TAX SERIES BY ENIOLA – SEASON 8 (PERSONAL INCOME TAX (PIT))
EPISODE 1 – WHAT TO DO?
What to do when upcoming Bar Exams are infiltrating your dreams, textbooks and notebooks are calling your name, the cramming game is on a high and your proud father is busy telling all his patients of his daughter in law school?
You switch up and tell everyone about the Tax that directly affects them this time. Not Companies Income Tax nor Petroleum Profits Tax, not Stamp Duties but Personal Income Tax.
A smart person once said, “The only thing that hurts more than paying Income Tax, is not having to pay Income Tax”.Smart because not having a Job sure will hurt more than paying Personal Income Tax!
Since we all have or want jobs, it is important to know that Personal Income Tax (PIT) is governed by the Personal Income Tax (Amendment) Act 2011 and other regulations like the Witholding Tax Amendment Regulation 2015, Pay as you Earn Regulations 2002, Self Assesment Regulations 2011 etc.
Also, the State Internal Revenue Service e.g Lagos Internal Revenue Service (LIRS) administers and collects PIT from all individuals, families and communities, executors and trustees resident in a State.
The Federal Internal Revenue Service (FIRS) administers and collects PIT from:
- Persons employed in the Nigerian Armed Forces and Police other than in a civilian capacity;
- Employees in the Nigerian Foreign Service;
- Residents of the Federal Capital Territory, Abuja; and
- Nigerians residing outside Nigeria but who derive income or profit from Nigeria.
EPISODE 2 – ROOTS
PIT is the most direct tax that we pay as individuals. It goes to the root of our matter. We are taking it personal with the IRS. PIT is levied when individuals, partnerships, trusts and other unincorporated entities;
- Earn income from an identified place of business in Nigeria;
- Habitually operate a trade or business through an authorised person in Nigeria.
- Engage in trade or business in Nigeria that involves a single contract for surveys, deliveries, installations or construction; or
- Engage in trade or business which the IRS deems to be artificial.
PIT is also levied when employed Individuals perform the duties of employment wholly or partially in Nigeria and where the employer is in Nigeria unless the employment duties are wholly performed with remuneration paid outside Nigeria.
The income that PIT applies to are;
- Gains or profits from any trade, business, profession or vocation;
- Salaries, wages, fees, allowances or other gain or profit from employment, use of property or anywhere else; and
- Dividends, interests or discounts. Interests earned from treasury bills, government and corporate bonds are however tax exempt.
To reduce the burden of everyone, PIT is administered in three ways. They are:
1. Direct Assessment: Self-employed individuals who earn income through a trade, business or vocation like Mama Fashola the t-shirt trader in Mandilas or Power who sells quality weaves in Balogun Market are allowed to calculate their taxes themselves, make payment and file relevant returns with evidence of payment to the Relevant Tax Authorities ( RTA) on or before the 31st day of March of every year. Extension of time to file returns can be granted upon fulfillment of conditions.
2. Pay as You Earn (PAYE): Employers deduct PIT at source from Employees salary and subsequently remit to the RTA while the remainder is paid to the employee as salary. Common slang among salary earners are “I earn 150,000 naira net of tax or after tax…” This is because of the operation of PAYE.
PAYE is to be remitted on or before the 10th day of the month following the payment of salary and returns showing total emoluments and total tax deducted are to be filed to the RTA not later than 31st January of each year.
Total emoluments are the aggregate of wages, salaries, allowances (including benefits –in- kind), gratuities, pension, superannuation and other income derived solely by reason of employment.
3. Witholding Tax (WHT): It is a specified amount deducted at source from payments accruing/made to individuals or corporate entities in respect of income receivable for services rendered or from investment.
The amount deducted is remitted to the RTA. Examples of income WHT applies to are: rents, royalties, interests, dividends and other unearned income.
WHT Rate is 10% of Gross interest, dividends, rent and 5% of Gross royalty. WHT is to be remitted within 30 days after the duty to deduct WHT arose.
Worthy of note is that WHT paid on an income is the final tax on that income.
EPISODE 3 – COMPUTATION
The rates of PIT are:
First ₦300,000 — 7%
Next ₦300,000 — 11%
Next ₦500,000 — 15%
Next ₦500,000 — 19%
Next ₦1,600,000 — 21%
Next ₦3,200,000 — 24%
Definitely, not all personal income is Taxable. Certain income are Exempted from PIT and certain Deductions and Reliefs are allowed to be removed from the Taxable Income basket.
Exempted Income includes:
- National Housing Fund Contributions;
- National Health Insurance Scheme Contributions;
- Life Assurance Premium;
- National Pension Scheme; and
They are not considered as part of the taxable income nor subject to PIT.
Deductions allowed from the Taxable Income Basket are all outgoings and expenses “wholly, exclusively, necessarily and reasonably” incurred in producing the Personal Income. They include:
- Interests on loans;
- Rents and premiums for land or buildings;
- Expenses incurred for repair of premises, plant, machinery or fixtures employed in acquiring the income;
- Bad debts incurred in any trade, business, profession or vocation;
- Contribution to a pension, provident or other retirement benefits fund;
- Expenses incurred wholly, exclusively for the purposes of the trade, business, profession or vocation, amongst others
Deductions not allowed include:
- Domestic or Private Expenses;
- Capital withdrawn from a trade, business, profession or vocation;
- Expenditures of a capital nature;
- Losses or expenses recoverable under an insurance or indemnity contract;
- Rents or costs of repairs to any premises or part of premises not incurred for the purpose of producing the income;
- Taxes on income or profits levied in Nigeria or elsewhere
- Payment to a pension, provident, savings or widows’ and orphans’ society, fund or scheme;
- Depreciation of any assets, amongst others.
