Tutorial Questions

1. A tax is a form of contribution from a member of a society to the constituted

authority of that society in order to assist the authority. Discuss.

The concept of taxation is very difficult to define in few words. As a matter of fact, Nigerian tax
legislations never defined the word ‘tax’ rather an attempt was made to describe this concept.

Taxation is an essential sociolegal instrument used by the government in any society for the
effective management as well as delivery of economic and sociopolitical dividends of
governance. The Nigerian National Tax policy attempted a compilation of several definitions for
taxation among which is a monetary charge imposed by the Government on persons, entities,
transactions or properties to yield revenue. It is also defined as any contribution imposed by
Government. The Nigerian National Tax policy tried to avoid the blunder of restraining the
definition of tax to one definition, especially because tax varies based on types and purpose.

Several attempts have been made by people to define this concept some of which I’m going to be
examining. Ola a Nigerian author defined tax as a demand made by the Government of a country
for a compulsory payment of money by the citizens of that country. This definition is quite
detailed but lacks a fundamental characteristic of tax which is annual payment. This is what
differentiates it from other charges. Ayua concluded that it is a payment by legislative authority.
This conclusion is in exhaustive as such cannot stand as a complete definition for tax.

Agbonika attempted to define tax as an obligatory levy, exacted by Government on eligible

persons, goods or activities for particular purpose which may be expressed or implied in the
interest of the nation. This definition attempts to be complete but lacks the fundamental
characteristics of method of collection which is annual payment. This differentiate it from other
charges. In United State v Butter tax was defined as an exaction for the support of government.
In Leake v Commissioner of Taxation tax was defined as a compulsory contribution imposed
by sovereign authority on the citizens. The word tax was further judicially defined in the
Australian case of Matthews v Chicory Marketing Board as a compulsory exaction of money
by a public authority for public purpose or raising money for the purpose of government by
means of contribution from individual persons.

The introduction of tax is a good omen for human society. In egalitarian society, the importance
of tax cannot be overemphasized. Income tax is one of the major sources of revenue for the
government, and it must be reckoned with in all the government’s budgets. It raises revenue to
meet government expenditure. The government expenditure which requires to be met include
provision of services which the free market cannot provide such as defence, law and order and
parks as well as provision of services which the state feels are better provided by itself such as
Health services and education – often referred to as public goods. Thus the taxes collected come
back to the tax payers in the form of social amenities.
Income tax has been used to encourage and discourage some activities in the private sector,
though this depends on whether the policy of the government is towards encouraging or
discouraging such activities. The tax system may thus be used for discouraging immoral
activities such use of alcohol or purchase of cigarettes.

Taxation is especially important to businessmen, who enjoy the benefits of water supply,
electricity and land allocation. It also reduces the net return on investment and decreases the
balance for private savings.
Taxation also has social effects as it affects the lives of nearly everybody. Personal reliefs (aids
and assistance), reliefs in respect of children and tuition (scholarships and grants), reliefs on
insurance policy premiums, and dependent relatives’ relief (e.g. gratuities of a dead civil servant)
affect the social structure of the whole country. Taxation further assists in the redistribution of
wealth in the society. Taxes paid are used to bridge the gap between the rich and the poor.
Income tax also has some effect on population movements and the extent of business carried on.
A state with a low income tax rate will find that more people are moving into that state, while
traders will leave states with high income tax rates or engaged in various schemes of tax
avoidance and tax evasions.
Conclusively, Tax is a payment that is backed by law: For a payment to qualify as a tax, it must
be backed by an enabling law. Any payment that is not statutorily backed is not a tax. An attempt
to define tax must therefore have and contain all essential features of taxation. Though defining
tax is next to impossible, an attempt can be made in this direction and such attempt must contain
the essential features of taxation.

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 b Explain five criteria that can be used to determine an ideal tax

1. Simplicity: A good tax system must be straightforward, simple and coherent. The concept and
principles of the tax must be understood by majority of the citizens and also must be simple to
operate. There must also be consistency in administration of the tax among the different strata of
government.

2. Equity: An ideal tax must be administered on the principles of equity. There are two types of
equitable principles in the taxing system – horizontal equity and vertical equity. What we mean
by horizontal equity is that those in equal circumstances should pay an equal amount of tax. And
when we say vertical equity, it means that those in unequal circumstances should pay different
amount of tax. The importance of this criterion is to install confidence in the tax payer who will
be more willing to pay their taxes if they believe that the system is fair and equal.

3. Ability to pay: By this, we mean that the tax must not be unbearable for the tax payers. It must
be within their financial capability.

4. Administrative Efficiency: The administrative costs should not be higher than the revenue
yielded. Also the tax must take into account certain factors such as, the effects on economic
incentives, and whether it is compatible with desirable international economic relations.

5. Certainty: The scope of the tax should be clear. This criteria also means the certainty that the
tax can and will be enforced, because a tax that is easily evaded usually causes resentment and
often a decline in tax payer morality. Also the tax which every person is bound to pay ought to
be certain and not arbitrary.

6. Flexibility and Stability: The tax system should be flexible especially in a federal and
democratic country such as Nigeria where there are always changes in government.

7. Neutrality: A tax must be neutral thus it must avoid distortions of the market. For instance, a
selective tax, such as the sales tax, is not neutral, because it encourages the consumer to spend
his money on another item rather than a taxable one.

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 2. Differentiate between a money paid by a person for the provision of education in his
society and a fee paid for crossing a bridge.

