These taxes are important
I recently came across two female entrepreneurs at a profile interview and we got into a conversation about taxes. I found it interesting that they were quick to say they were good with their taxes but didn’t have a clear understanding of Value Added Tax (VAT) and how they should be remitted. I once didn’t know much about it either even while I had my business operating for almost a year. We are not properly educated about taxes in this region and this can be detrimental to a business. People get scared and defensive when it comes to taxes because they haven’t been well informed or done their due diligence.
Taxes are compulsory monetary remittances to state revenue, levied by the government on workers’ income and business profits, or added to the cost of some goods, services, and transactions. As business owners, it is important you know the tax laws of your country and abide by them. There are so many reasons you should endeavour to pay your taxes:
You would be in good books with the government; you can bid for government contracts and grants. Also, potential investors and financial institutions such as banks, want to see that you are disciplined enough to be invested in. What else would connote discipline than to pay out a substantial amount of your business profits to the government you complain about, eh?
Apart from what you stand to gain by complying with the tax laws, there are fines that can be imposed on your business for defaulting in taxes. In many countries, tax defaulters/evaders can be downright prosecuted. In some cases, the business could be shut down by the government. These could be detrimental to your business. To be honest, nobody wants to invest in a business that could be shut down by the government for tax reasons.
There are nine types of taxes governed by the laws of Nigeria. For purpose sake, I will border on three of them. Value Added Tax (VAT), is what consumers pay to the government on any bought taxable product or service. VAT is collected by the seller and the seller remits them to the government monthly. The standard VAT rate is currently 5% in Nigeria and ideally should be priced in your products and services. VAT collected by the seller over a period of one month should be gathered and paid into any Federal Inland Revenue Service (FIRS) bank accounts and receipts on payment should be filed at the FIRS office on or before the 21st of the following month. There are penalties and interests for missing this deadline, please don’t learn the hard way. Some products and services like fresh farm produce are however, exempted from VAT by the government, you can find out more about this on the FIRS website.
Company Income Tax (CIT) is a percentage of the net profit a resident or non-resident company incorporated in Nigeria, remitted to the government yearly. In Nigeria, CIT rate is 30% of the net profit and it is assessed on a past business year. Businesses are required to submit a financial audit for the past year and other supporting documents to the FIRS office within six months of a financial year for assessment after which the CIT would be derived and payment must be made to any of the FIRS accounts. If the company declares a loss for up to four years in a row, the company can be exempted from paying the CIT, however, after four years, it may be required to pay a minimum CIT even if a loss is reported.
Education Tax (ET) is a compulsory percentage of the net profit a resident company incorporated in Nigeria, remits to the government yearly. ‘ET is intended to achieve restoration, rehabilitation, consolidation and development of tertiary education in Nigeria’. ET rate is 2% of the net profit and it is assessed on a past business year. Payment must be made to any of the FIRS accounts not more than two months after an assessment notice has been derived.
Taxes should be taken seriously so it doesn’t come back to bite you in the face. Please take practical steps further to understand and comply with taxes. I must mention that the whole process of tax and remittances can be a bit tedious and should be done meticulously. Keep all records of assessments, receipts of remittances and certificates properly at all times. Sometimes Company files at the FIRS office can go missing and the only evidence that you have been complying with the Tax laws of Nigeria would be the copies you kept. I know it can be challenging giving the government a huge chunk of the profit your business makes but taxes are bitter pills everyone must swallow.