A Thesis on Personal Income Tax in Nigeria written by Osho Olumide T.
PERSONAL INCOME TAX IN NIGERIA
A LONG ESSAY SUBMITTED TO THE FACULTY OF LAW OBAFEMI AWOLOWO
UNIVERSITY ILE-IFE
IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE AWARD OF A
BACHELOR OF LAW (LL.B) DEGREE
BY OSHO OLUMIDE TEMIDAYO LAW/2005/224
OCTOBER 2010
1
CERTIFICATIONThis is to certify that this long essay written by
Osho Olumide Temidayo LAW/2005/224 under my supervision.
__________________ DATE
____________________ Mr. O.A. ORIFOWOMO
2
DEDICATIONI dedicate this project to God Almighty who has always
been everything to me. He has and will always be my God.
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ACKNOWLEDGEMENTI would first and foremost like to appreciate my
parents Mr. and Mrs. C. O. Osho for their love, care, devotion,
goodwill, support, encouragement, guidance, and for always being
there for me. I wouldnt have wished for any other parents than you.
Also, thanks for my brilliant brain; it is the most important thing
I inherited from your genes. I would also like to appreciate my
sisters and brother, Osho Olabc and Temitope and Ayodeji; my ever
present helps (whenever I need any and every thing). Thank you for
the corrections, the advice, encouragement and support. And Yes! I
know now what I want to do with my life. To my baby sister
Temiloluwa, I hope youd be better than I can ever get to be (mind
you, Ill be exceedingly great so you have a lot of work to do). Now
Id like to appreciate my supervisor, Mr. O. A. Orifowomo. Though
you may not know it, we your students think you are the best not
just in marking and lecturing but also in character. I am really
grateful to have been thought by you and it is an overwhelming
bonus to have been supervised by you. I guess God, fate and luck is
on my side. Thank you for your patience and understanding while
supervising me. Next, Id like to appreciate my all friends and
mates; Kuye Sadiq, Mogbeyi Eyituoyo, Aderogba Quadri, Opkala Osita,
Sanusi Adetunji, Asere Tomisin, Awolade Oluwaseun, Sodeinde Damola,
Tunde, Odekunle Temilorun, Ekunkan
4
Olayinka, Popoola Kehinde, Talabi Fisayo, Owolabi Adeolu,
Akinfenwa Bolanle, Yesin Elizabeth, Nene, Nwokocha Charity, Mimiko
Kayode, Leke-Oyedemi Adesola, Isiaka Hammed Adigun (Kunle),
Ogunromo Fuminiyi, Emmanuel Iduma, Adodo Destiny, Olumide Abiodun,
and Akinshe Olayinka. I am privileged to have met you and to have
made your acquaintance. Finally, I am very grateful to God Almighty
for having seen me through all good and bad times. I am indeed
grateful and thankful, for the past the present and the future
(which seems would be astonishing and filled with overwhelming
success).
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TABLE OF CONTENTTitle Page Certification Dedication
Acknowledgement Table of Content Table of Cases Abstract CHAPTER
ONE: GENERAL INTRODUCTION 1.1 1.2 1.3 1.4 Introduction Definition
of Tax Classification of Tax Historical Outline of Nigerian Tax
System 1 2 3 7 i ii iii iv vi ix x
CHAPTER TWO: BASIS OF PERSONAL INCOME TAXATION IN NIGERIA 2.1
2.2 2.3 Income as a Tax Base Definition of Income Distinction
between Income and Capital 14 15 17
6
2.4 2.5
Definition of Employment Taxable Persons
19 20
CHAPTER THREE: TAXING POWERS IN NIGERIA 3.1 3.2 3.3 Distribution
of Taxing Powers in Nigeria History of Distribution of Taxing
Powers Current Position of Taxing Powers 23 25 31
CHAPTER FOUR: PERSONAL INCOME TAX IN NIGERIA 4.1 4.2 4.3 4.4 4.5
4.6 4.7 Personal Income Tax in Nigeria The Legal Basis of Personal
Income Tax Income Taxation Determination of Residence Chargeable
Income Employment Taxation Deduction, Reliefs and Exemptions 42 45
46 48 56 56 58
CHAPTER FIVE: PROBLEMS OF PERSONAL INCOME TAX IN NIGERIA 5.1 5.2
Problems of Personal Income Taxation in Nigeria Tax Collection 68
697
5.3 5.4
Tax Evasion and Tax Avoidance Double Taxation
72 86
CHAPTER SIX: SUMMARY, CONCLUSION AND RECOMMENDATIONS 6.1 6.2 6.3
Summary Conclusion Recommendations 91 94 96
Bibliography
105
8
TABLE OF CASESColtaness Iron Co. v. Black (1881) 9 TC 287 London
County Council v. Attorney General (1901) AC 26 Matthews v. Chicory
Marketing Board (1939) 60 C.L.R. 263 at p. 276 Strick v Regent Oil
Co. Ltd (1965) 3 W.L.R at p. 1571 Western Railway Co. v Baker
(1922) 8 TC 231 at p.235 16
16 2 17 20
9
ABSTRACTIt has long been evident that personal income tax in
Nigeria has remained the most unsatisfactory, disappointing and
problematic of all the taxes in the tax system today. This is in
spite of the fact that tax reform has of recent been a key element
in economic reform which the country had undergone. Generally,
personal income tax is closely related to the pace of development
and growth of any economy. An effective tax system ought to satisfy
the twin purpose of raising maximum revenue and at the same time
encourage production. In an effectively managed tax system, the two
purposes are not irreconcilable provided of course that the
beneficial effects of Governmental expenditure and incentives for
production exceed the unfavourable effects of taxation. This long
essay attempts to analyze the present application and
administration of personal income tax in Nigeria, by first
examining the history of taxation and indeed the history of
personal income tax in Nigeria. Also, income as the basis of
personal income tax was also analyzed with the distinction between
income and capital drawn out. Furthermore, the various taxing
powers in the country were enumerated and their powers were
discussed and delineated marking out the differences between the
three taxing powers of Federal, State and Local Governments.
Personal income tax in Nigeria and its problems, which this long
essay majorly revolves around, were then fully focused on and well
appraised, the legal
10
basis of personal income tax and all the components associated
with personal income tax as well as its prevailing problems are
well discussed in the long essay. Conclusively, recommendations
were made which would, when applied, help resolve the problems of
personal income tax in Nigeria.
11
CHAPTER ONE: GENERAL INTRODUCTION1.1 INTRODUCTION Though
collection of Personal Income Tax is a federal responsibility this
tax is generally collected by state governments from those that are
resident in their various states, regardless of whether they are
federal, state, local government, or private sector workers. The
Federal Inland Revenue Service, however, also collects this tax but
only from residents of the Federal Capital Territory as well as
what may be described as highly mobile federal workers staff of the
Ministry of Foreign Affairs and other Nigerians and foreigners
outside the country but earning income in Nigeria (nonresidents),
expatriate workers resident in Nigeria, Police Officers, and
Military Officers. Civilians working in Police and Military
formations, however, pay to their respective States of residence.
The current law guiding the taxation of personal incomes is the
Personal Income Tax Act (Cap P8 LFN 2004). Under the law, Federal
and States tax boards are empowered to identify persons living in
or earning income from Nigeria who are required to pay tax, and to
assess incomes and tax their incomes using specified guidelines and
rules. This law also guides the tax official in identifying the
residence of potential taxpayers, as well as the sources and
origins of their incomes for the purpose of taxing the income.
12
1.1.1 FORMS OF PERSONAL INCOME TAX Two forms of taxes are
administered under Act, namely:
(a) Pay-As-You-Earn (PAYE) i.e. taxes from employment, and (b)
Taxes from self employed persons. 1.2 DEFINITION OF TAX
The Blacks Law Dictionary1 defines tax as: A monetary charge
imposed by the government on persons, entities, transactions, or
property to yield public revenue. Most broadly, the term embraces
all governmental impositions on the person, property, privileges,
occupations, and enjoyment of the people, and includes duties,
imposts, and excises. Although a tax is often thought of as being
pecuniary in nature, it is not necessarily payable in money. The
Oxford English Dictionary also, defines tax as: a compulsory
contribution to the support of the government levied on persons,
property, income, commodities, transactions and so on, now at a
fixed rate most proportionate to the amount on which the
contribution is levied Tax was also defined in the Australian case
of Matthews v. Chicory Marketing Board2 as:
1 2
Black's Law Dictionary (8th ed. 2004) , p. 4561 (1939) 60 C.L.R.
263 at p. 276
13
A tax is a compulsory exaction of money by a public authority
for public purposes, or taxation is raising money for the purpose
of government by means of contributions from individual persons.
Furthermore, tax was defined by Thomas M. Cooley, in his book The
Law of Taxation3 as the enforced proportional contributions from
persons and property, levied by the state by virtue of its
sovereignty for the support of government and for all public needs.
This definition of taxes, often referred to as Cooley's definition,
has been quoted and indorsed, or approved, expressly or otherwise,
by many different courts. While this definition of taxes
characterizes them as contributions, other definitions refer to
them as imposts, duty or impost, charges, burdens, or exactions';
but these variations in phraseology are of no practical importance.
From the above definitions of tax, Personal Income Tax could
therefore be said to be a tax that is imposed on individuals who
are either in employment or are running their own small businesses
under a business name or partnership. 1.3 CLASSIFICATION OF TAX
Taxes are classified into various forms and these include the
classification into proportional, progressive and regressive taxes;
and direct and indirect taxes.