PIT Reliefs include:
- Consolidated Relief Allowance of ₦200,000 or 1% of gross income whichever is higher. 20% of gross income is then added to whichever of both is higher.
- Child Allowance of ₦2,500 applies for each unmarried child less than 16 child up to a maximum of four children unless in a recognized school, under articleship or learning a trade.
- Dependent relative allowance of a sum of ₦2,000 for each dependent relative up to a maximum of two who are widowed or infirmed or incapacitated by old age.
- Interest paid on mortgage loan for owner’s occupied property in any year is granted as a relief in the following year.
- Disability allowance which is a deduction of ₦3,000 or 20% of earned income, whichever is higher, accrues. In the case of a disabled person who uses special equipment or the services of an attendant in the course of a paid employment.
Minimum Tax accrues where the annual taxable income is below 300,000. It is at a rate of 1% of gross income.
Benefits in Kind (BIK) that accrue by virtue of the position of employee e.g Official accommodation, Cars, Gardeners, Cooks, Drivers, Security etc. are taxed at a rate of 5% per annum of the cost where the asset is owned by the employer or the actual rent paid where the asset is leased by the employer.
BIK on accommodation is taxed at an annual rate equal to the annual value of the premises as according to prevailing local rates and not the cost of actual rent paid.
After the allowable deductions, consolidated relief allowance and other allowances are removed from the total income, the remaining is Chargeable income. It is the amount that the PIT rate is applied to and taxed.
Best of Judgement (BOJ) is the assessment based on what the RTA thinks is the true estimate of the Personal Income of the taxpayer based on his status and circumstances as opposed to the alleged representation by the taxpayer. RTA can exercise this power if it thinks the taxpayer has under-declared or under-paid his taxes.
Penalty for non-payment of PIT is 10% per annum of the amount of Tax payable plus annual interest at the bank lending rate. Penalty for late filing is a fine of ₦5,000.
Distrain is the seizure of someone’s property in order to obtain money owed. The RTA may in enforcing payment of Tax due distrain the taxpayer by his goods or other chattels, bonds or other securities or distrain upon any land, premises or place in respect of which the taxpayer is the owner. They can recover the money owned by sale of anything so distrained. The power to distrain must be exercised with a warrant.
Appeal from grievances or objections on assessments go to the Tax Appeal Tribunal.
A limitation period of six (6) years applies for assessing a taxable person except in the event of fraud, willful default or neglect by the taxable person for which there is no limitation.
EPISODE 4 – ENNY MONEY
Enny Money earns an annual salary of ₦15million. She doesn’t have a Life Assurance Premium because she believes her life is in God’s hands but she contributes to the National Pension Scheme and National Housing Fund.
She has a great-grand aunt listed as her dependent relative and she recently incurred ₦250,000 as expenses in paying for a container of office materials as ordered by her Managing Partner.
To Calculate Income Tax payable by Enny Money:
Add Enny Money’s income from all sources:
Remove Exempted Income:
i.e Money Contributed to the National Pension Scheme and the National Housing Fund
= ₦200,000 and ₦400,000 respectively, = ₦600,000
Thus ₦15,000,000 – ₦600,000 = ₦14,400,000.
Deduct Allowed Expenses
i.e Money spent on the Container of Office Materials
Thus ₦14,400,000 – ₦ 250,000 = ₦14,150,000.
Deduct Consolidated Relief Allowance and other reliefs:
Consolidated Relief Allowance = 1% of gross income or ₦200,000 whichever is higher, then whichever is higher plus 20% of gross income.
1/100 x ₦15,000,000 = ₦150,000
₦200,000 thus applies. 20/100 x ₦15,000,000 = ₦3,000,000
₦14,150,000 – ₦3,000,000 = ₦11,150,000.
Dependent Relative Relief is ₦2,000 per dependent relative, in this case, 1 great-grand aunt. Thus ₦11,150,000 – ₦2,000 = ₦11,148,000.
The remainder is the taxable income. The PIT income rates are then applied to the taxable income of ₦11,148,000.
First ₦300,000 — 7% = 7/100 x 300,000 = ₦21,000.
Next ₦300,000 — 11% = 11/100 x 300,000 = ₦33,000.
Next ₦500,000 — 15% = 15/100 x 500,000 = ₦75,000.
Next ₦500,000 — 19% = 19/100 x 500,000 = ₦95,000.
Next ₦1,600,000 — 21% = 21/100 x 1,600,000 = ₦336,000.
Over ₦3,200,000 — 24% = 11,148,000 – 3,200,000 = ₦7,948,000.
Then 24/100 x 7,948,000 = ₦1,907,520.
The total amount at each rates are then added together:
21,000 + 33,000 + 75,000 + 95,000 + 336,000 + 1,907,520 = 2,467,520.
Amount Taxed as PIT on Enny Money’s annual income of ₦15,000,000 is thus ₦2,467,520.
Enny Money’s Monthly PIT (PAYE) is thus ₦2,467,520 divided by 12 = ₦205,627.
EPISODE 4 – PIT AND VAIDS
Personal Income Tax is our “grassroot tax” as it is the Tax we all can either relate to or interestingly, will want to be relating to in the nearest future. To avoid the strain of Distrain or other unsavoury aftermath, PIT must be accorded priority.
In light of this, TSE had a recent discourse on Voluntary Assets and Income Declaration Scheme (VAIDS). VAIDS applies to PIT and as such, all individuals, partnerships, trusts and other unincorporated entities earning income derived from or accruing in Nigeria and defaulting in filing their PIT returns should seize the opportunity of the VAIDS amnesty period to regularize their tax defaults before June 30.