TAXATION I

LESSON 1&2
Introduction to taxation,
classifications, principles and
the tax System
Course Lecturer
Dr. Suleiman Aruwa
Associate Professor of Accounting
 Definition of Tax
Tax is defined as a compulsory
contribution from individuals and or
business organizations for the
purpose of financing the
expenditure of the government.
Taxation is therefore the process of
levying and collection of tax from
taxable persons.
Classification of Taxes
There are three broad
classifications as follows:
(i) Classification based on Tax
base;
(ii) Classification based on
Incidence; and
(iii) Classification based on Tax
rate.
Classification Based on Tax Base
A Tax base is the object or item on which tax is collected. This
could be income, capital, consumption etc. Within the context of the
Nigerian Tax Laws, three (3) bases are identifiable. These are:

Income: These are taxes levied on the income of Individual and

companies. In Nigeria, the common classifications are: Personal
Income Tax, Companies Income Tax and Petroleum Profit Tax.

Capital: These are taxes levied on asset. The asset could be

human or other forms of assets. The Nigerian Tax Law recognizes
two forms of Capital taxation i.e. Capital Gains Tax and Capital
Transfer Tax. However, the Federal Government of Nigeria has
through the 1996 budget abrogated the Capital Transfer Tax.

Consumption: These are taxes levied on goods and services. The

most common forms of consumption tax in Nigeria are the Value
Added Tax, Excise Duties and Customs duties.
Classification Based on Incidence of Tax
An incidence of tax is the impact of tax on the person who pays tax to
the Government. Under this classification of tax, two forms of taxes
are evident.

Direct Taxes: These are taxes collected directly from the income of
individuals and companies whose incidence and burden is on the
individuals or the companies that pay the tax to the Government.
Examples are Personal Income Tax, Company Income Tax,
Petroleum Profit Tax, Capital Gains Tax, etc.

Indirect Taxes: These are taxes imposed on the value of goods and
services, produced and consumed within the country, imported into
the country or exported to other countries, whose burden can be
shifted in part or in full by the taxpayer who has paid the tax to the
government to the final consumers who do not even know either
when they pay the tax or the exact amount of the tax they pay.
Examples are Value Added Tax, entertainment tax, import duties,
export duties, excise duties, etc. Indirect taxes paid by a company
usually reflect in the selling price of the goods and Services to be
payable by the consumers.
Classification Based on Tax Rate
A Tax rate is the portion of tax base paid as tax. Under this classification, the following
can be identified.
Progressive Tax: This is a tax which increases as the tax base (i.e. income or stock of
wealth being tax) increases. It is commonly found in income taxation and the aim is to
achieve equitable distribution of tax burden. For example Mr. A earns N20,000 taxable
income and pays 10% as tax (i.e. N,2000) and Mr. B earns a taxable income of
N80,000 and pays 20% as tax (i.e. 16,000). In this situation, income tax is progressive,
as the tax rate has direct relationship with the tax base (i.e. they change in the same
direction).
Proportional Tax: This is a tax that remains fixed regardless of change in the tax
base. In proportional tax, all tax payers, both the rich and the poor are made to pay the
same percentage of their income as tax. For example Mr. A earns N20,000 taxable
income and pays 10% as tax (i.e. N,2000) and Mr. B earns a taxable income of
N80,000 and pays 10% as tax (i.e. 8,000). In this case, the rich pays more than the
poor in absolute terms, even thought the tax rate is fixed percentage of the tax base.
Regressive Tax: This is the tax which decreases as the tax base (i.e. income or stock
of wealth being tax) increases. For example Mr. A earns N20,000 taxable income and
pays 10% as tax (i.e. N,2000) and Mr. B earns a taxable income of N15,000 and pays
20% as tax (i.e. 3,000). This tax system is usually imposed as punishment for non-
performance in situation where the government creates an enabling business

environment but the citizens are inherently lazy .

Distinction between Tax and Other Levies
There are other payments which resemble tax but are not tax. These
payments are:

Fees: This is a levy imposed with the aim of reducing the cost of each
recurrent service undertaken by the Government in public interest but
conferring a significant advantage on the fee payer. E.g. registration
fees, court fees, school fees, etc.

Licenses: This is a charge by Government to grant permission to a

person for the performance of a service. E.g. motor vehicle license
fees, broadcasting license fees, business registration fees, etc.

Fines: This is a levy imposed as a punishment for breach of law with

a view to ensuring future adherence.

