Understanding tax and it's effect on employee

1. UNDERSTANDING TAX
It’s effect on Employee’s Income.
Presented by Mr Sina Hassan, ACA; CFA; ACTI.

2. DEFINITION
■ A tax is a compulsory payment made by individuals and
organizations to the government in accordance with
predetermine rules.
■ A tax is a compulsory payment
■ A tax is usually backed by law
■ Tax is levied according to predetermine criteria

3. PRINCIPLES OF TAX
■ In his book the Wealth of Nation, Adam Smith laid down 4
Canons or principles of taxation.
■ Equity – ability to pay/ equality
■ Certainty – date the payment & manner of payment should be
certain
■ Convenience – payment should be convenient e.g. VAT
■ Economy – cost of collection must be lesser than the tax itself
■ Simplicity
■ Diversity – government should not put all its eggs in one
basket. It should be diverts

4. TYPES OF TAXES
Powell (1989) states that taxes can be classified into various ways.
■ According to who levies the tax
■ According to what is taxed ( income, expenditure, capital)
■ Direct or Indirect taxation
Direct Taxes – Taxes paid directly by the taxpayer on whom it is levied
e.g. taxes on income.
■ Personal income tax
■ Companies income tax
■ Petroleum tax
■ Education tax
■ Capital gain
Hence the person who pays direct tax bears the burden

5. TYPE OF TAX cont’d
Direct Tax can be;
■ Proportional Tax – each taxpayer pays the same rate a percentage of his
income as tax e.g. 30% on company profit.
■ Progressive Tax – here, rate of tax increases as the income of the taxpayer
increases. The higher your income, the higher the tax you pay
■ Regressive Tax – opposite of progressive tax. The rate decreases as the income
of the taxpayer increases i.e. the poor man pays tax at a higher rate than the
rich man.
Indirect Tax – Taxes imposed on goods and services e.g. Custom & Excise duties,
Value Added Tax (VAT)
Indirect Tax can be Specific or Ad- Valorem.
■ Specific – certain amount is levied on each unit of a commodity produced as
sold.
■ Ad- Valorem – levied on the value of the product being taxed. This is
calculated as a percentage of the price of the commodity e.g. VAT.

6. ADVANTAGES AND DISADVANTAGES
Advantages of direct Taxes Disadvantages
 Equitable i. Unpopular
 Re-distribution of income ii. Inconvenient
 Certainty iii. Tax evasion
 Cost of inflation IV. Disincentive to work
 Civil consciousness V. Disincentive to investment
 Economical
Advantages of Indirect Taxes Disadvantages
 Wider tax base i. Unequitable
 Difficult to evade ii. Inflation
 Convenient iii. Loss of revenue
 Beneficial social effect IV. Tax evasion
 Re-allocation od resources
 Protection of home industries
 Easy to collect

7. PERSONAL INCOME TAX
INCOME TAX; is a tax based on income. Black (1990.p.764) defines income as;
■ A tax on the annual profit arising from property, business pursuits, profession, trade, or offices.
A tax on a person’s income, wages, salary, commissions, employments, profit and the likes, or excess
thereof over a certain amount.
■ Liability to tax in Nigeria depends on whether or not the person sought to be taxed has income liable to tax
■ and resident or deemed to be a resident in Nigeria, for the year of assessment.
Section 1 of Personal Income Tax Act, Cap. P8, LFN 2004 imposes tax on the;
 Income of Individuals, Communities and Families
 Income arising or due to Trustee or Executor under any settlement; trust or estate,
■ Individuals includes a corporation sole and a body of individuals but exclude a company, partnership, community,
faculty, trustee or executor or anybody of trustees or executors. PITA 2004, s. 108
■ Income tax from an individual is only collected by the state, in which the individual is deemed to be
resident for that year, except the following;
 Person employed in the Nigerian Army, Navy, Air force, Nig. Police. Other than in a civilian capacity
 Officers of the Nigerian. Foreign service
 Every resident of the Federal Capital Territory. Abuja
 A person resident outside Nigeria who derives income or profit from Nigeria

