2 Contents COURSE MANUAL. Taxation I AC310. Modibbo Adama University of Technology Open and Distance Learning Course Development Series

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2 2 Contents COURSE MANUAL Taxation I AC310 Modibbo Adama University of Technology Open and Distance Learning Course Development Series

3 2016 Academic Collectives Initiative. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the copyright owner Academic Collectives. Institution: mail@cdl.mautech.edu.ng Website:

4 4 Contents Course Development Team Credits All illustrations (photos and charts) used are sourced from except otherwise indicated. Credits / source are properly placed by the image.

5 Taxation I Contents Course Development Team 4 Credits 4 About this Course Manual 1 How this Course Manual is structured... 1 Course overview 3 Welcome to Taxation I AC Taxation I AC310 is this course for you?... 3 Course outcomes... 3 Timeframe... 4 Need help?... 4 Academic Support... 4 Assessments... 4 List of Figures... 6 List of Tables... 6 Study Session 1 7 Principles of Taxation in Nigeria... 7 Introduction Defining Tax and Taxation Canons of Taxation Classification of Tax System in Nigeria Session Review Assessment Resources Study Session 2 17 Tax Administration Bodies in Nigeria Introduction Tax Regulation Bodies in Nigeria Session Review Assessment Resources Study Session 3 23 Framework on Tax Returns, Assessment and Collection of Personal Income Tax Introduction Tax Laws and Legislations... 24

6 ii Contents Session Review Assessment Resources Study Session 4 28 Determination of Taxable Income Introduction Taxation of Income versus Taxation of Capital Basic Knowledge Underlying Taxable Income Session Review Assessment Resources Study Session 5 40 Assessment of Personal Income Introduction Assessment of Income From Employment Assessment of Income From Trade, Business, Profession or Vocation Session Review Assessment Resources Study Session 6 47 Capital Allowances Introduction Fundamental Features of capital allowance Types of Capital Allowance Methods of Calculating Capital Allowance Session Review Assessment Resources Study Session 7 55 Business Losses and Personal Reliefs Introduction Application of Relief in Business Session Review Assessment Resources Study Session 8 62 Taxation for Partnership Introduction Basic Features of taxation for Partnership... 63

7 Session Review Assessment Resources Study Session 9 71 Computation of Personal Income Tax Introduction Computation of Tax Liability of Individuals Session Review Assessment Resources Glossary of Terms 79 References 80 Appendix Section 81 Linked Articles I: What is Capital Gains?... 81

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9 AC310 Taxation I About this Course Manual Taxation I AC310 is provided to you by MAUTECH-CDL, AS IS. Module is mixed. It is localised and adapted to ODL format under the Academic Collectives Initiative. How this Course Manual is structured Course overview The course overview gives you a general introduction to the course. Information contained in the course overview will help you determine: If the course is suitable for you. What you can expect from the course. How much time you will need to invest to complete the course. Where to get help. Course assessments. We strongly recommend that you read the overview carefully before starting your study. The course content The course is broken down into Study Sessions. Each Study Session comprises: An introduction to the Study Session content. Learning outcomes. Study Session preview. New terminology. Structured content of the study session with a variety of focus articles, learning activities and learning devices. Study Session review. Self Assessments. Resources for further studying. 1

10 About this Course Manual Your comments After completing Taxation I we would appreciate it if you would take a few moments to give us your feedback on any aspect of this course. Your feedback might include comments on: Course content and structure. Course reading materials and resources. Course assessments. Course duration. Your constructive feedback will help us to improve and enhance this course. You can forward your comments to feedback.mautech@edutechportal.org 2

11 AC310 Taxation I Course overview Welcome to Taxation I AC310 Most economies of the world are based on one form of taxation or the other. Countries of the world have different fiscal policies that enable them to explore various types of taxation and impose them on their citizens for the purpose of enhancing revenue and for regulation and governance of the economy. The government of Nigeria, as one of these countries, has legislative powers to impose on its citizens, any form of tax and at the rate it deems appropriate. This course will therefore be exposing you to the principles and administration of taxation in Nigeria. It will also underscore the legal framework upon which taxation is built in the country. This course manual supplements and complements a blend of resources & platforms: AC310 Audiobook available via Audio Resources Library app on your official mobile device and accessible online at: AC310 Courseware available in your course pack as a disk, it is also downloadable from your course website: Schoolboard offers a multi-channel platform for you to discuss with content experts and other learners from across the nation and the globe at large. You may also use the platform to enrich your learning with engaging webinars, articulate presentations, smart puzzles, audiobooks, podcasts, interactive gloassaries, smart quizzes, case studies and discussions. Schoolboard comes with updates and is accessible on web and on app. It is also linkable from your course CD. Taxation I AC310 is this course for you? AC310 is a 3 unit course. Basic arithmethic skill is a prerequisite to this course. Course outcomes Upon completion of Taxation I AC310, you will be able to: Outcomes state clearly, the objectives of taxation in Nigeria explain the structure of the Nigerian tax system 3