In a plain language, the Oxford English Dictionary (1973) has defined tax as ‘a compulsory
contribution to the support of government levied on persons property, income, commodities,
transactions, etc, now at a fixed rate proportionate to the amount on which the contributions is
levied’. However, to further simplify this definition, the Oxford Advanced Learner’s Dictionary
(2006) defined tax as ‘money that you have to pay to the government so that it can pay for public
services.’ It further concluded that ‘people pay tax according to their income and businesses pay
tax according to their profits. Tax is also often paid on goods and services.’ Another definition
supplied by Investwords.com refers to tax as ‘a fee charged by a government on a product,
income or activity.’ However, despite the various definitions, you should note that a proper tax
within the above definitions must be one backed by legislation and must be a deduction that
gives to treasury of the authorities concerned with revenue generally. Also the compulsory nature
of tax should also be noted.
Tax should not however be confused with other forms of compulsory contribution which bear
semblance with it. The criterion of the compulsory nature of tax becomes clearer when
distinguishing a tax from a charge for a government service. Firstly, if a payment is a charge for
a government service, some service must be provided directly to the individual. For example,
there is difference between paying a bridge toll and paying a tax to be used for the defence of
one’s country. Secondly, the charge must be related to the service given, and not varied
according to the person’s ability to pay or to some other criterion such as the value of his
property. Aiyar’s Concise Law Dictionary (2009) as the most apt and encompassing definition.
Tax was defined as ‘a compulsory exaction of money by a public authority for public purposes
enforceable by law and is not payment for services rendered.’

b. How important is taxation to our society?

United State v Butter tax was defined as an exaction for the support of government. In Leake v
Commissioner of Taxation tax was defined as a compulsory contribution imposed by sovereign
authority on the citizens. The word tax was further judicially defined in the Australian case of
Matthews’s v Chicory Marketing Board as a compulsory exaction of money by a public
authority for public purpose or raising money for the purpose of government by means of
contribution from individual persons.

The introduction of tax is a good omen for human society. In egalitarian society, the importance
of tax cannot be overemphasized. Income tax is one of the major sources of revenue for the
4
government, and it must be reckoned with in all the government’s budgets. It raises revenue to
meet government expenditure. The government expenditure which requires to be met include
provision of services which the free market cannot provide such as defence, law and order and
parks as well as provision of services which the state feels are better provided by itself such as
Health services and education – often referred to as public goods. Thus the taxes collected come
back to the tax payers in the form of social amenities.
Income tax has been used to encourage and discourage some activities in the private sector,
though this depends on whether the policy of the government is towards encouraging or
discouraging such activities. The tax system may thus be used for discouraging immoral
activities such use of alcohol or purchase of cigarettes.

Taxation is especially important to businessmen, who enjoy the benefits of water supply,
electricity and land allocation. It also reduces the net return on investment and decreases the
balance for private savings.
Taxation also has social effects as it affects the lives of nearly everybody. Personal reliefs (aids
and assistance), reliefs in respect of children and tuition (scholarships and grants), reliefs on
insurance policy premiums, and dependent relatives’ relief (e.g. gratuities of a dead civil servant)
affect the social structure of the whole country. Taxation further assists in the redistribution of
wealth in the society. Taxes paid are used to bridge the gap between the rich and the poor.
Income tax also has some effect on population movements and the extent of business carried on.
A state with a low income tax rate will find that more people are moving into that state, while
traders will leave states with high income tax rates or engaged in various schemes of tax
avoidance and tax evasions.
Conclusively, Tax is a payment that is backed by law: For a payment to qualify as a tax, it must
be backed by an enabling law. Any payment that is not statutorily backed is not a tax. An attempt
to define tax must therefore have and contain all essential features of taxation. Though defining
tax is next to impossible, an attempt can be made in this direction and such attempt must contain
the essential features of taxation.

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 3. The system of taxation is alien to the Nigerian legal system before the advent of
British rule. Discuss

According to M. T. Abdulrazaq in his book, Principles and Practice of Nigerian Tax Planning
and Management (1993), a country’s tax system for all intents and purposes emanates from its
economic, political and cultural history. Nigeria is a country with very rich and long cultural
histories which still substantially rub on general polity including our tax system. It is known that
before the invasion of the Europeans in Africa especially Nigeria, the various communities that
existed in the landmass that today constitute the entity known as Nigeria have their respective
legal norms and way of lives

Thus before the incursion of the British into Nigeria, the idea and system of tax levying and
payment was an integral part of the financial system of the Nigerian communities then. Although
at that period, the taxation system was largely operated on an ethnical basis. Therefore, there
were few communities where taxes were not levied. In the northern Nigeria, where there was a
well-structured government entrenched on the principles of Islamic law (Shari’ah), the emirs as
the political and religious leader established various kinds of tax systems. These taxes include
the payment of Zakat – a tax levied on Muslims for charitable, religious, and educational and
welfare purposes. It is generally used to cater for the needs of the less privileged and the needy in
the society. There was also another kind of tax known as Jizyah – a form of tax levied on the
nonMuslims who live in the Muslim communities. This was used as a payment for ensuring the
safety of their lives and properties while they still lived in the Muslim community. Another tax
being levied at the time was Shukka-Shukka – a tax paid on all crops that were not liable to
Zakat. There was also Jangali – a tax levied on the heads of livestocks. It was commonly known
as Cattle tax. Agricultural tax was also common at the time. It was known as Kurdin Kasa and
paid by farmers on all their cash crops harvested within the territory of the Emir’s province.
However, in the southern Nigeria, not all the communities practiced the taxing system. This is
because quite a number of the communities did not have a formalized and organized governance
system as the north.
Therefore, in the part of the southern communities where there was an established centralized
authority, administrative machinery and judicial institutions (just as it operated in the north),
such as the Yoruba land and the Benin Kingdom (both of which fell within the Western and Mid-
western part of Nigeria), there was a system of taxation. But in other communities which do not
have any centralized constituted authority, such as the Ibos, Tivs, Buras, Igbiras and Bachamas,
there was little or no form of organized tax system. You should note that the pre-colonial era

6
taxes were not strictly pecuniary. That is, they were not only paid in money or cash. They were
also (largely) paid in kind and through obligatory personal services, which is also known as
tribute taxes - for instance the Ishakole in the Yoruba land. Although introduction of money did
not stop the use of obligatory personal service as a form of tax payment, it rather supplemented
it.

b. Account for the evolution of the legal framework of taxation in Nigeria after the advent
of British rule in Nigeria.