3
Cooley T. M., The Law of Taxation, Clark A. N. ed., 4th ed.,
1924,.
14
Proportional, Progressive and Regressive Taxation 1.3.1
Proportional Tax Also known as flat tax, proportional tax is one
which when paid by the tax payer bears the same ratio to the amount
to be raised as the value of his property bears to the total
taxable income. In other words it takes a constant proportion of
income and so it can be said to be a neutral tax. 1.3.2 Progressive
Tax This is defined4 as: a tax structured so that the effective tax
rate increases more than proportionately as the tax base increases,
or so that an exemption remains flat or diminishes. With this type
of tax, the percentage of income paid in taxes increases as the
taxpayer's income increases. Most income taxes are progressive, so
that higher incomes are taxed at a higher rate. But a tax can be
progressive without using graduated rates. In this sense it is
known as graduated tax. 1.3.3 Regressive Tax Regressive tax is
defined by the Blacks Law Dictionary5 as:
4 5
Black's Law Dictionary (8th ed. 2004) , Page 4566 Black's Law
Dictionary (8th ed. 2004) , Page 4567
15
A tax structured so that the effective tax rate decreases as the
tax base increases. With this type of tax, the percentage of income
paid in taxes decreases as the taxpayer's income increases. A flat
tax (such as the typical sales tax) is usually considered
regressive despite its constant rate because it is more burdensome
for low-income taxpayers than high-income taxpayers. A growing tax
exemption also produces a regressive tax effect. Regressive
taxation is not suitable for the underdeveloped and developing
countries as it would not generate the required revenue for the
administration of the country, it would also fail to provide a just
and egalitarian society. Direct and Indirect Taxes 1.3.4 Direct Tax
In the general sense, a direct tax is one paid directly to the
government by the persons (juristic or natural) on whom it is
imposed (often accompanied by a tax return filed by the taxpayer).
Examples include some income taxes, some corporate taxes, and
transfer taxes such as estate (inheritance) tax and gift tax. In
this sense, a direct tax is contrasted with an indirect tax or
collected tax (such as sales tax or value added tax (VAT)); a
collected tax is one which is collected by intermediaries who turn
over the proceeds to the government and file the related tax
return. Some
16
commentators have argued that a direct tax is one that cannot be
shifted by the taxpayer to someone else, whereas an indirect tax
can be.6 An 18th century writing7 about the tax explained:
The power of direct taxation applies to every individual, as
congress unde this government is expressly vested with the
authority of laying a capitation or poll-tax upon every person to
any amount. This is a tax that, howeve oppressive in its nature,
and unequal in its operation, is certain as to its produce and
simple in it collection; it cannot be evaded like the objects o
imposts or excise, and will be paid, because all that a man hath
will he give for his head.
Basically, a direct tax is one which is demanded from the very
person who it is intended or desired to pay it. 1.3.5 Indirect Tax
The term indirect tax in the colloquial sense, is a tax collected
by an intermediary (such as a retail store) from the person who
bears the ultimate economic burden of the tax (such as the
customer). The intermediary later files a tax return and forwards
the tax proceeds to government with the return. In this sense, the
term
6
7
Britannica Online, Article on Taxation. The Address and Reasons
of Dissent of the Minority of the Convention, of the State of
Pennsylvania, to their constituents.
17
indirect tax is contrasted with a direct tax which is collected
directly by government from the persons (legal or natural) on which
it is imposed. An indirect tax may increase the price of a good so
that consumers are actually paying the tax by paying more for the
products. Examples would be fuel, liquor, and cigarette taxes. An
excise duty on motor cars is paid in the first instance by the
manufacturer of the cars; ultimately the manufacturer transfers the
burden of this duty to the buyer of the car in form of a higher
price. Thus, an indirect tax is such which can be shifted or passed
on. Basically, indirect taxes are demanded from one person, in the
expectation and intention that he shall indemnify himself at the
expense of another. In other words, indirect taxes are those which
are imposed on commodities before the reach the final consumer, and
are paid by those upon whom they ultimately fall, not as taxes, but
as part of the market price of the commodity.8 General examples of
indirect taxes are Stamp Duty, Excise Duty, Customs Duty, Value
Added Tax, and Sales or Purchase Tax. 1.4 HISTORICAL OUTLINE OF
NIGERIAN TAX SYSTEM A system of direct taxation had been in
existence in this country before the advent of colonial rule,
particularly in the North where there was an efficient and stable
administration based for the most part on the Islamic system. Thus
in Northern Nigeria there were various forms of taxation such as
the zakat a tax levied on
8
Mill. Principles of Political Economy, Book V, Ch. 3
18
moslems for charitable, religious and educational purposes,
kurdin kasa an agricultural tax; shukka another tax paid on all
crops not liable to zakat. There was another called jangali a
cattle tax levied on livestock.9 In Southern Nigeria there was also
an indigenous system of taxation, it was not as organized and as
broad-based as it was in the Northern parts of the country. During
the pre-colonial period taxation functioned more or less on an
ethnic basis. In societies with a centralized authority,
administrative machinery and judicial institutions such as the
areas of Northern Nigeria, Yoruba Land and the Benin Kingdom where
you have Emirs and Obas respectively, there was a system of
taxation. In the lesser organized societies like the Ibo, Tiv,
Bura, Igbirra, and Bachama areas, there existed little or no form
of organized taxation. Furthermore, taxes were not necessarily paid
in money. There were mostly paid in kind and obligatory personal
services otherwise known as tribute taxes. When money came into
general use, this did not abrogate the obligatory personal services
but only supplemented them. When the British came to Nigeria they
were therefore naturally attracted by the organized tax system in
Northern Nigeria and so they immediately consolidated all the
various traditional taxes here under the Land Revenue Proclamation
Law of 1904. There was no such law in Southern Nigeria until after
the amalgamation of the Northern Provinces with the colony and
protectorate of Nigeria in 1914 when the
9
Ayua, I.A. (1999) The Nigerian Tax Law, Ibadan Spectrum Law
Publishing. p.22
19
Native Revenue Ordinance of 1917 was enacted to cover the areas
of the Western region of Nigeria. It was not until 1927 after much
debate and hesitation that the first Personal Income Tax Law was
introduced into the Eastern Region of the country. This sparked off
disturbances culminating in the Aba Tax Riot of 1929 which resulted
into loss of lives and destruction of property. The lack of
adequate information on the purpose of tax and generally the tax
itself was largely responsible for the disturbances. Many other
direct taxation ordinances were passed such as Non-Native
(protectorate) Ordinance of 1931 which was repealed by that of
1939. This two ordinances provided for the taxation of non-natives.
It was only in 1939 that an income tax was specifically introduced
for the first time on company profits accruing in, derived from or
brought into Nigeria under the Companies Income Tax Ordinance
1939.10 In 1940, there was a major tax legislation; this was the
Direct Taxation Ordinance No. 4 of 1940 and the Income Tax
Ordinance No. 3 of 1940 which repealed all previous Ordinances. The
Direct Taxation Ordinance provided for the taxation of Nigerians
except those in the township of Lagos. Taxable persons covered by
the Direct Taxation Ordinance included the community which was
defined11 to comprise any town, village or settlement, or any
locality therein including a band of
10 11
Ayua, I.A. (1999) The Nigerian Tax Law, Ibadan Spectrum Law
Publishing. p.23 Direct Taxation Ordinance No. 4 of 1940 S.
2(1)
20
nomadic herdsmen and individuals residing within the community.
Incomes that were taxable under this Ordinance were: a. Income from
land; b. Rents derived from land; c. Annual profits of the produce
from land which were enjoyed by the community or individuals; d.
Income from employment and pensions; e. Profits from trade or
manufacture; f. Dividends or interest; and g. The value of all life
stock owned by the individuals or the community.12 The importance
of the Direct Taxation Ordinance in the history of income tax law
in Nigeria lies in the fact that it was the first taxing statute
that applied throughout the country, having consolidated all
previous tax Ordinances from 1906 to 1940. It also provided for the
appointment and control of tax collectors by the residents. One
shortcoming of the Direct Ordinance was however, its failure to
provide for uniform tax rates throughout the country. The Income
Tax Ordinance of 1940 applied to expatriates and to Nigerians
living in Lagos as well as to companies, thereby lumping together
under the same law the provisions for the taxation of personal and
company incomes. Up to this period, the essential features of our
tax system included the narrowness of the national tax base13 and a
few tax instruments, thereby lacking the
12
Direct Taxation Ordinance No. 4 of 1940 S. 4
21
revenue elasticity required to meet the usual upward trend in
national spending. This had to do with the stage of economic
development as at that time Nigeria was basically an underdeveloped
country with few viable economic activities. In 1943 a more
comprehensive income tax ordinance was passed. This repealed the
1940 Ordinance. The 1943 Ordinance imposed higher rates of taxes on
certain types of income and in general it taxed income which
accrued in, derived from, were received in, or brought into
Nigeria. At this stage no principle of federalism was introduced in
Nigeria and so the constitutional question of allocation of taxing
powers between different tiers of government did not arise. Up
until 1954 the country was administered as a unitary state but with
the division of the country into three regions by the Richards
Constitution and the establishment of the Phillipson Commission
created to recommend ways and means of allocating the revenue
collected by the central government, this led to the introduction
of taxing powers being exercised by the regional governments,
though the central government continued to levy taxes. The new
regions were given control over direct taxation but there was the
absence of any formal legislative which made the exercise of the
power national. The Richards Constitution was replaced by the
McPhersons Constitution in 1951 which was designed with the basic
aim of granting greatly increased measure of responsibility to
Nigerians for the conduct of their own affairs and which granted
increased autonomy to the three regions with special tax powers in
order to build up a strong and united Nigeria. While the 1951
Constitution did not significantly enhance13
A. O. Phillips Nigerias Tax Effort (1970) B.T.R. 182-3
22
the independent revenue capacity of the regions, it however,
marked a significant milestone on the road to fiscal federalism.
