The Nigerian tax system is similar to other tax systems in the world. However, its lapses are based on inadequate data of businesses and individuals. Nigeria tax can be classified into three forms:
- Method of tax
- Incidence of tax
- Tax base
Method of tax
There are basically three methods of tax. Progressive, proportional, and regressive tax methods.
This tax method uses a higher tax rate for a higher tax base or taxable income. In Nigeria, the Personal Income tax uses this method to charge an individual’s chargeable income.
The current schedule for personal tax in Nigeria is displayed on the table.
Critics believe that using the progressive tax method will discourage people from earning more income. But this is not the order of the day. Therefore, many Nigerians still glamour for more wealth.
The method favors low-income earners as they will pay less tax.
Under this method of tax, a single tax rate is used irrespective of the level of income or the tax base. The tax rate is usually in percentage. For example, the Nigerian company income tax uses 35 percent as its flat rate, irrespective of the profit before tax of that company (adjusted for nontaxable items).
This tax system favors large companies. However, smaller companies are given incentives to comply with the principle of tax equity, that is, the company’s ability to pay taxes.
This is the opposite of a progressive tax method. Regressive tax uses a higher tax rate for the lower tax base and a lower tax rate for the higher tax base.
This means that if the income of the individual tax base is higher, a lower tax rate is used. And if the income is small, a higher tax rate is used.
In a nutshell, this method favors the wealthy class. As fewer tax liabilities will be paid on their income. But, it will provide lower revenue to the government.
Classification according to the incidence
This is a tax charged directly on the tax object. The tax assessment is based on the taxpayer’s tax base. That is his income for a personal income tax, profits for company tax, and properties for capital gain tax.
In other words, this type of tax is assessed by the tax authority on the taxpayer. The taxpayer received assessment notice and he pays tax returns directly to the relevant tax authority.
This tax is not chargeable directly on the taxpayer. It is mostly charged on goods and services. Therefore, citizens pay for the tax while buying goods or paying for services.
Also, the tax liabilities are not paid by individual taxpayers but the company and entities that provide the goods or services.
Value Added Tax (VAT) is a good example of indirect tax. Others are excise duties, customs duties, and stamp duties.
Classification based on the tax base
If you have noticed, we have used the term tax base earlier. This means that the base to which the tax rate is assessed or charged.
For individuals, the tax base is their income. For companies, it is the profit. For properties, it is the gains derived from the sale of the property or investment. For VAT, it is the vatable goods and services.
Tax types or classification serves as the culture to which taxes are assessed. Typically, taxes are charged on individuals, companies, properties, investments, goods, and services, among other ways.