Undoubtedly, there was no such tax law in the southern part of Nigeria until 1917 when Lord
Luggard made certain changes to the law which culminated in the Native Revenue Ordinance of
1917. The ordinance became operative in the western and mid-western Nigeria in 1918 while it
started operating in the eastern Nigeria in 1928. The Native Revenue Ordinance was believed to
be discriminatory as it applied to only natives that lived in other parts of Nigeria other than
Lagos. Thus, in 1937, a Native Direct Taxation (Colony) Ordinance No. 41 of 1937 was passed
to provide for taxes for natives living within the Lagos colony. Later, the Non Native
(Protectorate) Ordinance of 1939 was also passed to provide for taxation of non natives.
However, in 1940, the Native Revenue Ordinances of 1917, 1918 and 1928 were all later
incorporated into one tax legislation that was more comprehensive – Direct Tax Ordinance No. 4
of 1940.

The Direct Taxation Ordinance 1940 was believed to be the first major tax legislation in Nigeria.
It would therefore be proper to describe it as the fore runner of Nigerian tax legislations. Tax
under the Direct Taxation Ordinance 1940 was levied on the community. The community was
described in section 2 (1) of the Ordinance as comprising any town, village or settlement, or any
locality therein, including a band of nomad herdsmen; and individuals within a community. By
section 4 of the Ordinance, the income to be assessed was income from land; rents derived from
land; annual profits of the produce from land which were enjoyed by the community or
individual; income from employments and pensions; profits from trade or manufacture;
dividends or interest; and the value of all livestock owned by individuals or community.

The importance of the Direct Taxation Ordinance in the history of income tax in Nigeria is that it
was the first tax statute that applied throughout the country having consolidated all previous tax
ordinances from 1907 to 1939. One shortcoming for the Direct Taxation Ordinance however was
its failure to uniformity in the administration of tax in the country. Under the Direct Taxation
Ordinance, administrative officers only levied tax on the incomes of Africans throughout the

7
country and the Europeans that lived in Federal Territory of Lagos. Thus the Europeans living in
the former regions were not subject to tax in the regions in which they were resident.

Conclusively, the Nigerian tax system has a narrow national tax base and limited tax instruments,
thus lacking the revenue elasticity required to meet the usual upward trend in national spending.
The situations described above led to the constitution of the Raisman Fiscal Commission of
1958. The Commission recommended the introduction throughout Nigeria of basic principles for
taxing incomes. The recommendation however formed the basis of the Income Tax Management
Act of 1961 whose principles we still largely use in Nigeria today though with periodic reviews
and amendments.

4. Discuss the importance and shortcomings of the 1940 Ordinance to the system of
taxation in Nigeria.

After the British came into Nigeria and after having discovered that there was an organized
government in the north and upon the introduction of the indirect rule, the British government
under Lord Lugard introduced the first Income Tax law in what is today known as Nigeria in
1904 by consolidating all the various traditional taxes under the Land Revenue Proclamation of
1904. There was no such tax law in the southern part of Nigeria until 1917 when Lord Luggard
made certain changes to the law which culminated in the Native Revenue Ordinance of 1917.
The ordinance became operative in the western and mid-western Nigeria in 1918 while it started
operating in the eastern Nigeria in 1928. The Native Revenue Ordinance was believed to be
discriminatory as it applied to only natives that lived in other parts of Nigeria other than Lagos.

Thus, in 1937, a Native Direct Taxation (Colony) Ordinance No. 41 of 1937 was passed to
provide for taxes for natives living within the Lagos colony. Later, the Non Native (Protectorate)
Ordinance of 1939 was also passed to provide for taxation of non-natives. However, in 1940, the
Native Revenue Ordinances of 1917, 1918 and 1928 were all later incorporated into one tax
legislation that was more comprehensive – Direct Tax Ordinance No. 4 of 1940. The Direct
Taxation Ordinance 1940 was believed to be the first major tax legislation in Nigeria. It would
therefore be proper to describe it as the fore runner of Nigerian tax legislations.

Tax under the Direct Taxation Ordinance 1940 was levied on the community. The community
was described in section 2 (1) of the Ordinance as comprising any town, village or settlement, or
any locality therein, including a band of nomad herdsmen; and individuals within a community.
By section 4 of the Ordinance, the income to be assessed was income from land; rents derived

8
from land; annual profits of the produce from land which were enjoyed by the community or
individual; income from employments and pensions; profits from trade or manufacture;
dividends or interest; and the value of all livestock owned by individuals or community. You
should note that apart from the introduction of tax over employment and pension, other items
upon which tax were levied were those inherited from the earlier traditional tax system.

The importance of the Direct Taxation Ordinance in the history of income tax in Nigeria is that it
was the first tax statute that applied throughout the country having consolidated all previous tax
ordinances from 1907 to 1939. One shortcoming for the Direct Taxation Ordinance however was
its failure to uniformity in the administration of tax in the country. Under the Direct Taxation
Ordinance, administrative officers only levied tax on the incomes of Africans throughout the
country and the Europeans that lived in Federal Territory of Lagos. Thus the Europeans living in
the former regions were not subject to tax in the regions in which they were resident Another
shortcoming was that the Ordinance applied to both persons and companies thus lumping
together under the same law provisions for the taxation of personal and company incomes.

