As a business owner, one big financial constraint is the payment of taxes. This is especially true if you operate your business in an economy where your taxes do not produce tangible results. However, paying of taxes is as important as paying your electricity bill. It not only proves that you can cooperate with government authorities, but it also allows you contribute to the development of your economy. Let’s quickly look into what the term “tax” means. This article will show you why you need to pay tax.
Tax is the compulsory levy that the government charge individuals and companies on earnings or profits. Taxation occurs when a government or other authorities in that jurisdiction require that citizens and corporations pay a fee to them.
Tax can also be seen as a compulsory financial charge or some other type of levy the government imposes on a taxpayer in order to fund government spending and various public expenditures. A failure to pay, along with evasion of or resistance to taxation, is punishable by law.
A government survives on taxes. It’s a major source of revenue to the government of any country. This is to enable them undertake projects that will boost the economy of the country, and to raise the standard of living of its citizens.
There are various types and forms of taxes according to the regulations of that particular government. But for this article, we would be looking at the type of taxes that businesses pay to the government.
Types Of Taxes For Businesses In Nigeria
1. Company Income Tax or Corporate Tax
All businesses must pay tax on their income. This means that a business must pay tax on the profits they incurred in that operating year. How they pay the tax depends on the form of business.
The Company Income Tax Act (CITA) is the law that superintends the taxation of companies in Nigeria. The three tiers of government ( Federal, state and local government) usually collect the taxes. However, The Federal Inland Revenue Service (FIRS) administers or oversee the income tax for companies. The FIRS currently charges companies with a yearly turnover of N100 million 30%. It charges the businesses with revenue between N25 million and N100 million 20%. The FIRS assesses the tax at the end of the year because that is when they ascertain the profit.
A company that is not generating up to N25 Million in revenue is not to pay tax in line with the Finance Act 2019. Small businesses, Medium businesses, and sole proprietorship owners pay taxes on their personal income tax returns. This tax is payable only to the federal government.
State governments collect income taxes of individuals and unincorporated entities. The local government only collects levies and rates and not income tax.
2. Sales Tax
Sales Tax (Value Added Tax). Also known as goods and services tax. It is a tax that the FIRS places on a product whenever the producer adds value to the product at the stage of production, distribution or at the final sale. This tax is an indirect tax because the consumers pay at the point of purchase. The merchants collect it and pay to the state department of revenue. Specific products and services are taxed and money must be collected, paid and reported regularly.
In Nigeria, the average sales tax rate charged on the purchase price of certain goods and services is 5%. Every taxable business owner should file for their VAT monthly returns not later than the 21st day following the month of transaction.
3. Education Tax (EDT)
With this type of tax, the government charges on all companies incorporated in Nigeria 2% of profit. The government does this to ensure that all companies contribute to the development of the education sector.
This means that all registered companies in Nigeria must pay a percentage of their accessible profit into an Education Tax Fund. The tax is payable within two months of an assessment notice from the FIRS. In practice, many companies pay the tax on a self-assessment basis along with their Company Income Tax (CIT).
4. Capital Gains Tax
The government imposes this tax on people who get an income from the sale of a capital asset. They charge this tax at the rate of ten percent (10%) on any gain which accrues from the sale, lease, transfer, assignment, or compulsory acquisition of assets (stocks, bonds, real estate, etc.).
Capital gains are taxable at both the federal and state level. At the federal level, capital gains are taxed at a lower rate than personal income.
Why Businesses Have To Pay Their Taxes
As earlier stated, asides from the fact that paying taxes is highly recommended by the good book of the christian faith because it showed submissiveness to the governing authorities, there are a few other reasons why businesses have to pay their taxes.
(a) Boosts Business reputation: Paying tax as a small business is advantageous to the business owner as it’s evidence that the business is a committed one. it also helps to boost the reputation of the business owner especially when dealing with investors. This also shows a level of responsibility of the board of directors to its investors and the government.
(b) Contribution to a forward economy: As a business, being fully aware that government taxes are used to provide social amenities and contribute to overall growth of the economy, failure to pay your taxes can restrict the government from generating enough revenue to provide social, economic and infrastructural facilities to the society. In order to avoid this, it’s important for businesses to pay their taxes.
(c) Punishment: Tax evasion and Avoidance are both crimes that are punishable by the law. Tax evasion is a situation whereby taxes are not paid completely. Tax avoidance is where tax is not paid at all. Both are punishable under the law. The offender would be liable to pay the tax and a penalty of 10% of the total amount. The offender is also liable to imprisonment for a period of not less than 3 years.
Meanwhile, you can look below to find some of our recent articles specially curated for you;
I am the lady with the numbers at OG capital. Graduate of accounting from Bingham university and a Business Valuation officer from CFI in view. Fun loving and kind. Living the life of christ