Taxation Principles and Practices in Nigeria

Academic Paper, 2022

244 Pages, Grade: 4.5


















Taxation is perhaps the oldest and recognized profession in the world. It has always been with us, it is still with us and it will continue to be with us. According to chapter two verse one of St. Lukes gospel of the Holy Bible which reported the birth of our Lord Jesus Christ with a decree from Augustus Ceasar that all the world should be taxed.

“and it came to pass in those days that there went a decree from Ceasar Augustus that all the world should be taxed; (and this taxing was first made when Cyrenious was governor of Asyria).

This Biblical record is perhaps the origin of taxation.

Taxation may be defined as the compulsory contribution imposed by a public authority irrespective of the amount of services rendered to the taxpayer in return.

Taxation can also be defined according to Ola (1987) as the demand made by the Government of a country for compulsory payment of money by the citizens of the country.

Tabansi (1997) says tax is a levy imposed by the Government against the income, profit or wealth of the individual, partnership and corporate organization.

The above definitions emphasizes the fact that taxation is a compulsory levy or contribution that is imposed by the Government on the people resident in the country. Since it is a compulsory payment made either directly or indirectly, refusal to comply becomes an offence, which attracts punishment.

Taxation is divided into various types such as Income Tax, Corporation Tax, Capital Gain Tax etc. In Nigeria, tax is levied by the authority of Federal Government Income Tax Management Act of 1961 (ITMA) and subsequent amendment including the finance (Miscellaneous Taxation Provisions) Decree 1992 and the finance (Miscellaneous Provisions) Decree 1997.

The tax year of most government establishment is based on the fiscal year, which is the normal calendar year and ranges from 1st January to 31st December of the same year. This income tax year is also called the year of assessment, for instance the 1999 year of assessment is the 1999 fiscal year.

Development of Income Tax in Nigeria

The development with respect to income taxation in Nigeria has been greatly influenced by the provision of the 1954 Constitution, which related to the sharing of income tax revenue among tiers of government. The constitutions were as follows: each region to fix the rate of tax under the direct ordinance, collect the tax and share the proceeds with the local government under its jurisdiction, the Federal government should fix the rate of tax under the personal income tax ordinance, collect the tax and share the proceeds to the regions on the basis of derivation, and the Federal government should fix the company income tax, collect the tax and retain wholly the proceeds of the tax.

By the provision of this constitution, the then Eastern and Western region were granted internal governments, by 1956, they started their own tax laws and thus, had the power to impose tax on their residence and retain the proceeds of such tax. The Federal government had the power to impose tax on companies and retain their proceeds.

With independence in 1960, another constitution emerged with a new pattern of the Nigerian tax structure. Under the constitution, the Federal government maintained its power to impose tax on companies and retains the proceeds. The regional governments maintained the power to impose tax on their residence and retain such proceeds. In 1961, the Federal government enacted Income tax Management Act 1961 (ITMA). The Act came into force on 1st April 1961. it was the Act of the National Assembly and applies to individuals throughout the Federation. This Act was enacted for three reasons:

To promote a model personal Income tax law for the ascertainment of income of individuals liable to pay tax throughout Nigeria.

To promote uniformity in the incidence and application of personal income tax laws throughout the country.

To conform with the provision of the then constitution, to ensure that no income is subjected to tax by more than one tax authority in the country.

Any region adopting the law must ascertain income of individuals in that territory in accordance with the provisions of ITMA. Any region could adopt or enact its own personal income tax law without adopting ITMA, but the laws must conform with the provisions of ITMA. The act contains the following provisions for; identifying sources of income chargeable to tax, ascertainment of income specifying the deductions allowed and deductions not allowed, identifying assessable income from a particular source, ascertainment of total income, double taxation relief, and establishment of joint Tax Board (JTB) charged with the duty of promoting uniformity in the administration of personal taxation throughout the Federation.

Regional Tax Laws:

In discussing regional tax laws as practiced in Nigeria then, one has to examine the tax laws as practiced by defunct regions of Eastern, Northern, Western, Mid – Western regions and the Federal Capital Territory.

The Old Eastern Region:

The Eastern region adopted the provisions of ITMA into its own laws. In 1956, the Eastern Nigeria first enacted the finance laws. With independence and the change in constitution, the region enacted another Eastern Nigeria Finance Law 1962. The region in addition to adopting ITMA made its own laws to supplement what was not found in ITMA. A peculiar feature of the law was the provision by which tax was payable according to graduating scale.

Northern Region:

Before the advent of the British in Nigeria, direct taxation had already been developed in the North. For instance, the Zakka, a tithe paid on crops and livestock had its origin in the Koran. The Kurdin Kasa was a tax paid by pagan farmers. The Shukka – Shukka, a plantation tax paid on all crops not subject to Zakka and the Jangali or cattle tax was levied on livestock.

This region enacted the personal income tax law in 1962.the law adopted the provision of ITMA and it was in line with the 1960 constitution. It started operation on 1st April 1962. A peculiar feature of the law of the Northern region was the law relating to the imposition of community tax and cattle tax.

Western Region:

In the West, prior to 1900, there was no formalized system of taxation comparable to that in the North. Their Kings relied mainly on tributes, tolls and arbitrary levies for their revenue.

It had her personal income tax law in 1957 in line with the 1954 constitution. On independence, the law changed a bit and was amended in 1961 (Amendment No. 11 of 1961)

Federal Capital Territory:

Personal income tax (PITA) Act was enacted by the government of this area. The law adopted the provisions of ITMA initially. There was another enactment, personal income tax (armed forced and other persons decree 1872). This provision applies to three categories of persons; the armed forces which included army, navy, airforce and police, members of the ministry of external affairs, and anybody deriving income from Nigeria but not resident in Nigeria.

There have been several amendments in all these laws since it was first enacted, but the most important amendment, which was the Income Tax Management Act (Uniform Provisions Decree (1975). The amendment made the person of ITMA applicable uniformly throughout the federation. ITMA was now amended to the ascertainment of tax payable, rates of tax and rates of personal allowances with effect from 1st April 1974.

Mid – Western Region:

With the creation of Mid – Western Region, it adopted the income tax law of the old Western region, but called it the Mid – Western income tax law.

Objectives of Taxation:

Some of the key reasons for the imposition of taxes are:

- to cover the cost of general administration, internal and external defence, maintenance of law and order, and the social services provided by the government;
- to reduce income and wealth in order to reduce inequality;
- to control the consumption of goods and services considered non- essential or harmful;
- to check inflation by reducing the volume of purchasing power;
- to service national debt and to provide retirement benefits, etc;
- to provide subsidies in favour of preferred sectors of the economy, for example, agriculture and selected industries;
- to implement government policies. Since the budget became an adjunct to monetary policies, taxation has often been increased in order to provide a large budget surplus, or reduced to stimulate demand. The government is also expected to provide relief to areas affected by ecological distress and also contribute financial resources to assist public sector enterprises;
- to serve as a powerful fiscal weapon to plan and direct the economy by shaping the economic growth and development of a country.

Tax Administration:

Three tiers of government namely, the Federal, the State and the Local Governments are charged with tax administration in Nigeria. The tax authorities of these three tiers of government derive their creation from the laws and they include:

The Federal Tax Authority: Federal Board of Inland Revenue (FBIR) (Sections 1, 2 & 3 of CITA LFN 1990).

