You have seen ads everywhere saying PAY YOUR TAX this PAY YOUR TAX that, but many people only pay VAT on the products they purchase. What you may not know is that everyone has to pay their taxes; it's a civic responsibility, especially for business owners and big corporations. But many people still go out of their way to evade their taxes for one reason or the other.
Paying taxes is not a way for the government to extort or defraud you of your money; it is usually a small stipend that is taken from you that sums up the nation's yearly revenue to embark on projects for healthcare road reconstruction, revamping the education sector, etc.
To explain this further, we had a chat with Mr. Monsor Mumuney, a Tax and Revenue Rep of 21 years from LIRS (Lagos Inland Revenue Service); he gave us information on what it means, how it helps businesses, and general tax advice for small businesses.
What is tax, and why should you care as a small business owner?
Tax is a compulsory payment levied by the government on every individual's income, corporations, or businesses (e.g. SMEs) profits for revenue generation; The money is used to embark on projects like building public schools, building roads, providing healthcare, etc.
What are the kinds of Taxes small business owners should care about?
Personal income tax: This type of income tax is levied on an individual's wages, salaries, and other types of income. This tax is usually a tax the state imposes. You have to file your returns every year on or before the 31st of March for this kind of tax.
But for small businesses under the LIRS jurisdiction, Business Premises is one of the taxes levied. It costs #10,000 in the first year of commencement of business, and then subsequent years it cost #5000. Development levy- which cost #100 per person in a year
Value-added Tax: it's a tax imposed on goods and services. All business owners are taken to be collecting agents for the government
According to the financial act of 2020, only small businesses within the threshold of 25 million naira revenue or income less are not required to remit VAT or company income tax; but once the company's revenue exceeds that amount, tax has to be remitted to FIRS.
How is personal Income Tax paid?
The PITA law states that having deducted the consolidated relief before assessing the chargeable income. For example, an individual made an income of #1,000,000, your consolidated relief is 20% of the income plus #200,000 or 1% whichever is higher Then the remaining #600,000 is your chargeable income for taxes; on the first #300,000 is charged 7% of it is paid as tax, and on the next #300,000 is charged 11% is charged as tax; so if your income is 1 million for the year, you only pay #54,000 as tax to the government.
What is the point of paying taxes?
Aside from revenue generation for the government, as a business owner, you would aim to upscale your business, so you would probably have to consider loans from banks and other financial institutions. They would usually pull up your tax records to see if you are eligible for those loans; if you are a tax evader, then there's a high chance that it would be very tedious to upscale.
It would be tough to upscale if you're not a tax-oriented business owner. So failing to adhere means you are limiting your opportunity to expand.
How would defaulting on their taxes affect them and their businesses?
Tax evasion is punishable under the law, while avoidance is taken advantage of the law like the rule of residence which most individuals take advantage of .
In your experience as an LIRS, tax, and revenue rep, do small businesses pay their taxes?
Yes, many small businesses pay their taxes when they ought to, especially because many are looking to expand their businesses by accessing loans from financial institutions. So they just find that it is their civic, social responsibility and do it.
What is the process to pay taxes for small businesses?
- Go to the LIRS etax website.
- Create a payer ID and your company registration number
- Then you fill in the necessary contact information; then, you are assigned a payer id which would serve as an account number for every tax payment you make to the state government.
- Then your income is assessed for tax payment. Having filed your income returns.
- The document required is your CAC document and you can get this with Kippa Start.
Finally, other tax tips every business owner should know:
- Separate business and personal finances- You should create a new bank account for business funds only when starting a small business.
- Keep accurate financial records by using accounting software- Obviously, you need proper records highlighting your profit and losses before tax season. Kippa allows you to track all your incomes, sales expenses, debts, and more; in preparation.
- Track inventory accurately- Another metric on your small business's tax return is the inventory value; By using the Kippa app, you can track every product your business has sold for every business period, as it helps you determine your financial position before tax deductions.
- Make a charitable donation- Whether you're donating cash to a local non-profit or supporting a cause in your community, small businesses can reduce their tax liability by making philanthropic contributions.