12 About this Course Manual outline the sources of Nigerian tax laws distinguish between taxation of income and taxation of capital apply the various types of taxes discussed in the course. Timeframe This is a 15 week course. It requires a formal study time of 12 hours. We recommend you take an average of one to two hours for an extra personal study on each Study Session. You can also benefit from online discussions with your course tutor. Need help? You may contact via any of the following channels for information, learning resources and library services. CDL Student Support Desk support@cdl.mautech.edu.ng For technical issues (computer problems, web access, and etcetera), please visit: or send mail to support@cdl.mautech.edu.ng. Academic Support A course facilitator is commissioned for this course. You have also been assigned an academic tutor to provide learning support. See contacts of your course facilitator and academic advisor at the course website: Assessments Generally, there are two types of assessment: formative assessment and summative assessment. With regards to your formative assessment, there are three basic forms of assessment in the course: in-text questions (SELF-CHECKs), self-assessment questions (SAQs), and tutor marked assessment (TMAs). This manual provides you 4

13 AC310 Taxation I with SELF-CHECKs and SAQs. Feedbacks to the SELF-CHECKs are placed immediately after the questions, while the feedbacks to SAQs are at the rear of manual. You will receive your TMAs as assignments at the MAUTECH schoolboard platform. Some of your TMAs will be graded and will constitute 30/40 percent of your course marks. Feedbacks to TMAs will be provided by your tutor in not more than 2 weeks after entries. Your summative assessment is your final examination. AC310 exam is in multiple choice / essay format; and it carries 60/70 percent of your total earning in the course. Schedule dates for submitting assignments and engaging in course activities is available on the course website. 5

14 About this Course Manual List of Figures Figure 4.1 Format for computation of Adjusted Profit 34 List of Tables Table 1.1: Proportional Tax System 12 Table 1.1: Personal Income Tax Table 13 Table 1.3: Regressive Tax Table 14 Table 6.1 Initial Allowance (IA) 50 Table 6.2 Annual Allowance (AA) 50 6

15 AC310 Taxation I Study Session 1 In this study session, you will be fully capable to define taxation as a term. You will also learn the purpose as well as the classification of taxes. Lastly, you will be exposed to the canons of taxation and discuss the principles of residence in tax payment Learning Outcomes When you have studied this session, you should be able to: 1.1 define taxation 1.2 highlight the canons of taxation 1.3 discuss different classifications of taxation in Nigeria Principle of Taxation in Nigeria Defining Tax and Taxation Purpose of Imposing Tax Canons of Taxation Proportional Tax System Progressive Tax System Classifiacation of Tax System in Nigeria Regressive Tax Direct Taxes Principle of Residence This Study Session requires a one hour of formal study time. You may spend an additional two hours for revision. 7

16 Study Session 1 Principles of Taxation in Nigeria Terminologies Let s commence our study by attempting to define the keyword in this course title, which is taxation. What is? Do you say taxation is taxing? That will be a layman attempt. It is through though that taxation is all about tax. So what is a? Here is a collection of some scholars definition of tax and taxation: Tax is a compulsory extraction of money by a public authority for public purposes and taxation is a system of raising money for the purpose of governance by means of contributions from individuals or corporate bodies. Tax as monetary charge imposed by the government on persons, entities or property, levied to yield public revenue. Taxes are enforced proportional contribution from persons and property, levied by the state, by virtue of its sovereignty, for the support of government and for all public needs. Taxation is defined as the demand made by the government of a country for a compulsory payment of money by the citizens of the country. Sayode & Kajola, 2006:3. Black s Law Dictionary Thomas Cooley in ICAN study pack (2006:3) Ola, 1985:1 By principle, we can conclude that refers to the yardsticks, the canons, the criteria and the Maxims that are considered before the levying and collection of taxes. The government imposes a tax for a number of reasons, these include the following: 8

17 AC310 Taxation I 1. To raise revenue for the government: Taxes are collected to earn revenue to meet expenditure programmes in areas of health, education, defence, infrastructure, social amenities and central administration. 2. The instrument of Fiscal Policy: Tax is used as an instrument of fiscal policy for the purpose of stabilizing the economy. The government of a country can increase the tax to curtail the purchasing power of its citizens during inflation. Hence, in case of deflation, the tax is reduced in a way that the purchasing power of its citizens will improve. 3. For equitable income distribution: Government may impose a tax in order to enhance redistribution of income between the rich and the poor. A progressive tax is usually adopted for this purpose. 4. To discourage the consumption of certain goods: The consumption of certain goods and services, which have an effect on health conditions are discouraged through the imposition of the high tax rate on such goods and services. 5. To protect infant industries: Tax is levied to protect infant indigenous industries from competition with foreign industries. Adam smith in his book titled Wealth of Nations mentioned the standards or yardsticks by which a good tax system is measured. These principles are otherwise known as canons of taxation. o By canons of taxation, we mean the principles of a good tax system. The canons of taxation include the following: A good tax system should be fair to all citizens of the country in respect of payment of tax i.e. from each according to his ability. The first canon or principle of a good tax system emphasised by Adam Smith is of equality. According to the canon of equality, every person should pay to the Government according to his ability to pay that is in the 9

