Taxes are an essential part of any country’s economy, including Nigeria. All types of taxes in Nigeria play a crucial role in funding government activities and providing public services.
In this article, we will explore the various types of taxes in Nigeria, how taxes work in the country, the tax authorities, common misconceptions about taxes, and much more.
Some of the types of taxes in Nigeria include Personal Income Tax (PIT), Value Added Tax (VAT), Companies Income Tax (CIT), National Information Technology Development Levy (NITDL), Capital Gains Tax (CGT), and Withholding Tax (WHT).
Having a good understanding of these taxes is important for both business owners and individual taxpayers, in order to stay compliant and plan financially. Let’s get into it.
What are taxes?
According to Investopedia, taxes are mandatory contributions levied on individuals or corporations by a government entity—whether local, regional, or national.
In Nigeria, taxes are a primary source of government revenue and are utilized to finance infrastructure, social services, and other essential public goods.
The Nigerian Government employs various methods to collect taxes, which encompass income, property, goods, services, and other economic activities. Each type of tax serves a distinct purpose.
How do taxes work in Nigeria?
The tax system in Nigeria includes personal income tax, corporate income tax, value-added tax (VAT), capital gains tax, and more.
Individuals are required to pay tax on their income, which is categorized into different groups and taxed accordingly. Similarly, businesses are also subject to corporate income tax on their profits. Value-added tax is levied on the supply of goods and services in Nigeria.
In Nigeria, different levels of government are in charge of different taxes as required by the law. This means that local, state, and federal governments each deal with various types of taxes as stated by the laws that created them.
Federal taxes in Nigeria are administered and regulated by the Federal Inland Revenue Service (FIRS) and the various state boards of internal revenue for state taxes.
What type of tax system does Nigeria use?
Nigeria operates a progressive tax system, which means that the tax rate increases as the taxable amount increases. This system is designed to place a greater financial burden on those with higher incomes while providing tax relief to those with lower incomes.
In Nigeria, the government has also operated a decentralized system where different levels of government are in charge of collecting taxes in their own areas.
What are the types of taxes in Nigeria?
The following are the nine types of taxes in Nigeria today:
- Capital Gains Tax (CGT)
- Companies Income Tax (CIT)
- National Information Technology Development Levy (NITDL)
- Personal Income Tax (PIT)
- Petroleum Profits Tax (PPT)
- Stamp Duties (SD)
- Tertiary Education Tax (EDT)
- Value Added Tax (VAT)
- Withholding Tax (WHT)
We will now explain each of these types of taxes and break them down for you in the next section:
The Nigerian tax system consists of nine main types of taxes, each serving a specific purpose:
Capital Gains Tax (CGT)
The Capital Gains Tax (CGT) is a tax imposed on the profits realised from the sale of capital assets, which can include property, stocks, and other investments.
When an individual or entity sells a capital asset for a price higher than its purchase price, the difference in value is subject to the capital gains tax.
This tax is calculated based on the capital gain and is an important consideration for individuals and businesses involved in investment activities.
Companies Income Tax (CIT)
The Companies Income Tax (CIT) is a tax imposed on the profits of registered companies that are operating in Nigeria.
This tax is levied on the income generated by the companies and is an important source of revenue for the government.
National Information Technology Development Levy (NITDL):
This levy is aimed at promoting the development of information technology in Nigeria and is applicable to communication services.
The National Information Technology Development Levy (NITDL) is a tax aimed at promoting the development of information technology in Nigeria. It is applicable to communication services and is designed to support and foster the growth of the IT sector in the country.
Personal Income Tax (PIT)
Personal Income Tax (PIT) is a direct tax imposed on the income of individuals, encompassing earnings from various sources such as salaries, wages, bonuses, dividends, interest, and rental income.
It is a key source of revenue for the government and is calculated based on a progressive tax rate system, where higher-income earners are subject to a higher tax rate.
Petroleum Profits Tax (PPT)
PPT is specific to companies engaged in petroleum operations in Nigeria and is based on the profits derived from petroleum operations.
Stamp Duties (SD)
This tax is levied on various instruments such as agreements, contracts, and other transactions.
Tertiary Education Tax (EDT)
EDT is imposed on the assessable profits of all registered companies in Nigeria, with the aim of funding tertiary education in the country.
Value-Added Tax (VAT)
Value Added Tax (VAT) is a type of consumption tax that is imposed on the value added to goods and services at each stage of production or distribution.
In Nigeria, VAT is levied on the supply of goods and services, and it is ultimately borne by the final consumer. The current standard rate of VAT in Nigeria is 7.5%, although certain goods and services may be exempt or subject to a reduced rate.
Withholding Tax (WHT)
Withholding Tax (WHT) is a tax deducted at the source of income before it is received by the taxpayer.
It is applicable to payments made to individuals or companies and is relevant to various types of income, such as interest, dividends, royalties, and payments for services.
What are the tax authorities in Nigeria?
In Nigeria, the tax system is overseen by:
- Federal Board of Inland Revenue
- State Inland Revenue Board
- Local Government Revenue authorities
These agencies are responsible for the assessment, collection, and accounting of taxes in Nigeria.
Why do we pay taxes in Nigeria?
It is easy for you to wonder: why should I even pay my taxes? This is a valid question and we will answer it in this section.
In Nigeria, paying taxes is essential for the government to generate revenue and fund public services and infrastructure. Here are some of the reasons why you should pay taxes:
- Funding government services and infrastructure
- Redistributing wealth and reducing inequality
- Supporting social welfare programs
- Financing public education and healthcare
- Contributing to national defence and security
Overall, paying taxes is a civic responsibility that benefits the entire nation.
Frequently Asked Questions About Types Of Taxes In Nigeria
What is the difference between VAT and WHT in Nigeria?
VAT, or Value Added Tax, is a tax on the added value of goods and services at each stage of production. It is ultimately paid by the end consumer.
On the other hand, WHT, or Withholding Tax, is an upfront payment of income tax that is deducted from payments like interest, dividends, and contracts. This amount is then used to offset the recipient’s final tax bill.
What are the penalties for non-compliance with tax regulations in Nigeria?
Non-compliance with tax regulations is a grave violation in all countries and can lead to severe repercussions for the perpetrators. In Nigeria, those found guilty can face imprisonment for up to 3 years, hefty fines, and even mandatory tax payments with interest.
Read more about the dangers of evading and not complying with tax regulations here
How can I know what type of tax to pay?
The type of tax you need to pay depends on your specific financial situation.
For income tax, you’ll need to consider your sources of income and any deductions or credits you may be eligible for. Property tax, is based on the value of your property and local tax rates.
If you’re unsure, it’s best to consult with a tax professional. You can consult one of our experts here at Taxpal Africa here.
How can individuals and businesses optimize their tax payments in Nigeria?
Individuals and business can optimize their tax payments in Nigeria by using Taxpal.
Taxpal is a comprehensive tax management platform designed to simplify and streamline tax processes for individuals, corporations, and payroll companies. Our platform offers automated solutions, expert guidance, and personalized support to make tax management hassle-free.
You can sign up here.
Conclusion
In conclusion, understanding the type of tax you need to pay is essential for managing your finances effectively. By considering your sources of income, deductions, property value, and local tax rates, you can ensure compliance with tax regulations.