Types of taxes in Nigeria for businesses

Running a business in Nigeria can be quite challenging, and one of the most significant challenges faced by entrepreneurs is navigating the complex tax system. Taxes are an essential aspect of every business in Nigeria, and understanding the various types of taxes is crucial to ensure compliance and avoid legal complications. 

In Nigeria, businesses are divided into Sole Proprietorship, partnerships, and limited liability companies. In this article, we will discuss some of the significant taxes every business owner in Nigeria should know.

Taxes in Nigeria for all businesses 

1. Company income tax

Payable by limited liability companies only

Company Income Tax is a type of tax levied on the profits of Nigerian-registered companies and businesses. This tax is calculated based on the company’s taxable profit and is due annually. For companies registered in Nigeria, the company income tax rate is currently 30%, and it applies to all taxable profits earned from business operations in Nigeria.

It is important to note that not all of a company’s profits are subject to Company Income Tax. Profits from the sale of assets such as real estate or investments, for example, are not subject to Company Income Tax. Furthermore, certain business expenses, such as depreciation and capital allowances, can be deducted from taxable income.

2. Value-added tax 

Payable by all businesses 

Value-Added Tax (VAT) is a consumption tax that is levied on the supply of goods and services in Nigeria. The current rate of VAT in Nigeria is 7.5%, and it is payable by registered businesses on all taxable goods and services supplied to customers. VAT is charged and collected by businesses on behalf of the government and is remitted to the Federal Inland Revenue Service (FIRS).

Registered businesses are required to file their VAT returns monthly, and the deadline for filing is the 21st day of the following month. Failure to file or pay VAT on time can result in penalties and interest charges. It is important to note that not all goods and services are subject to VAT in Nigeria. Some exempt goods and services include basic food items, medical supplies, and educational materials.

Additionally, certain goods and services are zero-rated, meaning that they are not subject to VAT, but businesses can claim input VAT incurred on the purchase of such goods and services.

3. Withholding tax

Payable by all businesses 

Withholding Tax is a type of tax that is deducted at source from payments made to individuals and companies. In Nigeria, Withholding Tax is applicable to various types of payments, including rent, interest, dividends, royalties, and fees for professional services. The tax is deducted by the payer of the income and remitted to the Federal Inland Revenue Service.

The rate of Withholding Tax varies depending on the type of payment being made and the status of the recipient of the income. For example, the rate of Withholding Tax on dividends paid to a resident individual is 10%, while the rate for dividends paid to a non-resident individual is 7.5%. 

4. Personal income tax 

Payable by all businesses 

Personal Income Tax is a tax levied on the income of individuals resident in Nigeria. Business owners in Nigeria are required to deduct Personal Income Tax from the salaries and wages of their employees and remit the tax to the relevant state tax authority.

The rate of Personal Income Tax varies depending on the income bracket of the taxpayer. The tax rates range from 7% to 24%, and the rates are progressive, meaning that higher-income earners pay a higher rate of tax.

5. Education Tax

Payable by limited liability companies

Education Tax is a type of tax levied on the assessable profits of all registered companies in Nigeria. The tax is used to fund the education sector in Nigeria. The current rate of Education Tax in Nigeria is 2%, and it is calculated on the assessable profits of a company after deducting allowable expenses and exemptions.

Filing and paying Education Tax is a legal obligation for all registered businesses in Nigeria. The tax is usually filed annually, and the deadline for filing is six months after the end of the company’s financial year. Failure to file or pay Education Tax on time can result in penalties and interest charges.

6. Capital Gains Tax 

Payable by all businesses 

Capital Gains Tax is a tax levied on the gain or profit realized from the sale of a capital asset. In Nigeria, Capital Gains Tax is applicable to the sale of assets such as land, buildings, stocks, and shares.

The tax is calculated on the difference between the sale price of the asset and the cost of acquisition. The rate of Capital Gains Tax in Nigeria is 10%, and it is payable by the seller of the asset. The tax is usually deducted by the buyer of the asset and remitted to the Federal Inland Revenue Service.

Conclusion

Taxes are an integral part of every business, and understanding the Nigerian tax system is crucial for entrepreneurs to comply with legal obligations and avoid penalties. The various taxes that businesses must pay in Nigeria include corporate income tax, value-added tax, and withholding tax.

If a business fails to pay its taxes on time, it may be subject to penalties and interest charges. The penalties and interest charges are usually calculated based on the amount of tax owed and the duration of the delay. It is, therefore, advisable for businesses to file and pay their taxes on time to avoid legal complications.

There are tax exemptions for small businesses in Nigeria. Small businesses that have less than N25 million annual turnover are exempt from paying Company Income Tax. Additionally, companies that have less than N10 million annual turnover are exempt from paying Education Tax. However, even if a company is exempt from paying these taxes, it is still required to file tax returns indicating its status.

By understanding these taxes, business owners can make informed decisions and avoid any legal complications that may arise. We hope that this article has been informative and has provided valuable insights into the significant taxes that every business owner in Nigeria should know.