Taxation in Nigeria Prospects for Reform



According to Mr. A.L Buhari in 1993, he describe taxation in Nigeria prospects for reform as compulsory contribution from individuals and or business organisation for the purpose of financing government expenditure. According to him, government of almost every country engage in a number of activities which requires the expenditure of funds. In order for the government to be able to undertake most of these activities, it raises fund through taxation.

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However, taxation could also be described as the transfer resources and income from the private sector to the public sector in order to achieve goals, such as the provision of additional governmental basic services particularly in education, public health, transportation, capital information and in the provision of facilities.

To crown it all, the ultimate goal or aim of the subject matter being “Taxation in Nigeria prospects for reform” is to raise high standard of living and reduce high cost of living.


Taxation may be defined as a compulsory levy which a government imposes on the income of the citizens of a state for which the government makes no direct benefits to the tax payer. These levies are made on personal income, such as: salaries, business profits, income from dividends, interests, discounts and royalties. It is also levied against company profits, capital gains and capital transfers.


Taxes may broadly be classified or divided into direct and indirect taxes.

DIRECT TAXES: This means a tax borne or paid by a person on whom it is legally imposed. The burden is expected to fall upon the person who actually pays it. That is the impact and the same person e.g personal income tax, capital gain tax, petroleum  profit tax etc.

INDIRECT TAX: This means that tax is imposed on person but paid partly or wholly by another. It is a tax in which the burden of which is not expected to fall upon the person who actually pays it. That is to say, the impact and the incidence of taxation fall on different persons e.g custom duties, excise duties and entertainment tax, value added tax etc.


The following arguments may be advanced as reasons why the government levy taxes.

  1. Taxation is for satisfying collective want. There are some basic services which cannot be provided individually. Hence government levies taxes in order to provide such basic services to its citizens.
  2. taxation is a tool for government economic policies. It could be used as a means of redistribution of wealth.
  3. it may be used to effect changes in a country’s balance of payment with other countries.
  4. it is used to effect the mobilization of economic resources.
  5. it can be used to influence the level of economic activity, such as the combat of inflation within the country.

According to Adam Smith a great economist in his authored book “Wealth of nations”. He gave four basic qualities of a good tax system. Today, most government use these a guides for their tax system. The following are the basic principles of modern tax system:

  1. EQUALITY: This means that tax payers in the same income group should pay equal tax. There should be no room for any type of favoritism.
  2. CERTAINTY: This means that tax payers must be certain of the amount of tax to pay. The assessment showing the amount to be paid.
  3. CONVENIENCE: This means the tax assessed by the assessment authority must be convenient to the tax payer. This quality is totally exemplified by the introduction of the pay – as you –earn (PAYE) system for workers.
  4. ECONOMY: The tax collected should be reasonably higher than the expenses incurred in its collection and the revenue ought be judiciously used to the best interest of the country as a whole.
  5. ENFORCEABILITY: Government should be able to enforce the payment of tax so levied.
  6. ACCEPTABILITY: The tax should be acceptable to the tax payer as a way of raising revenue for the government.

The history of taxation in Nigeria dates back to 1904 when the system of indirect tax was introduced in Northern Nigeria by lord Lugard in 1904. the native revenue ordinance was introduced in 1917 also in Northern Nigeria extended to the east in 1928. it was not until 1961 that a uniform tax can come into force for the whole federation known as income tax management act of 1961 (ITMA). This was based on the recommendation of the raise men fiscal commission of 1958. which was embodied in the Nigerian constitution order in council 1960.