The State Tax Authority: State Board of Internal Revenue (SBIR) (Section 85A, B & C of Personal Income Tax Act as amended by Act No. 31, 1996).

The Local Government Tax Authority: Local Government Revenue Committee Sections 85D & E of Personal Income Tax Decree as amended by Decree No. 31, 1996).

Taxing Power and Tax Jurisdiction:

Under the 1999Constitution, items58 and 59 of part 1 (the second schedule) (Exclusive Legislative list) vested the power to legislate and impose stamp duties and taxes on incomes, profits and capital gains, both for individuals and corporate bodies, in the Federal Government. In effect, only the Federal Government has the exclusive power to impose tax on individuals and corporate bodies by way of decree or acts. Consequently, the company income tax act, the petroleum profit tax act, the personal income tax came into existence as a result of enactments.

With the promulgation of PITA 104 of 1993, which aims to ensure uniformity throughout the states of the federation, all the previous state edicts imposing one tax or the other were repealed. Section 99 of PITA, 1993 repealed ITMA and the income tax (Armed Forces and other persons) (Special Provisions) Act.

While the imposition of taxes on individuals and corporate bodies is under the exclusive list of the Constitution, the collection of such taxes is placed under the concurrent Legislative list: this means the power to collect the various taxes is shared among the three tiers of government.


The Federal Inland Revenue Board is the governing body of the Federal Inland Revenue service (FIRS) which have operational responsibilities. The Board is headed by the Executive chairmen and its operational arm (FIRS) located in each state is headed by a director.

The Board is governed by the Technical Committee, which has a five years term of office and should have both functional and common departments.

Functional departments include assessment, collection, petroleum, tax audit and investigation and legal while the common departments are personal management, finance, supply and planning, research and statistics.

The board is composed of:

- The Executive Chairman – being a person experienced in taxation and to be appointed by the president from within the service.
- A member of the Board of National Revenue mobilization, allocation and fiscal commission.
- Director from Ministry of Finance.
- A member from the Nigerian National Petroleum Corporation, not lower in rank than an Executive Director.
- A director from planning.
- Director from Customs and Excise.
- A member from Corporate Affairs Commission, not lower in rank than a Registrar.
- Two other persons appointed by the board.
- A legal Adviser to the Board.
- Board Secretary (Ex – officio) appointed by the board.
- Directors/Heads of Departments within the Revenue service.

Technical committee

The Technical committee of the Board is composed of:

- The Executive Chairman as Chairman
- All Directors of the Federal Inland Revenue Service (FIRS)
- The legal Adviser to the Board
- The Board Secretary

The committee has powers to co – opt additional members as may be necessary in the discharge of its duties.

Functions of the technical committee

The functions of the technical committee are as follows: to consider all tax matters that require professional and technical expertise and make recommendations to the Board to advise the Board on all the powers and duties specifically listed in the Companies Income Tax Act; to attend to such other matters as may from time to time be referred to it by the Board.

Power and Duties of the Board

The technical committee is to consider all matters that require professional and technical expertise before recommendations are passed to the board. The committee’s duties are spelt out in the First Schedule of Companies Income Tax Act (CITA) 1979 and personal income tax Act.

They include:-

Management and administration of the tax.

Assessment, collection and accounting for all company tax in the manner prescribed.

Acquisition, holding and disposal of any property taken as security for or in satisfaction of any such tax or penalty or of any judgment debt due.

Authorization of any person within or outside Nigeria to perform or exercise any power or duty conferred on the board.

Authorization with the consent of the Commissioner of the Joint Tax Board to perform on behalf of the board any power or duty conferred on it.

Appointment of any agent for any other company for the purpose of the act.

Make assessment or additional assessment or vary them on objection.

Require companies to furnish returns or supply information.

Direct companies to keep proper books of account.

The Board is responsible to the Minister of Finance in the formulation of tax policies but autonomous on day to day administration of the Inland Revenue Service.

Issuing directives on certain aspect of tax law requiring clarification.


Seven persons form a quorum, one of whom most be the chairman or director of the FIRS.


The state Board of Internal Revenue are to follow the same pattern of the federal (FBIR) but excluding members not relevant to the state.

Also the technical committee of the board is to follow the pattern of the federal but excluding members not relevant to it.

The powers, duties and responsibilities of the board include:-

Assessment, collection and accounting for taxes collected from taxable persons. Taxable persons here means “any individual or body of individuals (including a family) and any corporation sole, trustee or executor having any income chargeable which is chargeable with tax under the provisions of” the Personal Income Tax Act.

The Board shall have power with respect to any tax due, acquire hold and “dispose of any property taken as security for or in satisfaction of any tax or any judgment debt due in respect of any tax” and account for the property or proceeds of sale as may be prescribed by the Commissioner.

The board shall be responsible to the commissioner of finance in the formulation of tax policies but autonomous.

The board may from time to time specify the forms of returns, claims, statement and notices under the Act.

The board shall have powers to appoint an agent for any taxable person for the purpose of the act.


This board is responsible for administering taxes under the jurisdiction of the local governments and the committee is made up of:-

- The councilor for finance who is to service as the Chairman of the Committee.
- Three local government supervisors
- Two other members experienced in Revenue matters to be nominated by the Chairman on their personal merits.


This Board which was set up by the income tax management act 1961, is to ensure the uniformity of the tax administration in Nigeria. Membership of the board is:-

Chairman – Nominated from the Federal Inland Revenue Board.

Secretary – Nominee from the Federal Public Service Commission.

One nominee each from each state of the federation and the FCT.

The legal adviser of FBIR who also is not a member of the Board but in attendance as an observer and offer advice when required.

The main functions of the board include:-

Looking into disputes arising between state tax authorities Co – ordination of tax administration between states Ensuring uniformity in the application of the Income Tax Management Act 1961 (The Principal Act) Approval of Pension and Provident Fund Schemes.

Giving advice on tax matters with other countries i. e. taxation agreement, payment, etc.

Composition of Joint State Revenue Committee

For each State of the Federation, the Decree 19 of 1998 established a Joint State Revenue Committee, which shall comprise – the Chairman of the State Internal Service as the Chairman. the Chairman of the Local Government Revenue Committees, a representative of the Bureau on Local Government Affairs not below the rank of a Director a representative of the Revenue Mobilization Allocation and Fiscal commission, as an observer, the State Sector Commander of the Federal Road Safety Commission, as an observer; the Legal Adviser of the State Internal Revenue Service the Secretary of the Committee who shall be a staff of the State Internal Revenue Service.

Functions of the Joint State Revenue Committee

The functions shall be to: - implement decisions of the Joint Tax Board advise the Joint Tax Board and the State and Local Governments on revenue matters, harmonize tax administration in the State. enlighten members of the public generally on State and Local Government matters; and carry out such other functions as may be assigned to it by the Joint Tax Board.

Use of Tax Consultants

Under the present legislation, Section 85(B), Subsections (3) (a & b) of the Personal Income Tax Act (PITA) No. 104 of 1993, as amended, the relevant tax authorities can engage the services of tax consultants or any other person to carry out some secondary assignments.