1954 marked the year Nigeria was completely federalized. It was
during this period that the regional governments were for the first
time given the power to impose tax independent of the central
government, however their powers were severely restricted owing to
the existing tax source then. After independence, the parliament
exercising their legislative powers conferred on them by section 60
of the 1960 constitution enacted three Acts on taxation. They
include: 1. The Income Tax Management Act (ITMA) 1961 2. The
Personal Income Tax (Lagos State) Act (PITA) 1961 3. The Income Tax
(Armed forces and other persons) (special Provisions) Act 1972.
Since then different governments have continued to try to improve
on Nigerias taxation system. The general opinion among scholars is
that Nigerias fiscal regime is characterized by unnecessary
complex, distortionary and largely inequitable taxation laws that
have limited application in the formal sector that dominates the
economy. 1.4.1 HISTORY OF PERSONAL INCOME TAX LAW IN NIGERIA The
Nigerian tax system is basically structured as a tool for revenue
collection. This is a legacy from the pre-independence government.
Based on 1948 British tax laws and have been mainly static since
enactment. The history of personal income tax law in Nigeria is
traceable to the Raisman Commission of 1957, the recommendations of
which were incorporated in section 7023
of the 1960 constitution. The section provided that the Federal
Government had exclusive powers to levy tax on the income of all
limited liability companies while the Federal and State governments
enjoyed concurrent powers over personal income tax. Prior to 1961,
each region had its own tax law on personal income tax. However,
with the enactment by the Federal Government of the Income Tax
Management Act (ITMA) 1961, acting under its constitutional powers,
each region amended its laws to conform to the Act. The need to tax
personal incomes throughout the country prompted the Income Tax
Management Act (ITMA) of 1961. In Nigeria, personal income tax
(PIT) for salaried employment is based on a pay as you earn (PAYE)
system, and several amendments have been made to the 1961 ITMA Act.
For instance, in 1985 PIT was increased from N 600 or 10 per cent
of earned income to N 2,000 plus 12.5 per cent of income exceeding
N 6,000. In 1989, a 15 per cent withholding tax was applied to
savings deposits valued at N 50,000 or more while tax on rental
income was extended to cover chartered vessels, ships or aircraft.
In addition, tax on the fees of directors was fixed at 15 per cent.
These policies were geared to achieving effective protection for
local industries, greater use of local raw materials, generating
increased government revenue among others. Since the implementation
of the Structural Adjustment Programme (SAP), however, taxes have
been used to enhance the productivity and competitiveness of
business enterprises. Consequently, attention has been focused on
promoting exports of manufactures and reducing the tax burden of
individuals and companies. In line with this change in policy
focus, many measures were undertaken. These involved,24
among others, reviewing custom and excise duties, continuing
with the reduction of company and income taxes, expanding the range
of tax exemptions and rebates, introducing capital allowance,
expanding the duty drawback scheme and manufacturing-in-bond
scheme, abolishing excise duty, implementing VAT, monetizing fringe
benefits and increasing tax relief to low-income earners. The
current legislation is the Personal Income Tax Act (PITA) 1993,
which repealed the Income Tax Management Act (ITMA) 1961 and the
Income Tax (Armed Forces and Other Persons) (Special Provisions)
Act 1972.
CHAPTER TWO2.1 INCOME AS A TAX BASE In countries with advanced
tax system, the essence of income tax is hardly debatable, the
greater percentage of taxable adults pay their taxes voluntarily.
Speaking with reference to American tax system, Otto Eckstien
observed in this pertinent manner: The most astonishing fact about
the American tax system is the fantastic revenue it collects. Total
taxes are over $536 billion, about 31 percent of gross national
product. They are collected without violence or bloodshed, with
only some mild griping ... This is a small miracle, it is possible
because in our advanced society, business and individuals keep
accounting record from which they can compute their tax bill. More
importantly, it is possible because on the whole, people are
willing to pay their taxes. Ours is a system of voluntary25
compliance, not assessment and enforcement by Government. People
know that the common cost of national defence, of educating our
children, and of necessary public services have to be met.
Generally, people respect the law and pay their taxes. In Nigeria,
the attitude of the citizens towards this civic responsibility
(i.e. payment of tax) does not come near the Americans. Theirs is
that of apathy. Taxation serves myriad functions. The revenue
generated from taxation sustains the economic and social needs of
the nation. Infact, taxation serves multifarious ends, some of
which have political, economic or social bearings. In a nutshell,
the essence of taxation is to raise revenue for government
expenditure or finance government projects, control consumer
demand, encourage investment and savings, fight economic
depression, inflation and deflation, guarantee equitable
distribution of income and wealth, control the general trend of the
national economy, and ensure a proper allocation of national
resources. Income serves as a basis for taxation basically because
a tax payers income is used as the base for his tax liability. As
In Nigeria and many other countries income is being used as the
basis for taxation due to the fact that it has been considered anti
social to live on ones capital and as Professor Wheatcroft pointed
out in his book14: The tax collector requires his money next year
as well as this one. He does not want to kill the goose that lays
the golden eggs
14
G.S.A. Wheatcroft, What is Taxable Income? (1957) B.T.R. Page
310
26
2.2
DEFINITION OF INCOME In the Nigerian taxing statutes, no
comprehensive definition is given as to the
meaning of the word income. Under the present Personal Income
Tax Act (PITA)15, income is simply or evasively defined as
including any amount deemed to be income under the Act. No doubt
this definition has not helped matters in trying to delimit a clear
boundary around the concept of income. The reluctance to draw a
precise boundary in this regard is not a recent development. In
London County Council v. Attorney General16, Lord Mac Naughten
famously equipped, in an attempt to define the word income that
Income tax, if I may be pardoned for saying so, is a tax on income.
It is not meant to be a tax on anything else. No doubt, the
attitude of the courts and legislation in avoiding a comprehensive
definition is to avoid the lurking trap or pitfall that might
result from an imperfect definition which might give more room for
tax avoidance speculators to exploit. Indeed, any definition
incapable of generating revenue for Government ought to be avoided.
This problem of evolving an acceptable and precise definition was
to be seen in a number of bold but futile attempts by the courts.
In Coltaness Iron Co. v. Black17 Lord President offered a
conceptual definition of income in this manner:
15 16
Section 3(3)(b) (1901) AC 26
27
The general principle of the property and income tax to which
effect is given by the statutes is that everything of the nature of
income shall be assessed from that source so ever it may be derived
whether from invested capital, or from skill and labour or from a
combination of both, and whether temporary or permanent, steady or
fluctuating, precarious or secure. For practical purposes, the
above definition has not been precise in untying the difficult
problem of definition. Again, Lord Wrenbury18 evasively intoned: As
regards the word income, it means such income as is within the Act
taxable under the Act. Looking at the sum total of the judicial
dicta so far examined, it is clear that the term is far from being
precise. It is multidimensional, and to determine it one must rely
on the particular facts of a given case. Legislative approach to
the problem in Nigeria and some other jurisdictions which appears
the best option has been to classify income by reference to the
respective source from which such income may be derived. 2.3
DISTINCTION BETWEEN INCOME AND CAPITAL As stated above, income tax
is a tax on income and not on capital. Whether a particular receipt
is regarded as being of an income r capital nature has important
revenue consequences as this may determine whether income tax at
steeply
17 18
(1881) 9 TC 287 Whftoey v. I R C
28
progressive rates is imposed or capital gains tax at a
considerably lower rate is paid. The distinction is therefore
important for tax purposes. Capital, just as income, is very
difficult to define. As Lord Upjohn observed in Strick v Regent Oil
Co. Ltd19 I suppose that no part of our law of taxation presents
such almost insoluble conundrums as the decision whether a receipt
or outgoing is capital or income for tax purposes. Parliament
wisely has never given any general statutory guidance in this
matter. It has been content to leave the determination of these
difficult matters to the common sense of the tribunals and judges
before whom these matters are brought. The courts have therefore,
been called upon on numerous occasions to provide the much needed
distinction in order to determine into which category, income or
capital, a particular sum in dispute has fallen. The ancient
concept of capital and
income which is usually expressed in the familiar analogy the
tree is the capital from which the annual income of the fruit crops
is derived.20 No doubt a distinction premised on such analogy
represents a common sense approach to the problem, and can work
well in some cases. Presently, it is very difficult today to say
with any degree of precision whether a particular asset is a
revenue receipt or a capital receipt even by examining its nature.
With todays businesses becoming more and more complex with
sophisticated ways19 20
(1965) 3 W.L.R at p. 1571 Meade Report on the Structure and
Reform of Direct Taxation p.30-33
29
and means being devised to circumvent tax laws, the ancient
concept seems inadequate to distinguish income from capital.
