Types Of Taxes In Nigeria

What are Taxes?

Taxes are compulsory levies that individuals and businesses must pay to the government to generate revenue for government expenditure.

Taxes are typically levied on income, property, goods and services, and other economic activities. The Nigerian Government collects taxes in a variety of ways and they each serve different purposes.

This article briefly discusses the different types of taxes we have in Nigeria and what you need to know about them.

Types of Taxes

1. Personal Income Tax (PIT)

Personal Income Tax is the tax imposed on individuals who are in employment or self-employed through businesses or partnerships. It is paid to the jurisdiction of the State Inland Revenue Service in the payer’s state of residence.

Individuals who are in employment pay their taxes which are deducted from their income through a system called Pay As You Earn (PAYE). Self-employed individuals pay through a process called direct assessment.

Direct Assessment is an income tax that is imposed on self-employed persons. It is usually applied to individuals who operate small businesses.

2. Company Income Tax (CIT)

Company Income Tax is the tax paid by all corporate entities in Nigeria to the Federal Inland Revenue Service. It is usually 30% of the company’s total profit. 

All companies registered in Nigeria are expected to pay this tax except companies involved in petroleum activities (This is covered by the Petroleum Profit Tax Act). 

3. Value Added Tax (VAT)

Value Added Tax is an indirect taxation imposed on goods and services. The final consumer of purchased goods or rendered services pays the VAT charges.

Value Added Tax is usually a 7.5% rate and it is paid to the business owner or service provider who sums it up and pays to the FIRS.

Read more on our glossary: Value-Added Tax (VAT)

4. Withholding Tax (WHT)

Withholding Tax is an amount deducted from a person’s income to pay a tax they will owe. It is not exactly a type of tax but a method of payment. In this case, the employer pays the tax from the income instead of the employee. The percentage deducted from the income varies according to the tax to be paid. But it’s usually between 5% to 10%.

5. Petroleum Profit Tax (PPT)

Petroleum Profit Tax is the tax imposed on the income of all companies involved in upstream petroleum activities at a rate of 50% to 85%. Companies who pay this tax are exempted from the Company Income Tax according to the Petroleum Profit Tax Act.

6. Capital Gain Tax (CGT)

Capital Gain Tax is a 10% tax imposed on the profit of chargeable assets, either from sales or exchange. When an asset or investment makes a profit with a positive difference from the original price, a capital gain tax is expected to be paid.

Related: Types of Investment Costs

7. Stamp Duties (SD)

Stamp Duties Tax is a kind of tax imposed on written or electronic legal instruments/documents. It affects legal documents such as cheques, receipts, military commissions, agreements, bills of exchange, etc. For instance, in Nigeria, electronic transfers through traditional banks that are above #10,000 attract a stamp duty fee of #50.

8. Education Tax (EDT)

Education Tax is a 2% tax imposed on the income of all registered companies in Nigeria to fund the Tertiary Education Trust Fund (TETFUND). This is then used to fund projects in tertiary institutions.

9. National Information Technology Development Levy (NITDL)

The National Informational Technology Development tax is paid by specific companies with an annual turnover of N100 million and above. It is a 1% tax before profit levy. Companies that pay this tax include; 

• GSM service providers and telecommunication companies
•  Internet providers
•  Pension managers and pension-related companies
•  Banks and other financial institutions
•  Insurance companies, etc

Importance of Taxation in Nigeria

1. Source of income for the government: Taxation is a significant source of revenue for the government which is used in running the cost of governance.
2. Infrastructural development: Through the payment of taxes, the government can build social infrastructures that help to reduce poverty.
3.  Educational support: Through Education Tax, the government can support tertiary education with the Tertiary Education Trust Fund.
4. Economy Stabilization: With the aid of taxation, the government can plan and work on projects that will foster economic growth and stabilization.
5. Creation of employment opportunities: Part of economic growth and infrastructural development is the creation of job opportunities.

1. Progressive: In this system, higher-income earners pay a higher percentage of taxes than low-income earners.
2. Regressive: In the regressive tax system, lower-income earners pay a higher percentage of taxes than high-income earners
3. Proportional: This is a system of taxation where the same percentage of taxes is paid by all income groups.

Bottom Line

Taxation is a significant aspect of government. Different taxes are imposed on the income and profit of individuals and businesses at different levels which aid the government in generating revenue and pursuing better economic possibilities. 

Do you now know more about taxes in Nigeria? What better financial decisions will you make with this information? Tell us about it in the comment section.