However, all these levies above are similar to tax because they are
compulsory payments and they also serve as a source of income to
the Government, but differ from tax in the sense that taxes are not
levied in return for any specific service rendered by the Government
to the taxpayer.
Purposes of Taxation
Revenue Generation
Income Re-Distribution-progressive tax
Economic Stabilization- disposable
income
Discourage the Consumption of harmful
goods and services
Protect Infant Industries- tax on imported
goods
Prevent Dumping- tax on imported goods
Correct Unfavourable Balance of
Payment-high tax on import promote export
Principles of Taxation
Principle of Equity: This principle states that a good tax system should be
as just as possible by ensuring that all persons who ought to pay the tax are
covered by the tax and that each taxpayer pays exactly what is just and
equitable considering his circumstance and ability. There are two types of
equity i.e. vertical and horizontal equity. Vertical equity is the unequal
treatment of taxable persons with varied taxable income. While horizontal
equity is the equal treatment of tax payers with the same taxable income.

Principle of Economy: This principle states that the cost of collecting tax
should not be too high so as to outweigh the benefits derivable from the
imposition of tax. For example if it costs a government N9 million to collect tax
revenue of N10 million, the tax system is said to lack economy.

Principle of Certainty: This principle states that the amount to collect as tax,
the time of payment, the mode of payment and the place of payment must be
made clear to the tax payer, so that the tax payer is not left at the whims and
caprice of the tax authorities. In other words, the taxpayer should be fully
informed about taxes to be able to arrive at a conclusion as to the amount of
tax payable by him with reference to the provision of the tax law, as well as, to
preventing him from being subjected to cheating by unwanted people and
dishonest tax officials.
Principles of Taxation
Principle of Convenience: This principle states that tax should be imposed
at a time, in a manner and at a place that the taxpayer is in position to pay, so
that collection of tax would be easy for the tax administrators. E.g. salary
earner should be asked to pay tax when he receive his salary and not at the
middle or the end of the month when the salary may have been exhausted.
This is why the PAYE (Pay-As-You-Earn) is deducted at source, because it is
more convenient than requiring the taxpayer to pay after collection of salary
and a farmer should be asked to pay tax when he harvest his crops and not
when he is doing the planting or clearing the farm.

Principle of Simplicity: This principle states that a good tax system and the
tax law should be as simple as possible, both in interpretation and application.
This requirement is particularly important in developing economy where the
rate of illiteracy is high and where the culture of record keeping has not been
imbibed by most small scale entrepreneurs.

Principle of Neutrality: This principle states that a good tax system should
neither distort the consumption habit nor the production decision of a tax
payer. In other words, a good tax system should not interfere with people’s
willingness to work, produce, consume, save and invest.
Tax System, Tax Policy, and Tax Laws
Tax system is an embodiments of tax policy, tax law and
tax administration.
Tax Policy:
Tax policies are general statements of procedure which guide the
thinking and action of all concerned towards the realization of the
stated tax objectives. The tax policies of Nigerian Governments are to:
pursue a low tax regime which aims at reducing individual tax burden
and thereby encouraging savings and investments;
move from the traditional coercive method of taxation to voluntary
compliance;
engage in tax payer education through public enlighten;
deliberate movement of emphasis from income tax to consumption tax
which is less prone to tax evasion;
introduction of self-assessment to encourage tax payers participation
in the tax assessment process which is more realistic in approach and
democratic in nature; and
reducing tax evasion and avoidance using the due process of law and
the mechanism of an efficient tax administration.
Tax Laws
These are the various legal instruments put in place to ensure the realization of
the tax policy objectives of the Governments. The notable ones are:
Personal Income Tax Act (PITA) CAP P8 LFN 2004 (as Amended in 2011):
This law imposes tax on the income of individual, a partner in partnerships, an
executor, a trustee, village or community throughout the Federation.
Companies Income Tax Act (CITA) CAP C21 LFN 2004: This law applies in
relation to companies throughout the Federation.
Petroleum Profits Tax Act (PPTA) CAP P13 LFN 2004: This law applies to
companies that engage in petroleum exploration and production throughout the
Federation.
Capital Gains Tax Act (CGTA) CAP C1 LFN 2004: This law imposes capital
gains tax on any capital gains i.e. gains resulting from the disposal of chargeable
assets, by both chargeable individuals and corporate entities throughout the
Federation.
Value Added Tax Act (VATA) CAP V1 LFN 2004: This is a multi stage tax levied
on the value of some selected goods and services that are consumed within the
country.
Education Tax Act (ETA) CAP E4 LFN 2004: This law imposes tax on the
assessable profit of all registered companies throughout Nigeria in order to raise
funds for the educational sector.
Stamp Duties Act (SDA) CAP S8 LFN 2004: The law imposes tax on documents
throughout Nigeria.
 Sources of Nigerian Tax Laws
• Constitution
• Legislation
• Court Judgments
• Circulars and Practices of Inland
Revenue Officials
• Opinion of income tax experts
• Budgetary pronouncement