Basically, the distinction between income and capital involves two
main considerations namely: 1. The physical nature of the asset;
and 2. Its function. In some cases, the physical nature of the
asset may be decisive of the question whether it is a capital or
trading receipt while in others, the function of the asset may be
conclusive of that question. This however, does not mean that the
two factors are mutually exclusive. In some cases they overlap. 2.4
DEFINITION OF EMPLOYMENT Income from an employment is liable to
income tax. The Personal Income Tax Act21 charges to tax: any
salary, wages, fees, allowances or other gains or profits from an
employment including gratuities, compensation, bonuses, premiums,
benefits, or other prerequisites allowed, given, or granted by any
person to an employee. Therefore, every emolument which comes from
the office or employment is taxable. The above provision however,
only applies if the tax payer holds an office or employment and
emoluments are derived from it.21
Section 3(1)(b)
30
2.4.1 MEANING OF EMPLOYMENT The Personal Income Tax Act22
defines employment to include: any appointment of office whether
public or otherwise for which remuneration is payable The word
employment has a more extensive meaning. It generally includes an
engagement, occupation, profession, trade, post, or business. When
employment is used in connection with a profession or vocation it
means a way in which a man employs himself. When used in connection
with a post or engagement, it means something like holding an
office. In the words of Rowlatt J. in Great Western Railway Co. v
Baker23: It means something analogous to an office and which is
conveniently amenable to the scheme of taxation which is applied to
offices as opposed to the earnings of a man who follows a
profession or vocation. 2.5 TAXABLE PERSONS Taxable persons in
Nigeria are individuals, partnerships, communities and families,
trustees and executors under the personal income tax.24 According
to the provisions of section 225 taxable persons include: Section
2.22
Persons on whom tax is to be imposed.
23
Section 100 (1922) 8 TC 231 at p.235 24 Section 2 Personal
Income Tax Act 1993 25 PITA
31
(1) Tax of an amount to be determined from the Table set out in
the Sixth Schedule (in this Act referred as "income tax") shall be
payable for each year of assessment on the total income of (a)
every individual other than persons covered under paragraph (b) of
this subsection or corporation sole or body of individuals deemed
to be resident for that year in the relevant State under the
provisions of this Act ; and (b) the following other persons, that
is -
(i) persons employed in the Nigerian Army, the Nigerian Navy,
the Nigerian Air force, the Nigerian Police Force other than in a
civilian capacity, (ii) officers of the Nigerian Foreign
Service,
(iii) every resident of the Federal Capital Territory, Abuja,
and (iv) a person resident outside Nigeria who derives income or
profit from Nigeria. Individuals. (2) In the case of an individual,
other than an itinerant worker and persons covered under paragraph
(b) of subsection (1) of this section, tax for any year of
assessment may be imposed only by the State in which the individual
is deemed to be resident for that year under the provisions of the
First Schedule to this Act and in the case of persons referred to
in subsection (1) (b) of this section tax shall be imposed by the
Federal Board of Inland Revenue. Itinerant workers. (3) In the case
of an itinerant worker, tax may be imposed for any year by any
State in which the itinerant worker is found during the year:
Provided that (a) in an assessment for any year upon an itinerant
worker credit shall be given against the tax payable, but not
exceeding the amount thereof, for any income tax already paid by
him to any other tax authority for the same year; and (b)
collection of so much of any tax imposed in a territory on an
itinerant worker for a year of assessment as remains unpaid on the
itinerant worker leaving that territory during that year shall
remain in abeyance during his absence from that territory, and if
he returns to that territory having during his absence paid tax in
some
32
other territory for that year, credit shall be given against any
unpaid tax in the first-mentioned territory, but not exceeding that
unpaid amount, for the tax paid in that other territory.
Communities. (4) In the case of a village or other indigenous
communities, tax may be imposed for any year only by the law of the
territory in which that community is to be found and the tax may be
charged on (a) the estimated total income of all its members;
(b) the estimated total income of those of its members whose
income it is impracticable in the opinion of the relevant tax
authority to assess individually; or (c) the amount of any communal
income which, in the opinion of the relevant tax authority in
relation to such community, it is impracticable to apportion with
certainty between its members. Families. (5) In the case of income
of a family recognised under any law or custom in Nigeria as
families income, in which the several interests of individual
members of the family are indeterminate or uncertain, tax may be
imposed only by the territory in which the member of that family
who customarily receives that income in the first instance in
Nigeria usually resides. Trustees (6) In the case of income arising
to a trustee of any settlements or trusts, or estates or to an
executor of any estate of a deceased person, tax may only be
imposed by the territory of which the tax authority is the relevant
tax authority in relation to such settlement, trust or estate and
to the extent provided in the Second Schedule to this Act . (7)
Nothing in this section shall be construed as imposing liability to
tax on the personal emoluments of any person serving as other rank
and accordingly any other enactment or law imposing tax on the
income of individuals shall not apply: Provided that where any
other income accrues to a person serving as other rank (not being
income by way of personal emoluments) that income shall be liable
to tax under this Act or under any relevant enactment or law.
33
(8) In this section "other rank" has the meaning assigned
thereto by the Armed Forces Pensions Act: and "personal emoluments"
means wages or salaries and includes allowances, gratuities,
superannuation or pension schemes and any other income derived
solely by reason of employment as other rank.
CHAPTER THREE: TAXING POWERS IN NIGERIA3.1 Distribution of
Taxing Powers in Nigeria
Introduction The essential feature of federalism is the formal
distribution or allocation of jurisdictional powers between the
Federal and State Governments. It follows therefore that the
financial powers of the federation must be distributed between the
Federal and the State governments under any federal Constitution.
As Hamilton said:26 It is ... as necessary that the State
governments should be able to command the means of supplying their
wants, as that the national government should possess the like
faculty in respect of the Union.26
Hamilton, Fedralist, No XXXI, p. 149
34
By this analysis it is assumed that the financial powers of the
Federation can be so neatly distributed between the Federal and
State governments that the taxing power of the respective
governments should be independent of each other, to raise financial
resources necessary to meet the needs of each government. But the
matter is not as simple as this though it might appear to be
desirable. Indeed the whole question of the division of financial
powers of a federation constitutes an intricate and complex
problem. As one source has rightly asserted27: Finance has emerged
as the most critical policy issue in IGR(i.e. International Fiscal
Relations) in every federal administration system since the Second
World War. Almost without exception, the financial resources
available to the central government have exceeded considerably
those available to the other levels of government. The federal
dominance of the inter-governmental fiscal relations if not
properly controlled will make the state completely dependent
financially and thereof generally, upon the central government,
thereby denying them of their autonomy in matters that directly
concern them. This is not a recipe for political unity particularly
in a developing heterogeneous society like Nigeria where there is
differential socioeconomic development with the Central government
apparently lacking any definitive policy to bring about even
development. The problem is more acute today considering the
mounting cost of State and
27
Ladipo Adamolekun, Public administration, 1st ed., Longman
Publishers at p. 93
35
Local services. For instance, the sharp rise in the costs of
providing education to meet our societys insatiable demand for
trained people, paying the salaries of civil servants, providing
hospital and medicare, providing adequate water supply and other
valuable services to meet the growth in population all point to the
need for new sources of revenue as the pressure on State
governments becomes unbearable. It is against this background that
the distribution of taxing power in Nigeria should be reviewed. 3.2
History of Distribution of Taxing Powers in Nigeria When Nigeria
became a federation in 1954, the question of sharing taxing powers
between the Regions and the Federal government in immediately
arose. This question was discussed at the Nigeria Constitutional
Conference in London in 1957 where it was decided to refer to a
Commission the issue of how to allocate taxing powers between the
Regional and Federal governments. Consequently, the Raisman
Commission was appointed to look into the matter and make
recommendations that would ensure inter alia, . . . that the
maximum possible proportion of the income of Regional Governments
... be within the exclusive power of those Governments to levy and
collect.28 In June 1958 the Commission submitted its report which
contained the following principal recommendations: a.28
that the Federal Government should have exclusive jurisdiction
on
Report of the Nigerian Constitutional Conference 1957 paragraph
57
36
corporations and companies taxes as well as on taxation of
non-resident persons, and also to enter into double taxation
agreements with other countries; b. that the Regions (now States)
have exclusive power to impose personal income tax on individuals,
sole traders, partnerships, clubs, trusts and other unincorporated
associations. These recommendations were accepted and embodied in
section 70 of the Nigeria (Constitution) Order in Council, 1960. In
giving the regions exclusive power to impose personal income tax on
individuals, the Commission identified three resultant problems.