I also wish to say that at the time we are talking about, the Nigerian tax system has a narrow
national tax base and limited tax instruments, thus lacking the revenue elasticity required to meet
the usual upward trend in national spending. The situations described above led to the
constitution of the Raisman Fiscal Commission of 1958. The Commission recommended the
introduction throughout Nigeria of basic principles for taxing incomes. The recommendation
however formed the basis of the Income Tax Management Act of 1961 whose principles we still
largely use in Nigeria today though with periodic reviews and amendments.

Conclusively, However, upon the advent of the British colonial rule in Nigeria, the British
government through the indirect rule policy introduced the first ever tax legislation in northern
Nigeria in 1904. The statute operated only in the northern region until it was extended to other
parts of Nigeria in 1918 and 1928. The inadequacies attendant to the above statute led to the
promulgation of the first general legislation on tax in Nigeria, the Direct Taxation Ordinance
1940 and subsequently Income Tax Management Act 1961 which introduced the Basic principles
for taxing incomes throughout Nigeria.

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 5. While citing statutory authorities, state the various relevant tax authorities.

Relevant Tax Authorities

After we have known and identified the relevant tax laws, what we need to know now is to
identify the relevant tax authorities that are in the position to collect the tax on behalf of
government. These are the revenue boards constituted by the government with mandate to assess
and collect tax. According to the provision of section 100 of Personal Income Tax Act (PITA)
(as amended by the Finance (Miscellaneous Taxation Provisions) Act 1998), ‘tax authorities’
means Federal Board of Inland Revenue (now Federal Inland Revenue Service), the State Board
of Internal Revenue or the Local Government Revenue Committee. For better understanding,
some of the relevant tax authorities are discussed hereunder:

1. Federal Inland Revenue Service (FIRS)

The FIRS was established by virtue of section 1 of the Federal Inland Revenue Service
(Establishment, etc.) Act of 2007 (hereafter referred to as the Act). This body took over from the
erstwhile Federal Board of Inland Revenue (established under section 1 of the Companies
Income Tax Act (CITA) 1990), which was dissolved by section 62 of the Act. The FIRS is the
federal government’s operational agency in charge of assessing and collecting relevant taxes for
the Federal Government. The function of the FIRS as provided in section 8 of the Act, include,
among others:

A. to collect, recover and pay to the designated account, any tax recognized b the Act or any
other law or enactment.

B. to assess persons including companies, enterprises and individuals chargeable with tax

C. to assess, collect and enforce payment of taxes as may be due to the government or any of its
officials

d. to collaborate with relevant ministries and agencies, for the review of the tax regimes and
promote the application of tax revenue for the stimulation of economic activities and
development

e. to make, from time to time, a determination of the extent of financial loss and such other
losses by government arising from tax evasion and fraud and such other losses (or revenue
forgone) arising from tax waivers and other related matters.

The FIRS also has a board, whose power is to provide general policy guidelines relating to the
functions of the service, among other related matters (section 7). There is also a Technical
Committee of the board which considers all tax matters that require professional expertise and
make recommendations to the Board.

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2. State Board of Internal Revenue (SBIR)

The SBIR is the relevant tax authority charged with assessing and collecting taxes that are due to
the state government. The SBIR was established under section 85A of the Personal Income Tax
Act (PITA) 1993. The SBIR has an operational arm known as State Internal Revenue Services or
State Services. The SBIR is responsible for:

a. ensuring the effectiveness and optimum collection of all taxes and penalties due to the state
government under the relevant laws.

b. doing all such things as may be deemed necessary and expedient for the assessment and
collection of the tax and shall account for all amounts so collected in a manner to be prescribed
by the Commissioner for Finance of the relevant state.

c. Making recommendations where appropriate to the Joint Tax Board on tax policy, tax reform,
tax legislation, tax treaties and exemptions as may be beginning from time to time.

d. generally controlling the management of the State Services on matters of policy subject to the
provisions of the law setting up the State Service.

3. Local Government Revenue Committee

The Local Government Revenue Committee was also established under the PITA , section 85D
(1). The function of the Revenue Committee includes assessment and collection of all taxes,
fines and rates under its jurisdiction and shall account for all amount so collected in a manner to
be prescribed by the Chairman of the Local Government.

4. Other tax authorities

Apart from the above mentioned, there are other tax authorities created by the law. These include
among others:

a. Joint Tax Board (created under section 85(1) of PITA 1993)

b. Joint State Revenue Committee (section 85F PITA 1993 as amended by Finance

(Miscellaneous Taxation Provisions) Act 1998).

b. Explain how No Problem Enterprises tax and Kalakuta Plc respectively for the year
2020 could be computed.
11
This question centers on how companies can be computed. The income tax of taxable persons
can be assessed and computed in accordance with the nature of each person. However the
assessment and computation had been undertaken in two major divides – personal income and
companies’ incomes. Before the statutory total income of a partnership or a company can be duly
taxed, the profits of the enterprise must first be ascertained. And according to sections 19 and 20
of the Companies Income Tax Act, certain expenses and income shall not be included in the
profits computation. Thus the accounting profits (that is the total calculated profits) will have to
be adjusted to obtain the actual profits due for tax. This is called Adjusted or Assessable Profits.
Taxable profit is however arrived at after the treatment of the following:

i. loss relief.
ii. Capital allowances and balancing allowances.
iii. Balancing charge.
Thus, the adjusted profit of a partnership or company is computed in accordance with the
Following steps:

First, ascertain the net profit as per account (i.e. the accounting profit as explained
Above).

