As a small business owner in Nigeria, conversations about taxation usually come off as rocket science. This can be attributed to the lack of enough information concerning the forms of taxes that small and medium scale businesses owners should be aware of.
In this article, we will walk you through the basics of taxation, how to get started with remitting your taxes, the types of taxes that you should know about, and the penalties for noncompliance.
What are Taxes?
Investopedia defines taxes as mandatory contributions levied on individuals or corporations by a government entity—whether local, regional, or national.
Getting started with paying taxes as a business owner.
The first step to remitting your taxes is to have a Tax Identification Number (TIN).
What is a Tax Identification Number?
The Tax Identification Number is a unique number that identifies a specific individual or business to pay tax. It is used to track tax remittances and is needed to get a tax clearance certificate which serves as evidence of tax payment.
Aside from a TIN being mandated by law and needed to generate, it is also needed for other things like opening a bank account and establishing a Form M (for businesses involved in importation).
How to apply for a TIN
In July 2020, the Corporate Affairs Commission (CAC) announced that as part of its ease of doing business initiative, companies registered under Part A of CAMA would henceforth have a TIN automatically assigned to them.
For businesses incorporated before July 2020, you would have to apply for a TIN directly with the Federal Inland Revenue Service (FIRS). This can be done by visiting any FIRS office closest to you or by applying online on the Joint Tax Board portal.
Businesses registered as business names would need to apply for VAT registration with the FIRS as the VAT number would also serve as the TIN.
Please note that obtaining your Tax Identification number is FREE.
Types of taxes you should be aware of
Several taxes are required of businesses to remit to the tax agencies at various levels of government. However, for this article, we would be limiting our discussion to Companies Income Tax, Value Added Tax, Personal Income Tax, and Withholding Tax.
(For knowledge sharing sake, other forms of taxes payable by the business include Petroleum Profit Tax, Education Tax, Capital Gains Tax)
Value Added Tax (VAT)
VAT is a tax imposed on all goods and services produced in or imported into Nigeria. VAT is currently charged at 7.5% and is payable by all individual companies and government agencies. Some items are, however, exempted from VAT. Examples of these items are basic food items, baby products, all medical and pharmaceutical products, locally produced fertilizers, veterinary medicine, etc. Considering that it is a multi-stage tax (meaning tax charged at all levels of production), the eventual cost is borne by the final consumer.
According to the Federal Inland Revenue Service (FIRS), VAT returns are to be filed monthly and are due on the 21st day of the month following the reporting period.
As a business owner, you are required to charge VAT on all goods sold and services delivered.
In Nigeria, failure to register for VAT attracts a fine of ₦10,000 for the first month and ₦5,000 in the subsequent months, while failure to remit taxes attracts a fine of 5% of the total tax liability plus interest on the sum owed.
Withholding Tax (WHT)
WHT is a method used to collect income tax in advance. WHT is not a distinct form of taxation. Rather, it is used as a means of collecting taxes that might have been lost to tax avoidance or evasion. The incomes subject to WHT include but are not limited to rents; consultancy/professional services; all aspects of building, construction, and related services; agency transactions and arrangements, etc. It is deducted at varying rates ranging from 5% to 10%, depending on the transaction.
You can find a summary of the applicable WHT rates on specified transactions here.
So as a business owner who offers a service subject to WHT, you are required to charge the commensurate rate on your invoices and file the total WHT returns to the FIRS before the 21st day of every succeeding month. The penalty for late filing of returns is ₦25,000 for the first month it occurs and ₦5,000 for each subsequent month the failure continues.
Companies Income Tax (CIT)
According to the Companies Income Tax Act of Nigeria, all companies incorporated in Nigeria must pay CIT. A company’s income tax is a tax levied on the profits of a company from all sources.
The CIT payable varies with respect to the turnover of the company. Companies with an annual turnover of less than ₦25 million are exempted from CIT. Companies with an annual turnover between ₦25 million and ₦100 million will pay 20%, while companies grossing over ₦100 million will pay 30%.
As the owner of a newly incorporated company, you would be required to file your company’s returns within eighteen (18) months from the date of incorporation or not later than six (6) months after the end of its accounting period, whichever is earlier. However, if your company has filed CIT in the past, you would have to file your tax returns within six months from the end of the accounting year.
The penalty for noncompliance on CIT is ₦25,000 for the first month and ₦5,000 for each subsequent month of default. Late payment attracts a 10% penalty plus interest. It is worthy to note that registered business names are not liable to pay CIT.
Personal Income Tax (PIT)
PIT is a tax that is levied on the income of all individuals. Although PIT is a federal government tax, it is administered by the State Internal Revenue services of the state of residence of the individual.
Types of PIT
- Pay-As-You-Earn: As a business owner with employees, PAYE is a method of deducting personal income tax from your employees’ salaries and wages from the source. To start filing PIT on behalf of your employee, you should contact the State Inland Revenue Service of your employee’s state of residence. The FIRS states that the due date of remitting PAYE is the 10th day of every succeeding month.
- Direct Assessment: Also known as taxes for self-employed persons, this type of PIT is raised directly by a self-employed individual. It is required that as a self-employed person, you are required to file the return of income earned in the preceding year to the relevant state tax collection agency.
As stated earlier, registered business names are not incorporated entities; thus, they are not liable to pay taxes. However, the principal(s) of the businesses are liable to file their tax returns and pay the relevant tax authorities.
According to the FIRS, failure to file your return shall be liable on conviction to a fine of N5,000 and a further sum of N100 for every day during which the failure continues or imprisonment of six (6) months or both. As an employer who fails to file a return, you shall be liable on conviction to a penalty of N500,000 for a corporate body and N50,000 in the case of an individual. The PIT rate to be charged depends on the annual income of the taxpayer.
Annual Income (₦)
PIT Rate (%)
First 300,000
7
Next 300,000
11
Next 500,000
15
Next 500,000
19
Next 1,600,000
21
Above 3,200,000
24
Tax Clearance Certificate (TCC)
As stated earlier, a TCC is a document that serves as evidence of tax payment. It states that an entity is not defaulting concerning tax payments in the period specified on the certificate.
The Federal Inland Revenue Service (FIRS) is responsible for issuing tax certificates to companies, while the State Inland Revenue services are responsible for issuing tax certificates to individuals.
You can apply for your Tax Clearance Certificate online through the FIRS Tax Clearance Certificate application portal.