Inside Nigeria’s Tax Maze: How A Critical System Became Confusing, Underfunded & Easily Abused

By BUNMI BUSOLA

How Nigeria Built a Tax System Few Understand but Everyone Depends On

IN every functioning nation, taxation is the engine that drives development. It builds roads, powers hospitals, funds education, and keeps government institutions alive. Yet in Nigeria—Africa’s largest economy and most populous nation—the tax system remains a puzzle to many citizens, a burden to businesses, and a structural weak point in national development.

“Taxation in Nigeria: A Beginner’s Guide” appears simple on the surface, but behind that simplicity lies a web of historical transitions, administrative weaknesses, and citizen distrust that continues to shape how the country gathers and spends its revenue.

From Tributes and Farm Levies to Modern Tax Laws

Taxation in Nigeria predates the name “Nigeria” itself. Long before colonial boundaries were drawn, traditional rulers collected tributes in the form of farm produce, livestock, labour contributions, and voluntary community dues. These were not just taxes—they were cultural obligations tied to governance and communal survival.

The modern tax story began in 1939 with the Companies Income Tax Ordinance, the first formal attempt to regulate business taxation under colonial rule. Over time, tax legislation expanded, leading to the establishment of the Federal Board of Inland Revenue (FBIR).

A major transformation came in 1978 when Alhaji Shehu Musa’s reforms created the Federal Inland Revenue Service (FIRS), which became Nigeria’s central authority for corporate and federal taxes. Despite these institutional reforms, the tax system remained largely reactive—changing with political transitions, economic shocks, or public pressure rather than long-term strategy.

Why Nigerians Pay Taxes—and Why Many Resist Doing So

In principle, tax compliance should be simple: governments pass tax laws, and citizens pay to support public services. But Nigeria’s reality is more complicated.

Taxpayers’ money is meant to fund:

• Security and law enforcement

• Public education

• Infrastructure and social amenities

• Administrative functions of the state

• Health systems

• National development initiatives

Yet for many citizens, taxation feels like a one-sided contract. Nigerians routinely face crumbling roads, poor hospitals, unreliable electricity, and minimal state accountability—raising a simple but powerful question: Where does the money go?

This distrust fuels evasion. But laws are strict: when the FIRS pursues defaulters, heavy penalties—including fines and imprisonment—can apply. In 2015 alone, the federal government collected more than ₦3.7 trillion in taxes, showing how central taxation is to national survival. Still, the shadow of mismanagement undermines public confidence.

Understanding the Taxes Nigerians Pay—but Often Don’t Realise Exist

Nigeria’s tax architecture is complex, shaped by federal, state, and local authorities. Many Nigerians do not know which taxes apply to them, partly because the system is filled with overlapping rules, poorly communicated procedures, and inconsistent enforcement.

The major taxes include:

1. Companies Income Tax (CIT)

Paid by Nigerian-based companies and foreign companies earning income in Nigeria.

2. Petroleum Profits Tax (PPT)

The crown jewel of federal revenue—paid by companies engaged in petroleum exploration and production.

3. Value Added Tax (VAT)

A consumption tax paid by every buyer of taxable goods and services.

4. Personal Income Tax (PIT)

Paid by individuals and small business owners. This is the most common tax but also the least understood.

5. Withholding Tax (WHT)

Deducted at the source as an advance tax payment on certain transactions.

6. Education Tax (EDT)

A mandatory contribution by companies for funding educational development.

7. Stamp Duties (STD)

A levy on written documents such as agreements, financial transactions, and legal instruments.

8. Capital Gains Tax (CGT)

Paid on profits from the sale of assets such as property or shares.

This variety should anchor a strong revenue base—but only if the administration works.

Who Controls What? Nigeria’s Three-Tier Tax Administration

Taxation is split across three levels of government:

1. Federal Board of Inland Revenue (FBIR) / FIRS

Handles corporate taxes, federal capital taxes, and nationwide VAT collections.

2. State Inland Revenue Services (SIRS)

Manage Personal Income Tax and other state-level levies. Many states rely on PIT as their largest internal revenue source.

3. Local Government Revenue Committees

Collect market fees, tenement rates, motor park charges, and small local taxes.

In theory, this structure ensures tax fairness and proper distribution of responsibilities. In practice, it creates duplication, rivalry, and confusion—frequently forcing taxpayers to navigate contradictory rules.

The Numbers Behind the Burden: Tax Rates in Nigeria

Corporate Tax Structure

• Nigerian companies: 30% of worldwide profits

• Foreign companies: 30% of profits earned within Nigeria

• Education tax: 2%

• Withholding tax on dividends: 10%

Individual Tax Structure

• Nigerians are taxed at progressive rates up to 25% of income

• Foreign individuals pay only on income earned within Nigeria

This system should theoretically be fair, but enforcement is inconsistent, leaving honest taxpayers carrying the burden while large segments evade responsibility entirely.

TIN: Nigeria’s Key to Tax Identity

Every business and employed individual in Nigeria must obtain a Tax Identification Number (TIN). It appears on tax returns, bank documents, corporate filings, and official forms. Without a TIN, you cannot legitimately operate a business or comply with tax laws.

Still, millions remain unregistered—another indicator of Nigeria’s enforcement and awareness gaps.

The Compliance Gap: Why the Government Created VAIDS

Tax filings are legally required within 90 days of every new year. Yet compliance rates remain low, especially among high-income individuals and informal businesses. To address this, the government launched the Voluntary Assets and Income Declaration Scheme (VAIDS), allowing taxpayers to regularize past obligations without fear of prosecution.

However, VAIDS exposed a deeper problem: millions of Nigerians simply do not trust that paying taxes will improve their lives.

Editorial Conclusion: A Tax System at War With Itself

Nigeria’s tax system is both essential and endangered—critical for national development but weakened by mistrust, inconsistency, corruption, and poor public awareness. Although the legal framework is robust, implementation remains the Achilles heel.

Until government becomes more transparent, citizens more informed, and agencies more coordinated, taxation in Nigeria will remain a running battle between law and reality.

A nation cannot grow on borrowed funds and leaking systems. Nigeria’s future depends on rebuilding a tax culture that inspires confidence—not fear—and delivers development, not disappointment.