ChizobaINTRODUCTION
The importance of taxation in the activities of any government cannot be over-emphasized. The world over, tax is one major source of revenue. However, not every national government has been able to effectively exploit this great opportunity for revenue generation. This setback can be attributed to several reasons amongst which is weak tax compliance.
Notably, this is more recurrent amongst individuals, families/communities, and Small and Medium Enterprises (SMEs) or Business owners who have seen little or no need to remit Tax. Relatively, most defaulters of tax remittance are ignorant of what it entails and how to ensure compliance of the same to the latter.
Wherefore this ignorance cannot be an excuse under the law, it is herein advised that there is a need for taxpayers to understand the need to remit taxes and what is required of them in doing that.
This article would seek to unveil what is tax compliance and would streamline same with respect to Personal Income Tax (PIT) and its remittance considering how PIT payment is made when Tax Compliance is said to be complete in PIT and will go further to look at what Tax return Filing entail in PIT.
• Tax Compliance
Tax compliance is the act of subjecting oneself to the demands of the tax laws either voluntarily, by persuasion, inducement, or compulsion. It is simply fulfilling all tax obligations as specified by law completely.
It would be rightly described as total obedience both willful and forced, to the relevant tax laws and regulations by both taxpayers and tax authorities. As already noted, it can be voluntary or compulsory.
Voluntary tax compliance is the concept by which taxable persons volunteer information relevant for appropriate taxation by tax authorities whereas Compulsory tax compliance deals with the belief in the power of sanctions and its potential to compel obedience to tax laws regarding tax remittance.
Tax compliance is a multi-faceted measure and theoretically, it examines payment compliance, filing compliance, and reporting compliance. The three are interwoven and for one to claim that he/she has complied with the tax requirements, the trio must have been fulfilled to the letter.
• Personal Income Tax (PIT)
Personal Income Tax (PIT) is a statutory obligation imposed by the government on the incomes of individuals, communities, and families as well as executors and trustees of any settlement. It is guided by the Personal Income Tax Act Cap P8 LFN 2011 (as amended).
Although the PIT is a federal obligation, PIT must be remitted to the Inland Revenue Service of the State in which categories of they reside. This position is static irrespective of the institutions or bodies they work for which could be the federal, state, or local governments or private organizations.
Mention must be made, however, that in some situations, PIT can be made to (FIRS) by some individuals or class of persons outside the above category already recognized.
PIT remitted to Federal Inland Revenue Service (FIRS) only applies to staff of the Ministry of Foreign Affairs, other Nigerians, and foreigners outside the country but earning income in Nigeria (non-residents), Police Officers, Military Officers, and Residents of the FCT.
• The two types of Personal Income Tax
(A) Pay-As-You-Earn (PAYE): This is a Scheme in which personal income taxes are deducted from the salaries or wages of the employee by the employer and remitted to the relevant tax authority.
The due date for the remittance of PAYE is the 10th day of every succeeding month. The deadline for filing returns for PAYE is the 31st of January of the succeeding year.
(B) Direct Assessment: This Scheme applies to self-employed individuals. The self-employed individual will without notice or demand, file a return of income earned in the preceding year and pay the requisite PIT to the relevant tax authority. The due date for filing returns and remittances is the 31st of March of every year.
Generally, the rate of PIT is not static but depends on the amount of money a person makes in one year. For the First N300,000, the Levy rate is 7%. If the person makes another N300,000, then the rate increases to 11%.
The next N500,000 escalate the deductible tariff rate to 15% and the subsequent N500,000 heighten it to 19%. The next N1,600,000 raises the levy rate to 21%.
Then in a case where a person receives another portion of revenue over N3,200,000 the rate soars to 24%. Mention must however be made with regards to the fact that where the taxable income is below N300,000, then a 1% tax rate of the gross income is what will be resorted to.
• Personal Income Tax (PIT) Compliance.
This applies to individuals, partners, employees, families, communities, trustees, and executors as regards their compliance with tax requirements. The question that pops up in this regard becomes how often taxpayers in the above category comply with tax requirements and if they do, how often to how well have they complied?
• The extent of compliance with the PIT.
Tax compliance is hugely affected by social norms as well as public services, trust in government institutions, subjective cultural characteristics of the person, the fairness of the tax system itself, perception of others, awareness of how tax revenues have been utilized, and taxpayers’ confidence in the country’s administration of tax policy.
Whereas, some of these factors could be argued either in the affirmative or negative, our take is that as it regards PIT, taxpayers are most times complacent about remitting taxes based on the above-stated causative factors.
The issue of PIT compliance has continued to be a serious challenge for many tax authorities and going forward, there has never been an easy ride in persuading taxpayers to comply with tax requirements even with the existence of tax laws.
