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UNDERSTANDING TAXES FOR MSMEs IN NIGERIA

Taxes are mandatory financial charges imposed by the government on people (be it citizens or not), companies, and other organizations in order to fund public spending/expenditures and other government functions. They are crucial to society’s operation because they generate the income required to fund a range of public services and infrastructure.

Yes! it may seem difficult, but paying taxes is an essential component of operating a business and it needs to be handled as an integral part of running a business. It is legally required of all business owners, regardless of size or nature, to pay taxes to the Nigerian government.

As a business owner, you run the risk of facing severe repercussions from not paying your taxes, such as hefty fines, harm to your company’s reputation, or even closure by the government.

WHO COLLECTS/REMIT TAXES IN NIGERIA?

There are three tiers of government in Nigeria that remit taxes: Federal, state, and local governments.

  • The Federal Inland Revenue Service (FIRS): This is the federal government’s main tax collection agency. A variety of taxes, including the company’s income tax (CIT), value-added tax (VAT), capital gain tax, stamp duty tax, etc., are collected by them.
  • The State Inland Revenue Service (SIRS): Nigerian states each have a State Inland Revenue Service (SIRS) to collect business taxes at the state level.
  • Local Government Revenue Committees (LGRC): Collection of taxes at the local government level is managed by Local Government Revenue Committees (LGRC). They charge and collect the following taxes/levies:
    – Prices for stores and kiosks
    – Street registration fees (not including state capital streets)
    – Fees for the right of occupancy on rural properties (apart from those under state and federal government administration)
    – Parking fees in motor parks
    – Tax on road closures and merchandising
    – Fees for garbage disposal, sewage, and public convenience e.t.c.


TYPES OF TAXES FOR SMALL BUSINESS IN NIGERIA

Small businesses/company owners needs to understand taxes better than anybody else as they are an inevitable part of running business. So here are some important tax and levies which small business owners need to know, along with a list of resources to help out and learn more:

  • Companies Income Tax (CIT)

This type of tax is imposed on the earnings of businesses registered in Nigeria and it is duly paid to the federal government. However, small enterprises with an annual sale of less than N25 million are no longer required to pay corporate income tax as a result of the new Finance Act 2019.

Large companies, on the other hand, pay a 30% tax rate on sales above NGN 100 million, while medium-sized businesses, with sales between NGN 25 million and NGN 100 million, pay a 20% tax rate.

  • Stamp Duty Tax

The Federal government levies a charge known as stamp duty on the transfer of legal papers and instruments. These documents cover the transfer of real estate, buildings, land, patents, securities, and copyrights.

Stamp duty-exempt instruments need to be stamped within 40 days of their original execution. The sort of instrument being transferred determines how much stamp duty is due. While some instruments have set stamp duty rates, others have additional rates, which increase the charge based on the transaction value.

  • Value Added Tax (VAT) – Also known as Sales Tax

In most states, business owners/retailers are obligated to collect sales tax, which is also known as value added tax (VAT), and pay it to the state inland revenue services. This tax (VAT) is appliable to goods and services sold to the public.

In Nigeria, the VAT tax rate stands at 7.5% as of 2023. It’s important to keep in mind that not all products and services are subjected to this tax. Basic food items, pharmaceutical and medical supplies, books and educational materials, and agricultural products are among the things that are excluded. There are two methods to computing VAT: the first method based on invoices and the other based on subtraction or accounts-based. The former is is most widely used method.

  • Business Premises Tax (BPT)

State governments impose the Business Premises Tax (BPT) on real estate used for commercial activities, including factories, stores, and office buildings. In Nigeria, the state and the property’s location determine the BPT tax rate.

In urban regions, the BPT registration fee is 10,000 Naira, and successive renewals in urban areas are 5,000 Naira. In rural areas, the BPT registration fee is 2,000 Naira. This is important to note for small business owners.

  • Personal Income Tax, Employment Tax and Pension Contribution Tax

The tax known as personal income tax (PIT) is imposed on the incomes of people who live in Nigeria. It is legally required of business owners to pay PIT on their profits.

In addition, if you are an employer and you have employees, you have certain employment tax obligations that you must fulfill and documentations that you need to submit. For instance, you have to take out PAYE (Pay As You Earn) from your employees’ paychecks and send it to the appropriate tax authorities by a certain day of the month at the latest. In Nigeria, PIT tax rates vary from 7% to 24% depending on your income class.

Additionally, in regard to the pension contribution tax, employers are required to pay 10% of an employee’s monthly salary toward the pension, with the employee contributes 8% of the same.

Capital Gains Tax, Education Tax, and Petroleum Profit Tax are other taxes/levies to be fulfilled to the Federal government by small business owners in Nigeria. While development levy/tax is another that needs to be fulfilled to the state government.

Nigerian Businesses’ Tax Requirements

The particular documentation required to file your Nigerian small business tax depends on the kind of business you run and the particular taxes you owe.

Nonetheless, the following is a list of the credentials/papers you’ll normally need:

  • Tax Identification Number (TIN)
  • Audited Financial Statement of The Year
  • Duly Completed and Signed Self-Assessment Form
  • Some additional Documents depending on the specific tax you’re paying
  • Certificate of Business Registration with the FIRS and the relevant tax authorities in the particular state in Nigeria – This is the most important of them all.

ON FINAL NOTE:

Sometimes it can feel like there are taxes coming from all angles for businesses. Nonetheless, it can be less expensive and much easier if you grab the opportunity to know the ins and outs of tax credits and deductions and can make it easier if you follow the regulations closely.

Hiring an accountant with experience in your industry could be a wise investment if you’re a small business owner and probably find it difficult or too bulky to handle these tasks yourself.

Lawrence Blessing

Olarewaju Lawrence is a versatile content writer known for his creative approach and attention to detail. With a background in the Chemical aspect of Engineering and visual arts, Lawrence has worked on diverse projects ranging from Charcoal drawing, contents creation to website layouts with years of experience. His ability to understand trending occurrences and translate them into powerful striking contents visually sets him apart.
Lawrence finds inspiration in nature, music, football and arts.

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