A BusinessDay report shows that Nigeria's tax income has decreased by 76% over 5 years; from ₦5 trillion in 2012 to ₦1.2 trillion by 2016.
The Nigerian law requires companies operating in and registered in the country to pay different taxes. These taxes are paid to different levels of government via the Federal Inland Revenue Service and the state's Revenue Service e. g Lagos Inland Revenue Service (LIRS).
State taxes include;
- Personal Income Tax,
- Business Premises Tax,
- Development Levy( for employees),
- Withholding Taxes (Individual and unincorporated entities)
On a federal level, taxes are;
- Value Added Tax,
- Withholding Tax (Incorporated entities)
- Company Income Tax Education Tax
These taxes sure look like a handful on paper, but they are mostly are inexpensive. Yet, for many reasons, tax compliance for small businesses are startups is at an all time low; most do not pay taxes at all.
A survey taken in the course of this report shows that 80% of sampled Nigerian businesses and startups do not pay taxes and most are not even aware of what is required of them. This is an alarming high considering the penalties and long-term costs of tax evasion. Why is tax evasion at an epidemic proportion in Nigeria?
Reasons for a low or zero tax compliance
Taxation has supposedly become easier over the years with digitization and Remita, but regardless of these simplifications, a lot still impede the taxpayer's experience. The potential taxpayer fills forms, then takes it to the bank where there is mostly a network/internet related problem in accessing the Remita platform.
The same aforementioned report shows that regardless of the digital means of remittance, preference for cheques has grown over the years.
This graph is enough pointer to the fact that complexities still abound in the revitalized tax payment systems.
Tax compliance is a not too expensive venture, but many businesses do not know this and cannot relate with the cost. AccountingHub charges between ₦20,000 to ₦30,000 monthly to file taxes; a good rate, but one that some small businesses may still not be able to afford.
This charge is for the nominal tax compliance procedure, after a major tax related brush, an external auditor will be needed to mediate with the government. The cost for getting this is prohibitive and dependent on how much is involved.
For a small business generating zero to minimal revenue and running lean, all these recurrent expenditures can sometimes be impossible to squeeze into a budget.
There are a myriad of problems that classified under this particular class; a lack of information is one of the major reasons small businesses in Nigeria do not pay taxes. Ninety percent of the startup and small business owners interviewed did not have the slightest inkling on what taxation for them entails.
Tayo operates a profitable internet based business but still cannot afford the time to pay tax. According to him,
The process of even finding out what taxes I have to pay is too tedious and time wasting to bother, believe me I've tried.
It is unclear whether to blame the government or the businesses themselves. Before going into business, every business owner should be equipped with knowledge of important things like taxation, but the entrepreneurial clime in Nigeria is not always the norm. People start businesses with passion,drive and hunger to succeed sans any real knowledge of how things actually work.
In cases like this which is majorly the norm, the onus is on the Federal Inland Revenue Service and other relevant government agencies to strategically amp up sensitization campaigns through relevant channels.
But it is clear they're failing woefully at this. Esther a Lagos based account executive says the Nigerian tax authorities are more interested in the enforcement and collection process than they are in enlightening the taxpayers.
Emmanuel a professional with over a decade of experience in tax consulting and auditing echoes Esther's sentiment. Speaking further on the lackadaisical attitude of the tax authorities he says;
Their jobs seem to be centered around chasing down offenders than educating them. If I do not know to pay tax, where do I start?
There have been multiple reports of unhelpful officials at the tax offices. As much as everybody is expected to research and be abreast of the relevant laws relating to taxation, the onus lies on the tax authorities to set the ball rolling.
A lack of a sense of civic responsibility can be a reason for non-payment of taxes. A startup founder explained in very strong words how he cannot remit ₦1 of his money to the Nigerian government because in his own words, the government has not done anything for him or his country.
This particular threw aside suggestions that the government cannot do something for everybody, even the projects that will be executed will come directly from the taxpayers purse. On the other hand, non-payment of tax is against the law of any country and it is unadvisable to start an entrepreneurial career on the wrong side of the law.
Penalties for defaulting on tax
There are various penalties for not paying tax, every single tax evaded carries its own punishment. Generally, under Section 66 of the Federal Inland Revenue Service’s Companies Income Tax Act tax collectors the power to seize/auction off the goods and even premises of defaulting taxpayers to recover monies owed.
So it is perfectly legal for the authorities to seize assets if taxes are default on; it is the law.
Section 40 of the 2006 Federal Inland Revenue Service Act deals with ‘Failure to deduct or remit tax’ and states that;
Any person who being obliged to deduct any tax under this Act or the laws listed in the First Schedule to this Act, but fails to deduct, or having deducted fails to pay to the Service within 30 days from the date the amount was deducted or the time the duty to deduct arose, commits and offence, and upon conviction be liable to pay the tax withheld or not remitted in addition to a penalty if 10 percent of the tax withheld or not remitted per annum at the prevailing Central Bank of Nigeria minimum re-discount rate and imprisonment for a period of more than 3 years.
4 quick facts on Taxation
- There are incentives for small businesses that pay tax. After registration, there is still an 18 months tax exempt window for you.
- You can pay taxes yourself without any professional. Even though it is advisable to have a professional with proper knowledge of the system on ground, anybody can still do it. Research, read and go file your taxes.
- Compound interest accrues on unpaid tax. If your monthly tax is ₦5,000 and you do not pay it throughout the year, by December you owe ₦395,000 and not ₦60,000
- As long as the business has transitioned from the idea stage, investors want to see proof of proper taxation before committing.
Paying taxes by yourself
As mentioned earlier, not everybody can afford a professional’s fee. Gbenga is an accountant for a Lagos-based startup and in his own words, paying taxes can be a strenuous process that gets easier with time. Here, he walks us briefly through the process;
First of all, upon registering your company, a tax identification number is assigned to you. This unique code is instrumental to the tax paying process. For federal taxes, which are paid to the Federal Inland Revenue Service(FIRS), log on to the Remita website, fill your details and the kind of tax you want to pay. After a code is generated, head on to a bank near you to complete the process or pay with your card details on the Remita website. Paying taxes to the state where your business resides is easier. Walk into any bank with your Tax Identification Number(TIN), there is a special reserved payment teller for taxes. After payment, you take the documents to the necessary authority.
On a final note, startups and some SMEs always erroneously assume the tax collector’s net is too porous to catch them because most of these businesses do not have brick and mortar operations. This assumption can be dangerous.
In an age of digitization, startups and SMEs cut deals that are bigger than what some of the “big businesses” do. With startups in Nigeria and the world over cutting multi-million dollar deals, it is a matter of time before most businesses get to a stage where tax papers can make or mar them.
As an entrepreneur and a Nigerian citizen, you and your employees have a right to some government facilities to assuage living costs and truly run lean. In states that are serious about taxing, these amenities cannot be accessed without a tax card.
There are resources on the web for getting a general grasp on taxation. The PwC Data Card is a summarized PDF document that briefly states tax laws in Nigeria and penalties for defaulting.
*NAMES IN THE ARTICLE HAVE BEEN CHANGED FOR IDENTITY PROTECTION