Perhaps due to the latest japa wave and current CBN-led monetary policies (like floating the Naira), we’re seeing more online chatter around finance topics like exchange rates and taxes. It stands to reason that even offline, more people are having honest conversations about money. Still, some clarity on specific topics is worthwhile.
The types of taxes in Nigeria include Capital Gains Tax (CGT), Companies Income Tax (CIT), National Information Technology Development Levy (NITDL), Personal Income Tax (PIT), Value Added Tax (VAT) and Withholding Tax (WHT). There’s also Stamp Duties (SD) and Tertiary Education Tax (EDT).
In this article, we’ll explore what taxes are, why we pay them in Nigeria, the types of taxes in the country. We’ll also discus the concept of tax evasion and touch on a few key concepts. Let’s get started!
What are taxes?
Simply put, taxes are compulsory fees imposed on individuals and businesses in a country. These fees are legal and are collected and used by the country’s local, state or federal government — depending on the country and the type of tax in question.
Taxes are an important part of public finance and serve as a major source of revenue for a country’s operations. But how do they work?
How do taxes work in Nigeria?
As in most countries, taxes in Nigeria are established by law. These laws specify all of the details around the tax, from structure to administration and even collection. But how exactly do taxes work here?
Well, each level of government in Nigeria is in charge of whichever tax is within their purview — as dictated by law. In other words, the local, state, and federal governments handle different types of taxes as specified by the law that established them.
Therefore, several local and state inland revenue authorities are responsible for local and state taxes.
However, there’s also the Federal Inland Revenue Service (FIRS), an organisation that collects federal government taxes and oversees the activities of other tax authorities.
Why do we pay taxes in Nigeria?
The definition of taxes is pretty straightforward and tells you much about the nature of the charge — even if you’re not a finance bro like Kalu Aja. But like many other Nigerians, you might have wondered, “Why do we pay taxes in Nigeria?”
We pay taxes in Nigeria for the following reasons:
- Civil obligation. Paying your tax makes you a law-abiding citizen of Nigeria. Therefore, you’re exempt from the repercussions — like fines and sanctions — of not paying.
- Wealth redistribution. Nigeria’s taxation system is progressive: higher earners pay more taxes than everyone else. So, in theory, paying taxes results in wealth redistribution in the country.
- Source of funding for the government. Taxes are a significant source of income for the government of most countries on the planet. In Nigeria, taxes are a means to finance government operations, public projects and economic development.
- Economic stimulation and stabilisation. Taxes serve as a tool that governments can use to promote favoured sectors and activities to enable economic stability. Governments can also use them to develop initiatives promoting the country’s growth.
This list isn’t exhaustive. To learn more, visit the FIRS tax benefits page on the service’s official website.
What are the types of taxes in Nigeria?
Now that we’ve seen how taxes work in Nigeria and why we pay them, let’s dive deeper into the country’s taxation system. What types of taxes do we have in Nigeria? And how do these taxes work?
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)
In the next section, we’ll explore these taxes, how they work and who pays them in Nigeria.
1. Capital Gains Tax (CGT)
Capital Gains Tax, sometimes called CGT, is a 10% charge levied on companies in Nigeria for profits on all chargeable assets in their inventory. In other words, it’s a tax charged on the earnings from the sale or exchange of all company assets — home or abroad.
These chargeable assets include real estate, foreign currency, business equipment, as well as collectables like art and gold. However, the Nigerian government only charges CGT when the company makes a profit during a sale or exchange.
The Capital Gains Tax Act, Cap C1 LFN 2004 (as amended) covers the specifics regarding CGT and spells out allowable expenditures (like the cost of transfer) for businesses. The law also highlights special cases for exemption. For example, some items are non-taxable, so some organisations do not have to pay this tax.
Nigerian companies are required to file these taxes through the Federal Inland Revenue Service (FIRS) using the Capital Gains Tax Returns Form 003.
2. Companies Income Tax (CIT)
The Companies Income Tax (CIT) is similar to Capital Gains Tax in many ways. However, the government levies this 30% charge on the total profits made by legally registered corporate organisations operating in Nigeria.
The Companies Income Tax Act (CITA), Cap C21, LFN 2004 (as amended) covers all the specifics of the CIT. It states that all companies engaging in trade or business activities — no matter their operating sector — are liable to pay.
Like most taxes, the CIT does have exceptions. The most notable exemptions are organisations in the Petroleum industry that pay the Petroleum Profit Tax instead.
There are a couple more specifics to know about how companies calculate and file CIT. To learn more, you can download the entire Companies Income Tax Act from the official FIRS website.
3. National Information Technology Development Levy (NITDL)
The National Information Technology Development Levy (NITDL) is probably one of the least-known taxes in Nigeria. After all, it mainly applies to specific companies operating in the Information and Technology industry.
Companies that operate in other industries but generate an annual turnover of NGN100 million and above must also pay the tax.
Companies that pay NITDL in Nigeria include:
- GSM Service Providers and all Telecommunication Companies
- Cyber Companies and Internet Providers
- Pension Managers and Pension Related Companies
- Banks and other Financial Institutions
- Insurance Companies
NITDL is charged as 1% of profit before tax and highlighted in the National Information Technology Development Agency Act, CAP N156 LFN 2004 (as amended).
4. Personal Income Tax (PIT)
You may know what a Personal Income Tax (or PIT) is if you work full-time or own a small business in Nigeria. It’s sometimes called PAYE (or Pay As You Earn) and is the 7% to 24% charge imposed on individuals and typically covers wages, salaries and similar earnings.
But unlike many other types of taxes in this article, the Personal Income Tax in Nigeria is collected by the State Inland Revenue Service of the state where a payer resides — regardless of where they work.
