcing of revenue for welfare-based public expenditure.

What are the types of Tax payable in Nigeria?

The most notable classes of Taxes payable in Nigeria are:

Company Income Taxes:- These are taxes imposed on the profits of a company from all its business sources and they are regulated by the Company Income Tax Act (CITA) and collected by the FIRS. The rate is 30% of total profits for companies with a gross turnover above 100 Million Naira minus all expenses for the period which a company made. 

Withholding Taxes:- These are prior tax deductions of not more than 10% remitted to the relevant Tax agency on payments to a taxable 3rd party.

Capital Gains Taxes (CGT):- These are taxes of not more than 10% charged on gains from asset sales governed by the Capital Gains Tax Act and usually used most in Land sale transactions.

Stamp Duties :- These are taxes which can be levied as flat rate charges or ad-valorem  governed by the Stamp Duties Act and which are payable to State Inland Revenue agencies for individuals and the FIRS for companies. 

Personal Income Taxes :- These are taxes imposed on the incomes of individuals be they trustees, employees or businessmen, regulated by the Personal Income Tax Act & is administered between the FIRS and State Internal Revenue agencies.

Value Added Taxes (VAT)/Consumption Taxes :- These are charges of 7.5%  levied on the sale of specified goods and services and paid for by a product or service end-user. These taxes are governed by the various State Inland Revenue Services in Nigeria and regulated by their various VAT laws.

Education Taxes pursuant mainly to the Education Tax Act :- These are taxes of 2% of assessable profits levied on all companies in Nigeria and is usually distributed between universities, polytechnics and colleges of education in Nigeria.

– Customs and Excise duties  collected by the Nigerian Customs Service by virtue of the Customs and Excise Management Act charged on imported goods being brought into the country . 

What is the difference between Tax avoidance and Tax evasion?

Tax avoidance involves lawful Tax non-compliance measures aimed at the reduction of a person’s Taxable income or Tax owed. 

Tax evasion on the other hand is the illegal Tax non-compliance in the form of either a refusal to pay Taxes at all or the practice of not declaring full taxable income in order to pay taxes at a greatly reduced rate. This is possible under Nigerian law with a maximum jail sentence term of 3 years.

Conclusion :- The Tax Regulatory regime applicable in Nigeria are too vast to be explained in full detail in the write-up, hence it is advisable to seek legal guidance on Taxation as it concerns your personal or business sector-specific circumstances.

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