Lecturer : barr akindele question: discuss the structure of nigerian tax system. Introduction

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Udu Teresa
Udu Teresa, Udu Teresa


MATRIC NO: 17/0930


LEVEL: 400




A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures. A failure to pay, along with evasion of or resistance to taxation, is punishable by law.

Taxation, imposition of compulsory levies on individuals or entities by governments. Taxes are levied in almost every country of the world, primarily to raise revenue for government expenditures, although they serve other purposes as well.

The main purpose of taxation is to raise revenue for the services and income supports the community needs. Public revenues should be adequate for that purpose.

Tax should, as far as possible, be levied equitably, according to ability to pay.

In modern economies taxes are the most important source of governmental revenue. Taxes differ from other sources of revenue in that they are compulsory levies and are unrequited i.e., they are generally not paid in exchange for some specific thing, such as a particular public service, the sale of public property, or the issuance of public debt. While taxes are presumably collected for the welfare of taxpayers as a whole, the individual taxpayer’s liability is independent of any specific benefit received. There are, however, important exceptions: payroll taxes, for example, are commonly levied on labour income in order to finance retirement benefits, medical payments, and other social security programs, all of which are likely to benefit the taxpayer. Because of the likely link between taxes paid and benefits received, payroll taxes are sometimes called “contributions” (as in the United States). Nevertheless, the payments are commonly compulsory, and the link to benefits is sometimes quite weak. Another example of a tax that is linked to benefits received, if only loosely, is the use of taxes on motor fuels to finance the construction and maintenance of roads and highways, whose services can be enjoyed only by consuming taxed motor fuels.


The Nigerian tax structure was initially defined to include only the direct and indirect taxes. The direct tax is made up of personal, corporate income and petroleum profit taxes. Indirect tax which was formerly made up of import, export and excise duties have undergone various reforms with the taxes under it joined together and called customs and excise duties. The tax handles under indirect taxes have increased, with the inclusion of withholding tax regime in 1978; value added tax (VAT) in 1993 and other tax systems. A study group and a working group were also inaugurated in 2002 and 2004 respectively to fashion out ways to entrench a better tax policy and improve tax administration in the country.

Available statistics shows that the link between taxation and economic growth in Nigeria since 1970 has been unstable. Between 1970 and 1990, the contribution of tax revenue to GDP was below 30 per cent, with the lowest being 9.7 per cent in 1970 and the highest of 24 per cent in 1982. While this is so, direct taxation has remained the highest contributor to this basket hovering around 28.1 per cent and 85.9 per cent within the period. Petroleum profit tax formed the bulk of this revenue from direct taxation with the highest contribution of 94.7 per cent in 1974. Udoh & Ebong (2009) highlighted the increasing importance of revenue from direct taxes relative to indirect taxes. This they adduced to the dominance of the oil sector in the economy. This sector showed a decreasing return between 1995 and 1999, thus affecting the shares of petroleum profit tax in direct tax revenue and also the total tax revenue. Beginning from 2003, the shares of direct tax revenue have been within the range of 72.0 percent and 84.7 percent. This is largely due to the high price of oil recorded in most part of the period 2003-2008. All these show that the tax system in Nigeria is still in a state of motion and will continue to be until a system that will generate the highest revenue to government without causing a distortion or deadweight loss to the economy is produced.

In other to raise revenue, most developing economies imposed taxation on their economic agents. The impact of taxation on growth was initially looked at Írom the view point of tax level (tax rate). However, with the understanding that different taxes have different effects on growth as enunciated by the endogenous growth theorists, tax policies were refocused towards diversification from direct taxation to indirect taxation in other not to discourage investments in both human and physical capital as those have been proved to be the channels through which taxation impact on growth and also strong determinants of growth. The reverse has been the case in Nigeria as the bulk of revenue comes from the non tax revenue with an average of 52 per cent contribution to total revenue within the period under review. More so, even as countries are redirecting policies away from direct taxation, that is not case with Nigeria.

The revenue profile of Nigeria in the 1970s was dominated by tax revenue. Such impressive contribution then has witnessed diminishing returns from 81.6 per cent in 1970, to 72 per cent, 53.5 per cent, 42 8 per cent and 42.3 per cent in 1980, 1990, 2000 and 2007 respectively. During this period, the contribution of tax revenue to GDP was never above 24 per cent in any year, with the lowest being 7.1 per cent in 1996 and the highest of 24 per cent in 1982. While this is so, direct taxation has remained the highest contributor to this basket hovering around 28.1 per cent and 85.9 per cent within the period. Petroleum profit tax formed the bulk of this revenue from direct taxation with the highest contribution of 94.7 per cent in 1974 because the oil sector became the mainstay of the Nigerian economy. According to Odusola (2006), oil has dominated Nigeria’s revenue structure and its share in federally collected revenue rose from 26.3 per cent in 1970 to 81.8 per cent, 72.6 per cent and 76.3 per cent in 1979, 1989 and 1999, respectively. It has accounted for over 70 per cent of the revenue profile of Nigeria in the last two decades. Instead of transforming the existing revenue base, fiscal management has merely transited from one primary product-based revenue to another with attendant reduction of the contribution of taxation to total government revenue and thus, economic growth. This neglect of other sectors has exposed the economy to the vagaries of the international oil market. The bulk of Nigeria’s economic problems emanate from this mono-economic nature.

Tax administration in Nigeria is vested in the three tiers of government. Taxes payable to the Federal Government are administered by the Federal Inland Revenue Service (FIRS), while those payable to the State Governments are administered by the State Boards of Internal Revenue (SBIRs) of the thirty- six states of the Federation. Local Governments also administer rates and levies collectible by them through their various councils.

There are a good number of taxes payable by persons doing business in Nigeria. These include companies' income tax, personal income tax, capital gains tax, value-added tax, education tax, technology tax, stamp duties, and withholding tax. Penalties are imposed for failure to pay taxes when due.

A Tax Clearance Certificate is issued on demand when taxes due have been fully paid for three years immediately preceding the current year of assessment. A Tax Clearance Certificate is usually required for official transactions with Government Ministries, Departments, and Agencies (MDAs).


Types Of Taxes In Nigeria

Companies Income Taxes (CIT) CIT is one of the major types of taxes collected by FIRS

Value Added Taxes (VAT)

Withholding Taxes (WHT)

Petroleum Profits Taxes (PPT)

Personal Income Taxes (PIT)

Stamp Duties (SD)

Capital Gains Taxes (CGT)

National Information Technology Development Levy (NITDL)


The major taxes of the federal government include the corporate income tax, petroleum profit tax, customs and excise duties, value-added tax and others. We will therefore elaborate on the operations of these taxes in Nigeria.


Taxation was originally designed to generate revenue. As a result, direct taxes from agriculture via the different marketing boards formed the major component of revenue and a determinant of GDP behaviour in the economy since the 1960s. From the 1970s, attention was diverted to oil revenue and the hitherto vibrant agricultural sector with the attendant tax revenue from it began exhibiting decreasing returns with consequential impact on economic growth. This is represented in the tables 2.4 and 2.5 capturing the two structures of Nigerian taxation.



The Finance Act of 2020 (the Act) reviews and amends several tax legislations.




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