18 Study Session 1 Principles of Taxation in Nigeria proportion of the income or revenue. Thus under the tax system based on equality principle, the richer persons in the society will pay more than the poor. However, modem economists interpret equality or ability to pay differently from Adam Smith. Based on the assumption of diminishing the marginal utility of money income, they argue that ability to pay principle calls for progressive income tax, that is, the rate of tax increases as income rises. Now, in most of the countries, progressive system of income and other direct taxes have been adopted to ensure equality in the tax system. It may, however, be mentioned here that there are two aspects of ability to pay principle. First is the concept of horizontal. According to the concept of horizontal equity, those who are equal, that is, similarly situated persons ought to be treated equally. This implies that those who have same income should pay the same amount of tax and there should be no discrimination between them. Second is the concept of vertical equity. The concept of vertical equity is concerned with how people with different abilities to pay should be treated for the purposes of division of tax burden. In other words, what various tax rates should be levied on people with different levels of income, A good tax system must be such as will ensure the horizontal as well as vertical equity. Tax administration should be efficient. I.e. cost of tax collection should be lesser than the amount of tax to be collected. The Government has to spend money on collecting taxes levied by it- Since collection costs of taxes add nothing to the national product, they should be minimized as far as possible. If the collection costs of a tax are more than the total revenue yielded by it, it is not worthwhile to levy it. The amount of tax to be collected should be made clear and precise to the tax payer. Another important principle of a good tax system on which Adam Smith laid a good deal of stress is the canon of certainty. To quote Adam Smith, the tax which each individual is bound to pay ought to be certain and not arbitrary. The time of payment, the manner of payment, the quantity to be paid ought all to be clear and plain to the contributor and to every other person. The tax system should be such that sum of tax should not be arbitrarily fixed by the income tax authorities. While taking a decision about the amount of work effort that a 10

19 AC310 Taxation I person should put in or how much investment should he undertake under risky circumstances, he must know with certainty the definite amount of the tax payable by him on his income. If the sum of tax payable by him is subject to much discretion and arbitrariness of the tax assessment authority, this will weaken his incentive to work and invest more. Moreover, lack of certainty in the tax system, as pointed out by Smith, encourages corruption in the tax administration. Therefore in a good tax system, individuals should be secure against unpredictable taxes levied on their wages or other incomes. The law should be clear and specific; tax collectors should have little discretion about how much to assess tax payers, for this is a very great power and subject to abuse. Tax collection should be made in a manner and time that the tax payer will be in a position to pay the tax. According to this canon of Adam Smith, the sum, time and/manner of payment of a tax should not only be certain but the time and manner of its payment should also be convenient to the contributor. If land revenue is collected at the time of harvest, it will be convenient since at this time farmers reap their crop and obtain income. A good tax system should be neutral. I.e. it should not distort the consumption habit or saving decision of the tax payer. Principle of residence Place of residence of a tax payer is a prominent factor that has to be considered by the relevant tax authority which has jurisdiction to levy a tax on the income of an individual. 1. A place of residence As defined under PITA 1993 (paragraph 1 of the first schedule) refers to a place available for his domestic use in Nigeria on a relevant day and does not include any hotel, rest home or other place at which he is temporarily lodging unless no more permanent place is available for his use on the day. This definition is considered to an individual tax payer in Nigeria. 2. Principal Place of Residence Where an individual has two or more places of a residence located in different territories, the rule relating to the establishment of a principal place of residence will be applied to ascertain the appropriate tax authority under whose jurisdiction the individual s income shall be subject to tax. The rules as stated under paragraph 1 of First Schedule (P1TA 93) are as follows: 1. Where an individual source of income is the only pension in Nigeria, his principal place of residence will be that place out of those places he usually resides. 2. Where an individual has a source of earned income not a pension in Nigeria, his principal place of residence is that place of those places which us nearest to his usual place of work on a relevant day. Where an individual has a source of unearned income in Nigeria, his place of residence is that 11

20 Study Session 1 Principles of Taxation in Nigeria place or those places in which the individual usually resides. o The structure of the tax system in Nigeria can be classified into two forms; under the first form of classification, Nigerian taxes are classified as follows. This form of tax assesses taxpayers on a fixed percentage. As a result, the amount of tax payable is proportional to every taxpayer s income. For example, if the tax rate is fixed at 10%, every taxpayer will have to pay income tax at this rate, as his/her income increases or decreases. Taxpayer s Income Tax Rate Tax Payable N % N 15, , , , , , 500 A taxpayer, whose income doubles, pays double the amount of tax. That is, when the income was N15, 000, the tax payable was N1,500, but when the income increased to N30, 000, the tax payable went up to N3, Advantages of Proportional Tax System 1. It is simple to understand; 2. It is easy to calculate; 3. It does not affect the pattern of income distribution in the country because every person pays the same rate of tax; 12

