Understanding our tax obligations

With the recent increase in the VAT rate, there is a lot of buzz about our tax obligations. This is underscored by the new policy requiring every bank account owner to have a Tax Identification Number (TIN). This implies that our bank account turnover and balance will now be measured against our tax payments. As with the BVN, everyone is expected to use the same TIN in all accounts nationwide. Companies also submit their TINs since they also pay taxes. SMEs with annual turnovers below N25 million have now been exempted from taxation. This makes the TIN necessary, because their turnovers will be monitored to confirm that they qualify for the exemption.

Here are some of taxes individuals must pay.

Personal Income Tax (PIT) – This is the tax payable on income earned from work and investments e.g. rental income. Salary earners pay their PIT through the PAYE system (Pay As You Earn). Employers are obligated to deduct the PIT payable from each employee from their monthly pay before crediting the employee with the balance. PIT rates vary from as low as 1% for minimum wage earners, with high personal tax reliefs, to 24% for those who earn more than N260,000 per month. Tax due on investment income varies depending on the investment. For instance, it is currently 10% for house rent income. The taxpayer is expected to calculate the additional income earned outside her monthly salary and pay the extra when filing her annual tax returns.

In the days before TIN was mandatory for operating a bank account, it was easy to hide other incomes; but now, so long as the income enters a bank account, it will be subject to scrutiny by the tax office.

Value Added Tax (VAT) – This a consumption tax paid at the point of purchase of goods and services. The service provider manages the payment. It has been increased to 7.5% on most items whilst others have been exempted and brought to zero per cent. So long as we buy the goods and services that attract VAT e.g. processed foods, banking services, telephone services, airline tickets etc. we automatically pay VAT.

Capital Gains Tax (CGT) – We pay capital gains tax when we sell assets at a profit. If I buy a piece of land for one million naira and sell it for three million naira, I am liable to pay CGT on the two million naira profit less any expenses incurred whilst buying and selling the asset. It is assumed that I paid PIT on the one million naira I used to buy the land earlier. Other CGT qualifying assets include company shares and jewellery. Again, it is the taxpayer that computes this when filing tax returns.

Withholding Tax (WHT) – Like the PAYE, WHT is withheld by the payer and the payee only receives the balance. The new Finance Act appears to have removed 10% WHT withheld from dividends earned from company shares; observers had always considered that double taxation. However, 5% WHT is still due on income earned from services rendered by individuals (or sole proprietors) e.g.the fee earned from serving as MC at a function.The “employer” is supposed to deduct 5% WHT from your fees and pay to the tax office. You should collect the receipt andsubmit it with your tax returns, so you can deduct WHT already paid from the PIT payable on thatfee.

Estate (Death) Tax – Whilst there is no direct Inheritance Tax in Nigeria, there is a 10% Estate Tax chargeable on the estate of a deceased before the estate’s administrators can distribute the properties. The properties in the estate are valued by the office of the Administrator-General. Property titles cannot be changed until this 10% Estate Tax is paid.

Our non-tax obligations include Stamp Duty and Customs Duty. Stamp duty is administered by the Nigerian Postal Service. It is payable at various rates on banking services, legal contracts, financial instruments, insurance policies, agreements and much more. The Post Office may not deliver letters, but it is still earning incomes.Customs Duty is collected by the Nigerian Customs Service on all chargeable imported items. Individuals who buy jewelry and other luxury goods are expected to declare them at the ports of entry and pay the duties. Those who do not may be embarrassed if discovered.

Taxes are important for the smooth running of any society. The countries we admire pay hefty taxes; with PIT up to 61% in Scandinavian countries. Let us ensure we meet our civic responsibilities. Happy investing.