Areas where consultants can be used by Tax Authorities include: Computerization of the tax system, including payroll system; Training and re-training of tax authorities in specific areas; Researching into specific areas where improvement in tax administration may be required; Reviewing operational procedures from time to time, like the process of assessment, appeal, and objection; VAT Monitoring or procedures to ensure VAT compliance, provided assessments are not raised by consultants themselves and they do not undertake collection as well, and Monitoring compliance with PAYE procedures operated by employers provided no assessment is raised or actual collection undertaken by the consultants.


These are employees of the State Revenue Board who may vary in rank depending upon their knowledge and experience. They are: - to receive and examine returns and other information in order to determine the tax payable by a person to make and issue assessments on tax payable to make Beast of Judgment Assessment (BOJ) where no returns are received from the taxpayer. received and consider tax assessment objections from taxpayer and take decisions whether to revise earlier assessments or reject the objections. receive and deal with claims for repayment of overpaid tax administer PAYE system by receiving returns, issuing tax deduction cards and considering other matters.


Tax inspectors must be; Versed in the income tax laws Accommodating but firm Persevering and painstaking Patient and tolerant Above board and should neither show favour nor abuse his office in any way Credulous


These are also officials of the State Revenue Board who take steps to ensure that taxpayers pay their tax promptly. Such steps include service of notice of assessment returns of income forms, summons and affidavits and other necessary information. They are not however involved in the actual collection of taxes.


This is a body of six non-public officers having experience and capacity in management of substantial trade or business or the exercise of the profession, appointed by the commissioner by a notice in the gazette. The commissioner will ensure that one of the members is a member of a recognized professional accountancy body such as ANAN, ICAN, etc. and in case where any member resigns before the expiration of his three (3) years term, determine the vacancy and give notice of same in the gazette.

An appeal commissioner having financial interest or relative with the tax payer making an appeal or professional/client relationship if he is an Accountant or legal practitioner, shall give notice of such facts and absent himself from meetings(s) discussing such taxpayer’s appeal.

Without resignation, the office of an appeal commissioner shall be vacant if:-

The appeal commissioner has been absent at meeting (other than because of his interest) at two consecutive meeting without the written permission of the chairman of the board or He has failed to disclose his interest in a taxpayer or He has been convicted of a felony charge or of an offence under an income tax enactment in Nigeria or He is incapacitated by physical or mental illness. Adhoc appointment can be made by the commissioner where there is a vacancy. The commissioner shall also consider the remuneration of appeal commissioner subject to the approval of the executive council.


Assessment is determination of the total taxable profit and tax payable through the returns and other information supplied to the Board or Relevant Tax Authority(ies), by the various Tax payers.

The Board may proceed to assess every person or company chargeable with income tax as it may be after the expiration of time limit to such person or company and the delivering of the audited accounts and making of returns.

Where a taxable person or company has delivered a return or audited accounts and return, the Board may: accept the audited accounts and make an assessment accordingly; or refuse to accept the returns and, to the best its judgment, determine the amount of the total profits of the company or chargeable income of such person and make an assessment accordingly.

Income Tax Management Act (ITMA 1961), (as amended) and section 46 (3) of Company Income Tax Act (CITA 1979), in the following circumstances

- where a tax payer fails to declare his income. Income may be estimated and assessment raised thereon;
- where a company fails to deliver its return and the Board is of the opinion that such company is liable to pay tax;
- where a company delivers a doubtful return.

Best of Judgment (BOJ)

Best of judgment is a situation where an assessment is based on estimates and discretion of tax official, which may be on a fair percentage of the turnover of the business for a company. The chargeable income of individual may be estimated on discretion.

Notice of Assessment

This is a statement that is sent by the Board to each company or person on whose name a company is chargeable. This shows: the name of the person (or company) chargeable to taxes; the amount of income assessed; the tax payable; the place where payment of tax is to be made; the rights and duties of the tax payer in relation to the assessment i.e. the right of objection.

Note: The assessment notice must be served personally on the payer or served by registered post.

Types of Assessment

Under CITA, the following types of assessment may be raised.

(a) Original Assessment: This is the first assessment which is required to be made on a taxpayer under any of the following conditions:

(i) where the assessment has been made based on a return filed by the tax payer and accepted by accepted by the Revenue;
(ii) where the Revenue is not satisfied with the returns filed and has therefore, to the best of its judgment, determined the total profit of the company and hence the corresponding assessment; where no return has been delivered by a company that is liable to pay tax, the Revenue may use its Best of Judgment to determent the total profits and the tax payable.

Additional Assessment:

The Board is empowered to make an additional assessment if it discovers, at any time, that a company or person has been under assessed. Additional assessments may be made within the year of assessment or within six years after the expiration thereof. Where the omission or error is due to fraud, willful default or neglect the time limit will not stay.

(c) Revised Assessment: Where an original assessment received by a taxpayer is not accepted, a notice of objection may be raised in writing stating clearly the grounds of objection. The Revenue, considering the grounds of objection, may require additional particulars or information. Where this is satisfactory and both tax payer and the Revenue reached a compromise, the original assessment is put in abeyance (or no longer in use) and a revised or amended assessment is raised to replace it.

Forms of Assessment

(a) Provisional (Interim) Tax: The provisional tax is usually an amount that is equal to the amount paid by the company in the preceding tax year.

Every company shall, not later than three (3) months from the beginning of each year of assessment, pay a provisional tax in one lump sum. Where a company is interested in paying its tax liability for a tax year by self-assessment it may apply in writing to the Federal Inland Revenue Service (FIRS), for a waiver. If this is not received by the Board, the provisional tax assessment would be raised by the Board at the appropriate time. Where provisional tax assessment is raised, it may still be set aside where the tax payer writes to the Board of his intention to pay upon the filing of the annual return at appropriate time.

Provisional tax is not an assessment but an advance payment to be made as a set-off against the assessment for the year.

When is it Payable? payable when a self-assessment person fails to file his returns when due. payable where the collection of tax is in abeyance following an objection or an appeal. also, payable if the provisional tax is higher than the tax in dispute. Not later than 31st March of the year of assessment if paid in one lump sum. To enjoy installment payment concession however, the payment must commence in January. When approval is given for installmental payment, provisional tax may be paid in 4 monthly installments terminating 30th April of the year to which the payment relates.

Self-Assessment: Under this system taxpayers are required to make a return of their income plus a self-assessment of what their tax liability should be and forward these with their cheque for the tax due to their respective tax offices. In a self-assessment scheme, the tax payer computes his tax and capital allowances and uses this to complete the self-assessment form issued by the Board. This is opposed to the traditional method whereby assessments are raised by the Revenue. The Revenue’s role in the scheme is the verification of the assessment together with the supporting documents so as to sustain and ascertain the credibility of the scheme. The self-Assessment was introduced with effect from 1st January 1996.

Time for Payment of Self-Assessment

Accounting Date Due Date of Payment

(a) 31st December 30th June of the succeeding year
(b) 30th September 31st March of the succeeding year
(c) between first January and 30th June 1st January of the succeeding year
(d) at other cases 6 months after the end of the accounting year.

b(i) Advantages/Benefits of Self –Assessment Scheme

The long-time lag between the submission of returns and service of the notices of assessment would be eliminated.

It eases cash flow of a company, because it may be allowed to pay the tax over a maximum of six equal installments.

