THE NIGERIAN TAX REGIME, LEGAL FRAMEWORK, CHALLENGES AND PROSPECTS: PAYE IN PERSPECTIVE

PAYE tax is quite simple and not as complex as Witholding Tax (WHT) or Value Added Tax (VAT). The difference between PAYE and the other two lies in the fact that it is a PERSONAL INCOME TAX payable by an employee.

PAYE shares a similarity with WHT in that they are both deductible at source, meaning that the taxes are deducted before the net income accrues to the beneficiary. However, while WHT has a macroeconomic outlook, PAYE doesn’t and it is focused on the individual employee’s tax obligation.

VAT is a tax borne by the consumer or buyer of VATable goods; whereas PAYE tax is borne by the employee.

With that been said, PAYE is regulated by law. From the PDF we have seen some of the Acts governing taxation in Nigeria. PAYE tax is provided for under Section 81 of the Personal Income Tax. In addition, states are allowed to make regulations on PAYE rates, the Lagos state Internal Revenue occasionally issue out PAYE guidelines. Also in Lagos the requisite PAYE form is FORM H.

Employers must begin deducting tax from the salaries and wages of their employees after 6 months of the company commencing business operations. PAYE falls under the jurisdiction of the State Inland Revenue Service, meaning that such taxes are remitted to the state government of where you reside. But such tax is remitted to the Federal Inland Revenue Services if you reside in the FCT. Employers in Nigeria are required to deduct PAYE tax at source and remit the amounts deducted to the tax authorities within 14 days.

Note that contract employees are not exempted from PAYE deduction.See StarDeep Water Petroleum Limited v LIRS Appeal No. TAT/LZ/022/2012 The position was affirmed that based on the “manager concept” in Regulation 2(3) of the PAYE Regulations, where an employee works under the supervision or management of a person who is not his employer, that person (referred to in the Regulations as the “Manager”) is required to furnish the particulars of the employee’s emoluments to the relevant tax authority (RTA), deduct the tax due from the employee’s emolument, and remit the tax deducted to the RTA.

The penalty for failing to file returns according to the Personal Income Tax (Amendment) Act, 2011 is N500,000 for corporate organizations and N50,000 for individuals.

PAYE RATES

The rates depends on state tax regulations, Lagos operates a graduating scale PAYE system. The tax rates increases based on the employee’s annual taxable income the scale used by the LIRS is:

a. The first N300,000 will be charged at 7%; 

b. The next N300,000 will be charged at 11%; 

c. The next N500,000 will be charged at 15%; 

d. The next N500,000 will be charged at 19%; 

e. The next N1,600,000 will be charged at 21%; 

and 

f. Then above N3,200,000 will be charged at 24%. 

Where an employee’s annual taxable income is below the N300,000 threshold, then the appropriate tax rate will be 1%. 

So, for instance, where an employee makes N5 million a year, not all of the N5 million would be taxed at the maximum of 24%, but rather the first N300,000 of the N5 million would be taxed at 7%, the next N300,000 of the remaining N4.7 million will be taxed at 11%, the next N500,000 of the remaining N4.4 million will be taxed at 15% and so on until the maximum threshold is reached. 

There is however a difference between monthly PAYE deductions/remittance and annual returns:

The two submissions, though made at different times, should be accompanied with a comprehensive list of staff that suffered the PAYE deductions. Comprehensive lists of employees from whom PAYE no  were made is continuously submitted on monthly basis each time PAYE is deducted and remitted to the tax authorities.

The Annual returns on the other hand is to be submitted by 31st day of January of every year by every employer to enable the tax authority ascertain whether the correct deductions and payments of tax have been made for the previous year (period of twelve months) for all its employees and for incomes from all sources earned during the year.

Where excess tax has been paid by any employee, he shall be refunded on application by the employee to the relevant tax authority. He could however elect to have the excess tax payment be used to off-set future tax liability.

When there is an under deduction of tax from a staff salary, the employer whose duty it is to deduct correctly and remit to the relevant tax authority bears the burden.

The following items are tax exempt and tax is calculated after amounts paid in respect of these items are deducted:

– National Housing Fund Contributions.

– National Health Insurance Scheme.

– Life Assurance Premiums.

– Pension Deductions.

— Gratuities.

The challenges facing the PAYE Tax system is interrelated with the general outlook of taxation in Nigeria. 

One common problem associated with PAYE system is tax evasion on the part of some employers saddled with the responsibility to remit payable taxes; this also extends to the bulk of the Nigerian tax sphere where fraudulent tactics are employed by individuals to deprive the state its revenues. 

According to a 2017 survey by the FIRS, only 16 per cent of Nigerians regularly pay income tax. In Lagos for example where huge infrastructure projects are being implemented for the past 16 years, only 4.6 million persons and companies in a population of about 22 million are registered for income tax payment. The figures become even more depressing when broken down.

Consider that of the 13.4 million regular taxpayers nationwide; only 10 million are individuals so this will give us a gloomy picture as to the poor tax compliance prevalent in the country.

Despite the plethora of sanctions prescribed by law against tax offenders, there is still a high level of poor tax compliance. This is inextricably linked to the fact that the tax authorities (Federal and States) are yet to properly enforce the payment of taxes.  Some Nigerian states have an almost insignificant tax base, but rely almost entirely on federal allocations to fund virtually all their activities thus leading to the assumption that this is why they are not keen in increasing their tax revenues. In other states where the will power exists to improve tax revenues, the authorities are ill-equipped and lack the funding/expertise to investigate offenders and ensure compliance. 

The National Bureau of Statistics put the national workforce – the number of adults aged 15-64 – at 77 million, effectively putting the 10 million people in the tax net at a weak 13 per cent and this figure will grow if steps are not taken to checkmate the trend. 

Technically, multiplicity in tax obligations does not specifically affect PAYE since it is clear that payment of this type of tax is to the state government. However on a general outlook most businesses are subject to multiple and overburdening tax regimes (from the federal, states and local authorities) which has nudged them in the path of failing to comply with remitting income taxes of their employees.  

A complex tax system would not necessarily achieve national development.

RECOMMENDATIONS 

To effectively implement a holistic tax compliance, the following measures are suggested:

▶Reinforcing tax authorities with technical and financial resources to investigate and prosecute tax offenders.

▶Regular sensitization of business stakeholders and individuals on meeting tax obligations.

▶Reducing the administrative bottlenecks hindering efficient filing of tax returns. 

▶ Reviewing tax legislations in the country to minimize the  encumbrances on businesses especially start-ups and SMEs which constitute 80% of the country’s industry employers. this will in turn provide the avenue to capture more income tax payers within the tax net.

CONCLUSION 

In the spirit of this tax convention, it is apt to highlight the prospects taxation has to offer the country:

Tax revenue is one of the most important factors that could be a catalyst to a country’s growth. It has provided developing countries with a stable and predictable environment to promote growth and to finance their infrastructures. Economists observe that a country’s tax system is a major determinant of other macroeconomic indexes, for instance the economy is highly dependent on tax revenue as a source of government expenditure for developmental purposes. For Nigeria, it has provided the government an opportunity to collect additional revenue besides other sources needed to discharge its pressing obligations.

Combined with economic growth, it reduces long-term reliance on aid and Crude Oil. There is a significant positive effect of tax revenue on the gross domestic product of Nigeria. The positive impact of the tax on the economy can be sustained and enhanced if the government makes efforts and its relevant agencies are efficient. Also, the management, administration, and implementation of Taxes in Nigeria should be done in such a way that it would not have an adverse effect on the economy by distorting the free forces of demand and supply.

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