8. INCOME EXEMPTED FROM TAX
■ The 3rd schedule to PITA listed the income exempted from tax.
 Income from local govt. and govt. institution
 Income from ecclesiastical, charitable or educational institution of a public
character provided such income is not from trade or business carried out by
such institution
 Pension
 Ward and disability person granted to Armed forces injured during war
 Income of trade union registered under trade union Act
 Gratuities
 Any sum withdrawn or received by employees from approved Pension Scheme
 Income of a Co-operative Society registered under the co-operatives societal act
1993

9. RESIDENCE & RELEVANT TAX
AUTHORITY
■ Resident individual is regarded as resident in Nigeria throughout an assessment year if
he;
 Is domiciled in Nigeria
 Sojourns in Nigeria for a period or periods in all amounting to 183 days or more in a
12-month period.
 Serves as a diplomat or diplomatic agent of Nigeria in a country other than Nigeria
(FIRS.1993, P.1)
■ Note that 12-month period can commence in a calendar year and end within the same
year or the following year.

10. ■ NON- RESIDENT INDIVIDUAL; is a person who is not domiciled in Nigeria or who stays in Nigeria for
less than 183 days in a 12-months period but derives income or profit from Nigeria
■ A non- resident individual becomes liable to tax in Nigeria from the day he commences to carry on a
trade business, vocation or profession in Nigeria.
NOTE: In case of employment income, he is liable to tax in Nigeria, when he becomes a resident that is
183 days plus.
■ EARNED INCOME: income derived from one’s own labor. This income derived from trade, business,
profession, vacation or employment earned on or exercised by an individual and a pension derived by him
in respect of a pervious employment. E.g. wages, salaries, pension, and profit from a trade.
■ UNEARNED INCOME: income derived from investment such as dividend, interest, rent income derived
from source other than trade employment.
■ INCOME FROM EMPLOYMENT; income tax is payable for any year of assessment on the chargeable
income of an individual.
Section 32 of PITA 2004 provides that where income tax is payable for any year of assessment on the
chargeable income, of an individual other than a corporation sole, a body of individual, the amount of that
chargeable income shall be the amount of the total income of that individual after any income exempted
has been excluded or deducted.

11. TAX EXAMPTED DEDUCTIONS
■ PITA (amendment) Act 2011 replaced the 6th schedule. Under the new 6th
schedule. The following deductions are new tax exempt i.e. they are to be deducted
from gross income before income is subject to tax
 National housing fund. 2.5% is charged on any individual earning income of
#3,000 & above
 National Health Insurance Scheme
 Life Assurance Premium
 National Pension Scheme. Pension Reform Act 2004. establishes a uniform
contributory pension scheme, before 2011,it was 7.5% Employee & 7.5%
Employer but now, it is 8% Employee & 10% Employer.
 Gratuity - amount paid to any employee who is retiring or leaving his employer
after many years of service.

12. RELIEF AND ALLOWANCE
■ Prior to the enactment of PITA (amendment) Act 2011, PITA 2004 made
provision for the granting of Personal Reliefs and Allowances to individual as
follows;
 Personal Relief of N5000 + 20% of earned income
 Alimony
 Children allowance N2,500 per child maximum of 4 children
 Dependent Relatives Allowance of N600/ maximum of 2 persons
 Life insurance premium
 Disabled person allowance
■ But now with the amendment, S. 5 of PITA 2011 provides as follows.
■ There shall be allowed a Consolidation of relief allowance CRA of N200,000
subject to a minimum of 1% of gross income whichever is higher plus 20% of the
gross income and the balance to be taxable in accordance with income table.

13. TAX TABLE
First #300,000 7%
Next 300,000 11%
Next 500,000 15%
Next 500,000 19%
Next 1,600,000 21%
Next 3,200,000 24%
Gross income/Total
emolument
# XXX
CRA X
FORMAT
NHF X
Pension X
L.A.P X (XX)
Chargeable
income
XX
Apply tax liable (XX)
Tax liability X

14. Thank You