- Sep 10, 2018
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TYPES OF TAXES IN NIGERIA.
A tax is a mandatory financial contribution made by private individuals, groups and institutions paid for public services towards the expenditure of the government. Taxation is paid by the individuals and institutions of a country to the government for public services. Just as tithe is observed by Christians in churches, so is tax observed by citizens in the country.
In addition, taxation is not considered as a direct payment for goods and services provided by the government. It is also imposed on goods to defray government expenses. We are not paying taxes for no just reasons; government imposed taxation on Nigerians because of the following set objectives:
#1 To defray public expenditure.
#2 To curtain harmful consumption
#3 To reduce income inequalities
#4 To protect infant industries
#5 To combat inflation.
Now, let’s take a look at the system, or rather the Classes of taxation in Nigeria.
The System of Taxation in Nigeria.
Taxes may be classified based on the relationship between the tax base which is the total amount of money from which a particular proportion must be transferred to the government AND the tax rate which means that proportion of the tax base which must be paid in tax to the government. As such, the classes of tax in Nigeria include:
#1 Proportional Tax: This is a system of taxation in which the rate of tax payable is the same with no regards to the size of the tax base. Every member of the society is made to pay the same proportion of his income as tax. Proportional tax means that a fixed percentage (%) must be paid as tax at all levels of income. This system major objective is to reduce the welfare of low -income earners more than that of the high -income earners in the country.
#2 Progressive Taxation
In this system of taxation, the tax rate increases more in proportion than the size of the tax rate. Under this system, the tax claims an increasing proportion of the income as the size increases. The Progressive taxation system can be seen to follow the “ability to pay” principle- “The higher the income, the more the tax and the lower the income, the lesser the tax.” This is the fairest system of taxation as it favors the poor.
#3 Regressive Tax System:
In regressive tax system, the tax rate reduces as the income increases. This is obviously an unfair system of taxation because the high-income earners are made to pay a lower proportion of their incomes as tax than low-income earners.
Now that we’ve examined the taxation systems adopted in our country, let’s move onto the two types of taxes we have in Nigeria.
TYPES OF TAXES IN NIGERIA
The two types of tax depend on the tax incidence and the method of collection. They include:
1. Direct Tax: Direct taxes are levied on individuals & organizations. This involve a direct personal relationship between the taxpayer and the tax levying authority, with the amount paid being easily determined. Direct taxes are imposed on both individuals and organizations in the following forms;
#1 Income tax: Income tax is imposed on the income earned by individuals and such unincorporated businesses as a sole trader and partnership. It follows the basis of “pay-as-you-earn”.
#2 Company tax: It is levied on the profits of all incorporated business establishments or organizations. Company tax is calculated after the deduction of accrued interest & all revenue allowances. This is calculated before the distribution of dividends. In this form of direct tax, the higher the profit level of an organization, the higher the proportion of the profit to be paid as a tax.
#3 Poll tax: Poll tax is a typical example of a regressive system of taxation. It is levied equally on each person resident in a country regardless of the level of income. In Nigeria, poll tax is imposed on peasants where the tax base cannot be accurately determined due to the fact that they are neither employed in the public sector nor in an organized private sector.
#4 Capital Transfer tax: This is a tax paid on the value of all properties or wealth received by an individual from another person, regardless of the fact that the giver is dead or still alive.
#5 Capital Gains Tax: The capital gains tax is imposed on the gains made from the sale of capital assets.
Direct taxation has its own advantages and disadvantages. Let’s take a look at some:
MERITS OF DIRECT TAXES:
#1 Cheapness of Collection
#2 Facilitation of planning
DEMERITS OF DIRECT TAXES:
#1 Discouragement of Zeal
#2 Reduction of Capital Formation.
2. The Indirect Tax: Indirect tax is a type of tax levied on expenditure. They are imposed initially on the manufacturer, importer and the wholesaler, but are ultimately paid in whole by either the final consumer or the producer. The amount paid as indirect taxes is unknown to the consumer who ultimately pays it because there is no direct relationship between the consumer and the taxation authority.
Indirect taxes are in two forms:
#1 Specific Tax: A tax is specific if the amount of tax is fixed.
#2 Ad Valorem Tax: In this case the amount of tax paid varies according to the value of the item purchased or sold.
In addition, both direct and indirect taxes can be encountered in several forms including:
1. Import Duty tax
2. Export Duty Tax
3. Custom Duty Tax and then
4. Excise Duty.
Let’s take a look at the advantages and disadvantages of indirect taxes.
MERITS OF INDIRECT TAXES:
#1 Minimum Evasion
#2 Protection of home industries
#3 Less social discontent.
DEMERITS OF INDIRECT TAXES:
#1 Inexactitude of revenue
#2 Inflationary tendency
#3 Regressive nature.
TAX IDENTIFICATION NUMBER (TIN)
Every Nigerian working with the Government, in a private organization or owns a business is expected to obtain a Tax Identification Number (TIN). TIN is a unique number issued and allocated to individuals and companies to identify them as registered tax payers in Nigeria.
The Nigerian Government recently launched the Voluntary Assets and Income Declaration Scheme (VAIDS) which is a time limited opportunity for tax payers to regularize their tax status. This is in line with the requirement for annual submission of self-assessment tax returns.