The taxpayer is in a better position to know his economic circumstances that will determine his tax liability and the burden of tax computation and assessment is shifted from the tax authorities to the tax payers It accelerates the pace of tax collection with the attendant cash flow benefits to the government.

It assumes the taxpayer to be honest and reasonable which bestows a high degree of trust and honour on the taxpayer.

Tax collection cost would be drastically reduced Where the installments are paid on the due dates, the tax payer is entitled to a 1% bonus which is deductible from the sixth and last installment.

In the event that the specified date for a particular installment is not met, the 1% bonus would be lost aside from the payment of penalty and interest.

b(ii) Disadvantages of Self—Assessment Scheme

Many taxpayers are likely to understate their liability because of high tendency to evade tax by Nigerians. Hence, there will be understatement of tax liability.

Illiteracy on the part of taxpayers may contribute to non compliance with tax policy. Thus, the problem of illiteracy may affect the success of the scheme adversely.


The relevant tax authority should keep the lists of all persons assessed to tax for each year of assessment while the Federal Board of Inland Revenue should keep the lists of all companies assessed to tax. Such lists are referred to as assessment lists. The lists shall contain the names and addresses of the persons (or companies) assessed to tax, amount of total income or profits, tax payable and such other particulars of assessment as may be required by the Board.


If a taxpayer or a company disputes an assessment, objection against the assessment may be made in writing to the Board within 30 days (except in exceptional circumstances beyond the taxpayer’s control e.g. postal delay) to review and revise the assessment. Such application should state precisely the grounds of objection. Where the relevant tax authority or the Board is satisfied with the grounds of objection, the assessment shall be amended accordingly. Where there is no agreement, the relevant tax authority (RTA) or the Board shall serve notice of its refusal to amend the assessment or amends the assessment accordingly to its Best of Judgment and serve the notice of the revised assessment to the taxpayer.


When the notice of refusal to amend had been received by the taxpayer or company, the taxpayer or company can appeal by giving a notice of appeal to the Body of Appeal Commissioners or State High Court within 30 days. Late appeal can only be heard if a reasonable excuse is given.


This shall specify the following: the official number of the assessment; the year of the assessment; the amount of tax charged; name and address of the applicant; the amount of the assessable income; relevant notice of assessment; the date the applicant was served with the notice of refusal to amend by the Board the precise grounds of appeal.

All notices or document to be given to the Appeal Commissioners should be addressed to the Secretary to the Appeal Commissioners. The taxpayer has the opportunity to discontinue any appeal before the hearing of such appeal by giving notice of the Appeal Commissioners’ Secretary and the Board may review the assessment in agreement with the taxpayer, and the appeal will be cancelled.


The Body of Appeal Commissioners shall meet in any town where there is office of the Federal Inland Revenue Department. The quorum at any meeting is any three Appeal Commissioners. In the absence of the chairman, any member can be voted as chairman. The secretary shall give seven (7) days’ notice to the Board and the taxpayer (appellant) of the date and place fixed for the hearing of each appeal. No notice is required in the case of an adjourned meetings for which a date was fixed at the previous meetings.

All notices, precepts and documents other than decisions of the Appeal Commissioners may be signed by the Secretary of the Body. All appeal shall be held in camera.

An appeal Commissioner having any direct or indirect financial interest in any taxpayer or company, or being a relative of any person having such an interest, and having knowledge thereof, shall, when any appeal by such tax-payer or company is pending before the body of Appeal Commissioners give notice to the Relevant Tax Authority or Board in writing of such interest or relationship and he shall not sit at any meeting for the hearing of that appeal. This provision shall also apply where an Appeal Commissioner is a legal practitioner or an Accountant, and the taxpayer or company is or has been a client of that Appeal Commissioner. The applicant may be requested to make a deposit of the lower of the amount of the tax charged upon the appellant for the preceding year of assessment, or one half of the tax charged by the assessment under appeal, before proceeding with the hearing of the appeal if the Relevant Tax Authority (or the Board) can prove to the satisfaction of the Appeal Commissioners or the court hearing the appeal in the first instance that: the appellant has failed to render an income tax return for the tax year concerned; or the appeal is frivolous or vexatious or is an abuse of the appeal process; or it is expedient to require the appellant to pay an amount as security for prosecuting the appeal If the appellant fails to comply with such order, the assessment against which he has appealed shall be confirmed and the appellant will have no further right of appeal whatsoever with respect to that assessment.

At the conclusion of the hearing, the Appeal Commissioners may confirm, reduce, increase or annul the assessment or make such order thereon as they think fit.

Every decision of the Appeal Commissioners shall be recorded in writing by their Chairman and a certified true copy supplied to the appellant (or company) and the Relevant Tax Authority upon a request made within three months of such decision. Notice of the tax charged by the Appeal commissioners will be served on the taxpayer and the tax charged must be paid within one month of notification of the amount of tax payable.

Canons or Principles of Taxation

Mercantilists, classical economists and physiocratic such as Adam Smith, J. S. Mill, and J. B. Say enunciated the 8 canons or principles of taxation which the tax system of a country should be based on. Adams Smith’s in The Wealth of Nations set out the first four – these are:

Canon of Equity or Equality. Canon of convenience. Canon of certainty: and Canon of economy. The other four canons such as Canon of simplicity Canon of flexibility Canon of impartiality and Canon of productivity; were articulated by other classical economists. The eight canons are desirable characteristics of a healthy tax system.

Briefly, they are as follows:

(i) The Canon of Equity/Equality: This means that the distribution of the tax burden should be equitable. Everyone should be made to pay his ‘fair’ share. The idea embodies the ability to pay. Only when a tax is based on the taxpayer’s ability to pay then it can be considered equitable or just. Equity can be horizontal or vertical.

‘Horizontal Equity ’ means that those with the same income should pay an equal amount of tax.

‘Vertical Equity’ means that those with different incomes should pay different amount of tax. Equity may be a proportional, just as much as by a progressive system of taxation.

The Canon of convenience: Under this canon, taxes should be considered in such a way that the manner and time of payment should be suitable the taxpayer.

The Canon of Certainty: The scope of the tax should be cleared; the tax should not be arbitrary. The taxpayers ought to be aware of the exact amount of tax they are expected to pay as well as the time and method of payment.

The Canon of Economy: The administrative costs should not be higher than the revenue to be realized. This principle of taxation requires that taxes should not be imposed if their cost of collection was excessive. A tax can be considered economical if the cost of collection is not excessive. On the other hand, if the cost of collection takes a large part of the tax collected, the tax is not economical.

The Canon of Simplicity: A good tax system should be coherent, simple and straight forward. The tax should be clear to the taxpayers and must be accepted by the public. Ambiguities should be avoided. A properly understood tax system eliminates the chances of corruption and oppression by tax officials.

The Canon of Flexibility: The tax system should be flexible especially in a Federal and democratic country where there are always changes of government. It is recognized under the canon that instead of a rigid tax system, a tax system that is responsive to changing realities is preferred. An adjustable tax system would allow any tax found to be obsolete, to be scrapped, and to be replaced with a meaningful and collectible tax.

The Canon of Impartiality: This principle recognizes that a tax should not discriminate between taxpayers under similar circumstances. An impartial tax system ensures that all persons similarly placed pay the same tax.

The Canon of Productivity/Fiscal Adequacy: This canon advocates that the yield from a tax should be adequate to cover government’s expenditure.