First, there was the danger that a regional personal income tax law
might conflict with double taxation agreements which the Federal
Government has entered into, or might do so in the future with
foreign governments. Secondly, there was the danger of internal
double taxation. In fact it is on record that at the time of the
Commissions report, the Eastern Region taxed the individual incomes
of its residents while the Western Region not only taxed those
resident in the West, but also taxed any income which was derived
from the Western Region irrespective of the residence of the
recipient. The result of this was that a resident of Eastern
Nigeria working in Western Nigeria would be taxed twice on the same
income by both governments. Thirdly, the Commission felt that it
would be desirable to define carefully what income would be subject
to the Federal Governments companies tax and which
37
would be subject to regional income tax. In the light of the
above problems, the Raisman Commission whist stating that each
regional government should have the exclusive right to fix rates of
tax and personal allowances, and to decide upon its own method of
assessment and administration, went on to say that some specific
issues among others required some arrangement to ensure uniformity
in tax treatment. These issues were as follows: a. The definition
of taxable income and the basis of charge; b. The period of
assessment; b. The taxation of income remitted to Nigeria from
overseas sources; c. The taxation of income accruing in Nigeria to
residents overseas; d. The approval of pensions and provident funds
for tax purposes; tile treatment of dividends; e. The taxation of
partnership; f. The type of information to be exchanged between one
tax authority and another.29 Thus the Commission recommended the
introduction of general principles for taxing individual incomes to
be applicable to the whole country. It was also in acceptance of
these recommendations that Section 70 (ii) and (iii) of the 1960
Constitution conferred concurrent powers upon Parliament to make
laws for Nigeria or any part thereof with respect to certain
enumerated uniform principles in relation to personal income tax.
In consequence, the Income Tax Management Act (ITMA) of 1961 was
enacted29
Report of the Fiscal Commission, 1958 paragraph 88, 91.
38
and was based essentially on the recommendations of the Raisman
Commission. The Act provided for the definition of taxable income
and the basis of charge, the period of assessment, the list of
allowable deductions, the treatment of dividends and so on. Its
principal purpose is to assist in the administration of tax laws in
the country so as to avoid internal double taxation of incomes. It
governs only the taxation of individuals. It can thus be seen that
the Raisman Commission enlarged tile fiscal autonomy of the Regions
(now States) by giving them exclusive power to tax individual
incomes and also brought into existence the Income Tax Management
Act, 1961. It must be mentioned that an important innovation
introduced in 1956 was the Pay-As- You-earn system of taxation.
This is not a separate tax but a system whereby income on wages and
salaries are collected by dedication at source by directed
employers. The directed employers are required to hand over the tax
so withheld to the tax authorities. It should also be mentioned
that the then Western Region was the first to enact a model income
tax law in 1957 which was known as the Western Region Income Tax
Law No. 16 of 1957. This was in existence four years before the
enactment of the Income Tax Management Act 1961. The Western Region
Income Tax Law was therefore amended in 1961 by the Income Tax
(Amendment) Law 1961 otherwise known as Income Tax Development
Contribution Law (ITDCL) to bring it into conformity with I.T.M.A.,
1961. The Eastern and the Northern regions also enacted their own
separate income
39
tax laws known as the Eastern Region Finance Law, 1962 and the
Northern Nigeria Personal Tax Law, 1962 respectively. Nigeria
became a Republic in 1963 and so all the provisions of Section70 of
the 1960 Constitution were re-enacted under Section 76 of the 1963
Republic Constitution. The Mid-Western Region which was created in
1963 adopted the tax law of the Western Region. There were thus
four income tax laws applying in the country with different rates
of tax, reliefs and personal allowances. The tax situation was
worsened in 1967 when on the 27th of May of that year the Federal
Military Government decided to divide the country into 12 states.
The Northern Region was divided into 6 States, the Eastern Region
into 3 States, the Western and Mid-Western Regions were also
constituted into States. Lagos State was created. All the States
created out of the Northern Region applied the Personal Tax Law,
those of the East, the Eastern Region Finance Law, Lagos State
applied the Federal Personal Income Tax Law and the Western and
Mid-Western States applied the Income Tax Development Contribution
Law. One can therefore imagine the effect of this diversity on
rates of tax reliefs and personal allowances on mobility of labour.
Commenting on this situation, A.O. Phillips had this to say30:
Personal income tax has all the time been the problem item of
Nigerias revenue structure particularly since its regionalization
in the late 1950s. Nigeria is the
30
A. O. Phillips Nigerias Tax Effort (1970) B.T.R. Publishers 180
at p. 186
40
only Federation in the World in which a significant tax such as
this is vested in other than the central authorities. Thus Nigeria
has as many tax systems as there are governments in Nigeria,
resulting in differential income tax burdens throughout the
country, and hampering its use as a significant source of revenue
and as an instrument of economic control. The administration is
generally thought to be inefficientthe opinion has gained ground
that unless and until a uniform personal income tax system is
established in Nigeria, the tax cannot play the significant role it
should play in Nigerias revenue structure and economic development.
It was, perhaps, against this background that it was considered
necessary to promulgate the Income Tax Management (Uniform Taxation
Provisions, etc.) Act 1975. 3.2.1 Income Tax M anagement (Uniform
Taxation, Provisions, etc.) Act 1975 This Act which was enacted to
amend the Income Tax Management Act 1961 (as amended) and the
Income Tax (Armed Forces and other persons) (Special Provisions)
Act No. 51 of 1972, provides for uniform rates of tax, reliefs and
allowances throughout the country thereby putting an end to varying
rates of tax, reliefs and allowances. It covers only the taxation
of individuals. Thus all individual taxpayers regardless of their
State of residence are entitled to the same system of allowances
and reliefs and are liable to pay income tax at the
41
same rates. When therefore, in 1976 the number of States was
increased from 12 to 19 and later 21 they applied the same rates of
tax reliefs and allowances, thereby posing no problem in respect of
the tax burden to be borne by Nigerians. Thus apart from the
amendment of the Income Tax Management Act, 1961 in 1975, as shown
above, the position of the division of taxing powers under the 1963
Constitution as amended remained as follows: 1. The Federal
Government enjoyed exclusive jurisdiction over the taxation of the
income and profits of companies, petroleum profits tax, import,
export and excise duties, purchase and sales taxes on some
commodities and mining royalties. 2. The Regional (now State)
governments had jurisdiction over personal income taxes, community
tax, purchase and sales taxes on produce, hides, skins, and motor
fuel, licence fees, wealth and property taxes, estate duties,
casino and pools betting taxes and motor registration and driver's
licence fees. The division of taxing powers under the 1963
constitution of course favoured the Federal Government more as they
had more important sources of revenue than the Regions whose tax
base was quite narrow. When the Military took over the government,
rather than narrow the gap they widened it by increasing the
Federal Government's share of the national revenue particularly
between 1970 and 1979. The State governments became financially
dependent on the Federal Government and the Federal Government
unilaterally passed any lax laws it wanted such as the Capital
42
Gains Tax in 1967 and the Capital Transfer Tax in 1979.31 3.3
Current Position of Taxing Powers The 1979 Constitution has not
done much to improve on the lot of the States in terms of
allocation of financial sovereignty, with the consequence that the
Federal Government maintains its strong position. Thus under the
Exclusive Legislative list set out in Part 1 of the Second Schedule
to the 1979 Constitution the Federal Government has exclusive
jurisdiction on the following taxes: 1. 2. 3. 4. 5. Item 15: Custom
and Excise duties Item 22: Export duties Item 37: Mining rents and
royalties Item: 57: Stamp duties Item 58: Taxation of incomes,
profits and Capital gains, except as
otherwise prescribed by the 1979 Constitution. Under this item
the Federal Government has exclusive power to legislate on the
taxation of individuals and Companies throughout the whole
Federation. From the above list it will be seen that the 1979
Constitution has enhanced the Federal Government's taxing power by
explicitly placing within its exclusive competence the more
important forms of taxation while leaving the residuary matters at
the disposal of the States. If one takes into account the unlimited
legislative31
Ladipo Adamolekun, Public Administration, 1st ed., Longman
Publishers p. 94
43
competence of the Federal Military Government provided by
Section 2 subsection 1 of Decree No. 1 of 1984 one can then
appreciate the immense taxing power that has been allocated to the
central government. It should not, however, be supposed that the
States lack taxing power. Indeed under the 1979 Constitution the
residuary tax matters lie at the disposal of the States. Thus it is
the States and not the Federal Government that have inherent power
of taxation. This is confined by Section 2 subsections (2) and (3)
of Decree No. l of 1984 which permits the State Military Governor
to make laws for the peace, order and good government of the state,
only forbidding him to legislate on matters within the exclusive
legislative list and matters on the concurrent legislative list
relating to federal legislative powers except with prior consent of
the Federal Government thus under the present framework the States
have the taxing power to legislate on any taxing matter which has
not been specifically allocated to the Federal Military Government
which is the same arrangement as in the 1979 Constitution. Thus the
States enjoy taxing power in respect of the following items: taxes
on lands and buildings, taxes on the entry of goods into the State
for consumption, use or sale; taxes on the sale or purchase of
goods; taxes on goods and passengers carried by road or inland
waterways, road tax-vehicle licences and Registration feeds, tools,
Entertainment Tax on cinemas houses, betting and gambling, Pay-Roll
Tax etc. The local governments enjoy taxing power mostly in
property tax, rates and market rates. The system of distribution of
taxing power as embodied in the 1979
44
Constitution look fairly straightforward, simple as shown above.
However, in practice, this is hardly the case. For instance, once
the subject matter of taxation has been allocated to one tier of
government, the proceeds of the tax usually belong exclusively to
the authority levying the tax. But this is not the case under the
1979 Constitution with the taxation of individuals which has
exclusively been vested in the Federal Government. This therefore
needs examination. The other matter concerns Sales Tax which under
the analysis above is within the legislative competence of the
States. Because of the great importance of the Sales Tax and also
of the fact it has given rise to litigation up to the Supreme
Court, its Constitutional status is worth considering further.