Second, add the available disallowable expenses to the accounting net profit

Third, deduct the following from summation of the above (i.e. net profit as per account +

Disallowable expenses):

i. allowable items not so treated.

ii. Income exempted.

After the ascertainment of the taxable profit (adjusted profit) as we have calculated above, then
the tax payable for the relevant year of assessment shall be computed as
Follows:

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First, add together the adjusted profit and balancing charge

Second, then deduct the following from the above summation (i.e. adjusted profit plus balancing
charge)
i. capital allowances
ii. Loss relief
The result of this calculation is known as Taxable or chargeable profit.

Third, after determining the chargeable/taxable profit, the actual tax payable on the profit shall
then be determined by multiplying the applicable rate (as prescribed by the tax authorities from
time to time) by the taxable profit (e.g. 30% x Taxable Profit).

Conclusively, above is how No Problem Enterprises tax and Kalakuta Plc respectively for the
year 2020 could be computed

6. In computing the profits of a company, only expenses wholly, exclusively,

necessarily and reasonably incurred for companies’ income tax are deductible.
Discuss.

Tax concessions and deductions are methods by which countries uses to promote economic
development. Deductions involves excluding some expenses when calculating taxable profit of a
company. Deductions are done in other to encourage investments in the economy. Tax
concessions and deductions are granted in industries where the government want to encourage
investment. In ascertaining the profits under the CITA, there are certain deductions that are
allowable. Section 24 of CITA fully encapsulates the deductions allowable in determining the
taxable profits of the company.

Section 24 further provides for the deductions allowed:

1. Interest on borrowed capital in acquiring the profits;

2. Rent and premiums on property
3. Any outlay or expenses incurred during the year in respect of
i. salary, wages, or other remuneration paid to the senior staff and executives
ii. Cost to the company of any benefit or allowance provided for the senior staff and
executives which shall not exceed the prescribed limit.

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 4. Any expenses incurred for repair of premises, plant, machinery or fixtures employed in
acquiring the profits.
5. Bad debts incurred in the course of a trade or business.
6. Any contribution to a pension, provident or other retirement benefits fund, society or
scheme approved by the Joint Tax Board.
7. In the case of profits from a trade or business, any expense or part thereof
i. the liability for which was incurred during that period wholly, exclusively, necessarily and
reasonably for the purposes of such trade or business and which is not specifically referable
to any other period or periods, or
ii. the liability for which was incurred during any previous period wholly, exclusively,
necessarily and reasonably for the purpose of such trade or business and which is specifically
referable to the period of which the profits are being ascertained;

Section 25 and 25A of CITA also provide for deductions of donations made to fund, body, or
institutions in Nigeria, for the purpose of ascertaining the profits. Section 26 of the Act permits a
deduction for the purpose of research and development, provided such a deduction does not
exceed 10% of the profit ascertained before any deductions.

Section 27 addresses the deductions not allowed in ascertaining a company's profits, which are

1. capital repaid or withdrawn and any expenditure of a capital nature;

2. Any sum recoverable under an insurance or contract of indemnity;
3. Taxes on income or profits levied in Nigeria or elsewhere, other than tax levied outside
Nigeria on profits which are also chargeable to tax in Nigeria.
4. Any payment to a savings, widows and orphans, pension, provident or other retirement
benefit fund, society or scheme.
5. The depreciation of any asset;
6. Any sum reserved out of profits.
7. Any expense incurred within or outside Nigeria for the purpose of earning management
fee unless prior approval of an agreement giving rise to such management fee has been
obtained from the Minister;
8. Any expense whatsoever incurred within or outside Nigeria as management fee under any
agreement except as allowed by the minister.
9. Any expense of any description incurred outside Nigeria for and on behalf of any
company except as the Board may consider allowable.

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 7. How do the rules of residence affect taxpayers in foreign employment, local
employment, federal service and pensioners?

Tax is not imposed upon nothing. The entity to be taxed and the source(s) of the income to be
taxed must be identifiable. However, it is necessary to state here that the person upon whom tax
assessed and from whom tax is collected is known as ‘assessable person’. The assessable person
is the person whether artificial or real who resides in any part of the country in a particular year
of assessment with express exemption of religious, charitable, trade union, labour organizations
and government boards, states and corporation.

After we have identified the persons liable to pay tax, another issue that is very germane to the
proper administration of tax is that of residence of the tax payers. This is because the
determination of the residence of the tax payers will resolve the relevant tax authority that will
collect the tax. Resolving the issue of residency also affect the scope and type of deductions and
relief that may be allowed to a particular tax payer. For example, the amount that would be
deducted as PAYE for a person resident in Lagos would be different from the amount to be
deducted from the income of a person resident in Dutse.

Generally, residence means living in a particular locality and it may be possible that a person has
two places of residence. Residence therefore connotes the idea of remaining and settling in a
place for a fairly long period. It is for this reason that residence is used to determine liability to
personal income tax. The Personal Income Tax Act considered the question of where a person is
deemed to be resident in a particular year of assessment along the following lines. However, for
the sake of this question we shall be limited to how the rules of residence affect taxpayers in
foreign employment, local employment, federal service and pensioners.

i) Pensioners: for an individual who is a pensioner, with no other source of income, his principal
place of residence is that particular place or those places that he usually resides

ii) Federal service: for an individual who earns his income from paid jobs in Nigeria (that is
not pensioner), his principal place of residence is that place or those places which on a relevant
day is nearest to his usual place of work

iii) Local employment: for an individual who has a source or sources of unearned income in
Nigeria, his principal place of residence is that place or those places in which he usually resides.