Tax Avoidance and Tax Evasion

Tax evasion is an attempt to escape tax liability (wholly or partially) by breaking the tax law. It is essentially, therefore, a criminal act since it is achieved principally by making false declarations such as under – reporting income or over – reporting relief and allowances. It is important to distinguish tax evasion from tax avoidance. The latter is an attempt to escape tax liability by circumventing the law, not by breaking it. Thus, even though the tax evader and the tax avoider have a similar end (namely, to escape tax liability), their means to the end differs. The evader is a criminal, but the tax avoider is just a smart taxpayer who exploits loopholes in the tax laws (and related laws) to reduce his tax liability. Tax evasion and tax avoidance are to be distinguished from tax delinquent or tax default both of which describe a situation in which a tax payer refuses (for one reason or the other) to pay his assessed tax in full and/or in time. Thus, it is possible for a tax evader or tax avoider to also be a tax delinquent.

It is clear from the above comparison that not much can be done by the tax administration about tax avoidance as long as the law continues to produce various loopholes for the smart taxpayer to exploit. Indeed, the tax administration by and large is not to blame for successful tax avoidance. By contrast, tax evasion is due principally to administrative ineffectiveness.

Distinction Between Tax Evasion and Tax Avoidance

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How Tax Can be Avoided

1. Indirect Tax Can Be Avoided

(a) Buying articles manufactured in Nigeria thereby avoiding import duty or imported articles.
(b) Describing an article as medicinal e.g. Ribena to avoid paying say VAT thereby leading to price reduction.
(c) Avoiding the consumption of goods whose prices are indirect taxes incorporated e.g. tobacco.

2. Direct Taxes may Be Avoided thus:

(a) Oil companies paying huge sums of foreign contractors;
(b) Engaging in pioneer industry and appointing outside associates as buying agents entitled to commissions;
(c) Transferring assets immediately before their sale from a subsidiary to its holding company to avoid attributing the profit to the subsidiary;
(d) A company setting up its new agriculture factory or equipment so as to obtain the additional rate of investment grant,
(e) A company wishing to pay a lump-sum to an employee, who is leaving, seeks to treat the payment as compensation for loss of office rather than remuneration (to reduce the employee’s tax burden on the amount payable).

Steps to be taken to Register a Company with the FIRS

The formal letter will have to be written by the Auditors or Tax Consultants to the FIRS informing the Board of appointment.

The letter should be accompanied by

i. A photocopy of the letter to appointment
ii. A photocopy of the company’s certificate of incorporation;
iii. A copy of the company’s memorandum and articles of association

The following additional information would need to be supplied:

The date of commencement of operation;

The registered office of the company

The names and addresses of the directors;

The addresses of the company’s bankers;

The principal activity of the company;

The accounting reference date of the company annually;

The shareholdings of the company.

Features of a Good Tax System

A good tax system for a developing country should satisfy most of the following salient features;

(i) Economic Growth Facilitator: The taxes should be an effective instrument of economic growth. The long term objective of a good public finance system is economic growth rather than short-run economic stability, so, a good tax system should encourage savings and capital formation and should be suitable for the mobilization of resources for accelerated economic growth.
(ii) Tolerable Tax Burden: A good tax system should ensure that the tax burden on a community does not exceed its taxable capacity. Tax burden can be minimized by introducing tax reforms that improve the nature of the tax levied, the time and mode of payment.
(iii) Minimum Sacrifice: Taxes are levied on incomes and wealth and their payment involves sacrifice on the part of the taxpayers. A good tax system, nevertheless, will always aim at minimizing this sacrifice.
(iv) Common Good and Maximum Social Advantage: A good tax system should adhere to this principle of maximum social advantage. It should ensure maximum benefits to the community as a whole.
(v) Highly Canonical: A good tax system should be highly canonical, (canons of taxation discussed under section ii above). A good tax system should be simple to administer as this will minimize the chances of tax evasion and tax avoidance. A good tax system should avoid multiplicity of taxes. However to ensure adequate public revenue, the tax system should be broad-based. Taxes should be convenient to the taxpayers in terms of the time and mode of payment. A tax system which enables the government to easily predict with sufficient accuracy the tax revenue yield is considered a good one. Also a tax system which is able to narrow the disparities in income and wealth between the haves and the have nots in the society is a good one.
(vi) Employment Stimulator: A good tax system for a developing country should aim at creating an enabling environment for raising the level of employment and for raising the standard of living of the people.


1. Classification according to Tax Base:

Taxes are classified in accordance with the tax base. The classifications are as follows: -

(a) Taxes on Income/Profits: These are:

(i) Personal Income Tax: This is based upon the income of persons, other than companies. The dominant factor is that what is taxes should be the income of the individual or person within the purview of the tax, e.g. income of individuals from trading, business, employment, partnership, trusts, and corporation sole are assessed under the PIT.
(ii) Companies Income Tax: This is based upon the taxable profits of companies incorporated under the Companies and Allied Matters Act 1990 or any other law that may replace it dealing with the incorporation of companies.
(iii) Petroleum Profits Tax

(b) Taxes on Capital: These are:

(i) Capital Gains Tax
(ii) Sales/Purchase Tax - Ad valorem taxes on specified commodities
(iii) Customs duties - Are taxes on imports and exports
(iv) Excise duties - Are taxes on locally produced goods within a country.

2. Classification according to the burden

(a) Direct and Indirect Taxes: Indirect taxation, the tax is imposed directly upon or on the property of the person paying the tax e.g. they are paid mainly on income, capital or property. In the case of indirect taxation, the payer is different from the person who bears the burden of the tax. The tax is generally collected from the importer, exporter, manufacturer, proprietor, wholesaler etc, of the taxable commodity or service but the burden of the tax is borne by the ultimate consumer or user of the commodity or service in the form of higher prices.

1. Direct Taxes

- Person Income tax
- Capital Gains Tax
- Petroleum Profit Tax
- Companies Income Tax
- Capital Transfer Tax (abrogated in Nigeria) with effect from 1/1/96.
- Certain category of property tax (depending on usage of property)
- Certain types of stamp duties (depending on type of instrument and the legal status of the parties)
- Some aspects of road taxes (depending on usage of vehicle)
- Entertainment tax (depending on who is paying)

2. Indirect Taxes: These are taxes on goods or services. They are sometimes referred to as expenditure taxes or outlay taxes. Many of them are ad valorem taxes.

- Value Added Tax
- Sales Tax (ST)
- Excise Duties
- Goods and Services Taxes (GST)
- Customs (Import/Export Duties)

Merits and Demerits of Direct and Indirect Tax

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(a) Equitable: Direct taxes are based on the principle of payment ability and are therefore considered equitable. Direct taxes are often progressive, thus in conformity with the principle of justice.
(b) Economical: Direct taxes are economical to collect, for example, the Pay As You Earn (PAYE). Additional collection expenses are not incurred in collecting additional tax revenue. Furthermore, no part of it is lost to collecting intermediaries such as employers.
(c) Certain: Taxpayers know exactly the amount and time for payment. The authorities can predict the anticipated yield from direct tax with a fair degree of accuracy.
(d) Flexible: Direct taxes are most convenient to adjusting according to government policy objectives. Higher revenue can be derived simply by an upward adjustment of the rate of tax.
(e) Civic Consciousness: The payment of direct taxes ignites the sense of civic responsibility. The reason for this is that payment of taxes makes the taxpayer feel that his money is a part of government revenue, and this stimulates a sense of concern for government financial prudence and accountability.
(f) Income Re-distribution: With relatively few distortions, direct taxes can generate a significant amount of revenue, and leave scope for income redistribution. Personal and company income tax reforms will often be necessary to enhance the revenue and efficiency of a tax system. Reform of taxes on company income is especially important because they account for about a third of revenue in developing countries.