21 AC310 Taxation I 4. It is a neutral tax; it has neutralising effects on savings and incentives. Disadvantages of Proportional Tax System 1. It increases inequalities of income and wealth. Both high-income and low-income groups are taxed at the same rate thereby making the low-income earner to sacrifice more than those in the high income group. 2. It does not encourage maximisation of government revenue because of the constant tax rate. 3. It is against the principle of taxable capacity. This is because the lower income group is required to sacrifice more than the higher income group. This form of tax is graduated as it applies higher rates of tax as income increases. For instance, the progressive tax concept can be explained with the following illustration: Taxable Income N Tax Rate (%) First Next Next Next Over 30, , , , , 000 From the illustration above, it shows that progressive tax system has a main objective of redistributing the income of the rich to that of the poor in some ways. For instance, the rich are taxed heavily to finance projects of common interest. Advantages of Progressive Tax System 1. It is based on the ability of the tax payer to pay; 2. It maximises the revenue for the government; 3. It is flexible as government can use it to get more revenue or to grant tax relief to low income earners; 4. It is equitable this tax system is equitable because it requires proportional sacrifice on the part of taxpayers. The higher income group bears the heaviest tax burden; 5. It promotes economic stability by reducing the tax rates during recession or depression periods, the government provides relief to the taxpayer so that they may increase their demand for goods and as a result investment is encouraged. On the other hand, tax rates can be raised during economic boom thereby reducing the purchasing power of the taxpayers and as a result, inflation is fought. Thus, this tax system helps in bringing economic stability in the economy; 6. It encourages better use of resources the high income groups mostly indulge in conspicuous consumption and thereby waste their incomes. By taxing luxury goods and incomes of the rich heavily, the government can prevent them from wasteful expenditures and therefore, be in the position to make better use of the country s resources. Disadvantages of Progressive Tax System

22 Study Session 1 Principles of Taxation in Nigeria 1. It has faulty basis it is based on diminishing the marginal utility of income, which is faulty. Utility is subjective and cannot be measured in terms of money, it is not, therefore, right to base a tax system on subjective utility that is arbitrary; 2. It is arbitrary there is no scientific or standard method of fixing the rate of progression. It is usually fixed by the revenue board; but where there are checks and balances, arbitrariness can be curtailed; 3. It discourages capital formation this tax system adversely affects savings, investment and capital formation as taxpayers that have the ability to save and subsequently invest are taxed heavily; 4. It is unjustifiable some people earn high as a result of working hard, while some remain poor because of laziness; it becomes unjustified to tax high-income groups at high rates thus punishing them for their resourcefulness; 5. It may lead to tax evasion or tax avoidance people who are taxed heavily try to evade payment of taxes by maintaining false accounts and submitting false statements to tax authorities or avoid taxes by finding and taking advantage of loopholes in the tax laws. Under this type of tax, the tax payable decreases as the taxpayer s income increases. A high income person pays less tax than a low income person in a regressive tax system. Taxpayer Income Tax Rate Tax Payable N 20, , , , % N 6, , , , This system may not be suitable for developing countries as it yields low revenue and condones political and social reactions. However, it is not commonly applied even in developed economies. o The second form of tax classification is by incidence which is given as follows. 14

23 AC310 Taxation I These are taxes that the government imposes on the income of individuals and corporate organizations. They account for substantial part of the revenue accruing to the Nigerian government. Direct taxes in Nigeria include: 1. Personal Income Tax: This is a type of tax levied on the income of individuals gained from employment, from a trade, business, profession or vocation. Example, the tax collected on the income of workers of Adamawa State ministry of Education is personal income tax, usually called PAYE deductions. 2. Company Income Tax: This is a type of direct tax levied on the profit of corporate entities. The tax imposed on the income of AFCOTT Nig. Plc, NBPC Ltd. and Savannah Sugar Company are few examples. 3. Petroleum Profit Tax: This is a tax exclusively imposed on the income of companies engaged in exploration, exploitation and marketing of petroleum products in Nigeria. 4. Capital Gains Tax: This is a tax levied on the gains made on disposal of capital assets by individuals or companies. Example: building, motor-vehicle, equipment, debt, currency, stock and shares etc. These are taxes levied on goods and services produced within a country and exported to other countries or goods imported into a country. The following are the types of indirect taxes in Nigeria. 1. Value Added Tax: This is a tax on the expenditure of individuals and organizations on some selected goods and services produced and consumed in a country. VAT was introduced in Nigeria in 1994 at a flat rate of 5%. It is a multistage tax on goods such as soap, tobacco and detergents and also on services like legal services, consultancy and hoteliers. 2. Import Duties: They are imposed on goods and services brought into Nigeria. They are also referred to as import tariffs. These duties are levied on equipment, spare parts, raw materials etc. 3. Export Duties: These are on goods and services sold to other countries. Nigerian government levies export duties on raw materials exported to foreign countries. 4. Excise Duties: These are levies charged on goods and services that are locally produced and consumed. Example beer, sugar, cigarettes produced and consumed in Nigeria. 1.1 define taxation Taxation refers to compulsory or coercive money collection by a levying authority, usually a government. The term "taxation" applies to all types of involuntary levies, from income to capital gains to estate taxes. Though taxation can be a noun or verb, it is usually referred to as an act; the resulting revenue is usually called "taxes." 15

