Taxation simply refers to a levy imposed by a taxing authority, usually a government on a group, organization or individual known as the taxpayer. This levy is charged compulsory from the taxpayer as a means of income generation for the government.
Taxation has since existed from ancient times but had only a minimal role in state development. It has since then received constant policy amendments on the choice, amount and structure it takes. Today, the tax has helped many countries to generate a huge amount of revenue.
The era of the colonial masters in the early 20th century marks the existence of taxation in Nigeria. In fact, some researchers affirmed the evidence of taxes paid before 1904. Both in the northern and southern part of Nigeria; there were records of some compulsory levies paid. In the northern region, some examples include but not limited to Kurdin Kasa and Kharant. These were levies paid on income from some agricultural products including animal husbandry. It was highly enforced in the Northern Region due to the fact that they have a more organized reign by the Emirs. The story is not different among the Yorubas, as taxes in the form of tribute, tolls and various fees were paid. As farming is the majority’s occupation, before their products are allowed in the markets – these levies had to be paid. Nevertheless, most of these levies are not formal and legally binding.
The administration of Lord Lugar’s as the British High Commissioner in Northern Nigeria was the beginning of formal taxation in Nigeria. It was then that several laws on taxes were passed into law. They are:
- The 1904 Land Revenue Proclamation. This law empowers traditional rulers as the taxing authority. They are saddled with the responsibility to collect taxes from their people which will then be shared between them and the government.
- Native Revenue proclamation (1906). This was an amended 1904 law with the goal to centralize and unify all forms of taxation in existence.
- Native Revenue Ordinance (1917). The 1906 proclamation was also amended, which limit the type and amount of taxes imposed on natives and indigenes of the land. This law was not only enforced in the North but this time also in the South. At first, the compliance level by the Southerners was low because their opinions seem to be different. The law continues to receive its far spread by getting an extension to the Eastern and Western part of the country in 1917 and 1928 respectively. Taxation since then has received various amendments from time to time.
In 1930, the Native Revenue Ordinance of 1917 was later amended and later incorporated in 1940 into the Direct Taxation Ordinance No. 4 of 1940. The Nigeria tax system has since then received various amendments both on natives and on import trade which generates income to fund government expenditure and community service. In 1958, Raisman Fiscal Commission gave a recommendation on some fundamental principles for imposing and collecting taxes from incomes of individuals to liability companies throughout the country. These set of recommendation later formed the basis of the present Income Tax Management Act, the Companies Income Tax Act, and the Personal Income Tax Act.
System of Taxation in Nigeria
In Nigeria, the taxation system has been divided accordingly into three tiers of government; from the highest tier of government (Federal) to the State Government and to the grass-root government (Local Government). The Federal Government is legally authorized to generate taxes from industrial development, the petroleum and foreign trades and operations. This is monitored by the Federal Inland Revenue Services (FIRS). Also, the State Government receives tax from private companies in their state, establishments and personal income of salary earners. The body that oversees this whole process in the state is the State Board of Internal Revenue tax persons. The Local Government collects tax from shops and kiosks, tenement rates, marriage, birth and death registration fees.
As of today, the tax laws that exist in Nigeria include Value Added Tax Decree 102,1993, Companies Income Tax Act Cap 345 LFN, Companies Gains Tax Act Cap 42 LFN, Companies Income Tax Act Cap 60 LFN, Withholding Tax Decree 8 1993, Industrial Development (Income Tax Relief Act) Cap 178 LFN and the Personal Income Tax Decree 140 1993. While some of the types of taxation in Nigeria include the PAYE (Pay as You Earn) also called the Personal Income Tax, Companies Income Tax (to be paid from the gross incomes of companies, whether monthly or annually), Value Added Tax and Capital Gain Tax.
Exemptions from the Payment of Tax
- Leave allowance and bonus given to an employee as an entitlement
- Retirement gratitude for successful completion of years in service
- Medical costs incurred by the employee
- Interest on loans taken for residential or other purposes
- The cost of passage to and from one place to the other in the country by the employees
Challenges of Taxation Systems in Nigeria
Nigeria has been faced with different challenges since the inception of taxation which was like a clog in the wheel to its growth and development. The major ones are enumerated below:
- Low level of voluntary compliance. Compliance has been a major challenge as there are many illegal boycotted of processes. This amount to low-income generation for national development.
- Corruption and tax revenue diversion by tax officials before and during collection.
- Lack of sufficient impact of government on the citizens. Nigerians are not encouraged to pay taxes because the impacts of the tax paid were not felt on national and local development.
- Lack of good understanding of the impacts of taxation on national development. There are no effective awareness and sensitization of citizens on the role taxation will play in nation-building
- Multiple taxations. When taxes of the same description are charges in multiple stages and increased tax rates.
- Deliberate evasion and non-compliance due to lack of proper education on taxation.
- Inadequate interstate or intergovernmental collaboration between tiers and agencies of government.
Taxation in Nigeria has seen its effectiveness in one way or the other; it has provided a means for subvention in education and various sectors. If taxation is properly source and well appropriated, it’s a proven means of revenue generation for the country.