Small business owners in Nigeria often juggle multiple responsibilities, from managing day-to-day operations of the business to ensuring compliance with regulatory requirements. Among all of these, is the need to fulfil tax obligations which is crucial for maintaining the credibility and sustainability of their businesses.
A lot of people believe that taxes are just a legal requirement, however, taxes are not just a legal requirement but also a contribution to the nation’s development, funding infrastructure, education, and healthcare.
This article provides a comprehensive guide to help small business owners navigate Nigeria’s tax landscape with confidence.
Types of taxes for small business owners
The tax your small business may have to pay depends on different factors like your business location, type, size, and revenue. There isn’t a specific small business tax rate guide in Nigeria.
However, we’ll walk you through the 7 most common taxes you’re likely to come across as a business owner in Nigeria.
- Corporate Income Tax: This is a mandatory tax levied on the profits of registered businesses operating in Nigeria.
Applicability: This tax applies to companies incorporated under the Companies and Allied Matters Act (CAMA).
Rates: Small companies with a turnover of less than ₦25 million are exempt, while medium-sized businesses pay 20%, and large companies pay 30% of their taxable profits. Businesses are required to file their annual CIT returns and pay the corresponding tax within six months of the end of their financial year.
Not paying your CIT at the right time can lead to a fine of 25,000 Naira in the first month, followed by 5,000 Naira for each subsequent month.
- Withholding Tax (WHT): withholding Tax is an advance payment of income tax deducted at the source. Its like saving a little bit of money for your income tax before you even get paid
Applicability: It applies to payments such as contracts, rent, interest, and dividends.
Rates: WHT rates vary, typically ranging from 5% to 10% depending on the nature of the transaction.
- As-You-Earn (PAYE) Tax
For small businesses with employees, PAYE tax is deducted from employees’ salaries and remitted to the state tax authorities.
Applicability: This tax applies to all employers who pay salaries.
Mechanism: The tax is progressive, meaning higher earnings attract higher rates.
- Value Added Tax, or VAT, is a consumption tax on goods and services sold to the public. Registered businesses must collect VAT on sales and remit it to the Federal Inland Revenue Service (FIRS) The VAT rate is 7.5%, though some items, like basic food, medical products, books, and agricultural products, are exempt. Failing to pay VAT can result in a 5% per annum penalty plus interest. Not registering for VAT incurs a 10,000 Naira penalty for the first month and 5,000 Naira for each following month.
Additional documents may be needed depending on the specific tax.
- Other Applicable Taxes
Stamp Duties: Paid on legal documents like contracts and agreements.
Education Tax: Levied at 2% on the assessable profits of registered companies.
Local Government Levies: These include shop permits and signage fees, which vary by locality.
Customs Duties: Customs duties are taxes on imported goods, with rates ranging from 5% to 35%, depending on the type of goods.
Capital Gains Tax (CGT): Capital Gains Tax applies to profits from selling capital assets like land, buildings, stocks, and shares. The CGT rate in Nigeria is 10%, payable by the seller of the asset.
Tax Requirements for Nigerian Businesses
Documents you typically need include:
Tax Identification Number (TIN): Issued when registering with the Corporate Affairs Commission (CAC).
Audited Financial Statement: A yearly overview of your business’s finances, prepared according to International Financial Reporting Standards (IFRS).
Self-Assessment Form: Declares your estimated tax liability.
How to Pay Tax as a Small Business in Nigeria
Paying taxes involves several steps, but it’s manageable:
Step 1: Register Your Business
Register with the Federal Inland Revenue Service (FIRS) and your state’s tax authority. Visit their office or website and complete the necessary forms with your business details.
Step 2: Identify Applicable Taxes
Determine which taxes apply to your business based on factors like location and type. Monitor your expenses and profits to calculate your taxable income and review financial statements for deductions and allowances.
Step 3: Fill Out a Self-Assessment Form
This form estimates your tax for the year. Get the form from the tax authority’s office or website, and carefully provide details about your business, income, and tax amount due.
Step 4: File Your Tax Returns
Gather essential documents like your annual financial statement, CAC documents, directors’ statements, and the completed self-assessment form. File returns via the FIRS or the appropriate state tax authority’s online portal.
Step 5: Pay Your Tax
Pay at a bank or through the tax authority’s website. Keep your TIN and other tax documents handy during payment.
Step 6: Keep Thorough Records:
Save receipts, financial statements, and tax returns for at least six years. These records are vital for audits and proving compliance to stakeholders like investors, lenders, customers, or suppliers.
Conclusion
Understanding tax basics for small businesses in Nigeria helps you make informed decisions, ensuring your business can leverage any tax benefits. Complying with tax regulations protects you from penalties and boosts your credibility with customers and investors.
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