These two issues will now be examined. 3.3.1 Personal Income Tax As
shown above, the Federal Government has the exclusive power under
paragraph 58 of the Second Schedule to the 1979 Constitution to
legislate on personal income tax which under the 1963 Constitution
was a matter for the States. Thus exclusive power of the Federal
Government to tax individuals can however, be traced to Section 76
(1) and (2) of the 1963 Constitution as amended by the Constitution
(Suspension and Modification) Decree, 1967 which gave power to the
then Supreme Military Council to make Laws for Nigeria or any part
thereof with respect to taxes on companies for certain purposes.
This was the genesis of paragraph 59 of the second schedule to the
Constitution
45
which vests in the Federal Government the exclusive power to
legislate on income tax. This is desirable for the purposes of
bringing about uniform principles for the taxation of income and
profits accruing to the taxpayers. Thus under the 1979 Nigerian
Constitution the Federal Government now has the power to enact a
uniform tax code throughout the country which can harmonize the
rates of taxes, reliefs and allowances thereby possessing a
powerful fiscal weapon with which to manage the economy of the
country. Although the Federal Government has the exclusive power to
legislate on the taxation of individuals, the proceeds from
personal taxation go to the States. The probable reason for this
may be simply to achieve uniformity in personal income tax
liability and make personal income tax an economic tool for the
Federal Government for the purpose of influencing economic
development in the country. The Federal Government has however not
used its taxing power to enact a comprehensive personal income tax
law for the whole country. The present tax law is the Personal
Income Tax Decree of 1993 which repealed Income Tax Management Act
1961 and the Income Tax (Armed Forces and other Persons) (Special
Provisions) Act 1972. 3.3.3 The Scope of the States Taxing Power As
has already been stated, the Federal Government has enumerated
powers of taxation. The 1999 Constitution has defined the cases in
which the tax power of the Federal Government is to be exclusive
(that is, Customs and Excise, Export duties,
46
Stamp duties, matters of taxation of incomes, profits and
Capital gains). Outside of this list, the States are
constitutionally competent to legislate on tax subjects as residual
matters. Thus the powers of the States in respect of taxation are
plenary except in so far as the contrary are expressly provided in
the Constitution which in this case, are the enumerated taxing
powers of the Federal Government. It is therefore the States that
have an inherent taxing power and not the Federal Government. Now
there is no specific mention of Sales tax as an item either in the
Exclusive Legislative list or in the Concurrent list of the 1999
Constitution in contradistinction to its specific stipulation in
the Exclusive lists of the 1960 and 1963 Constitution. The omission
or exclusion of the Sales tax from any of the legislative lists in
the 1999 Constitution therefore makes it a residual subject on
which only the States can legislate. Furthermore, constitutionally
there is no bar against multiple taxation. Thus where more than one
legislative authority such as the Federal legislature and a State
legislature have the power to levy a tax, there is nothing in the
Constitution that prevents the same person or article being taxed
by both the Federal and State Governments. What appears from the
above constitutional analysis is that the States have the power to
levy Sales Tax on commercial transactions of sales and purchase of
commodities and services. The power of the States to do so does not
therefore conflict with lie power of the Federal Government to
exercise its general taxing power as expressly spelt out in the
Constitution.
47
3.3.4 Tax Clearance Certificate It became compulsory as from 1st
April 1978 for a taxpayer to produce a Tax Clearance Certificate
for the preceding three years for some business transactions he
wants to undertake with the Government. Some of the transactions
and circumstances for which the production of a Tax Clearance
Certificate is required are: 1. 2. 3. 4. 5. 6. 7. 8. 9. application
for a government loan for industry or business; application for
registration and licensing of vehicles; approval of building plans;
application for Import Export licences; application for firearms
licence; pools betting licences; issue and renewal of liquor
licences; application for Government loans; application for foreign
exchange or exchange control and permission to remit funds outside
Nigeria;
10. application for Certificates of Occupancy; 11. application
for transfer of real property; 12. issue and renewal of market
stalls; 13. application for award of contracts by Government and
its agencies and registered companies; 14. application for
registration of a limited liability company or of a business name;
15. stamping of a guarantor's form for a Nigerian Passport; 16.
application for a buying agent's licence;
48
17. application for registration as contractors by Government;
18. application for distributorship of commodities in Government
owned Companies/Parastatals; 19. application for an Approved Users
Certificate. Several Tax Acts have been promulgated in the past
years in order to enhance the revenue accruing to Government from
taxation. These tax decrees however do not amount to a
comprehensive overhauling of the Nigerian tax system. They are only
geared towards patching or reshaping the existing structure which
complicates its conceptions. Finally, there is a complete dearth of
Nigerian tax cases and so Nigerian courts and Tax Authorities refer
frequently to English Tax cases which are of course necessary for
the understanding of Nigerian Tax Laws. This is so because Nigerian
Tax Law bears much similarity to English Revenue Law, at least as
regards general principles of taxation. English precedents, though
not legally binding here, and English methods for computing profits
and income for tax purposes are therefore followed in Nigeria.
3.3.4 LIST OF APPROVED T32AXES AND LEVIES FOR THE THREE TIERS OF
GOVERNMENT The following forms the list of taxes and levies for
collection by the three tiers of government which has been approved
by government and published by the Joint Tax Board (J.T.B.) as
follows:
32
Online website of the Nigeria High Commission, Canberra,
Australia
49
(A) Taxes collectible by the Federal Government i. Companies
income tax; ii. Withholding tax on companies; iii. Petroleum Profit
Tax; iv. Value-added tax (VAT); v. Education tax; vi. Capital gains
tax - Abuja residents and corporate bodies; vii. Stamp duties
involving a corporate entity; viii. Personal income tax in respect
of: y Armed forces personnel; y Police personnel; y Residents of
Abuja FCT; y External Affairs officers; and y Non-residents. (B)
Taxes/Levies Collectible by State Governments i. Personal income
tax: Pay-As-You-Earn (PAYE); Direct (self and government)
assessment; Withholding tax (individuals only);50
y y y
ii. Capital gains tax; iii. Stamp duties (instruments executed
by individuals); iv. Pools betting, lotteries, gaming and casino
taxes; v. Road taxes; vi. Business premises registration and
renewal levy; urban areas (as defined by each state): maximum of N
10,000 for registration and N5 ,000 for the renewal per annum rural
areas registration N2,000 per annum renewal N 1,000 per annum
y
y y y
vii. Development levy (individuals only) not more than N100 per
annum on all taxable individuals; viii. Naming of street
registration fee in state capitals ix. Right of occupancy fees in
state capitals; x. Rates in markets where state finances are
involved. (C) Taxes/Levies Collectible by Local Governments i.
Shops and kiosks rates; ii. Tenement rates;
51
iii. On and off liquor licence; iv. Slaughter slab fees; v.
Marriage, birth and death registration fees; vi. Naming of street
registration fee (excluding state capitals): vii. Right of
occupancy fees (excluding state capitals); viii. Market/motor park
fees (excluding market where state finance are involved); ix.
Domestic animal licence; x. Bicycle, truck, canoe, wheelbarrow and
cart fees; xi. Cattle tax; xii. Merriment and road closure fees;
xiii. Radio/television (other than radio/tv transmitter) licences
and vehicle radio licence (to be imposed by the local government in
which the car is registered); xiv. Wrong parking charges; xv.
Public convenience, sewage and refuse disposal fees; xvi.
Customary, burial ground and religious places permits; and
52
xvii.
Signboard/advertisement permit.
CHAPTER FOUR: PERSONAL INCOME TAX IN NIGERIA4.1 Personal Income
Tax in Nigeria Personal Income Tax is the oldest form of tax in the
country. It was first introduced as a community tax in northern
Nigeria in 1904, before the unification of the country in 1914, and
was later implemented through the Native Revenue Ordinances to the
western and eastern regions in 1917 and 1928, respectively. Among
other amendments in the 1930s, it was later incorporated into
Direct Taxation
53
Ordinance No. 4 of 1940. The need to tax personal incomes
throughout the country prompted the Income Tax Management Act
(ITMA) of 1961. In Nigeria, personal income tax for salaried
employment is based on a pay as you earn (PAYE) system, and several
amendments have been made to the 1961 Income Tax Management Act.
For instance, in 1985 Personal Income Tax was increased from N 600
or 10 per cent of earned income to N 2,000 plus 12.5 per cent of
income exceeding N 6,000. In 1989, a 15 per cent withholding tax
was applied to savings deposits valued at N 50,000 or more while
tax on rental income was extended to cover chartered vessels, ships
or aircraft. In addition, tax on the fees of directors was fixed at
15 per cent. In 1990 further amendments were made to Personal
Income Tax: apart from providing additional individual tax
allowances, minimum taxation was reduced from 1 per cent to 0.5 per
cent, so that individuals with incomes of N 3,000 or less were
exempt from submitting tax returns. Non-residents were exempt from
withholding tax on interest accruing in deposit accounts. Personal
allowances were further extended in 1992 to reduce the tax burden
of individuals while the monetization and taxation of fringe
benefits were introduced. The application of Income Tax Management
Act varied across regions/states, causing the burden of multiple
taxes on individuals. Two study groups were subsequently set up in
1991 to review the situation and improve tax collection. The 1961
ITMA was replaced with an amended act, which was superseded in 1993
by Personal Income Tax Act (PITA) No. 104. It was applicable with
nationwide coverage. Its administration, however, was assigned to
the states, which were54
empowered to tax individuals, or corporate or bodies of
individuals residing in its territory in a particular year. Rates
were also increased. The PITA coordinated the subsidiary
legislations for the PAYE system, withholding taxes, among others,
as stipulated by the Ministry of Finance. The PITA empowered the
Joint Tax Board to administer the tax throughout the country and to
coordinate its administration, while the State Board of Internal
Revenue (SBIR) became responsible for the administration of the
revenue. There have been some amendments since its implementation.
