ACC318 Taxation II: Unit 1 Overview of Business Taxation in Nigeria – Study Notes, Definitions and Practice Questions | Download ACC318 Summary
Unit 1: Overview of Business Taxation in Nigeria
Learning Objectives
- Understand the developments in the Nigerian tax system
- Explain the types of income recognized in taxation
- Know the offences and penalties
- Identify the minimum tax
- Grasp the graduated tax bands applicable from 1996 to date
Introduction
Taxation is a compulsory levy imposed by the government on individuals and corporate entities to generate revenue for the provision of social amenities, security, and other public goods. In Nigeria, the tax system has evolved through various phases, and this unit provides an overview of the developments, types of income, offences and penalties, minimum tax, and applicable tax rates.
Developments in Nigerian Taxation
The Nigerian tax system has undergone significant changes since the Income Tax Management Act (ITMA) of 1961. The developments can be categorized into phases:
- 1961–1975: The ITMA 1961 was enacted following the Raisman Fiscal Commission (RFC) of 1958. It established uniform tax principles. In 1975, the Unilorin Taxation Provision Decree No. 7 unified reliefs and tax rates. ITMA was the predecessor to CITA and PITA.
- 1985–1987: Finance Miscellaneous (Taxation Provisions) Decree 1985 was amended. Key changes included increased personal allowances, empowerment of tax authorities to request bank customer information, change from reducing balance to straight-line capital allowance computation, restriction of capital allowance to 75% for manufacturing and 66⅔% for other entities, and limiting loss carry-forward to four years (except agriculture). In 1987, further amendments addressed withholding taxes on interest and dividends as Franked Investment Income (FII).
- 1990–1993: 1990 amendments introduced new capital allowance rates and 100% capital allowance for manufacturing. 1992 amendments changed tax rate tables and increased reliefs. In 1993, PITA was enacted as Decree No. 4, replacing ITMA.
- 2000–present: Continuous amendments to improve tax administration, including the Personal Income Tax (Amendment) Act 2011.
Types of Income Recognized Under Taxation
There are two categories of income: Earned Income and Unearned Income.
- Earned Income arises from trade, business, profession, vocation, or employment. It includes profits, salaries, wages, bonuses, commission, etc.
- Unearned Income is income from sources other than employment or business, such as royalties, trademarks, patent rights, rents, dividends, gifts, inheritance, and bequeathals.
Offences and Penalties
The tax system imposes penalties to maintain integrity and encourage compliance. The offences and penalties include:
| Offence | Penalty |
|---|---|
| False statements and returns | Fine of N1,000 or imprisonment for 5 years or both |
| Non-compliance with notice | Amount equal to the income tax chargeable for the preceding year of assessment |
| Failure to submit returns | Additional N40 per day of continued failure; absolute default leads to 6 months imprisonment on conviction |
| Inappropriate returns | Fine of N200 and double the tax undercharged |
Minimum Tax
Minimum tax is a measure to discourage tax avoidance through excessive reliefs and allowances. It applies where an individual has no taxable income due to large reliefs or where the tax payable is lower than the minimum tax. The rate has evolved:
- Up to 1989: 1% of total income
- 1990–1992: 0.5% of total income; exemption for earners ≤ N3,000
- 1993/1994: 0.5% of total income; exemption for earners < N5,000
- 1995–1996: 0.5% of total income; exemption for earned income < N7,500 (normal tax only)
- 1997: Exempt income increased to N10,000; 1998: N30,000 (for employment income only)
- With effect from 2011: 1% of gross income
Applicable Tax Rates
The tax bands have changed over time. The current rates effective from 14 June 2011 are:
| Income Band (Annual) | Rate |
|---|---|
| First N300,000 | 7% |
| Next N300,000 | 11% |
| Next N500,000 | 15% |
| Next N500,000 | 19% |
| Next N1,600,000 | 21% |
| Above N3,200,000 | 24% |
Summary
This unit covered the historical development of Nigerian taxation, types of income, offences and penalties, minimum tax, and applicable tax rates. Understanding these fundamentals is essential for grasping the broader concepts of business taxation.
Practice Questions
Question 1
Question: Discuss the major developments in Nigerian taxation from 1961 to the present, highlighting key legislative changes.
Correct Answer / Model Answer
The developments are as follows: (1) 1961-1975: ITMA enacted after Raisman Fiscal Commission; 1975 Unilorin Decree unified reliefs and rates; (2) 1985-1987: Finance Miscellaneous Decree amended – increased allowances, capital allowance changes, loss carry-forward limit, etc.; (3) 1990-1993: new capital allowances, tax rate changes, PITA 1993 replaced ITMA; (4) 2000-present: continuous amendments including PITA (Amendment) Act 2011. Key highlights include the shift to straight-line capital allowance, introduction of FII, and changes in minimum tax rates.
Question 2
Question: Differentiate between earned income and unearned income, giving two examples of each.
Correct Answer / Model Answer
Earned income is derived from personal effort, such as salaries, wages, profits from trade or profession. Unearned income is from investments or passive sources, such as dividends, rents, royalties, and interest.
Question 3
Question: State the penalties for the following tax offences: (a) false statements, (b) failure to submit returns, and (c) inappropriate returns.
Correct Answer / Model Answer
(a) False statements: fine of N1,000 or imprisonment for 5 years or both. (b) Failure to submit returns: additional N40 per day of continued failure; imprisonment for 6 months on conviction for absolute default. (c) Inappropriate returns: fine of N200 and double the tax undercharged.
Question 4
Question: With effect from 14 June 2011, what are the tax rates for individuals in Nigeria? Show the first three bands.
Correct Answer / Model Answer
First N300,000 at 7%; next N300,000 at 11%; next N500,000 at 15%; next N500,000 at 19%; next N1,600,000 at 21%; above N3,200,000 at 24%.
Revision Points
- ITMA 1961 was a result of Raisman Fiscal Commission.
- PITA 1993 replaced ITMA.
- Earned vs unearned income: earned from effort, unearned from investments.
- Minimum tax increased from 0.5% to 1% of gross income in 2011.
- Current tax rates: 7% first N300,000, up to 24% above N3.2m.
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