Only a few people are enthusiastic about paying taxes because many people abhor tax payments due to their acclaimed effect on their income. Those who eventually pay are in most cases not consistent with the payment or do not complete the compliance requirements. This then brings us to when compliance is said to be complete in PIT.
• When is Tax Compliance in PIT said to be complete
Taxes are always seen as burdens to taxpayers and most individuals seek various means to reduce their tax liabilities. A lot of taxpayers believe once they make the relevant payment of their taxes then compliance is complete. They would rather not have any further interaction with the Relevant Tax Authority/States’ Internal Revenue Service (SIRS).
To be tax compliant, a taxpayer (corporate or individual) must ensure that his/her taxes are paid, and returns are filed with the relevant tax authorities in the manner prescribed by the SIRS from time to time within the stipulated period.
In line with section 41 and section 81 of the Personal Income Tax Act (PITA), all taxable persons are required, without notice or demand, to file their income and taxes in the prescribed form and containing the prescribed information with the tax authority of their state of residence for each year of assessment.
A good incentive for taxable persons who earn N30,000 or less is that they are exempted from Personal Income Tax (PIT) therefore, they are not required to file tax returns.
• What does the Tax Return Filing entail.
The filing returns should contain income earned from every source, in the year preceding the year of assessment computed in line with the provision of PITA.
These returns are expected to be filed by individuals who are self-employed by way of direct assessments as well as those who are in paid employment under the Pay-As-You-Earn (PAYE) scheme.
The individual’s annual returns (Persons who earn other incomes outside of their employment income) are to be filed not later than 31st March every year and cover the income earned and taxes paid in the preceding year. Failure to comply with the requirements to file returns will attract a penalty of N50,000 (Fifty Thousand Naira only).
It is also noteworthy to mention that employers of labour are mandated by the provisions of Section 81 of PITA to file annual returns (Form H1) of all emoluments paid to their employees and taxes deducted and remitted to the relevant tax authorities.
The employer’s annual return is to be filed no later than 31st January of every year and covers the income earned and taxes paid in the preceding year.
Failure to comply with the requirements to file employer annual returns by the due date attracts a penalty of N500,000 (Five Hundred Thousand Naira Only). Remittance of Personal Income Tax or Pay-As-You-Earn (PAYE) is not just enough but remittance and filing of PIT/PAYE returns will complete the cycle.
CONCLUSIONS AND RECOMMENDATIONS:
Ensuring Tax compliance can be challenging for taxpayers especially when expertise is jettisoned. The outcome of this is the unhealthy environment that it breeds amongst tax collectors and taxpayers which in many cases goes against the odds of the taxpayers.
Relatively, the position of ignorance of the law not being an excuse for default is still in place and that is why seeking professional advice can never be over-emphasized in this context.
Wherefore Total Tax Compliance still proves unattainable, it is hereby recommended that we leverage the idea of Constraint.
This may be achieved by intricately weaving tax compliance into the social fabric to such an extent that would limit the opportunity for taxable persons to decide whether or not to subject themselves to income tax law. Some notable areas of interest where the Idea of constraint can be applied are as follows;
NYSC Program: In line with Section 12 of the NYSC Act Cap N84 LFN 2004, there should be no Employment of a person in both the private or public sector without the production of an NYSC certificate or Exemption from same.
On this note, If the President can by regulations require a tax certificate as part of the call-up or discharge documentation failing it means no employment. In cases where no Income has been earned, the Certificate should state the same.
• Professional Licensing: Requiring the production of a tax compliance certificate as a mandatory requirement for licensing, payment of practicing fees, and the issuance of practitioners’ seals would improve tax compliance within this professional group.
• Vehicle Registration: The multiplicity of vehicles and the frequency that would be required for annual licensing and vehicle registration would widen the tax compliance net and demand frequent taxman-taxpayer interaction.
• Court Processes: As far as practicable, all persons seeking (personally or by legal representation) to avail themselves of court civil processes should be required to show proof of tax compliance.
• Assignment of Stores and Payment of Rent: The incorporation of tax compliance certificates into processes for a stall assignment and rent payment would significantly induct these informal businesses into the mainstream of Nigeria’s economy.
• Business Registration: Because business names (sole proprietorships) in Nigeria generally have no legal personality separate from their owners, demanding tax certificates from such individuals prior to registration is very practicable as it avoids the legal impediment encountered for company registration.
In view of the above recommendation, caution must be however applied to ensure the regulation of constraint strategy so as not to defeat the purpose.
About the Author
Chidiebere Mbah Esq., is a Corporate and Commercial Practice Consultant. A Legal Practitioner with a flare for Corporate Practice, Taxation, Litigation/ADR, and Human Rights Advocacy. He is a prolific writer and Poet who believes in salvaging the hope of the common man. He has written various legal and artistic works to his credit.
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