24 Study Session 1 Principles of Taxation in Nigeria 1.2 highlight the canons of taxation Canons of taxation refer to the administrative aspects of a tax. They relate to the rate, amount, method of levy and collection of a tax. In other words, the characteristics or qualities which a good tax should possess are described as canons of taxation. These canons are equity, economic, certainty, convenience and neutrality. 1.3 discuss different classifications of taxation in Nigeria Taxes in Nigeria can be classified as proportionate, progressive, regressive, direct and indirect taxes. 1. Discuss briefly the standards of a good tax system as outlined by Adam Smith in his book The Wealth of Nation. 2. Tax classification is broadly categorized into direct and indirect taxes. What are the major types of direct taxes levied in Nigeria under established statutory regulation? 3. Tax is not only levied to raise revenue for the government but also used as an instrument of Fiscal Policy. Explain how the tax is applied as an instrument of Fiscal Policy. 4. A fine is a tax levied on individuals doing a wrong thing but a tax is a fine levied on individuals for doing the right thing. Discuss. 5. In accordance with the provisions of PITA 1993, identify the place of residence for a person who owns several houses in Abuja and Lagos, a native of Kano and works with NNPC in Port-Harcourt. Articulate Presentation This is a complimentary resource to facilitate the quick delivery of this session. It is available in your course pack (Schoolboard disc / online page) and also linked here. Schoolboard Access your schoolboard app, or visit to access updated online activities and resources related to the units of this Study Session. 16

25 AC310 Taxation I Study Session 2 In this study session, we will discuss the personal income tax regulatory bodies such as Federal Board of Inland Revenue FBIR, State Board of Internal Revenue SBIR, The Joint Tax Board JTB and Local Government Revenue Committee LGRC. We will as well discuss the composition, powers and duties etc. of these bodies. Learning Outcomes When you have studied this session, you should be able to: 2.1 discuss the roles of administrative bodies responsible for the regulation of tax in Nigeria Tax Adminnistration Bodies in Nigeria Federal Board of Inland Revenue (FBIR) State Board of Inland Revenue (SBIR) Tax Regulatory Bodies in Nigeria Joint Tax Board (JTB) Local Government Revenue Committe This Study Session requires a one hour of formal study time. You may spend an additional two hours for revision. 17

26 Study Session 2 Tax Administration Bodies in Nigeria Terminologies Several administrative bodies are responsible for the regulation and collections of Personal Income Tax, prominent among them are: FBIR was established by the Income Tax Administration Ordinance of 1958 (S.3) as the highest tax regulatory body in Nigeria. However, the compositions and operations of FBIR were subsequently modified by Income Tax Management Act (ITMA) 1961, Company Income Tax Act (CITA) 1979 and Finance (Miscellaneous Tax Provisions) decree At present, the composition and duties of FBIR are established in S.1 of CITA The operational arm of the FBIR as Federal Tax Authority is the Federal Inland Revenue Service. FIRS as provided by Law (S.1) (i) n CITA 1979). The FIRS carries out the day to d ay routine activities of tax administration on behalf of the FBIR. The Federal Board of Inland revenue is composed of the following: 1. An executive Chairman who shall be a person experienced in taxation appointed by the President. 2. The Directors and Heads of Departments of the FIRS. 3. The Directors in charge of planning, research and statistics in the Federal Ministry of Finance. 4. A member of the Board of National Revenue mobilization Allocation (NRMA) and Fiscal Commission (FC). 5. A member from the NNPC not lower than an Executive Director in rank. 6. A director from National Planning Commission. 7. A director from Nigeria Customs Service. 8. The Registrar-General of the Corporate Affairs Commission (CAC). 9. The legal Adviser to FBIRS. 10. A secretary as ex-officio member nominated by the FBIR from within FIRS. The Powers and Duties of the Federal Board of Inland Revenue are also highlighted below: 1. The Board is responsible for the administration of CITA and PPTA. 2. Responsible for assessment and collection of taxes. 18

27 AC310 Taxation I 3. Give an account of all monies collected in a manner prescribed by the Minister of Finance. 4. May sue or be sued in its official name. 5. Have the right to acquire, hold and dispose of any property taken as security for tax or penalty and shall account for such property in a manner prescribed by the Minister of Finance. 6. May, by written authority, appoint any person, within or outside Nigeria, to perform on its behalf any of its powers or duties as provided by law. 7. With the consent of the Minister of Finance, authorize Joint Tax Board (JTB) to perform on its behalf, any power or duty as provided by Law. Technical Committee of the Board The Technical Committee is established by S.1 A (1) of CITA, its composition is: 1. Executive Chairman of the board as chairman. 2. All Directors and HODs of the Service. 3. The Legal Adviser to the FIRS. 4. The Secretary to the Board as Secretary. The functions of the technical committee includes 1. Consider relevant tax matters that require technical competence and expertise. 2. Make recommendations to the Board on technical matters. 3. Advises the Board on all its key functions. 4. Receive and consider other matters referred to it by the Board from time to time. This is a tax authority established in all states of the Federation and Federal Capital Territory (FCT) Abuja. It is established by the Finance (Miscellaneous Taxation Provision) Act No.3 of 1993, Section 9. It administers tax in the state; its operational arm is the State Inland Revenue Service (SIRS). The State Board of Internal Revenue is composed of the following: 1. The Executive Head of SIRS as Chairman who shall be appointed by the Governor. 2. The Director as and HODs within the SIRS. 3. A Director of the state ministry of Finance. 4. The legal Adviser to the SBIR. 5. Three (3) other persons nominated by the Commissioner for Finance strictly on personal merit. 6. The Secretary (Ex-Officio) appointed by the SBIR from within the SIRS. The State Board of Internal Revenue have the following Powers and Duties 1. Ensures that all taxes and penalties due to the government under relevant laws are collected effectively. 2. Responsible for assessment and collection of taxes. 3. Give an account for all amounts collected in a prescribed manner. 19