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iv) Foreign employment: An individual who holds a foreign employment on the first day of
January of the year of assessment, the duties of which are performed in Nigeria (apart from
temporary visits of the employee to Nigeria), is deemed to be resident in that year in the territory
in which the main or principal office is situated on that day.

b. State the persons upon whom tax is chargeable and explain how their places of residence
would be used to determine the payment of their tax.

There are personalities relevant to the process of levying and collection of tax. The taxable
persons therefore include:

i. Individuals,

ii. Sole proprietors,

iii. Partnerships,

iv. Companies,

v. Communities and families,

vi. Trustees and executors.

The taxes of all of these persons except the company are chargeable under the PITA while the
taxes chargeable to a company are assessed under the CITA.

Determination of Residence as a basis for Taxation

After we have identified the persons liable to pay tax, another issue that is very germane to the
proper administration of tax is that of residence of the tax payers. This is because the
determination of the residence of the tax payers will resolve the relevant tax authority that will
collect the tax. Resolving the issue of residency also affect the scope and type of deductions and
relief that may be allowed to a particular tax payer. For example, the amount that would be
deducted as PAYE for a person resident in Lagos would be different from the amount to be
deducted from the income of a person resident in Dutse. Generally, residence means living in a
particular locality and it may be possible that a person has two places of residence. Residence
therefore connotes the idea of remaining and settling in a place for a fairly long period. It is for
this reason that residence is used to determine liability to personal income tax. The Personal
Income Tax Act considered the question of where a person is deemed to be resident in a
particular year of assessment along the following lines:

a. Individuals in Employment on 1st January of a particular year

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A place of residence is defined under paragraph 1 of the First Schedule to the PITA in relation to
an individual to mean ‘a place available for his domestic use in Nigeria on a relevant day, and
does not include any hotel, rest house or other places at which he is temporarily lodging unless
no more permanent place is available for his use on that day.’ However, where an individual has
two or more places of residence, his tax would be administered by the tax authority within his
principal place of residence. And the phrase ‘principal place of residence’ in relation to an
individual with two or more places of residence on a relevant day not being both within a State
means:

i. for an individual who is a pensioner, with no other source of income, his principal place of
residence is that particular place or those places that he usually resides.

ii. for an individual who earns his income from paid jobs in Nigeria (that is not pensioner), his
principal place of residence is that place or those places which on a relevant day is nearest to his
usual place of work

iii. for an individual who has a source or sources of unearned income in Nigeria, his principal
place of residence is that place or those places in which he usually resides.

b. Individuals taking up Employment within the Year

A person taking up an employment or trade during a particular year of assessment is deemed to

be resident for that year in place where he has a place of residence or principal place of residence
if he resides in resides in two or more places in an assessment year.

c. Persons on Leave from Employment at 1st January

An individual who is on leave from a Nigerian employment on the first day of January in a year
of assessment shall be deemed to be resident for that year by reference to his place or principal
place of residence immediately before his Leave begins.

d. An Indvidual who is in a Foreign Employment on 1st January

An individual who holds a foreign employment on the first day of January of the year of
assessment, the duties of which are performed in Nigeria (apart from temporary visits of the
employee to Nigeria), is deemed to be resident in that year in the territory in which the main or
principal office is situated on that day.

e. Armed Forces Personnel

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A member of the Armed Forces (employed in combatant capacity) is deemed to be resident in
the Federal Capital Territory for tax purposes in the year of assessment.

f. Trustees

The tax to be paid on the estates managed by trustees on a year of assessment would be payable
to the tax authority in charge of the place where the Trustee has a place or place of business
(registered office) in the assessment year.

g. Executors

The tax to be paid with respect to the estates managed by an executor would collected by the tax
authority in charge of the place where the deceased was last resident.

h. Itinerant Worker

In the case of an itinerant worker, tax may be imposed for any year by any state, in which the
itinerant worker is found mostly during the year.

i. Communities

Community income is taxed by the tax authority of the State where the members of the
community are usually resident. That is, the State in which the community is found during the
year of assessment.

j. Corporation Sole, Partnership or Body of Individuals

A corporation sole, partnership or body of individuals other than a family or community shall be
deemed to be resident for a year of assessment in the State in which its principal office in Nigeria
is situated on the first day of January in that year. But the corporation sole, partnership or body
of individuals has no office in Nigeria on that day, its place of residence shall be the State in
which any part or the whole of its income liable to tax in Nigeria arises for that year.

It is important for you to note that any dispute that arises with respect to the determination of
place of residence of a person for the purpose of tax in any assessment year shall be referred to
the Board for adjudication by the relevant tax authorities involved.

8. It is generally believed that profits and gains are the major chargeable incomes.
Discuss, while stating the chargeable income for a business person and a company,
the factors used to determine profit for the purpose of taxation.

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Every company or person that earns certain amount of income or gain a measure of profit from
its business is subject to payment of tax.

Companies Income Tax (CIT) is a tax on the profits of registered companies in Nigeria.
Company income tax is payable upon income accruing in Nigeria, derived from Nigeria, brought
into Nigeria and received in Nigeria. Income tax is payable on income from a source inside or
outside Nigeria.

Section 9(1) of CITA provides for the categories of chargeable income for the purpose of
measuring the taxes of companies, which are

1. Gains or profits from a trade or business,

2. Rents or premiums arising from property,
3. Dividends, interests, royalties, discounts, charges, or annuities.
4. any source of annual profits or gains not falling within the preceding categories,
5. benefits from pension or provident funds treated as income under the Income Tax
Management Act,
6. Fees, dues and allowances (wherever paid) for services rendered.
7. Any amount of profits or gains arising from acquisition and disposal of short term money
instruments like federal government securities, treasury bills, treasury bonds, etc.