Also Read: An Approval Of Pay-As You Earn System Of Taxation In Nigeria

However, taxes are one of the major sources of revenue for all governments in Nigeria. The taxes paid come back to the taxpayers in the form of social by the states and federal government to enable them provide services for Nigeria is guided by the following acts and degrees:

  1. PERSONAL INCOME TAX DECREE 1993: The personal income tax degree 1993 referred to as degree 104 or 1993. this governs the taxation of individuals, (individual, trustees, executors, partnerships, communities and families). This act has suffered so many amendments especially during the budget speeches of successive Head of State. The degree replaces income tax management act 1961 (ITMA).
  2. company income tax act (CITA) 1979 referred to as the 1979 act which regulates taxation of registered companies. This act was also suffered some amendments.
  3. petroleum profits tax act (PPTA) 1959 as amended. This act regulates the assessment and collection of petroleum profits tax payable by organisation that engage in the extraction and sale of petroleum products in Nigeria.
  4. Capital gains tax degree (CGTD) 1967 which was introduced by degree 44 of 1967. this degree takes care of gains accruing to any person on or after 1st April 1967 on the disposal of chargeable assets.
  5. value added tax (VAT) degree 102 of 1993 which imposes tax on some selected goods and services manufactured in or imported into the country. The degree repeated sales tax in the country.

The main objectives of ITMA could be regarded as follows:

  1. it helps in the regulation of the imposition of the personal income tax throughout the federation, so that internal double taxation of income by the federation will be avoided.
  2. It helps in the determination of the tax authority and other technical issues arising from personal taxation, in which the interests of this government might otherwise be in conflict.
  • It helps to achieve uniformity in the incidence of personal income tax in Nigeria.

The powers and the responsibilities of the joint  board is as follows:

  1. to excise powers and duties conferred on it powers arising under this act 1961 and any other powers arising under this act which may agreed by the government of each state to be exercise by the board.
  2. to exercise powers expressly conferred on it by the Government of the states.
  3. to exercise any power and duties conferred on it by enactment of the federal Government imposing tax on income or profit of companies.
  4. to advise the federal Government on request, in respect of double taxation arrangement with any other country and in respect of rates of capital allowances and other taxation matters having any effect throughout Nigeria.
  5. To advise the federal Government on request, in respect of double taxation arrangement with any other country and in respect of rates of capital allowances and other taxation matters having any effect throughout Nigeria.
  6. To promote uniformity both in application of tax laws and incidence of tax on individuals throughout Nigeria.
  7. to settle complaints or conflicts among the states tax authorities.

The following incomes are exempted from tax leave travel allowances of employment aid:

  1. cash to cover the travel expenses of the employee.
  2. Touring allowances to cover incidental or out of pocket expenses of the employee.
  • Reasonable entertainment expenses agreed by the relevant tax authority.
  1. DIVIDEND: Payable to a share holder is prior to 1985. the scope of withholding tax was also expanded in 1985 under section 33 of the finance (miscellaneous taxation provisions) decree No 4 of 1985. the reference to section 9 of the 1961 act as amended, the income from a dividend by a Nigeria company to be disclosed by the tax –payer shall be the gross amount of that dividend before deduction on payment. The receipt is provided by the company and certificate showing the gross dividend and if tax has been deducted, the tax deducted and the net dividend. However, certain Nigerian dividends are specifically excepted from tax. These are dividends distributed by a Nigerian company.
    • Out of any form of capital profit realized by such company. eg. profit realized from sale of the buildings or other fixed assets.
    • Out of certain profits of companies changeable to petroleum profits tax.
    • Out of any profits exempted from tax by the provisions of section 17 of the industrial development (income tax relief/act 1971 under the pioneer industries provisions.
  2. interest have been defined as money paid for the use of money or compensation or rent paid by a borrower for loan of money. However, interests paid or credited to any person by the Nigerian post offices saving bank or in respect to any Nigeria saving certificates are exempted from income tax. (see the 1961 act schedule 3). Interest accruing to non – resident on certain official and semi –official loans are specified in the same schedule to the 1961 act as amended, are also exempted.
  • Discounts covers only those profits arising from discounting transaction s in the ordinary financial sense. The discount on bills is the interest deducted from the principal becomes payable.

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