I was having a conversation on tax with one of my girlfriends and she just couldn’t fathom why her driver who is making N45k a month is expected to also pay taxes, especially in this harsh economy. Her argument was that “what’s the point in paying tax when “they” don’t use it to do what they are supposed to do, all they know is how to share money.
Road we no get, NEPA get spiritual problem, police na to collect money for road side dem know, if robbers dey my house dem no go show”. Having lived in Nigeria for some time, I understood her argument. However, I had to stress that this does not invalidate the law; to be deemed as a law abiding citizen, one has to behave accordingly.
Nigeria’s Need For An Improved Tax Regime
Economists across the globe are in unison when conceding this is a very fascinating period in the history of Nigeria. The wonderful part is the fact that no one seems able to predict what might happen next.
Recently, after many months of deliberation, the 2016 “Budget of Change” was finally passed by the President. Even from a casual look at the budget, one thing that is very clear is the fact that the budget is greatly dependent on increased borrowing. The rationale behind this is that by pumping money into the system and using same for the development of several sectors, we ‘should’ see an immediate alleviation of the forex pressures the country has been recently facing . ‘Eventually’, these sectors will yield substantial returns. The tentative plan for the repayment of this new debt being mostly money generated from taxes.
There has been rigorous efforts to make the Nigerian tax regime significantly more efficient. Historically, it has been weakened by the countries relaxed dependency on revenues being generated from Oil and Gas activities. However, as we are all probably aware, with the fall in oil prices and the recurring issues clouding that sector generally, the urgent need to revitalise the country’s tax regime has become increasingly glaring. Even the layman knows that taxation in this jurisdiction cannot be compared to that of foreign counterparts whether comparing the tax rates or the effectiveness of collection.
There appears to be an intention to rejuvenate the various streams of income generated from taxes. From Value Added Tax to Companies Income Tax for smaller companies, we have already seen the recent introduction of the N50 stamp duty levy for all transfers made into current accounts. The eventual reality of this new budget is the layman being obliged to comply with their statutory responsibility to pay taxes, thus further feeling the squeeze.
Definition of Low Cadre Employee
The term “Low Cadre Employee” refers to employees offering unskilled manual work, as well as office and administrative support. Thus the driver, the cook, the nanny and the cleaner are all captured by this term.
Persons Subject To Tax
An Assessable Person is the person upon whom tax is assessed and collected. The term captures individuals, sole proprietors, partnerships, communities and families, as well as trustees and executors. An Assessable Person may be a nomadic worker who constantly moves around as well as persons working in a structured stable environment. An Assessable Person, whether artificial or real, must reside in any part of the country in the particular year of assessment. However, there is express exemption granted to religious and charitable organizations, labour organizations and governmental boards, states and corporations.
As we can see, the definition of Assessable Person includes all low cadre employees.
With the exception of companies, the Personal Income Tax Act (PITA) regulates the tax obligations of the above mentioned persons.
“Pay as You Earn”
This is a method of collecting Personal Income Tax directly from employees’ salaries and wages. The employer deducts the requisite amount and then pays the employee the balance, as provided by S.81, PITA.
Under this section, every employer is required to file a return with the relevant tax authority for all emoluments paid to its employees with respect of all employees in its employment in the preceding tax year.
PITA describes emoluments as being the total wages, salaries, allowances (including benefits or perquisites that accrue to a person by reason of the person’s employment), gratuities, pension, superannuation and any other income derived solely by reason of that employment.
Applicable Tax Rates
The applicable tax rates are the same for all industries and operate on the basis of prescribed intervals. Thus the tax rates increase as the income received by the employee for that particular tax year increases.
The scale is as follows:-
a. The first N300,000 will be charged at 7%;
b. The next N300,000 will be charged at 11%;
c. The next N500,000 will be charged at 15%;
d. The next N500,000 will be charged at 19%;
e. The next N1,600,000 will be charged at 21%; and
f. Then above N3,200,000 will be charged at 24%.
Where an employee’s taxable income is below the N300,000 threshold, then the appropriate tax rate will be 1%.
Emphasis must be placed on the fact that this is a graduated scale and so where the employee is making N3.5m a year the entirety of this amount would not be taxed at the maximum of 24%, but rather the first N300k of this amount would be taxed at 7%, the next N300k at 11% and so on until the maximum threshold is reached; the eventual total of these calculations will be computed as the Assessable Persons tax liability for that year.
Implications of Breaking the Law
An employer will be deemed to be in contravention of this Act where they have either failed to charge the correct rates or where there has been a partial or non-remittance of the PAYE deductions to the relevant tax authority.
A defaulting employer shall be liable upon conviction to pay a penalty consisting of the total of the tax withheld or not remitted, as well as 10% premium. Interest on this combined amount shall be charged at the prevailing Central Bank of Nigeria rate. The employer shall also be liable to imprisonment for a period not exceeding 3 years.
Many employers of domestic staff do not appreciate the fact that they are required under the provisions of this Act to make deductions from the salaries of their employees and pay same to the relevant tax authority.
The ramifications of this is that, they have left themselves liable to the mercy of a regime that is about to acquire significant debt and seriously looking for money.
The FIRS has stressed that every citizen must be in compliance with the provisions of this Act in order to ensure the availability of funds for sustainable national development.
Ivie Omoregie is the Founding Consultant at Skye Advisory. Skye Advisory is a boutique business advisory firm with locations in London, England, as well as Lagos, Nigeria. Skye Advisory offers bespoke Legal, Financial and General Business advisory services to small and micro businesses.