In Arbico v FBIR the court held that before any particular activity can be said to be trading
transaction which has given rise to profit or gains upon which tax can be levied, some factors
must be considered. These factors are used to determine profit for the purpose of taxation. They
include

1. nature of assets,
2. circumstances of purchase,
3. vocation of tax payer,
4. number of like transactions,
5. circumstances of sale,
6. the object clause of memorandum and articles of association,
7. length of time property held by the company,
8. circumstances of sale

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Section 31 of the Act provides that the total profit of any company year of assessment is the
amount of its total assessment profits from all sources for that year together with any addition
thereto.

In conclusion, it is clear from the provision of the CITA that incomes and gains of companies are
subject to taxation and the above factors are used to determine profits for the purpose of taxation.

9. As a student of law of taxation, Chika has approached you that he wishes to pay his
tax. Explain to him how his tax would be computed.

The income tax of taxable persons can be assessed and computed in accordance with the nature
of each person. However the assessment and computation had been undertaken in two major
divides – personal income and companies’ incomes. Computation of personal income tax
accruing to an employed individual is different from an individual business person. Please note
that a person is described as an individual or a businessperson. A businessperson is further
looked at as a sole proprietor or partnership. We shall examine them each below.

a. Assessment and Computation of the Statutory Total Income for employed Individual and
individual businessperson.
According to section 36 of the Personal Income Tax Act (PITA), the total income of any
individual for any year of assessment shall be assessed in accordance with the following steps:

First, the total amount of his total assessable income (statutory total income), earned and
unearned, from all sources for that year.

Second, you will add this total assessable income to any balancing charge for the year
Third, you will deduct the following from the total summation of the above (total assessable
income plus balancing charge):
i. any loss relief for that year
ii. Any capital allowances for that year
iii. Personal relief granted by the Act. For example, personal allowance, life assurance relief,
children allowance and dependant relative allowance (e.g. wife etc.)
The net (total) figure of the above is called chargeable income on which tax is chargeable at
progressive rates in force during the particular year of assessment.

20
However, according to section 37 of the PITA 2005 (as amended) and the Sixth Schedule of the
Act, the personal income tax shall be computed as follows
i. the personal relief allowance of a flat rate of 40 percent of the taxpayers’ income shall be
granted on the income. That is, an amount equivalent to 40 percent shall be deducted from the
taxpayers’ total assessable income.
ii. After the personal relief allowance has been granted, the balance of income shall be taxed as
specified in the following tax table:

Income to be taxed Percent Rates of Tax

First N30, 000 1 percent

Next N30, 000 5 percent

Next N50, 000 15 percent

Next N50, 000 20 percent

Next N2, 840, 000 25 percent

Above N3, 000, 000 30 percent

Conclusively, chika is however advised to follow the above in computing his tax.

b. What is meant by ‘statutory total income’? State five each of the two categories of the
statutory total income discussed in this unit.

The aggregate of a taxpayer's income from all sources calculated inaccordance with the provision
s of the Income and Corporation Taxes Acts. Sometimes knownas statutory total income. From t
his figure must be deducted certain sums (e.g. loss reliefand interest relief ranking as a charge on
income) to obtain the taxpayer's taxable income.

State five each of the two categories of the statutory total income discussed in this unit.

(THE ANSWER FOR THIS IS NOT STATED IN THE MATERIALS GIVEN BY PROF
OJEDOKUN)

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 10. Shelltox (Nig.) Ltd engages in Catering business. It is reputed to be the largest
Catering Company in Nigeria. The company is ready to pay its tax for the year
2010. Explain in detail how its taxable income will be ascertained and computed.

Before the statutory total income of a partnership or a company can be duly taxed, the profits of
the enterprise must first be ascertained. And according to sections 19 and 20 of the Companies
Income Tax Act, certain expenses and income shall not be included in the profits computation.
Thus the accounting profits (that is the total calculated profits) will have to be adjusted to obtain
the actual profits due for tax. This is called Adjusted or Assessable Profits.
Taxable profit is however arrived at after the treatment of the following:

i. loss relief.
ii. Capital allowances and balancing allowances.
iii. Balancing charge.
Thus, the adjusted profit of a partnership or company is computed in accordance with the
Following steps:

First, ascertain the net profit as per account (i.e. the accounting profit as explained
Above).

Second, add the available disallowable expenses to the accounting net profit

Third, deduct the following from summation of the above (i.e. net profit as per account +

Disallowable expenses):

i. allowable items not so treated.

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ii. Income exempted.

After the ascertainment of the taxable profit (adjusted profit) as we have calculated above, then
the tax payable for the relevant year of assessment shall be computed as
Follows:

First, add together the adjusted profit and balancing charge

Second, then deduct the following from the above summation (i.e. adjusted profit plus balancing
charge)
i. capital allowances
ii. Loss relief
The result of this calculation is known as Taxable or chargeable profit.

Third, after determining the chargeable/taxable profit, the actual tax payable on the profit shall
then be determined by multiplying the applicable rate (as prescribed by the tax authorities from
time to time) by the taxable profit (e.g. 30% x Taxable Profit).

