FUNDAMENTALS OF PERSONAL INCOME TAX IN NIGERIA: FILING OF TAX RETURNS IN LIGHT OF THE COVID-19 PANDEMIC
By: Obare Princess Dafiaghor, ACTI
When people hear the word ‘tax’, they cringe at the idea of giving hard earned money to the government, especially where the government has failed to carry out visible developments for the good of its citizenry. Nonetheless, tax is necessary for revenue generation, which could in turn spur government into embarking on developmental projects as well as spur the taxpayers into persistently demanding for good governance.
Tax is a compulsory contribution levied on the income and gains accruing to individuals and corporate bodies for public benefit. Taxation is one of the emerging areas of practice for professionals in Nigeria and an evolving area for the Nigerian Government. However, there is a dearth of awareness on tax responsibilities by majority of the masses. Come to think of it, how many persons actually pay income tax in Nigeria?
No doubt that almost everyone pays Value Added Tax (VAT), but VAT is just a small fraction of the tax required to be paid and it is an indirect tax levied on specified goods and services.
There are various types of taxes which include Companies Income Tax, Personal Income Tax, Petroleum Profits Tax, Capital Gains Tax, Withholding Tax, Value Added Tax, Education Tax, Stamp Duties, Custom and Excise Duties etc., but this article focuses on the basics of Personal Income Tax in Nigeria.
Personal Income Tax
Personal Income Tax is the tax paid by an individual to the Government on income received from employment, investment and/or business transactions. However, certain classes of income are exempted from tax, such as, gratuities and compensation for loss of employment. The issue of whether gratuities are exempted from tax has been laid to rest by the case of Nigerian Breweries Plc v. Abia State Board of Internal Revenue, wherein it was held that gratuities are wholly tax exempt.
Who Pays Personal Income Tax?
As the name implies, it is a tax paid by a natural person. Such natural person could either be a sole proprietor, a partner, a trustee or an employee. Please note that Juristic persons (companies) are excluded from paying personal income tax, but they can act as collection agents for the tax authority under Pay as you Earn Scheme, which would be subsequently expounded in this article.
Who is Personal Income Tax paid to?
The authority to which the tax would be paid is determined by the residence of the individual. For persons resident in the Federal Capital Territory and members of the armed forces, police force and staff of the Ministry of Foreign Affairs, tax is payable to the Federal Inland Revenue Service. For persons resident in one of the various states of Nigeria, tax is payable to the relevant State Board of Internal Revenue.
What is the rate of tax payable?
Tax is paid on a yearly basis and the amount of tax payable by a taxable person is determined by the amount of income received by that person in the relevant tax year.
Where a person (whose only source of income is employment) earns less than N300,000.00 in a year, the tax payable would be 1% of the gross income. But where the income exceeds N300,000.00, the tax payable would be calculated based on graduated rates ranging from 7%, 11%, 15%, 19%, 21% to 24% of taxable income.
For example, say the taxable income of Mr. Bruce is N3,500,000.00 (Three Million Five Hundred Thousand Naira), the personal income tax payable would be calculated as follows:
7% of 300,000 (out of 3.5m) = 21,000
11% of 300,000 (from remaining 3.2m) = 33,000
15% of 500,000 (from remaining 2.9m) = 75,000
19% of 500,000 (from remaining 2.4m) = 95,000
21% of 1,600,000 (from remaining 1.9m) = 336,000
24% of remaining 300,000 = 72,000
Tax payable would therefore be: 21,000+33,000+75,000+95,000+336,000+72,000 = N632,000.00 (Six Hundred and Thirty-two Thousand Naira)
It is imperative to note that gross income is different from taxable income. While gross income consists of the entire sums received in a tax year, taxable income is the sum remaining after the deduction of allowables and reliefs from the gross income. By virtue of the Personal Income Tax Amendment Act, 2011, every taxable individual is allowed to deduct from the gross income a consolidated relief allowance (which is 20% of the gross income plus N200,000.00 or 1% of gross income, whichever is higher). Also in the deductible category are: pension contribution, payments made for health insurance, life assurance and payments made for national housing fund contribution.
Mode of assessment of tax payable –
For a person whose income is derived from only employment, tax would be paid under the Pay-As-You-Earn (P.A.Y.E.) Scheme. This is a scheme whereby the employer acts as a tax collecting agent for the tax authority and as such, the employer is mandated by law to deduct tax from the employee’s salary monthly and remit same to the tax authority. As a mandatory provision of law, every employer is required to register for P.A.Y.E. with the relevant tax authority.
Usually the process for registration under the P.A.Y.E. scheme starts with submitting a letter of application to the tax authority. The letter would contain the name of the employer, the details of the employees as well as their monthly remuneration. It is important that an employer retains the service of a tax practitioner to help him/her compute the tax liability of his/her employees or leave the calculation of tax liability to the relevant tax authority. If an employer opts for the latter, it is important to include in the application letter, details of any tax exempt contribution which the employees have made. E.g. pension contribution, health insurance, etc.
While for a person whose income is derived from other sources apart from employment, payment of tax would be made on a direct assessment basis. This could take the form of self-assessment; in which case the taxable person would compute his tax liability without the aid of the tax authority, or, the tax authority would compute the taxpayer’s tax liability based on his/her account record.
Timeline for filing tax returns and making remittances
For direct/self-assessment, filing of tax returns and payment of tax are carried out concurrently. Every taxable person is required to file his/her Personal Income Tax returns and pay tax not later than 31st march of every assessment year.
