“…but in this world, nothing can be said to be certain, except death and taxes.” These were the exact words of Benjamin Franklin in his letter to Jean-Baptiste Le Roy in 1789. In the context with which these words were written, they express the inevitability of taxes in governance, much like death in life. In other words, taxes will always be a part of government and a major tool in financing it.
It’s been over 200 years since Benjamin Franklin wrote these words, and they still ring true. Taxes have always been a mandatory financial contribution to the established authorities, specifically the government, and they still are. While it’s quite difficult to pinpoint where taxes originated from specifically, we know that it’s a universal concept today; all countries have a tax system in place.
Since tax payment is an unavoidable obligation, it is important to understand it, especially how it works in your country. Understanding taxation and tax accounting is crucial to adequate finance management.
In view of this, this article will discuss taxation as a concept, especially in Nigeria. We will also explore tax accounting and its significance in financial management. Let’s dive in!
Understanding Tax
As mentioned earlier, taxes are a financial obligation required of a taxpayer. It is a charge or levy that taxpayers have to pay to the government. It funds government spending, public works, and services and finances the maintenance of the infrastructure used in a country.
Every country has a taxing system, which usually differs. In Nigeria, we currently operate under a decentralized and progressive taxing system. Under this system, the different levels of government, federal, state, and local, are in charge of taxes within their jurisdiction. Taxpayers who earn higher incomes are also required to pay more taxes.
There are, however, different tax types. They include:
-
Value added tax (VAT)
VAT is an indirect tax paid on every purchase of goods and services. The final consumer pays the business owner or service provider 7.5%, which the latter forwards to the Federal Internal Revenue Service (FIRS).
-
Personal income tax (PIT)
As the name implies, the personal income tax is a tax on an employed individual’s income. This includes both employed individuals and self-employed persons.
The PIT tax rate ranges from 7% to 24% of an individual’s income, depending on the total amount earned. However, individuals who earn minimum wage or below are only required to pay a tax rate of 1%. The tax is paid to the State Inland Revenue Service in the payer’s state of residence.
-
Company income tax (CIT)
The CIT is a tax on the total income generated in a company or any corporate entity registered in Nigeria. It is usually 30% of a company’s total profit.
-
Petroleum profit tax (PPT)
PPT is a form of company tax that only applies to companies involved in upstream petroleum activities. The tax rate could range from 50% to 85% of the company’s chargeable profit.
-
Capital gain tax (CGT)
You pay a capital gain tax on the profits you earn from selling an asset. The tax is usually 10% of the profit.
Other types of taxes paid in Nigeria include;
- Education Tax (EDT)
- Stamp Duties (SD)
- Withholding Tax (WHT)
- Land use charge
- Tenement Rates, etc.
Read also: 10 Major Importance of Taxation in Nigerian Businesses.
Fundamentals of Tax Accounting
What is tax accounting? Simply put, tax accounting is the aspect of accounting that deals with taxes. It’s all about ensuring that tax obligations are met. Tax accounting entails:
- Income recognition: This involves recognizing and documenting an individual or organization’s total income in accordance with tax laws.
- Tax planning: Proactive tax planning involves documenting accurate financial records to support tax returns and making strategic financial plans to minimize tax liability.
- Ensuring compliance: This is the main point of tax accounting; ensuring compliance with tax laws to avoid legal penalties.
- Filing tax returns: Filing a tax return involves preparing accurate tax information, including total income, amount of tax owed, allowable deductions, claimable tax credits and incentives, etc.
Common Tax and Tax Accounting Terminologies
As a Nigerian taxpayer, here are some common tax and tax accounting terminologies that you should get familiar with:
- Earned income: Includes earnings from a job or employment. Simply put, it includes any form of compensation for services you rendered, such as salaries, wages, bonuses, commissions, tips, etc.
- Taxable income: This Includes the portion of your earned income that can be taxed during a fiscal year after all applicable tax deductions and exemptions have been accounted for.
- Non-taxable income: This income can not be taxed—for example, investment income like dividends that has been subjected to withholding tax.
- Deductions: These expenses can be subtracted from your earned income to determine your taxable income. For example, contributions to pension funds are tax-exempt.
- Fiscal year: Financial or tax year; runs from the first of January to the 31st of December in Nigeria.
- Taxpayer identification number (TIN): This unique identification number is assigned to all taxpayers upon registration. It’s used for the payment of all tax types in Nigeria.
- Tax clearance certificate (TCC): This document shows tax compliance for a particular fiscal year. It’s also known as form Z.
Read also: Financial Management: Key Strategies for Small Businesses.
The Significance of Tax Accounting in Financial Management
Taxing or taxation is a significant aspect of finance. Beyond just ensuring compliance or avoiding legal penalties, tax accounting also has significant implications for a business’ trajectory. Here are some notable financial significance of tax accounting:
-
Reduced tax load
Tax accounting helps individuals and businesses identify legal avenues to reduce their tax burden. Individuals and companies can free up more funds for business growth, investment, or other financial obligations by reducing the tax burden.
-
Influences financial decision
Tax accounting helps businesses and individuals identify the most tax-efficient business and financial path. In other words, it helps them identify which business or financial structure to adopt to pay less taxes.
-
Resolves tax-related hassles
Proper tax accounting will help lessen the burden and hassle associated with taxation, especially for big corporations or individuals with complex financial conditions.
Other Importance of Tax Accounting include;
- It helps individuals and businesses identify business/ investment opportunities with tax benefits.
- It helps avoid financial disruptions as a result of tax defaulting.
- It helps individuals and businesses identify and take proactive business/financial approaches that guarantee long-term profitability.
There are three types of tax accounting: individual, business, and tax-exempt organization tax accounting. Sometimes, tax accountants are needed to carry out tax accounting services. This is advisable especially for big corporations, entrepreneurs, or individuals with high incomes, significant assets, or complex financial situations.
Beyond the traditional tax accounting job description, tax accountants can also act as trusted financial advisors and provide professional representation before tax authorities in the event of a tax audit.
Read also: 9 Steps to Get Small Business Loans in Africa.
Conclusion
Tax is a financial obligation or levy required of a taxpayer, usually to the government. Every country has a taxing system, which generally differs. Therefore, as a taxpayer, you must understand the taxing system in your country to ensure compliance and structure your financial decisions accordingly.
Have you learnt a thing or two? Follow us on Twitter and Instagram to catch up on the latest news, trends, and insights. Also, reach out to us on WhatsApp so we can help you spotlight your business to the right audience.
