The Importance of Personal Income Tax to You

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The Importance of Personal Income Tax to You

By James Hughes

There are some wrong notions people have about mandatory tax obligations of employers of labour, as well as employees of organisations. Many entrepreneurs think they are not individually obligated to pay tax in so far as their businesses have complied with relevant tax laws. Some even assume Personal Income Tax (PIT) rates are as high as 40%-50% in the country today, so they are not willing to pay. Many can’t even differentiate between corporate taxes and PIT and which one they must comply with. Therefore, it was expected that the Voluntary Assets and Income Declaration Scheme (VAIDS),  a tax amnesty program put together by the Federal Ministry of Finance alongside other tax bodies in Nigeria, will have a lot of people wondering about its importance to them. Here we will be discussing the basics of Personal Income Tax (PIT) and how people can leverage on the tax amnesty program to regularize their tax records, and rightfully place themselves tax-wise going forward.What to Know About PITEvery income of an individual gotten from sources including paid-employment, business assets, investments etc. is liable to being taxed under the PIT Act 2011 (as amended). The income tax rate to be applied is informed by the level of income and the respective tax rate for each income category. PIT rates were substantially high in times past. In 1977-1986, on a yearly income of 30,000 upward, PIT rate was 70%; between 1986-1997, the rate was 55% on a yearly income of 40,000 upward. The PIT rates have however experienced reduction lately. Putting into consideration reliefs and allowances, which includes consolidated relief allowance, pension deductions, interest paid on mortgage and premium payment for life assurance, that are deducted from the income to be taxed, the mandatory PIT rate on the average is approximately 18%.It’s important to be able to differentiate between personal income and company income and the relevant tax authority for each one. Whether a company is owned by an individual or several people, the profit of such company is liable to tax, as stipulated by the Companies Income Tax (CIT) Act. However, the income earned by the individual from the company is also subject to tax as stipulated by the PIT Act. Payment of CIT by the company does not exempt the individual from paying for PIT on income he/she earns from the company, except where such category of income is exempted from PIT as provided by the Act.Consequences of Non-complianceThere is a general reluctance in the remittance of tax among Nigerians, because most people don’t see the need, and the evidence of judicious use of tax payers’ money. You hear people querying “how has the government spent the tax money collected over the years?” While this might make a lot of moral sense from an ethical perspective (as everyone expects commensurate value in return when money exchange hands), sadly the PIT administration as with all other tax administrations is not necessarily based on moral suasion. Every taxable individual (entrepreneurs and their employees) in Nigeria has an obligation to adhere to provisions of the PIT as regards monthly tax remittances and annual tax returns filing, not minding the derived benefits from compliance or lack of it. Any individual who fail to comply with statutory expectations of payment of tax and filing for annual tax returns is liable to a penalty together with an interest payment in addition to the total tax liabilities owed. As the law provides, default can lead to a criminal case instituted against the defaulter, and ultimately conviction and jail term could follow as the law finds necessary.The damage done to the reputation of an organization which fails to pay tax far outweighs the value of tax unpaid which are retained. Such firms would be ineligible for Tax Clearance Certificate, which is essential for transacting business both locally and internationally. This could seriously impede the growth of such organization.Worthy of note is the government’s drive to increase revenue from tax, thereby increasing the percentage tax revenue contributes to GDP and make it favorably comparable to other nations’ GDP composition. Part of the initiative is to foster ease of information exchange, chief of which is a unified reporting standard, that enables the Nigerian Government access to information on financial transactions done by Nigerians anywhere in the world, and the VAIDS which seeks to encourage deliberate tax compliance and regularization of tax records for all defaulters.VAIDSThe VAIDS is a program set-up by the Ministry of Finance in conjunction with other bodies to allow taxpayers declare willingly their assets/income and make right taxes accrued on such within a period. The amnesty program affords taxpayers with unreported or under-reported earnings within the last 6 years to make right their tax status, pay taxes due and avoid any interest, penalty payment or prosecution as stipulated by law. The period started from July 1st, 2017 and ends March 31st, 2018. A similar program has been done in other countries. In Brazil, the amnesty program recorded $15.8 billion in tax revenue, while in India $9.5 billion was recorded. Indonesia’s own version spurred close to a million tax-payers to declare more than $330 billion worth of assets hidden offshore and onshore.Information Available to Tax AuthoritiesThe Federal Government of Nigeria recently put together Project Lighthouse (PL), a data-mining and information-collating apparatus by which data will be gotten on assets, trusts, investments of Nigerians domiciled locally or abroad, to ascertain their level of tax compliance. The Federal Government of Nigeria is a signatory to several multilateral concords, that will ensure unrestricted exchange of financial information with other tax jurisdictions; this gives room for the mandated tax body in a tax jurisdiction to seek for information from another tax jurisdiction, from the relevant tax authority there, as regards tax-related investigations without being turned down. These concords would immensely enhance data-digging efforts of the authorities. Locally, information can easily be sourced from tax-payers’ bank details through the bank verification number, land ownership record, especially in high-brow areas through the Ministry of Lands records, Bureau De Change information, luxurious assets ownership records such as yacht and private jets etc.So, it is clear that the authorities are now better informed on avenues of income of individuals both locally and abroad unlike before, and they may decide to swoop in on any defaulter at any point in time with valid proof.Responsibility of Each Tax-PayerMany would think to themselves that they have been able to hide from the tax-man for many years, so why should they declare their assets now and pay the tax due from their limited resources? Some are even calling the bluff of the authorities saying the time-frame for the amnesty program will eventually be extended as it’s common in this part. Let get some things clear, owning an asset does not make a person subject to tax. Albeit, the tax authorities would naturally be alarmed in a taxable period where the income reported is in contrast with the total asset acquisition in that particular year based on information gotten through the Project Lighthouse. Assets acquired via loan or inherited are not taxable, so income may be accurately reported in some cases. A person can only be compelled to pay tax where an incongruence can’t be adequately explained beyond reasonable doubt by the tax-payer.Also, not all income can be subjected to tax in Nigeria. Some selected income when brought into the country through approved mediums are excluded from PIT. It’s advised that tax-payers should consult recognized tax practitioners, present their assets and income sources, to duly ascertain their level of compliance, remit whatever outstanding they may have, and be sure the authorities will have nothing against them.The FIRS announced lately that it has written to certain individuals, which they have credible information about, to use advantage of the amnesty program and regularize their tax records. We hope more of this will be done to sensitize individuals before the program comes to a close.In conclusion, individuals need to meticulously ascertain what they stand to lose or gain for non-compliance with relevant tax regulations by calculating the extra cost they may eventually incur. Tax-payers should consult recognized tax practitioners to assist them in ascertaining their compliance level and regularize whatever outstanding they may have, so you don’t attract the sledge hammer of the law.   

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