For instance in 1994, to achieve progressive taxation, the
withholding tax was increased from 5 to 10 per cent. Directors fees
payable by property and investment companies were raised from N
3,000 to N 10,000 when a 30 per cent ceiling was set for PIT. Child
allowance was first increased to N 1,000 and then, in 1996, to N
1,500 per child payable up to four children. In 1998 this became N
2,500 per child. In addition, tax relief to low-income earners was
increased to N 2,500, and individual marginal taxes were decreased
from 30 per cent in 1995 to 25 per cent in 1996. A recurring
problem with Personal Income Tax is the non-compliance of employers
to register their employees and to remit such taxes to relevant
authorities. To address this, in 2002 the government amended the
1993 Personal Income Tax Act to make non-compliant employers liable
to penalties up to N 25,000, as well as liable for the payment of
all tax arrears. Employers failing to keep proper records would
also face a penalty of N 5,000. A fine this small tends to
encourage tax evasion since the penalty for being caught is lower
than the cost for non-compliance. The issues of unremitted funds
from the PAYE system and withholding taxes particularly among
55
government ministries and agencies as well as lax adherence by
all three levels of government to the approved list for (tax)
collection, as stipulated by the 1998 Taxes and Levies Act 21, have
over the past five years attracted the attention of Joint Tax
Board. Personal income tax failed in Nigeria for lack of
equitability. In spite of the fact that the self-employed outnumber
paid workers and that they earn as much as four times that of the
formal sector employees, the bulk of Personal Income Tax is paid by
employees whose salaries are deducted at source. Inadequate
monitoring by tax authorities, the dominance of informal sector
activities and the fact that many Nigerians live in rural areas
make the coverage of self-employed workers difficult. Although
regulations were enforced in Personal Income Tax Act No. 104 of
1993, amendments are still made on a yearly basis. In addition to
the fact that amendments are not adequately informed to the public
nor incorporated in the relevant legislation, the legal language is
also ambiguous, confusing and unprofessional. There is very little
tax education in Nigeria; taxpayers are ignorant of the laws
regulating their taxation, and this makes disclosure difficult. Due
to the absence of communication between the government and the
people, most citizens view taxes as a mere legal hindrance rather
than their civic responsibility. The CITN summarizes the problem
confronting the Personal Income Tax administration as follows:
56
We must admit that tax administration is particularly hard here
because literacy level is low and record keeping is not yet a
popular culture. There are not enough tax officials to cover the
field. Most of the officials are little trained, ill equipped,
badly remunerated and corrupt Governments in Nigeria are perceived
as a corrupt and selfish lot, to whom money should not ever be
voluntarily given. Taxes paid are expected to end up in private
pockets, not in public utilities. The foregoing not only makes
compliance difficult, but also enforcement problematic. 4.2 The
Legal Basis of Personal Income Tax In the taxation of persons in
Nigeria the Federal Government has been progressively empowered by
successive constitution since 1960 to provide uniform principles to
be applied by all the States in the identification of taxable
persons and income and the computation of taxable income, hence the
enactment by the Federal Government of first the Income Tax
Management Act, 1961 as severally amended and consolidated into
ITMA cap 173 LFN 1990, and secondly the PITA 1993 which repealed
ITMA. The Personal Income Tax Act 1993 identifies taxable persons
and determines their assessable income. This is achieved by
determining the residence of the taxpayer and the source of origin
of his income. It further determines how the income so determined
is to be taxed. Basically, by the provision of the Personal Income
Tax Act every individual is liable to personal income tax in the
State where he is resident or
57
deemed to be resident if on the first day of January in a year
of assessment, he has a place or principal place of residence in
that State. 4.3 Income Taxation Income serves as a basis for
taxation basically because a tax payers income is used as the base
for his tax liability. As In Nigeria and many other countries
income is being used as the basis for taxation due to the fact that
it has been considered anti social to live on ones capital and as
Professor Wheatcroft pointed out in his book33: The tax collector
requires his money next year as well as this one. He does not want
to kill the goose that lays the golden eggs In the Nigerian taxing
statutes, no comprehensive definition is given as to the meaning of
the word income. Under the present Personal Income Tax Act
(PITA)34, income is simply or evasively defined as including any
amount deemed to be income under the Act. No doubt this definition
has not helped matters in trying to delimit a clear boundary around
the concept of income. The reluctance to draw a precise boundary in
this regard is not a recent development. In London County Council
v. Attorney General35, Lord Mac Naughten famously equipped, in an
attempt to define the word income that Income tax, if I may be
pardoned for saying so, is a tax on income. It is not meant to be a
tax on anything else.33
G.S.A. Wheatcroft, What is Taxable Income? (1957) B.T.R. Page
310 Section 3(3)(b) 35 (1901) AC 2634
58
In countries with advanced tax system, the essence of income tax
is hardly debatable, the greater percentage of taxable adults pay
their taxes voluntarily. Speaking with reference to American tax
system, Otto Eckstien observed in this pertinent manner: The most
astonishing fact about the American tax system is the fantastic
revenue it collects. Total taxes are over $536 billion, about 31
percent of gross national product. They are collected without
violence or bloodshed, with only some mild griping ... This is a
small miracle, it is possible because in our advanced society,
business and individuals keep accounting record from which they can
compute their tax bill. More importantly, it is possible because on
the whole, people are willing to pay their taxes. Ours is a system
of voluntary compliance, not assessment and enforcement by
Government. People know that the common cost of national defence,
of educating our children, and of necessary public services have to
be met. Generally, people respect the law and pay their taxes. In
Nigeria, the attitude of the citizens towards this civic
responsibility (i.e. payment of tax) does not come near the
Americans. Theirs is that of apathy. Taxation serves myriad
functions. The revenue generated from taxation sustains the
economic and social needs of the nation. Infact, taxation serves
multifarious ends, some of which have political, economic or social
bearings. In a nutshell, the essence of taxation is to raise
revenue for government expenditure or finance government projects,
control consumer demand, encourage investment and savings,
fight59
economic depression, inflation and deflation, guarantee
equitable distribution of income and wealth, control the general
trend of the national economy, and ensure a proper allocation of
national resources. 4.4 Determination of Residence A UN manual
explains the significance of residence for tax purposes: The
jurisdiction to impose income tax is based either on the
relationship of the income (tax object) to the taxing state
(commonly known as the source or situs principle) or the
relationship of the taxpayer (tax subject) to the taxing state
based on residence or nationality.... Under the residence
principle, a States claim to tax income is based on its
relationship to the person deriving that income. For example, a
State would invoke the residence principle to tax wages earned by a
resident of that State without reference to the place where the
wages were earned. In general, a State invokes the residence
principle to impose tax on the worldwide income of its residents.36
Definitions of residence for tax purposes vary considerably from
state to state. For individuals, physical presence in a State is an
important factor. Some States also determine residency of an
individual by reference to a variety of other factors, such as the
ownership of a home or availability of accommodation, family, and
financial interests. For companies, some States determine the
residence of a corporation based on its place of incorporation.
Other States determine the residence of a corporation byUnited
Nations Manual for the Negotiation of Bilateral Tax Treaties
between developed and Developing Countries 2003.36
60
reference to its place of management. Some States use both a
place-of-incorporation test and a place-of-management test.
Domicile is, in common law jurisdictions, a different legal concept
to residence. Residence as defined in double taxation treaties is
different from residence as defined for domestic tax purposes. Tax
treaties generally follow the OECD Model Convention which provides:
1. For the purposes of this Convention, the term "resident of a
Contracting State" means any person who, under the laws of that
State, is liable to tax therein by reason of his domicile,
residence, place of management or any other criterion of a similar
nature, and also includes that State and any political subdivision
or local authority thereof. This term, however, does not include
any person who is liable to tax in that State in respect only of
income from sources in that State or capital situated therein. 2.
Where by reason of the provisions of paragraph 1 an individual is a
resident of both Contracting States, then his status shall be
determined as follows: a) He shall be deemed to be a resident only
of the State in which he has a permanent home available to him; if
he has a permanent home available to him in both States, he shall
be deemed to be a resident only of the State with which his
personal and economic relations are closer (centre of vital
interests); b) If the State in which he has his centre of vital
interests cannot be determined, or if he has not a permanent home
available to him in61
either State, he shall be deemed to be a resident only of the
State in which he has an habitual abode; c) If he has an habitual
abode in both States or in neither of them, he shall be deemed to
be a resident only of the State of which he is a national; d) If he
is a national of both States or of neither of them, the competent
authorities of the Contracting States shall settle the question by
mutual agreement. 3. Where by reason of the provisions of paragraph
1 a person other than an individual is a resident of both
Contracting States, then it shall be deemed to be a resident only
of the State in which its place of effective management is
situated.37 The concept of residence determines the extent to which
the income of a taxpayer is liable to tax under a tax jurisdiction.