(a) Easy to Pay: The key merit of indirect taxes is that they are convenient to pay. Its principle is Pay As You Acquire (PAYA). As you buy, you pay since the tax is in-built into the purchase price of goods.
(b) Difficult to Evade: Evasion is difficult if indirect taxes are levied on commodities for which demand is fairly inelastic.
(c) Highly productive: As indirect taxes are levied on a wide range of goods subject to mass consumption, the tax yield is very high. This is particularly so in developing countries where direct taxation yield is low due to the low taxable capacity of primary sector workers.
(d) Social Impact: Indirect taxes are effective for discouraging the consumption of non-essential foreign goods and undesirable commodities: Drugs, alcohol etc.
(e) Promotes Capital formation: Emanating from the social impact, when consumption of non-essential commodities are discouraged, it enhances saving which is the basis for capital formation and investment.
(f) Protection of Domestic Industries: High tariffs make imported goods costly hence less attractive. This serves as a protection for domestic enterprises producing similar goods.
(g) Discriminating: By imposing indirect taxes on luxury goods usually consumed by the rich and exempting the common man’s essential commodities from the taxes, indirect tax becomes an effective discriminating tool for effective fiscal equity.

(a) Disincentive to hard work: since direct taxes are targeted against income and profits, they suffer the weakness of acting as disincentive to hard work. It is observed that a high income tax or a super tax may discourage saving and investment and hence hinder the pace of economic progress. Instead of working overtime for higher pay that may become victim of high income tax, employees would prefer leisure.
(b) Tax Evasion: Tax evasion becomes attractive if the rate of income tax is high. Deliberate effort is made by taxpayers to locate loopholes in tax laws so that they can exploit them.
(c) Disincentive to foreign Investment: High income tax including company taxation and capital flight to tax haven elsewhere.
(d) Unpopular and Painful: direct taxes, for example, PAYE, affect workers take-home pay directly and helplessly. It is gone before you realize it and appeal against it is often protracted and futile.

(a) Inequitable: Indirect taxes are considered weak on ground of being equity-deficient. By this is meant the tendency of indirect taxes to be regressive. Where the tax is levied on essential goods and services the common man, that is the poor bears heavier tax burden hence makes a disproportionately high sacrifice.
(b) Diversion of Resources: Indirect tax may cause productive resources to shift away from the production of heavily taxed goods and services to lightly taxed ones.
(c) Uneconomical: Empirical results from developing countries indicate that indirect taxes are not as easy and cheap to collect as advocated theory. In practice many revenue officials are involved in collecting sales taxes, custom duties, VAT, exercise duties, etc.
(d) Difficult to predict yield: An additional demerit of indirect taxation is the difficulty associated with precise prediction of the tax yield. Indirect taxes are doomed if the commodities they are levied upon are perfectly demand elastic.
(e) Unpleasant to entrepreneurs: Compliance with the indirect tax laws may involve considerable nuisance and cost, the burden of which may rest on business owners.

3. Classification according to variation

Another way of classifying taxes is to categorize them on the basis of variation in tax rates. A particular tax can either be proportional, progressive or regressive.

Proportional Tax: A tax is regarded as being proportional when the same rate is charged on every taxpayer irrespective of the amount or size of the income.

Progressive Tax: A tax is progressive where the rate of taxation increases as income increases. It is a tax that is based on the idea of vertical equity which means redistribution of income from the well-to-do to the less privileged. A possible criticism is that it can produce disincentive effects by discouraging the spirit of enterprise or hard work. Others think otherwise, they feel it may actually encourage taxpayers to work hard. The system relies on the principle of ability to pay and is therefore considered mere equitable than proportional and regressive tax systems.

Regressive Tax: A regressive tax results when the incidence of the tax reduces with every rise in income or tax base. A regressive tax is a tax which falls more heavily on people with low income than on those with high incomes. The rate of tax decreases as the income rises.

Incidence of Taxation:

The incidence of a tax is on the person who actually pays it. In the case of income tax, it clearly falls on the person earning the income. In the case of indirect taxes, however, the incidence may be on the buyer or the seller or it may be shard in any proportion between them, depending on the elasticity of demand for the commodity on which the tax has been imposed. If the demand or a commodity is perfectly inelastic the price will rise by the full amount of tax, and so its incidence will be entirely on the buyer. If demand is fairly inelastic, the tax will fall mainly on the buyer. If, however, the demand for the commodity is perfectly elastic the seller will have to reduce his price by the full amount of the tax so that its incidence will be entirely on the seller. If the demand is fairly elastic the tax will fall largely on the seller than on the buyer.


Involves a tripartite position, namely:

- The tax policy;
- The tax laws; and
- The tax administration

The Tax Policies of Nigeria

Policies are general statements of intention which guide the thinking and action of all concerned towards the realization of the set objectives.

The following are the consistent tax policies of Nigeria since 1992.

(i) pursuance of a low tax regime with the aim of reducing individual tax burden, and thereby encouraging savings and investment,
(ii) deliberate movement of emphasis from income tax to consumption tax which is less prone to tax evasion,
(iii) introduction of the self-assessment scheme to encourage taxpayers participation in the tax assessment process which is considered to be more democratic in nature and realistic in approach.
(iv) movement from the traditional coercive method of taxation to voluntary compliance, and
(v) using the due process of law and the mechanism of an efficient tax administration to curb tax evasion and avoidance.

Tax Laws

The following are the notable tax legislation in Nigeria to date:

(a) Personal Income Tax Act (PITA) No. 104 1993: (This Act repeals the Income Tax Management Act and Income Tax (Armed Forces and other Persons) (Special provisions) Act 1972 No. 51 having reenacted the provisions of both enactment (Commencement 25th August, 1993)
(b) Companies Income Tax Act (CITA) CAP 60 LFN, 1990 (Commencement 1st January, 1958)
(c) Petroleum Profits Tax (PPT) CAP 354 LFN, 1990 (Commencement 1st January, 1958)
(d) Capital Gains Tax (CGT) CAP 42 LFN, 1990 (Commencement 1st April, 1967)
(e) Value Added Tax (VAT) Act No. 102 of 1993 (Commencement 1st December 1993)
(f) Education Tax Act No. 7 of 1993 (Commencement 1st January 1993)
(g) Stamp Duties Act CAP 411 LFN 1990 (Commencement 1st April, 1939)


The companies income Tax Act has note containing provision relating to the establishment of scrutineer committee. This is a committee of the Federal Inland Revenue which is saddled with special functions. The committee may be established by the Federal Ministry of Finance by notice in the Gazette in any area where the Federal Board of Internal Revenue has an office.

Composition: the committee shall consist;

(i) Not more than Six (6) persons, none of them being a public office;
(ii) A secretary who must be an officer of the FBIR department;
(iii) Members appointed must be of proven experience and knowledgeable in the management of large undertakings in trade or business, must be an experience person in a profession in Nigeria.