For example, say you work in a Lagos-based company and live in Ogun. You’ll pay your PIT to the Ogun State Internal Revenue Service (OGIRS) even if the company doesn’t have branches in Ogun or any affiliations with the state.
The tax is guided by the provisions of the Personal Income Tax Act Cap P8 LFN 2004 (as amended). It applies to communities, families, and some corporate bodies of individuals (like petty traders).
You can download a copy of the Personal Income Tax Act from the official FIRS website to learn more about PIT.
5. Petroleum Profits Tax (PPT)
As the name implies, the Petroleum Profits Tax (PPT) is a levy that applies to upstream petroleum organisations (like the Chevron Corporation and TotalEnergies) in Nigeria. These companies deal in oil and gas exploration as well as petroleum product manufacturing and are legally required to pay between 50% and 85% of their chargeable profit as taxes.
The Petroleum Profits Tax Act, Cap P13 LFN 2004 (as amended) highlights all the fine details associated with PPT. It also states that all petroleum companies that pay PPT are exempt from filing Companies Income Tax (CIT).
You can download a copy of the Act from the FIRS website if you’d like to read the fine print.
6. Stamp Duties (SD)
Stamp Duties (SD) have been a topic of online conversations for many reasons. But what exactly are they?
Simply put, they’re the tax the Nigerian government charges on legal instruments. These legal instruments include written and electronic documents like receipts, bills of exchange, and even guarantor forms.
An excellent example of a Stamp Duty is the mandatory ₦50 charge you pay when you make electronic transfers of above ₦10,000 through banks. Just like Personal Income Tax (PIT), Stamp Duties are administered and collected by the Internal Revenue Service of Nigerian states.
The Stamp Duties Act, CAP S8, LFN 2004 (as amended) highlights the tax in detail. The full document is available on the FIRS website.
7. Tertiary Education Tax (EDT)
These profits are also called taxable income and refer to a company’s gains after the government subtracts expenses, depreciation, and other tax write-offs (like charitable donations).
The Tertiary Education Trust Fund (TETFUND) uses the money generated via this tax for tertiary education purposes in Nigeria.
As of today, the Tertiary Education Trust Fund (Establishment, Etc.) Act 2011 regulates all the activities of the EDT.
8. Value Added Tax (VAT)
Value Added Tax (VAT) is a popular type of tax in Nigeria. It’s a 7.5% consumption levy that final consumers in Nigeria pay directly to service providers when purchasing a good or paying for a service.
The service providers later remit these fees to the FIRS.
VAT is probably the most widely paid tax in Nigeria. You’ll see the charge attached to almost every good and service — like food bills (if you’re eating out) and groceries.
The Value Added Tax Act Cap V1, LFN 2004 (as amended) outlines how the revenue from VAT should be summed and remitted. It also highlights the goods and services you don’t need to pay VAT for in Nigeria.
9. Withholding Tax (WHT)
Withholding Tax (WHT) is not exactly a type of tax. Instead, it is a method or mechanism of collecting future income tax in Nigeria.
In simple terms, it’s a system where a wage or salary payer (your employer) deducts a percentage of your income before paying you. This percentage is the withholding tax and is passed on to the government on your behalf.
However, the tax can also apply to non-salary items and other transactions.
The types of withholding tax in Nigeria today are:
- Withholding tax on dividends, interest and rents. This type of tax covers rent paid by tenants, dividends paid to shareholders and interest on all financial transactions.
- Withholding tax on Directors’ fees. This type of withholding tax applies to fees paid to shareholders and other company board members.
- Withholding tax on the hire of equipment. As the name suggests, you pay this tax on revenue from the hire of all kinds of equipment.
- Withholding tax on royalties. This tax applies to the income made from the sale of the right to use property, both physical and intellectual.
- Withholding tax on commission, consultancy, technical and service fees. This withholding tax covers every and all revenue from commission, consultancy, technical and service fees. It applies to individuals and businesses.
- Withholding tax on management fees. This tax is imposed on management fees collected by businesses and individuals.
- Withholding tax on construction. You pay this tax on the construction of roads, buildings and bridges in Nigeria.
- Withholding tax on contracts other than sales in the ordinary course of business. It applies to non-sale contracts like partnership agreements and employment contracts.
Withholding tax is between 5% and 10% in Nigeria (depending on your income or the transaction) and is one of the country’s most important taxes.
This type of tax specifically helps combat tax evasion in the country and is sometimes referred to as Advance Income Payment.
What is the difference between VAT and WHT in Nigeria?
VAT (Value Added Tax) and WHT (Withholding Tax) are both types of taxes in Nigeria, but they serve different purposes and are collected differently.
In a nutshell, VAT is a consumption tax added to the price of goods and services and paid by consumers. Businesses in the country collect and remit VAT to the government.
In contrast, WHT is a tax withheld by the payer on certain types of income (such as interest, dividends, and contract payments). You don’t pay for it yourself. Instead, your employer remits it to the government on your behalf before you receive your income.
While VAT applies broadly to goods and services, WHT is specific to certain income types, making them distinct in their scope and collection methods.
What is tax evasion?
Tax evasion refers to all planned illegal attempts by businesses or individuals to avoid paying taxes. But the term can also apply to the act of or attempt to underpay the tax amount due.
It is a serious offence in every country and carries severe consequences for offenders.
In Nigeria, the activity results in an imprisonment sentence of up to 3 years, heavy fines and even forced tax payments (with interest).
Taxes are essential to all countries and serve as crucial fundraising methods to help execute public projects. And whether you own a business or work in a company, you’re a part of Nigeria’s taxation story.