In Nigeria, a resident person (individual or corporate) is
assessable on the global income. This means that the taxpayer is
liable to tax on the income or profits accruing, derived from,
brought into, or received in Nigeria. It also determines the scope
of deductions that may be allowed for the purpose of computing an
individual's chargeable income. For instance, only residents may
claim childrens allowance, dependants allowance and life assurance
allowance.
37
http://www.oecd.org/dataoecd/50/49/35363840.
62
For income tax purposes, a person may be resident, non-resident
or possess dual residence. 4.4.1Residential Individual An
individual is regarded as resident in Nigeria throughout an
assessment year if he: (i) (ii) Is domiciled in Nigeria; Sojourns
in Nigeria for a period or periods in all amounting to 183 days or
more in a 12-month period; or (iii) Serves as a diplomat or
diplomatic agent of Nigeria in a country other than Nigeria. 4.4.2
Resident Individual And Liability To Tax (i) The Profit of a trade,
profession or vocation is liable to tax in Nigeria regardless of
the period for which such a trade, profession or vocation has been
carried on. (ii) Analysis Mr. John James entered Nigeria on 20th
July, 1991 and remained in an employment in the country till May
31st, 1992. Employment income is liable to tax on the basis of
residence.
63
Treatment Under the old law, Mr. John James would not be
regarded as resident in Nigeria since he stayed for less than 183
days in 1991 assessment year (July 20 to Dec. 31) and less than 183
days in 1992 Assessment Year (Jan. 1 to May 31). However, under the
new law, he becomes resident and therefore liable to Nigerian tax
as from January 19, 1992 (July 20, 1991 to Jan. 19, 1992 = 183
days). 4.4.3 Resident Corporation A company is resident in Nigeria
if it is registered or incorporated in Nigeria. Under the old law,
the determining factor was the "place of management". 4.4.4 Non
Resident A non-resident corporation or individual is liable to tax
only on the profit or income deemed to be derived from Nigeria.
4.4.5 Non-resident Individual A non- resident individual is a
person who is not domiciled in Nigeria or who stays in Nigeria for
less than 183 days but derives income or profits from Nigeria. A
non-resident individual becomes liable to tax from the day he
commences to carry on a trade, business, vocation, or profession in
Nigeria. However, he is liable to tax in respect of employment
income when he becomes resident. 4.4.6 Non-Resident Corporation
64
This is a company or corporation that is not registered or
incorporated in Nigeria but which derives income or profits from
Nigeria. It is to be mentioned here, for the sake of emphasis, that
exemption from incorporation does not confer exemption from payment
of tax on any company. Every company, resident and nonresident, is
liable to tax in Nigeria if its income is liable to tax under the
provisions of the Companies Incomes Tax Act. It is also to be
pointed out that the Nigerian tax laws do not exempt the income of
a branch from tax. An individual or corporation may have dual or
multiple residence status. 4.4.7 Dual Residence of Individuals
(Local) Ordinarily, a resident individual is subject to tax in
Nigeria in the State where the individual normally resides. In the
case where such an individual has two or more places of residence
in Nigeria for income tax purposes, he is subject to tax in the
State where he has the principal place of residence. The term
principal place of residence means, for an individual with: (i)
Pension as the only source of-earned income, his usual residence
constitutes the principal place of residence. (ii) Source of earned
income other than pension, and the place nearest to his usual place
of work; and (iii) Sources of unearned income, his usual residence.
Where the determination of the principal place of residence leads
to dispute
65
between two or more tax authorities, the Joint Tax Board
determines the tax jurisdiction. In practice, the determining
factor is the source of earned income. 4.4.8 Local Dual Residence
of a Corporation The constitutional arrangement in Nigeria vested
the taxation of all companies in the Federal tax authority. This
does not allow for the dual residence of corporations locally. All
corporations wherever located in Nigeria are under Federal tax
jurisdiction. Therefore, the problem of local dual residence of
corporations does not arise. 4.4.9 International Dual Residence The
definition of the term residence differs from one country to the
other. For instance, in Nigeria, the length of stay to qualify a
taxpayer as a resident is reckoned within a 12-month period. In
some countries, this is reckoned within an assessment year -
allowing for the qualifying period of stay to split over two years
of assessment. In some other countries (e.g. the USA), the citizen
is regarded as resident in the home country whatever the length of
stay abroad. This creates the problem of dual residence for the
individual who is regarded as resident in more than one country.
For example, he is regarded as resident at the same time in country
A where nationality is the basis of residence, in country B where
he has stayed for more than 183 days in a 12-month period and,
maybe, in his home country where he is away for the less than 183
days in that assessment year.
66
A corporation may also have the problem of dual residence. For
instance, the definition of the residence of a corporation in
Nigeria is the place of incorporation. In some other countries, the
relevant criterion may be the "place of management" or the "place
of residence of the directors". In this instance, the Nigerian tax
authority would treat the corporation as resident in Nigeria on the
basis of the place of incorporation while the tax authority of the
other country would regard the same corporation as resident in that
other country on the basis of place of management. The Nigerian tax
treaties govern the treatment of such cases and affected companies
can claim tax credit for the Nigerian tax in their home countries
to avoid double taxation. 4.5 Chargeable Income According to
Section 3238 chargeable income is the total income of an individual
as ascertained under the Act, after excluding any income exempted
or expenses made deductible by the Act. It provides as follows:
Section 32. Ascertainment of chargeable income.
Where income tax is payable for any year of assessment on the
chargeable income of an individual, other than a corporation sole
or body of individuals, the amount of that chargeable income shall,
notwithstanding anything to the contrary in any other enactment or
law relating to the ascertainment of chargeable income, be the
amount of the total income of that individual for that year,
ascertained under the provisions of this Act , after any income
exempted has been excluded therefrom and the deductions allowed by
this Part of this Act have been made. 4.6 Employment Taxation
38
PITA
67
According to Section 3(1)(b)39 any salary, wage, fee, allowance
or other gain or profit from employment including compensations,
bonuses, premiums, benefits or other perquisites allowed, given or
granted by any person to an employee is liable to income tax.
Section 10840 states that "employment" includes any appointment or
office whether public or otherwise for which remuneration is
payable, and "employee" and "employer" shall be construed
accordingly. Section 3(2)(d) further states that "employment"
includes any service rendered by any person in return for any gains
or profits. Thus remuneration arising from employment, which
includes office, is chargeable to income tax. Also, any gains or
profit which arises from the rendering of any service is taxable,
except it is exempted under the Act. With the combined effect of
sections 3(1)(b), 3(2)(d) and 108,41 remuneration from employment
or office is taxable in the hands of the employee. 4.6.1 Employment
Income Exempt From Tax Section 3 (1)(b) makes provisions for the
employment income exempted for tax as follows: (b) any salary,
wage, fee, allowance or other gain or profit from employment
including compensations, bonuses, premiums, benefits or other
perquisites allowed, given or granted by any person to an employee
other than 39
PITA PITA 41 PITA40
68
(i) so much of any such sums as may be admitted by the relevant
tax authority to represent reimbursement to the employee or
expenses incurred by him in the performance of his duties, and from
which it is not intended that the employee should make any profit
or gain, (ii) medical or dental expenses incurred by the
employee,
(iii) the cost of any passage to or from Nigeria incurred by the
employee, (iv) any sum paid in respect of the maintenance or
education of a child if any provision of this Act provides that any
sum received by the employee during a year of assessment shall be
deducted from the personal reliefs to be granted to him for the
next following year, (v) so much of any amount of rent the employee
is treated as being in receipt equal to the annual amount deemed to
be incurred by the employer under section 4 of this Act , (vi) so
much of any amount of rent the employee is treated as having
received under the provisions of section 5 of this Act, (vii) so
much of the amount of rent subsidy or rent allowance paid by the
employer, to or on account, for the employee not exceeding N100,000
per annum, (viii) the amount not exceeding N15,000 per annum paid
to an employee as transport allowance, (ix) meal subsidy or mean
allowance, subject to a maximum of N5,000 per annum, (x) utility
allowance of N10,000 per annum, (xi) entertainment allowance of
N6,000 per annum, (xii) leave grant, subject to a maximum of 10 per
cent of annual basic salary; (c) gain or profit including any
premiums arising from a right granted to any other person for the
use or occupation of any property; (d) (e) dividend, interest or
discount; any pension, charge or annuity;
(f) any profit, gain or other payment not falling within
paragraphs (a) to (e) inclusive of this subsection.
69
4.7
Deduction, Reliefs and Exemptions Not all expenditure deductible
under accounting principles are equally
deductible for income tax purposes, and in such cases,
provisions of the tax statute prevail. Generally for an income to
be deductible, it must satisfy the following provisions of the
Personal Income Tax42: Section 20. Deduction allowed.
(1) For the purpose of ascertaining the income or loss of an
individual for any period from any source chargeable with tax under
this Act there shall be deducted all out going and expenses, or any
part thereof, wholly, exclusively, necessarily and reasonably
incurred during that period and ultimately borne by that individual
in the production of the income, including a sum payable by way of
interest on money borrowed and employed as capital in acquiring the
income; interest on loans for developing an owner-occupied
residential house; rent for that period, and premiums the liability
for which was incurred during that period, payable in respect of
land or buildings occupied for the purpose of acquiring the income;
and any expense incurred for repair of premises, plant, machi
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