28 Study Session 2 Tax Administration Bodies in Nigeria 4. Make recommendations to Joint Tax Board (JTB) on tax policy, tax reform, tax treaties and so on as may be required from time to time. 5. Responsible for appointments, promotions, transfers and imposes discipline on employees of the state service. Technical Committee of the SBIR (S.85C) The technical Committee as established by relevant law is composed of: 1. Chairman of the SBIR as chairman. 2. All Directors and HODs within the state service. 3. The Legal Adviser to the state service. 4. The secretary to the state service. The functions of the SBIR technical committee includes 1. The committee considers all tax matters that may require technical competence and expertise. 2. Make recommendations to the State Board on matters relating to tax. 3. Advises the State Board on other matters referred to it from time to time. The Joint Tax Board (JTB) is established under section 85 of PITA It provides that a Board is established to be known as Joint tax board to regulate the administration of personal income tax in Nigeria. It is composed of: 1. The Chairman of the Federal Board of Inland Revenue, who doubles as chairman of the JTB. 2. A member nominated from each state of the federation, who should be experienced in tax matters. 3. A representative of the Federal Civil Service Commission who shall serve as serves as secretary of the board. 4. A legal Adviser, who shall be the legal adviser of the Federal Inland Service. o The Functions of the JTB is provided under section 85 (a) of PITA 1993 which includes among others: 1. Exercise powers and duties conferred on it by PITA 1993 and other powers and duties within the framework of the Act as may be agreed by each state government of the federation. 20

29 AC310 Taxation I 2. Exercise any power and carry out duties conferred on it by any law of the Federation imposing a tax on income and profit of companies. 3. Advise Federal Government on double taxation arrangement with other countries of the world, when called to do so. 4. Advise the government, when called upon to do so, on the rate of capital allowances as well as matters relating to taxation that affects Nigeria 5. Settle disagreement between state governments in respect of personal income tax and impose its decision on matters of interpretation of PITA 1993 on any state. 6. Ensure uniformity in the application of PITA, throughout Nigeria Personal Income Tax Act of 1993 provides for the establishment of the Local Government Revenue Committee in section 85 (E). Its composition is: 1. The supervisor responsible for finance as chairman 2. Three persons who should be local government councillors 3. Any other two persons experienced in tax matters nominated by the chairman of the local government council 2.1 discuss the roles of administrative bodies responsible for the regulation of tax in Nigeria Some of the tax regulatory bodies in Nigeria include Federal Board of Inland Revenue, State Board of Inland Revenue, Joint Tax Board and Local Government Revenue Committee. 1. As provided under S.1 of CITA 1979, outline the composition of the Federal Board of Inland Revenue (FBIR) established under the same Act. 2. The operation Arm of the Board is the Federal Inland revenue services (FIRS), discuss the difference in structure and functions of the Board and the service. 3. Trace the constitutional development of personal income Tax matters as it relates to regulations on administration and tax collection in Nigeria. 4. How does the Technical Committee of the Federal Board of Inland Revenue (FBIR) differ from that of state Board of Internal revenue ((SBIR)? 5. The Joint Tax Board is an umbrella body of all the relevant Tax authorities in Nigeria, yes or no? Justify. 21

30 Study Session 2 Tax Administration Bodies in Nigeria Articulate Presentation This is a complimentary resource to facilitate the quick delivery of this session. It is available in your course pack (Schoolboard disc / online page) and also linked here. Schoolboard Access your schoolboard app, or visit to access updated online activities and resources related to the units of this Study Session. 22

31 AC310 Taxation I Study Session 3 In this study session, we will discuss the various ways and processes by which tax laws and regulation could be made effective. Learning Outcomes When you have studied this session, you should be able to: 3.1 discuss the various ways by which tax laws and legislation could be effective Framework on Tax Returns, Asessment and Collection of Personal Income Tax Tax Return Assessments Additional Assessement Tax Law and Legislation Notice on Assessement Objection to Assessement Appeals Collection of Personal Income Tax 23