As an incentive, the tax authority grants a 1% bonus of chargeable tax, to any person who files his/her self-assessment return early. Early in this parlance is within 90 days from the commencement of the assessment year. For instance if a person earns income from January, 2019 to December, 2019, the assessment year would be in 2020 since tax is paid in arrears.
Failure to file tax returns is an offence punishable with a fine of N5,000 alongside N500 for each day of default and or 6 months imprisonment.
For the P.A.Y.E. scheme, monthly tax returns are filed alongside the remitted tax. Every employer is expected to remit tax collected from his/her employee to the tax authority on the 10th day of the succeeding month. Take for example that Mrs. B is the employer of Mr. Cee, and for January, 2020, Mrs. B deducts N5,000.00 from Mr. Cee’s salary as personal income tax under P.A.Y.E, Mrs. B is required by law to remit the deducted tax to the tax authority not later than 10th February, 2020.
Every employer is also required to file annual returns of the tax deducted/remitted in the preceding year on or before 31st January of the assessment year. That is, returns of all tax deducted by Mrs. B from Mr. Cee’s salaries in 2020, must be filed by Mrs. B not later than 31st January, 2021.
By the Federal Inland Revenue Service gazetted Regulation dated 19 December, 2011, filing of tax returns can be done by the taxpayer personally or through an accredited agent; a person certified by CITN, ANAN or ICAN.
Procedure for Filing PIT Returns
A taxpayer is expected to file returns with the tax authority nearest to his/her residence. The said returns should consist of the following:
- Duly completed self-assessment form,
- Duly completed income tax form (Form A), showing:
- full amount of income earned in the preceding year from all sources;
- particulars of income, reliefs, allowances and deductions, and,
- declaration/attestation of the correctness of the returns. (persons in employment must also include a declaration of income earned outside employment and income earned from employment).
- Evidence of payment of tax.
Under PAYE, the returns to be filed by an employer must contain the following:
- Duly completed form A
- Duly completed Form H1 (annual income declaration form)
- Evidence of payment of tax
- A schedule of the tax deduction showing:
- Employer’s name
- Employer’s Tax Identification Number (TIN)
- Employees’ names
- Employees’ TINs
- Total salary for each employee
- Consolidated relief
- Tax deducted
- Total tax charged and remitted
The procedure for filing tax returns is outlined below:
- Obtain the relevant forms from the tax authority free of any charge;
- Complete and sign the forms correctly;
- Complete the pay-in slip correctly and make payment at the approved bank;
- Collect e-ticket from the bank as evidence of payment;
- Present the e-ticket alongside the duly completed forms to the tax authority;
- Obtain your tax receipt.
TAX MEASURES IN LIGHT OF COVID-19 PANDEMIC – FILING RETURNS
As a result of the Corona Virus (COVID–19) pandemic, which necessitated the Federal Government of Nigeria as well as various State Governments to direct the adoption of safety measures including mandatory lock down of business activities, persons who were awaiting the 31st day of March, 2020 to file their PIT returns with the tax authorities, onsite could not do so.
In a bid to bypass this constraint, the Federal Inland Revenue Service (FIRS) made express provisions for filing of tax returns and correspondence to be via electronic means. This in effect, is that taxpayers resident in the FCT and those under the FIRS tax net can conveniently file their tax returns online during this lock down period by accessing https://efiling.firs.gov.ng
Also, taxpayers in states like Lagos, Rivers, Anambra, Kogi and the FCT can also file their personal income tax returns online. Aside adopting the above measure, Lagos State Internal Revenue Service has also extended the time for filing of PIT returns by two months. In essence, the due date for filing tax returns by taxpayers resident in Lagos State is now 31st May, 2020.
For other states with no technological infrastructure for online filing of tax returns, taxpayers who are yet to file their returns would be left to incur the statutory consequences of failure to file tax returns within the prescribed time. As stated above, this includes payment of a fine alongside a default fee of N500.00 per day with the possibility of imprisonment for 6 years.
To escape this impending liability, a taxpayer can apply to his/her tax authority for extension of time within which to file tax returns in view of the compulsory lock down emanating from the COVID-19 pandemic, as the law vests the tax authorities with the powers to extend time for a taxpayer to file tax returns.
In conclusion, while the taxpayer can utilize the option of seeking for extension of time to file returns, it is recommended that the tax authorities take advantage of technological advancement by putting requisite infrastructure for online filings.
While this is not an exhaustive discuss on Personal Income Tax, it is an introductory discuss to bring to fore the simplicity shrouded in seemingly complexities regarding issues of tax as it relates to Personal Income Tax, as well as the tax palliative measures adopted by tax authorities in light of the Covid-19 pandemic. Professionals who are desirous of branching into tax practice should start by engaging in the process of paying/computing their personal income tax as well as that of their employees, where applicable. No better way to learn than to actually learn on the job.
DISCLAIMER: THIS ARTICLE IS INTENDED TO PROVIDE GENERAL INFORMATION ON THE ABOVE STATED SUBJECT AND DOES NOT IN ANY WAY CREATE A CLIENT/ATTORNEY RELATIONSHIP BETWEEN READERS AND AEQUITAS, NEITHER DOES IT SERVE AS LEGAL ADVICE. WE ARE AVAILABLE TO PROVIDE PROFESSIONAL LEGAL ADVICE WHERE SO REQUIRED BY THE READER.
 Judgment delivered on 20th June, 2019 in Appeal No. TAT/SEZ/002/2017
 Section 2 (2) of the Personal Income Tax Act, 2011
 Sixth Schedule to the Personal Income Tax (Amendment) Act, 2011
 Section 81 of the Personal Income Tax (Amendment) Act, 2011
 Section 44 of the Personal Income Tax (Amendment) Act, 2011