(i) To examine any accounts, documents, returns and any other statement of any company as listed by the board.
(i) To compute the adjusted profits of such companies for income tax purpose, in advance of an assessment;
(iii) To make recommendation to the board as to whether an assessment is adequate or otherwise;
(iv) The committee can increase an assessment, but has no power to reduce or lower it;
(v) Where the difference between the proposed assessment and the assessment recommended by it (committee) exceed one thousand Naira (N 1000) the mater must be referred to the board for its decision before that assessment is finalized;
(vi) To deal with claims for losses incurred by the companies which are referred to the committee by the Board.

Tax Administration:

Three tiers of government namely; Federal, State and Local Governments are charged with tax administration in Nigeria. The tax authorities of these tiers of government derive their creation from the laws and they include;

The Federal Tax Authority: Federal Board of Internal Revenue (FBIR) (Section 1, 2, & 3 of CITA LFN 1990)

The State Tax Authority: State Board of Internal Revenue (SBIR) (Section 85A, B & C of Personal Income Tax Act as amended by Act No. 31, 1996)

The Local Government Tax Authority: Local Government Revenue Committee (Sections 85D & E of Personal Income Tax Decree as amended by Decree No. 31, 1996).

Taxes to be Collected by the Federal Government

1. Companies income tax
2. Withholding tax on companies, residents of the Federal Capital Territory, Abuja and non-resident individuals.
3. Petroleum profit tax
4. Value added tax
5. Education Tax
6. Capital gains tax on residents of the Federal Capital Territory, Abuja, bodies corporate and non-resident individuals.
7. Stamp duties on bodies corporate and residents of the Federal Capital Territory, Abuja.
8. Personal income tax in respect of

(a) members of the Armed Forces of the Federation
(b) members of the Nigeria Police Force;
(c) Residents of the Federal Capital Territory, Abuja; and
(d) Staff of the Ministry of Foreign Affairs and non-resident individuals.

Taxes and Levies to be Collected by the State Government

1. Personal income Tax in respect of

(a) Pay-As-You-Earn (PAYE); and
(b) Direct taxation (Self Assessment)

2. Withholding tax (individuals only)
3. Capital gains tax (individuals only)
4. Stamp duties on instruments executed by individual
5. Pools betting and lotteries, gaming and casino tax
6. Road Taxes
7. Business premises registration fee in respect of:

(a) Urban areas as defined by each state, maximum of

(i) N10, 000 for registration, and
(ii) N5, 000 per annum retrieval of registration and

(b) Rural areas

(i) N2, 000 for registration, and
(ii) N1, 000 per annum for renewal of registration.

8. Development levy (individuals only) not more than N100 per annum on all taxable individuals.
9. Naming of street registration fees in the State Capital.
10. Right of Occupancy fees on lands owned by the State Government in urban areas of the State.

Part III – Taxes and levies to be collected by the Local Government.

1. Shops and kiosks rates
2. Tenement rates
3. On and Off Liquor License fees.
4. Slaughter slab fees.
5. Marriage, birth and death registration fees.
6. Naming of street registration fee, excluding any street in the State Capital
7. Right of Occupancy fees on lands in rural areas, excluding those collectable by the Federal and State Government.
8. Market taxes and levies excluding market where State finance is involved.

Constraints on the Effectiveness of Tax Administration

- Complete neglect of the Tax Authorities
- Improper use of Tax Consultants
- Limited or lack of Independence of the State Tax Authorities
- Inadequate Funding
- Lack of Qualified and Experienced tax officials at the State and Local government levels
- Tax Evasion and Avoidance
- Use of Extra-Legal means to collect tax by the Tax Consultants.

Effects of Taxation

It may act as dis-incentive to work e.g. tax on marginal earning.

Taxation may deter enterprise from increasing productivity especially if a businessman knows that the more money, the more tax he pays Taxation could encourage inflation if taxes on essential commodities increase there will be demand for high wages and this could lead to higher prices.

Taxation may direct economic resources depending on the elasticity of demand for the relevant product e.g. if there is a purchase tax on butter and price or butter goes up, people may like to purchase margarine and hence resource may be diverted to the production of margarine.

Practice Questions

1) a. State the composition of the Federal Inland Revenue Board.

b. List the duties the Board is expected to perform.
c. Explain briefly the duties of Scrutineers Committee, why are they established?
d. What constitute the Exclusive Legislative list and the concurrent legislative list of the 1999 constitution?

2) Highlight briefly on the development of Income Tax in Nigeria. Determine the specific origin of taxation.
3) a. When can the office of an Appeal Commissioner be deemed vacant?

b. Give 5 particulars to be stated in a notice of appeal against Appeal Commissioners’ assessment.
c. By what name can a company be chargeable to tax?
d. Distinguish the Technical Committee from the Joint Tax Board.

4) a. When can assessment be said to final and conclusive?
b. How may tax be classified?
d. Distinguish the Technical Committee from the Joint Tax Board.


Chargeable Persons

According to the ITMA 1961 part 1, persons chargeable to tax include the following:

Individuals Partnership Trustees of any trust or settlement Executors of Estate of deceased persons Family income A corporation sole or body of individuals An agent or itinerant worker.

An itinerant worker is an individual who works at any time during the year of assessment other than an Army officer, and Naval officer for a daily wage or earn his livelihood in more than one place in Nigeria and where total income does not exceed N600.

Total Income

It means in relation to an individual for the year of assessment, his aggregate assessable income for that year after the additions and deductions specified in part (v) if the ITMA, 1961.

Relevant Tax Authority (RTA)

This is the person or body of persons responsible under the law of the territory for imposing tax on income of individuals for administration of the law.

Individuals: Corporation sole or body of individuals – The RTA is the tax authority of the state in which the above is deemed to be resident for that year.

Executor: The RTA is the tax authority of the state in which the deceased was last deemed to be resident or should have been resident prior to the date of his death.

Trustee of any trust or settlement: The RTA is:

(i) The tax authority of the state in which the seat of administration of the trust or settlement is first administered where the income came from one state.
(ii) As determined by the Federal Board of internal Revenue in any other case.

Partnership: The RTA is the tax authority of the state in which the principal office or place of business of the partnership in Nigeria is situated on the first day of the year.

Village or Indigenous Community: The RTA is the tax authority in which the community is to be found.

Persons to whom special provision decree 1972 i.e. (Armed Forces and Persons in Foreign Service Employment and non - resident shareholders). The RTA is the Federal Board of Internal Revenue.

Resident – ITMA 1st Schedule

Place of residence in relation to individual means the place available for domestic use of individual a relevant day of the year (1st of January) except hotels etc, unless no other permanent place is available.

Principal Place of Residence (PPR)

Where an individual has more than one place of residence on the relevant day, the principal place of residence for tax purposes is as follows:

Individual holding foreign employment on the relevant day or hold such employment during the course of the year. The PPR is the territory in which the principal office of the employer is resident.

Where the individual holds a Nigeria employment: The PPR is the place he usually resides.

