THE TAX SERIES (Pt. 1)

Do you pay your tax?

The honest answer to this question by most Nigerians would be a capital “NO”. To some the idea is scary, and complex. While to others, it’s just none of their business. Some do not even know where to begin, while a few do not see reasons to pay. The list is endless. But not paying tax to the appropriate authorities in Nigeria is detrimental to you and your business.

I got talking with one of my colleagues who is an expert in taxation law in Nigeria, and it is amazing how many Nigerians do not know how cheap “Tax” is and how easy it is to pay. From our discussion, I realized that the issue with Nigerians is just ignorance and a bit of fear. Ignorance, as people do not even understand what tax is, and fear, as people believe it is just a way of the government extorting them exorbitantly.

In this series, I will like to take us on a journey which will most likely end in the next two articles, so take a sit, lets go for a ride.

WHO SHOULD PAY TAX?

Business Owners. Companies. Owners of companies, Employees. Do you fall under any of these categories? Then you should be paying your tax.

I will start with business owners. Why? Because most of you are business owners.  Don’t ask me how I know that, I mean almost every Nigerian sells either online or offline. Moreover, most of you have registered that idea of yours as “Business Name” under the Corporate Affairs Commission, majorly because that seems to be the easiest and cheapest of them all.

Before I continue, I must clearly state that there two major agencies that are saddled with the responsibility of receiving your tax payments, they are, the Federal Inland Revenue Services (FIRS) and the State Inland Revenue Services of each state. There are also different types of taxes in Nigeria, which include: Value Added Tax (VAT), Pay As You earn (PAYE), Company Income Tax, Capital Gains Tax, Education Tax, Withholding Tax, Personal Income Tax. 

Now, as a “Business Owner”, you are expected to pay a tax called Personal Income Tax (PIT). This is a tax paid by all individuals (that make money off doing business), registered business and partnership. In fact, everyone not registered as a Company or a Non-Governmental Organization (like religious bodies, charitable organization, Associations, and the likes) should be paying this type of tax. Personal Income Tax is to be paid to the State Internal Revenue Services where the business is situated. So, if your business is registered in let us say, Lagos state, you are to pay your Personal Income Tax to the Lagos State Revenue Service. The question is, when you registered your business, be it a boutique, restaurant, logistics business, etc, where did you put as your business’ registered office address? If you are yet to be registered, where is your business situate? Your answer determines who you are responsible to.

HOW MUCH IS YOUR PERSONAL INCOME TAX?

To know how much your Personal Income Tax is, you have to first know how it is calculated. First thing to note is that, it is your taxable income that determines how much you are to pay as PIT. To know your taxable income, you have to deduct your expenses from your income.

Therefore:

Income – Expenses = Taxable Income

Taxable income = Tax Due (this means that it from the taxable income that the tax you are to pay becomes known).

For example, Precious sells clothes in the city of Lagos. Her entire sale for a year is N1,000,000.00. it is not N1,000,000.00 that is taxable. She would first have to deduct her expenses such as fuel, electricity bill, rent, cost price of the goods etc. Whatever is left, that is what is taxable.

Imagine that all that is left is N300,000.00. Then, that is what is taxable.

In Nigeria, there are different rate for different income, meaning, there is no fixed percentage, and it goes like this: the first N300,000 is 7%, that is N21,000.00. The rate goes higher as your income goes higher. N600,000.00 is 11%. It keeps going till it gets to over N3,200,000.00, the rate is 24%. In other words, if your annual taxable income is over N3,200,000.00, you are to remit 24% of that sum as your Personal Income Tax.

BENEFITS OF PAYING TAX?

Generally speaking, since Nigerians do not like to pay tax, the only way to encourage one is by telling them one of the few benefits of doing it.

1. Let’s start with the juicy one. If you pay your tax as at when you should, you get your Tax Clearance Certificate. This is one of the documents needed by embassies whenever you want to travel out of the country. Not when you need Visa, you start running from one Tax office to the other. I hope that is juicy enough.
2. You pay way less. I said earlier that tax is cheap. The truth is when you default in paying your tax, you will be penalized. You will have to pay both the said tax you were supposed to pay, and the penalty, before your Tax Clearance certificate is issued to you. One of the main problems here is that, interest grows on penalties, you know, like how interest grows on bank loans. Imagine being in default for over ten years.
3. You can lose your business. Very true. This is the most damning. Some individuals have registered their businesses with the Corporate Affairs Commission and obtained their Tax Identification Number (TIN) and have never paid their taxes for years. When the Tax officers finally get them, the penalty alone, would be so enormous that it would be better to close the business, and start a new one.
4. Avoid arrest and Court drama. Tax officials can also make arrest if the need arises, and charge the offender to court. Don’t be that someone.

STEPS TO PAYING YOUR TAX

Since I am talking to business owners in this piece, the following steps should be taken.

1. After you register your business name with the Corporate Affairs Commission, please do well to also register the business with the Federal and State’s Internal Revenue Service. Nothing beats this. Generate a Tax Identity Number (TIN). Whether your goods and services are VATable or not. Whether you have started making the “mega” sales or not. Please endeavour to register to the Tax officer closet to you.
2. Update the Tax Office. Normally, when a new business starts, you might not make so much sales, at least not enough to pay tax. You are to update your tax office. Let them know how business is going. If you relocate from one state to another, also update them.
3. Create a separate account for your business name. Do not allow family and friends pay for services you render to them in your personal account. The reason is simple, when tax officials want to go through your account, they will not care that your personal money is mixed up with business money. I mean, how on earth are they to know. They will tax everything. The implications can be damning.
4. Keep proper records. Have a record book where you write your income and expenses. No tax official is going to magically know your expenses, and save yourself the stress of having to rack your head when it is time to pay. A quick look at your record book should make it easy for one to know how much is your taxable income.
5. Know when to file. You have to file as at when due. In Lagos, Personal Income Tax is payable on or before March 31^st every year.

In the next article, I will talk to people who earn salaries, and employers of labour.