Income Tax Return: Obligations of an Individual Taxpayer
The need to sufficiently assess to tax the income earned by individuals has been a challenge to tax authorities in Nigeria due to the absence of a central database to fully capture the total income earned by individuals from all sources. Notwithstanding, an individual taxpayer is obligated to file a return stating his total income from all sources derived in a year to the relevant tax authority.
The Personal Income Tax (Amendment) Act 2011 (PITAM) provides for the taxation of gains or profit from any trade, business, profession or vocation, any salary, wage, fee, allowance or other gain or profit from employment including compensations, bonuses, premiums, dividend, interest or discount, any pension, charge or annuity. The income of an individual from an employment is assessed to tax through the Pay-As-You-Earn (PAYE) scheme while the income of self-employed individuals will be taxed through the direct assessment scheme.
PAYE tax is calculated based on a graduated scale from 7% to 24% on the taxable income bands after deduction of reliefs, allowances, and other allowable deductions. PAYE tax is mainly paid by individuals in an employment and the tax is computed based on an employee’s total payroll income.
Employment income and Income from trade, business, profession, or vocation
The Employment income according to PITAM relates to income derived from the duties of the employment that are wholly or partly performed by an individual in Nigeria. This does not include duties that are performed on behalf of an employer outside Nigeria where the remuneration of the employee is not borne by a fixed base of the employer in Nigeria or where the employee is not in Nigeria for a period or periods amounting to an aggregate of 183 days.
However, Section 10(2) of PITAM provides that the income paid to an employee of Government in Nigeria is deemed to be derived from Nigeria regardless of where the remuneration is paid if the employee carries out the duties of such employment outside Nigeria.
Tax charge on employment income is computed in accordance with the requirements of Section 81 of PITAM and the Operation of Pay-As-You-Earn (PAYE) Regulations. Employers are required to deduct PAYE tax from the income of employees and remit same to the relevant tax authorities in the manner prescribed.
Employers Annual Declaration
Based on Section 81 of PITAM, employees are required to file the Employers Annual Declaration (Form H1) return of all emoluments paid to its employees not later than 31 January of every year. This is in respect of all employees in its employment in the preceding year. The return also includes the evidence of tax remitted by the employees and a projection of emoluments to be paid in the current year. Where an employer has in its employment an expatriate, the employer should include the relevant information of such expatriate(s) when filing the Form H1 returns.
Currently, the mode of filing the Form H1 returns slightly differs for various State Internal Revenue Services (SIRS) in Nigeria. While some SIRS allows for the filing of these returns electronically some others require taxpayers to file their return manually. Recently, the Lagos State Internal Revenue Service (LIRS) introduced an electronic system for the filing of Form H1 return where employers can submit their employers annual tax return through the e-tax portal, in a bid to improving the level of compliance.
In accordance with Section 81(3), where an employer fails to file the Form H1 return within the required timeline, the employer would be liable to a penalty of N500,000.
Return of Income and Claims for Allowances and Reliefs
Notwithstanding the provisions of Section 81 of PITA, every individual is required to file an annual return known as the ‘Income Tax Form for Return of Income and Claims for Allowances and Reliefs (Form A).’ The Form A return is an individual tax return that reflects the income earned from all sources which includes profits, salaries, gains, income, benefits-in-kind, pension, dividends, interest, and rent. The Form A also reflects the statutory contributions such as pension, life assurance premium, etc. The essence of filing the Form A return is to enable the tax authority to estimate the taxable income, tax reliefs and PAYE tax of an individual.
An individual taxpayer is required to file the Form A return within 90 days from the commencement of every year of assessment, i.e., 31 March every year.
It is important to note that employer’s annual declaration (Form H1) return relates only to individuals in employment and the responsibility to file such return lies with the employer. Form A return on the other hand is to be filed by all individual taxpayers i.e., individuals in employment and individuals that are self- employed.
Also, the LIRS has announced the extension of the deadline for filing Form A to Wednesday, 14 April 2021. This is in response to taxpayers’ appeals and as a measure to mitigate the impact of COVID-19 pandemic on taxpayers and residents of Lagos State. It is anticipated that other SIRS will grant similar extension in the light of current realities.