A Critical Appraisal of the Uniform Personal Income Tax System Within the Context of Nigeria’s Federalism

CONTRIBUTED BY ABDULWASIU MOHAMMED

INTRODUCTION

Nigeria operates a federal system of government under which system each tier of government has its legislative competence or functions conferred on it as the case may be. It is significant to note that Federalism in Nigeria dates back to 1954 when the country which had hitherto been administered as a Unitary state was restructured into three quasi-self-governing and administered regions.

It is equally noteworthy that shortly before and since the independence of Nigeria in 1960, all the constitutions that have been enacted have taken the pattern of federalism^[1]. Section 2 of the 1999 constitution provides:

“Nigeria shall be a federation consisting of states and a federal capital territory^[2]’’ However, there is no doubt that Nigerian federalism is anomalous in practice.

It is important to note that the purpose of this article is not to appraise the entire constituents of Nigerian federalism but only the aspect of it that affects the Uniform Personal Income Tax System. It is expedient to note that one of the most constant sources of inter-governmental wrangles, which any federal system is likely to confront is the distribution of financial resources among the various levels of government. The important concern in this regard is to ensure that the different tiers of government have adequate financial resources for the effective discharge of their essential political and constitutional responsibilities It is pertinent to note that since the inception of democracy in the country, the tension has been heightened on the centralized arrangement of the financial and fiscal jurisdiction of the federal government bequeathed by long years of military rule at the expense of the financial sovereignty of the federating states.

It is instructive to note that under the 1999 constitution, there exist two separate legislative lists. One enumerates the exclusive central powers of the federal government and the other enumerates the concurrent powers of the federal and the state governments, leaving the state governments with exclusive authority over unspecified residual fields.

Personal Income Tax is a significant tax that has at all times been the problem item of Nigeria’s revenue structure since the adoption of federalism in 1954. However, to reduce this attendant problem, the Federal Government is vested with the exclusive power under item 59 of the Second Schedule to the Constitution of the Federal Republic of Nigeria 1999 (as amended) to legislate on the personal income tax with a view to harmonizing the rates of taxes, reliefs, and allowances. As straightforward as this arrangement seems, it has excited mixed feelings from a cross-section of professionals^[3].

Moreover, it is the belief that once the subject matter of taxation has been allocated to one tier of government, the proceeds therefrom usually belong exclusively to the authority levying the tax. Is this, however, a water-tight arrangement, considering the fact that the 1999 constitution vests the power to impose and or collect a particular tax in one level of government while the proceeds therefrom are to be disbursed to other levels of government or shared among different tiers of government? There is therefore the need to examine which of these two arrangements will augur well for the Nigerian Federation.

Statement of Problem

The quest for an acceptable pattern for sharing of powers to levy personal income tax between the Federal and State governments has been a recurring problem in Nigeria. There is hardly any civilian administration since independence to date that has not experienced contentious litigation on income tax jurisdiction. It therefore becomes imperative to examine, nay appraise why the Federal government (and not the State) is vested with the exclusive power to legislate on this important tax in a way that portends a centralizing trend in Nigeria’s federalism.

Another significant issue worthy of consideration is the clamour or desire by state governments to ensure that the maximum possible proportion of the income of state governments should be within the exclusive power of those governments to levy and collect. The practicability of this shall be confronted with the consideration of national policy, which involves the well-being of Nigeria as a whole, and inter-state policy which will ensure harmonious relations between States to avoid causes of friction^[4].

Importance of Taxation in Nigeria.

To generate government revenue: Government revenue is the money that comes to the government monthly and that is used to pay civil servants, and political leaders and fund public projects like road construction, and power generation. The taxes paid by individuals and corporate bodies is one of the key ways through which the Federal Government of Nigeria is able to generate revenue to run the affairs of the country.
Stabilization of the Economy: Unemployment and underemployment are things that cause economic instability and this is what the government is fighting tooth and nail to curb or completely eradicate in the shortest possible time. One way to do this is to adjust taxation policy towards socially acceptable rates. Granting tax holidays and reduction of tax rates for firms and cooperate bodies will make employing more people and this would reduce unemployment.
Taxation is a subtle way to influence the sectors in which investments are made: The government has been clamouring for the need to invest in agriculture and agribusinesses, both for the attainment of food security and economic diversification. For this reason, the tax on importations of agricultural machinery and equipment is greatly reduced or duty-free import is allowed.
Taxation can be used to reduce poverty among the low-income groups in the country: This is done by taxing the high-income earners and then channelling the revenue from these taxes into subsidizing the goods most consumed by the low-income earners.

PERSONAL INCOME TAX

Personal income tax is a statutory obligation imposed by the government on the incomes of individuals, communities and families, trustees, or executors of any settlement. In Nigeria, PIT is guided by the Personal Income Tax Act Cap P8 LFN 2004 (as amended).

Although PIT is a federal obligation, it is mandatory that PIT be remitted to the Inland Revenue Service of the State in which they reside, irrespective of the institutions or bodies they work for, whether the federal, state or local governments or private organizations.

PIT remitted to Federal Inland Revenue Service (FIRS) only applies to staff of the Ministry of Foreign Affairs, other Nigerians and foreigners outside the country but earning income in Nigeria (non-residents), Police Officers, and Military Officers.

Types of Personal Income Tax are:

1. Pay-As-You-Earn (PAYE): This is a Scheme in which personal income taxes are deducted from the salaries or wages of the employee by the employer and remitted to the relevant tax authority. The due date for remittance of PAYE is the 10^th day of every succeeding month. The deadline for filing returns for PAYE is the 31^st of January, of the succeeding years.

2. Direct Assessment: This Scheme applies to self-employed individuals. The self-employed individual will, without notice or demand, file a return of income earned in the preceding year and pay the requisite PIT to the relevant tax authority. The due date for filing returns and remittances is the 31st of March of every year.

Penalties

An employer shall file a return of remunerations and tax deducted from the employees in the preceding year, not later than 31^st January of every year.

Any individual who fails to file a return shall be liable on conviction to a fine of N5,000 and a further sum of N100 for every day during which the failure continues or imprisonment of six (6) months or both.

Any employer who fails to file a return shall be liable on conviction to a penalty of N500,000 for body corporate and N50,000 in the case of an individual.

CONCLUSION

It is crystal clear that the taxing power of each tier of government broadly follows the division of its legislative powers in the Constitution. Thus, a tier of government can impose taxes only in respect of subject matters within its competence.