32 Study Session 3 Framework on Tax Returns, Assessment and Collection of Personal Income Tax This Study Session requires a one hour of formal study time. You may spend an additional two hours for revision. Terminologies Individuals who are subject to tax in Nigeria are expected in each year of assessment to file a return on their income in a prescribed form and manner to the relevant tax authority within 90 days from the commencement of every year of assessment. The filling of Tax returns form, assessment and collection of personal Income Taxes remains the sole responsibility of the State internal revenue Service and shall be discussed thus: A prescribed form is issued by the tax authority to individuals who earn a taxable income to file a return of income, also giving all necessary information to the state service with a written statement containing: 1. The amount of his income from all service in respect of the year preceding the year of assessment, computed in line with the provisions of PITA 2. Any other particular that may be required for the purpose of PITA in respect of income, allowance, relief, deduction and so on 3. The return shall according to section 41(2) contain a declaration which shall be made by the individual or someone on his behalf, that the return is true and correct. Section 43 of PITA provides that return is not to be filled where individual s income from employment is N7, 500 or less. This amount was increased to N10, 000 per annum in 1996 and N30, 000 per annum in 1998 The specific time provided by law to make tax returns is 90 days. Upon the lapse of the time allowed for making returns, the tax authority will proceed to assess the taxable 24

33 AC310 Taxation I income of every individual. Where an individual has filled a tax return, Section 53(2) of PITA provides that the relevant Tax authority may accept such returns and assess the individual accordingly. But where the tax authority refuses to accept such returns, it can use the Best of judgment (BOJ) to determine the assessable income and chargeable income of the individual and assess him accordingly. However, where an individual fails to fill returns within the specified period, Section 53(3) provides that the relevant tax authority should also, where it is of the opinion that income tax is chargeable on the individual, determine his assessable income and chargeable income using the Best of Judgment (BOJ) and assess the individual accordingly. Within an appropriate period of time, if the relevant tax authority discovers or is of the opinion that within six years of assessment, an individual who is subject to tax has not been assessed or not properly assessed, section 54 (1) empowers it to re-assess the individual at such amount or additional amount that he ought to have been charged. Consequently, the law specified that the six years limit for making additional assessment does not apply in respect of any form of fraud, wilful default or neglect which has been committed by individual tax payer or his agent in connection with any tax imposed under provisions of PITA. o The relevant tax authority, upon the completion of an assessment, will serve; send by registered post to each individual tax payer or individual in whose name an individual tax payer or some on his behalf in connection with any tax imposed under appropriate law. The chargeable income whose name is in the list of assessment, a notice of assessment showing the following items is given: (S. 57 (1) of PITA 1993): 1. The amount of income assessable. 2. The total chargeable income on which tax is charged. 3. The place at which the tax is to be paid. 4. The right of the individual tax payer to object. The individual tax payer is given the right to object to the assessment made by the relevant tax authority under section 57. The section provides that the individual disagrees with an assessment; he may apply within 30 days from the date of the notice 25

34 Study Session 3 Framework on Tax Returns, Assessment and Collection of Personal Income Tax of assessment to the relevant tax authority by a written notice of objection, praying that the assessment is revisited and reviewed or revised. Upon receipt of notice of objection by the Tax Authority, it may require that the individual tax payer furnish it with necessary documents and information to support his appeal. Where the tax payer agrees with the authority as the correct amount of the tax chargeable, then the assessment will be amended accordingly and notice of the tax chargeable will be served upon the individual tax payer. Where the tax payer disagrees with the authority, the authority will serve on the individual and in this case, the tax payer is given the right to appeal under section 60 of PITA Any matter of disagreement arising between individual tax payers and the tax authority can be forwarded to a body of Appeal Commissioners. The individual tax payer has right to appeal in case of disagreement on assessment of taxes. Section 60 of PITA 1993 provides that appeals can be made within 30 days from the date of the notice of refusal issued by a tax authority to individual tax payers. Notice of appeal is submitted to the secretary of the appropriate appeal commissioners. Any income tax charged in any year of assessment which is not subject to objection or appeals shall be payable at a specific place as contained in the notice of assessment, within 2 months after the date that the notice is served. However, section 67 (1) of PITA 1993 provides that if the period of two (2) months expires before the fourteenth day of December within the year of assessment for which the income tax has been charged and the aggregate of the tax to be deducted as aforesaid and of any income tax paid for that year within that period amounts to not less than one-half of the tax so charged, then payment of any balance of such tax maybe made not later than that day. But an assessment that is subject to objection or appeal, the collection of income tax will remain in abeyance until the objection or appeal is settled. 3.1 discuss the various ways by which tax laws and legislation could be effective Individuals who are subject to tax in Nigeria are expected in each year of assessment to file a return on their income in a prescribed form and manner to the relevant tax authority within 90 days from the 26