Conclusively, above is how Shelltox (Nig.) Ltd who engages in Catering business, a company
which is ready to pay its tax for the year 2010 can ascertain and compute its taxable income

b. Explain what you understand by the term ‘basis of period of assessment’ in

computation of tax

Basis period is simply time within which an assessment is raised/computed

on a taxpayer for the purpose of establishing the correct amount of tax
liability in a particular period. Basis period can also be seen as the basis
upon which tax liabilities would be computed. Every business has its
accounting year end (accounting period) as it suits the company’s operations
except for few industries in Nigeria where the permanent year end is
determined by the applicable authority. e.g Banks . The principle guiding the
determination of basis period of assessable income individuals (employed
and businessman) and assessable profits for companies is the same. Basis
period of assessment is the period, the profit of which is to be assessed in a
23
year of assessment. It is the period of business activity to be taken into
account in determining the tax liability of a chargeable person in a particular
year of assessment.

More so a company’s accounting date may not correspond with the

government fiscal year; which is 1st January to 31st December. Based on the
above, it can be said that for the sake of equity; which is one of the qualities
of the Nigerian tax system, the Nigerian government through the
TaxAuthorities provides for the basis upon which taxes would be computed
on a common ground. A Careful study of the provisions in the Nigerian tax
laws (CITA,PPTA,CGTA,PITA etc.) show that we basically have two (2) types of
basis period applicable to every company liable to tax. They are:

a. Normal Basis Period of assessment

In using a normal basis period of assessment, the tax administrator or

collector will use the preceding year to calculate the tax accruing from the
taxpayer. Thus, the profit or gain that will be taxed in this year of
assessment is the profit of the previous year (i.e. last year). The
characteristics of a normal basis period include:

i. It must be of 12 months duration

ii. It must be the only accounting period ending in a preceding fiscal or tax
year

iii. It must also be commenced from a da immediately after the end of the
previous year that is, there is an element of continuity. There must be no
gap or coincidence of dates; one basis period must commence the day the
end of the previous one.

b. Abnormal Basis period

Abnormal basis period of assessment is used where it is impossible for the

administrator to use parameters for the normal basis period to calculate the
tax. The following are examples of situations where a normal basis period
will not apply:

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i. where a business has just commenced operation

ii. Where a business has ceased operation

iii. Where there is a change in accounting date

11. In accordance with the provision of CITA, tax is imposed on the profits of any
company accruing, derived from, bought into, or received in Nigeria. You are
required to name six of such profits.

ANSWERS

Companies Income Tax (CIT) is a tax on the profits of registered companies in Nigeria.
Company income tax is payable upon income accruing in Nigeria, derived from Nigeria, brought
into Nigeria and received in Nigeria. Income tax is payable on income from a source inside or
outside Nigeria.

Section 9(1) of CITA provides for the categories of income have for the purpose of measuring
the taxable income of companies, which are

1. Gains or profits from a trade or business,

2. Rents or premiums arising from property,
3. dividends, interest, or annuities,
4. any source of annual profits or gains not falling within the preceding categories,
5. benefits from pension or provident funds treated as income under the Income Tax
Management Act,
6. Fees, dues and allowances (wherever paid) for services rendered.
7. Any amount of profits or gains arising from acquisition and disposal of short term money
instruments like federal government securities, treasury bills, treasury bonds, etc.

In Arbico v FBIR the court held that before any particular activity can be said to be trading
transaction which has given rise to profit or gains upon which tax can be levied, some factors
must be considered. These factors include nature of assets, circumstances of purchase, vocation
of tax payer, number of transactions, circumstances of sale etc.

25
The basis period for determination of assessable income for companies is based on the period of
business activity. This could be Normal Basis Period which is a period of 12-month duration of
the accounting period in a preceding fiscal year or abnormal basis period which is used where it
is impossible for the administrator to use parameters for the normal basis period to calculate the
tax. The only abnormal basis period in Nigerian taxation is when a company changes its financial
year-end to a new date.

12. Panaf works in Lead Oil and Energy Plc., an American company situated at Warri.
He has been asked to pay his tax. Explain to him how to go about the calculation of
his taxable income.

The income tax of taxable persons can be assessed and computed in accordance with the nature
of each person. However the assessment and computation had been undertaken in two major
divides – personal income and companies’ incomes. Computation of personal income tax
accruing to an employed individual is different from an individual business person. Please note
that a person is described as an individual or a businessperson. A businessperson is further
looked at as a sole proprietor or partnership. We shall examine them each below.

a. Assessment and Computation of the Statutory Total Income for employed Individual and
individual businessperson.
According to section 36 of the Personal Income Tax Act (PITA), the total income of any
individual for any year of assessment shall be assessed in accordance with the following steps:

First, the total amount of his total assessable income (statutory total income), earned and
unearned, from all sources for that year.

Second, you will add this total assessable income to any balancing charge for the year
Third, you will deduct the following from the total summation of the above (total assessable
income plus balancing charge):
i. any loss relief for that year
ii. Any capital allowances for that year
iii. Personal relief granted by the Act. For example, personal allowance, life assurance relief,
children allowance and dependant relative allowance (e.g. wife etc.)
26
The net (total) figure of the above is called chargeable income on which tax is chargeable at
progressive rates in force during the particular year of assessment.

However, according to section 37 of the PITA 2005 (as amended) and the Sixth Schedule of the
Act, the personal income tax shall be computed as follows
i. the personal relief allowance of a flat rate of 40 percent of the taxpayers’ income shall be
granted on the income. That is, an amount equivalent to 40 percent shall be deducted from the
taxpayers’ total assessable income.
ii. After the personal relief allowance has been granted, the balance of income shall be taxed as
specified in the following tax table:

Income to be taxed Percent Rates of Tax

First N30, 000 1 percent

Next N30, 000 5 percent

Next N50, 000 15 percent

Next N50, 000 20 percent

Next N2, 840, 000 25 percent

Above N3, 000, 000 30 percent

Conclusively, above is how MR Panaf that works in Lead Oil and Energy Plc., an American
company situated at Warri will go about the calculation of his taxable income.

27