How to Calculate Tax Relief in Nigeria

How to Calculate Tax Relief in Nigeria

Many governments regard the granting of tax incentives through special economic zones as a veritable economic tool to draw investment, especially foreign direct investment (FDI). This is attributable to a number of reasons like combating externalities that would hinder investment activities, or to compensate for poor public service delivery and generally an enabling environment for investors to mention a few. In many African countries, tax incentives schemes are varied and sometimes equally discretionary that issues such as lack of transparency and flawed processes are widespread.

In emulating the successes of East Asia and Latin America, many African governments including Nigeria have set up special economic zones (SEZ) to attract investment, create jobs and raise income. However, there is evidence to show that tax incentives are costly, robbing low-income countries of tax revenue needed to provide social infrastructure. Research also has it that tax incentives score low in investment climate surveys – factors such as political stability, infrastructure4 and rule of law are considered most important by investors, which means tax incentives may be inefficient to the extent that they are directed towards attracting investment5.

As reported by ActionAid in 2012 on the effect of corporate tax incentives in East Africa, (including those offered in special economic zones), it was reported that up to $2.8 billion is lost per year from providing incentives in just four countries: Tanzania, Kenya, Uganda and Rwanda6. Tax incentives offered in special economic zones accounts for a large proportion of these losses since a full tax exemption (of a profit-based incentive) is worse on balance than a partial exemption or reduction of tax7.

The Nigerian Export Promotion Council Act No 26 of 1976, the Export (Incentives and Miscellaneous Provisions) Act of 1986 and the various amendments, in no doubt, charged the Council with the responsibilities of promoting the development and diversification of Nigeria’s export trade; assisting in promoting the development of export-oriented industries and spearheading the development and administration of export incentives programmes of the Federal Government, amongst others

WHAT IS TAX RELIEF ON INTEREST INCOME?

Tax Relief on Interest Income is one of the tax statutes established to encourage manufacturing of goods for export. According to section 11 (5) of Company Income Tax Act LFN, 2004, as amended states: “Interest payable on loan granted by a Bank on or after April 1, 1980 for the purpose of manufacturing goods for export, shall be exempted from tax on the presentation of a certificate issued by the Nigerian Export Promotion Council stating that the level of export specified has been achieved by the company. A company shall be deemed to be engaged in manufacturing for export if the Nigerian Export Promotion Council certifies that no less than one half of its manufactured goods disposed of in its year account is sold outside Nigeria & is not re-exported to Nigeria.”

How to Calculate Tax Relief in Nigeria

Step 1:

Calculate the Consolidated Salary (CS)

Determine the annual Consolidated Salary or gross emolument of the taxpayer.

Step 2:

Calculate the Consolidated Relief Allowance (CRA)

Grant a relief allowance of N200,000.00 or 1% of the Consolidated Salary/Gross emolument, whichever is higher, plus 20% of the Consolidated Salary.

Step 3:

Identify Tax-Exempt Items (TEI)

Determine the taxpayer’s involvement or contributions to any of the following tax-exempt items:

– National Housing Fund Contribution

– National Health Insurance Scheme

– Life Assurance Premium

– National Pension Scheme

– Gratuities

Step 4:

Determine Taxable Income

Calculate taxable income by subtracting Total Relief from the Consolidated Salary, i.e., Chargeable Income = CS – (CRA – TEI).

Step 5:

Apply Income Tax Rates (Tax Bands)

Apply the prescribed tax rates (tax bands) to the chargeable income to determine the annual tax payable:

– 7% on the first N300,000.00

– 11% on the next N300,000.00

– 15% on the next N500,000.00

– 19% on the next N500,000.00

– 21% on the next N1,600,000.00

– 24% on amounts above N3,200,000.00

Step 6:

Determine the Minimum Tax Payable

If the chargeable income from step 5 is less than 1% of the Consolidated Salary or Gross Emolument, then 1% of the Consolidated Salary shall be the annual tax payable.

Step 7:

Calculate Monthly Tax Payable

Spread the annual tax payable over 12 months to determine the monthly tax payable.

CONCLUSION:

Reliefs and Allowances and Tax Exempt Deductions Reliefs and allowances are basically deductions available to individual taxpayers under the Personal Income Tax Act Cap P8 LFN 2004 (as amended) to reduce his tax burden. Also, the reliefs and allowances, Personal Income Tax (Amendment) Act, 2004 (as amended) provides that certain deductions shall be tax exempted under the sixth schedule to the.

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