35 AC310 Taxation I commencement of every year of assessment. The filling of Tax returns form, assessment and collection of personal Income Taxes remains the sole responsibility of the State internal revenue Service 1. Section 57 (1) of PITA 1993 outlined some items to be listed in the notice of assessment to individual taxpayers if the tax payer is not satisfied with the assessment, the relevant law under the same section gives the tax payer the right to object. Discuss. 2. Explain the procedure through which a tax payer can make appeals in case of disagreement with the tax authority to a body of appeal commissioners. 3. Under which circumstances is the tax authority permitted by law to make an assessment based on Best Of Judgment (BOJ)? 4. With specific reference to appropriate legislations, discuss the framework underlying the collection of personal income tax in Nigeria. Articulate Presentation This is a complimentary resource to facilitate the quick delivery of this session. It is available in your course pack (Schoolboard disc / online page) and also linked here. Schoolboard Access your schoolboard app, or visit to access updated online activities and resources related to the units of this Study Session. 27

36 Study Session 4 Determination of Taxable Income Study Session 4 We will learn to determine the categories of personal income that are taxable in this study session. We will discuss personal income exempted from tax as well as personal income subject to tax, allowable expenses as well as non-allowable expenses and computation of adjusted profit as basic knowledge underlying taxable income. Learning Outcomes When you have studied this session, you should be able to: 4.1 differentiate between Taxation of Income and Capital 4.2 discuss Taxable income Determination of Taxable Income Taxation of Income Distinction Between Taxation of Income and Taxation of Capital Taxation of Capital Capital Taxation versus Income Taxation Personal Income Subject to Tax Basic Knowledge Underlying Taxaable Income Personal Income Exempted from Tax Allowable Expenses Computation of Adjusted Profit 28

37 AC310 Taxation I This Study Session requires a one hour of formal study time. You may spend an additional two hours for revision. Terminologies In this section, we will be trying to make a distinction between taxation of income and taxation of capital. To start with, what do we refer to as taxation of income? Income accruing in Nigeria (income producing assets), derived from Nigeria (income producing activities), brought into Nigeria (remittances) and received in Nigeria (emoluments) are all subject to income tax. Income tax is payable on income from a source inside or outside Nigeria and in particular, but not restricted to the following: 1. profit or gains from a trade, business, profession or vocation; 2. remunerations from and employment which may be salary, wage, fees, allowances or gains from employment; including compensations, commissions, bonuses, premiums or benefits in kind. Individuals and companies alike are assessed on any taxable incomes they received or earned. For individuals, graduated tax rates are used in assessing them, while companies/corporate organisations are assessed using fixed and uniform rates as determined by the relevant legislation or the tax policy prevailing in that period. Basically, taxation of capital gains arises from the disposal of assets by both private and business entities. It was introduced in Nigeria through the capital gains tax act, Cap 42, LFN, Capital gains tax is charged on the proceeds of assets disposed of by a taxpayer. It is remarkable that while taxation of income had been a permanent feature of the English tax system since 1799, capital gains were not introduced until Even then, the tax was introduced solely for the limited purpose of levying speculative gains. A comprehensive version of capital gains tax was instituted in the United Kingdom only in One would have suggested that the decision to tax capital gains 29

38 Study Session 4 Determination of Taxable Income could have been implemented by integrating such gains into the mainstream of taxable income. The Structure of Capital Gains Tax (CGT) The tax aims at all gains accruing to any person upon the disposal of assets in the year of assessment. Such gains are determined by deducting from the proceeds of the disposal, certain specified sums. That is, the amount or value of the consideration laid out to acquire the asset, incidental costs of the acquisition, cost of improvements to the property, any amount incurred in establishing, preserving or defending the disposer s title to or right over the asset and incidental costs of the disposal. However, any sum which is ordinarily allowable as a deduction in computing the profits of a trade or business, profession or vocation for the purpose of income tax, may not be deducted in the computation of capital gains. Assets Subject to Capital Gains Tax (CGT) As has been obvious by the foregoing discussions, the subject matter of the tax is assets. Under the act, all forms of property, except those expressly excluded, are deemed to be assessable. Specific examples of assets given by the act include options, debts and incorporeal property (assets) generally; any currency other than Nigerian currency; any form of property created by the person disposing of it, or otherwise, coming to be owned without being acquired; and stocks and shares of every description. Until recently, it did not matter whether the assets were situated in Nigeria or not (CGTA, Section 3). Gains on foreign assets are chargeable in Nigeria if any part of such gains is brought into or received in Nigeria. From the description of assets, one may wonder where to draw the dividing line between incomes which are taxable under the PITA and CITA on the one hand, and capital gains intended to be taxed under CGTA on the other hand. Under the CGT act, a possible guide is a reference to the receipt of a capital sum as a condition precedent to capital gains tax liability. However, there is no helpful definition of a capital sum in the act. Section 6(2) defines it vividly as any money s worth which is not excluded from the consideration taken into account in the computation of chargeable gains. Unfortunately, one cannot take the general view that only the disposal of capital assets gives rise to the receipt of a capital sum. Apart from the customary dilemma of distinguishing capital from other assets, the act itself clearly contemplates the possibility of capital gains arising from the disposal of all forms of property, including tangible moveable properties. To be on a safe side, one can only summarise, albeit vaguely, that no recurrent gains, especially those that result from the disposal (not exploitation) of capital assets will be regarded as capital gains. o 30