Nothing is certain except death and taxes.

Benjamin Franklin, 1789

Introduction

Payment of income taxes is inevitable and evasion of it is a criminal offence as provided in section 40 of the Federal Inland Revenue Service Act, 2007. The payment of income tax by a legal entity is a civic obligation as stipulated under Section 24(f) of the Constitution of the Federal Republic of Nigeria 1999 (as amended); 

Our main focus in this article is the taxation of individuals who are under paid employment but also own and operate businesses like sole proprietorships.

With the rising cost of living in Nigeria, people are forced to engage in multiple commercial activities to battle the economic crises and stay afloat. How then should Tina, who is employed as a Sales Representative in Dumaji Ltd and who also registered her business “Tina Hairs” that she runs through WhatsApp, calculate and pay her taxes? 

Law Governing Personal Income Tax in Nigeria

The law governing personal income tax in Nigeria is the Personal Income Tax Act, 2011 (as amended) hereinafter referred to as PITA.

What Income is Chargeable to Tax?

Under section 3 of PITA, incomes chargeable to tax were enumerated and they include; gains/profits from trade, business, profession and vocation and also salaries and wages from employment.

Who is Responsible for Collecting Personal Income Tax?

The relevant authority to collect personal income tax will depend on where the tax payer is resident. For example, a person who lives and works in Kaduna will pay his or her tax to the nearest Kaduna State Inland Revenue Service. However, a person who lives in Ogun state but works in Lagos shall make their tax payment to the State Inland Revenue Service closest to their place of work. 

How are People under Paid Employment Taxed?

In Section 81 of PITA, a person under paid employment is taxed according to the Pay As You Earn (PAYE) method, wherein the tax is deducted at source. This tax is paid monthly by the Employer not later than the 10^th of the succeeding month. That is, February remittance is paid on or before the 10^th of March the following month.

So, the chargeable income is taxed after the total reliefs have been deducted from the total income using the formular stated in the 6^th schedule of PITA. This is stated below:

First 300,000 at 7%

Next 300,000 at 11%

Next 500,000 at 15%

Next 500,000 at 19%

Next 1,600,000 at 21%

Next 3,200,000 at 24%

Penalty for Failure of an Employer to Pay Personal Income Tax

An employer who fails to deduct or deducts and fails to remit the personal income tax for its employee shall be liable to an amount of 10% of the tax not deducted or remitted in addition to the amount of tax not deducted or remitted plus interest at the prevailing monetary policy of the Central Bank of Nigeria. 

Payment of Taxes for Sole Proprietorship

For a sole proprietorship whose income is also that of the owner, he uses the Direct Assessment Tax method.

What is Direct Assessment Tax?

Direct Assessment tax is a system through which self-employed persons are assessed and charged to pay tax based on their income. These include Professionals like Lawyers, Architects, Accountants, Surveyors, etc., Contractors, Politicians, Mechanics, Traders, Welders, Vulcanizers, Farmers, Carpenters, Tailors, Butchers, Hair Dressers, Bricklayers, Artisans, Musicians, Comedians, Athletes and all residents in a particular State who have any source of income, and others. 

The personal income tax of the owner is filed yearly on or before the 31^st of March of the successive year. That is, taxes for 2021 should be filed on or before the 31^st of March 2022. Here, it is advised that the owner self-assesses by calculating his gross profit less allowable reliefs which gives him his chargeable income, and then he uses the formular stated in the 6^th schedule of PITA to calculate his tax payable. 

What is Self Assessment?

This is a process whereby the sole proprietor who assesses themself voluntarily, comes up with the tax payable, files the tax returns, and makes the payment to the State Internal Revenue Service of their residence. 

The following are the steps for self-assessment:   

• Collection of the self-assessment form from the closest area revenue office.    
• Filling the form honestly by indicating the actual income for the relevant years of assessment and then using the self-assessment table stated in the 6^th schedule of PITA to indicate the correct tax to be paid.   
• Payment of the correct tax to any designated bank account and collection of an e-receipt.

After the assessment is done and payment is made, the State Inland Revenue Service will then review and ascertain the correctness of the assessment; the State Inland Revenue Agency may accept the assessment done by the sole proprietor if it is found to be accurate or may review the assessment upward or downward.   

Penalty for Failure of a Sole Proprietor to Pay their Taxes

Failure to file and pay taxes will attract a penalty of 10% of the tax not paid in addition to paying the tax owed.

How is Tina Supposed to Pay her Taxes?

In the case of Tina, her income tax will be paid in 2 ways;

1. The first income tax will be paid by her employer monthly before her salary is paid to her and;
2. For the second income tax, she will have to proceed to the office of the State Inland Revenue Service where she is resident to get a Tax Identification Number (TIN) for her business and then proceed to pay taxes for her business. Procedurally, at the back end of the State Inland Revenue Service, her TIN from her employer and the TIN for her business will be linked. 

Challenges Facing Personal Income Tax in Nigeria

One of the challenges people face with personal income tax is that most people do not keep proper financial records of their businesses and hence cannot properly calculate their gross profit. 

Also, there is a general apathy in most Nigerians to pay taxes except they are caught in the act of tax evasion. There is also the lack of proper tax education and the tax system is seemingly hard to comprehend for an average Nigerian. Most especially, the Nigerian tax system lacks accurate data to adequately trace incomes from multiple sources. 

Conclusion

In conclusion, irrespective of the obscure tax system, members of the public who are engaged in multiple commercial activities like Tina are encouraged to file and pay their taxes as and when due to avoid being charged for tax evasion and fined heavy penalties. 

Written by Esther Ogechi