Where the only source of income earn is pension in Nigeria: The PPR is the place he usually resides but where he has no place of residence i.e. not resident in Nigeria, the PPR will be:

(i) If the pension is a Nigerian person wholly payable by the government of the territory.
(ii) If the pension is a Nigeria person payable by one or more state government, is deemed to be resident in the Federal territory.
(iii) If the pension is not a Nigerian person, he is deemed resident in the territory of the principal office of the pension Fund.

Income Chargeable

The income of the individual cal be categorized into two. We have the earned and the unearned income.

Earned Income:

This is income laboured for by an individual and it is made up of the following:

(i) Basic Salary
(ii) Commission received/bonus
(iii) Pension
(iv) Profit from trade Benefit in kind.

Apart from item (iv) i.e. profit from trade, all the other items are assessed to tax on actual year basis. Profit from trade is assessed on preceding year basis.

Unearned Income:

This in income that one does not labour for and it comes up as a result of previous investment. The following items constitute unearned income in the hands of the individual.

(i) Dividends (gross)
(ii) Rent (gross)
(iii) Interest on Bank deposit (gross)

Building Society interest (gross) Royalty (gross) Annuity.

All the items listed under the unearned income are assessed to tax on preceding year basis and they also suffer withholding tax.

Non – Taxable Income

Leave Travel Allowance paid in cash to cover the travel of an employee.

Touring allowance to cover individual out – of – pocket – expenses when on an official tour.

Reasonable entertainment expenses agreed by the relevant tax authority. Canteen meals or luncheon vouchers Cost of uniform overall or protective clothing Reasonable re3moval expenses including a temporary subsistence allowance where a change in place of employment necessitates a change of residence.

Wages paid to gardeners, security officers for protecting the company’s properties.

Benefits Taxable – Benefit in Kind

Free accommodation – Taxable at ratable value of the occupied premises. The value is determined by the tax authority. The contents of the accommodation are taxable at 5% of the cost or estimated market value on the date of acquisition. With effect from 1993 tax year, where employers build their own houses for employee’s use, capital allowances are claimable on such property. Employee will no longer be subject to tax on such benefits. But where employers rent accommodation for their employees, the amount paid for the hire of such houses for staff would continue to be taxed as part of the profits of the employer. The amount to be taxed shall be the amount of rent which are in excess of the present limits.

Annual rental of any asset in a house, which is hired e.g. Air conditioners – 5% of the cost, is taxable.

Electricity paid by the employer or electricity allowance A steward paid for by the employer is taxable.

Free use of car – where an employee uses a car freely without private mileage paid, he is teemed to be receiving taxable benefit equivalent to 5% of the cost of the car and 5% annual running cost of the vehicle and where driver is used exclusively by the employee, he is also receiving the taxable benefit of the driver’s wages.

P. A. Y. E (PAY – AS – YOU – EARN)


The taxpayer is issued with the Income Tax Return Form for his or her completion. It is a return of income and claims for allowances and relief. The law requires that the annual return of income (forms) should reach the taxpayer between 1st January and 28th February, otherwise the taxpayer should demand one. All claims for allowances and relief which are not included in the annual returns should not be entertained by the Revenue Authorities.

All employees are required to complete the income tax return form. From the completed forms, the Revenue Authorities are able to issue tax codes to the employers for the employees. The tax codes advise the employers on the amount of taxes to be deducted from the employees’ salaries or wages every month or every week.

The Pay – As – You – Earn is a system whereby the employers deduct tax every month from their employees’ salaries or wages at the time of payment on behalf of the Revenue Authorities. These deductions are the remitted to the Revenue Authorities on a monthly basis.

The PAYE cover such areas as salaries, wages, bonuses, commissions, pensions, director’s fees and all other remuneration paid to the employee on account of his employment.

It is proper here to note some exemptions of benefits in kind from assessment. The employee is not required to pay any tax on the followings:-

Luncheon Vouchers where they are not transferable.

Cost of meals provided to employees at a staff canteen, either free of charge or subsidized.

Provision of uniforms, overalls or other protective clothing to employees are not tax able.

Tax Clearance Certificate

(i) The amount of tax paid over a period of at least three years should determine the amount of public patronage to be enjoyed by a taxpayer.
(ii) The presentation of the tax clearance certificate should be required from those seeking public offices.
(iii) Those seeking public offices are under obligation to make public their tax profile for proceeding three years.
(iv) The relevant tax office is obliged to issue a tax clearance certificate within a maximum period of two weeks of its demand or reasons given for the denial in writing.

Personal/Individual Reliefs and Allowances

After determining the assessable income of the individual, the relies and allowances are deducted from it to arrive at the chargeable income. It is the chargeable income of the individual that is taxed based on the appropriate tax table. The following is a format of how an individual is assessed to tax.


Personal Income Tax Computation

Abbildung in dieser Leseprobe nicht enthalten

(i) Rent Allowance

Individuals are allowed to enjoy the following rent allowance subject to the maximum amount indicated in the following periods. Any allowance paid to an employee beyond the maximum amount allowed is subject to tax.

Abbildung in dieser Leseprobe nicht enthalten

(ii) Transport Allowance

Every employee is allowed to enjoy transport allowance up to the maximum allowed for the following years:

Abbildung in dieser Leseprobe nicht enthalten

(iii) Personal Reliefs

Thee are reliefs enjoyed by individuals either as employees or self-employed

(a) Personal Allowance: This is granted to every taxpayer but where the relief is greater than total income, the taxpayer will pay the minimum tax

Abbildung in dieser Leseprobe nicht enthalten

(b) Marriage Allowance: This is granted to a married man living with the wife in the preceding tax year or where he is separated or divorced by a competent court, he could enjoy alimony not exceeding N300.

Abbildung in dieser Leseprobe nicht enthalten

(c) Children Allowance:

This is claimed by every taxpayer and subject to maximum of four children. The children must be under 16 years of age but where a child is more than 16 years, he must be;

(i) Receiving full time education in a recognized institution
(ii) An apprenticeship
(iii) An adopted child qualifies for this relief. It can be claimed between persons or apportioned equitably between parents. Widows can claim in respect of children by deceased spouse.

Abbildung in dieser Leseprobe nicht enthalten

(d) Dependent Relatives Allowance: Where a taxpayer maintains the following

(i) A widowed mother or mother-in-law
(ii) A close relative who is incapacitated by old age or infirmity both of whom can have an income not greater than N600. He may claim a maximum of N400 or equitable sum in proportion to his contribution where the dependant relative is being taken care of by more than one person. With effect from 1987 to 1994, the amount was increased to N600 per annum. From 1995 – 1997, the amount increased to N1, 000 per annum. From 1998 to 2002, it increased to N2, 000 per relative subject to maximum of two.

(e) Life Assurance Premium Relief: This is given in respect of premium paid in respect of the taxpayer or spouse, subject to restriction as follows; the lowest of :

(i) the actual premium paid
(ii) 10% of the capital sum assured on them; 20% of the total statutory income; premium payable on life assurance, retirement contributions, widow’s compensations scheme should be more than N2, 000 in one year with effect from 1987 to 1992. From 1993 – 1995, maximum of N5, 000 per annum. From 1996 tax year to 2002, the limitations and restrictions on insurance premium relief in determining the chargeable income of the individual were removed.


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Taxation Principles and Practices in Nigeria
National Open University of Nigeria
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Johnbest Churchill (Author), 2022, Taxation Principles and Practices in Nigeria, Munich, GRIN Verlag,


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