Of late, there has been a lot of jingles on the radio and TV encouraging people to pay their tax as a matter of civic responsibility, but even with that, many business owners do not understand the concepts surrounding tax and the need to pay it.
Mr Victor Ebhotemhen, an accounting and tax expert, shared with us this week about tax and what it means for fashion businesses.
What is Tax?
“Tax”, he said, “is a compulsory levy imposed by the state or the government on the income, profits or assets of individuals, businesses and estates in order to finance government activities.”
He explained that taxes are involuntary fees which the government requires that every business owner and income-earning individual pays. Failure to pay tax leads to penalties.
Tax compliance is necessary for every business. The cost of non-compliance is higher than the cost of compliance
Who Should Pay Tax?
Every business owner and individuals who earn an income should pay tax.
Unlike what many people believe when it comes to paying tax for businesses, he explained that it is not just registered business owners who pay tax but unregistered business owners should too. So whether your fashion business is registered or not, you should pay tax.
What Type of Tax Should Fashion Businesses Pay?
While owners of small fashion companies (those with a turnover of less than NGN 25m) are exempt from paying Company Income Tax (CIT), they are expected to deduct Pay As You Earn (PAYE), which ranges from 7% to 25% depending on income level, from staff salaries and are also expected to pay Withholding Tax (WHT) on contracts.
Withholding Tax is an advance payment of tax. Here is how it works; if your fashion business (business A) has a contract with another business (business B), when you are paying business B, you have to deduct a tax of 5% or 10% from the fee and pay to relevant tax authorities on their behalf. This payment can be used by business B to offset future tax payment, and they may not need to pay tax to the government.
This category of businesses is prohibited from charging Value Added Tax (VAT) on invoices to customers. VAT is a consumption tax placed on a product whenever value is added at each stage of the supply chain, from production to the point of sale.
Owners of medium-sized fashion companies (those with turnover between NGN 25m and 100m) are taxed at 20% CIT and owners of large fashion companies (above NGN 100m) are charged at 30% CIT.
How Are Taxes Calculated?
The first step is to prepare your books of account i.e. everything money about your business (income, expenses, profits, losses etc) and from there you begin the tax computation.
It is important that you seek professional advice when in doubt at this point because tax is law and needs a lot of interpretation.
Steps for tax computation;
- Get the figure for profit made before tax;
- Add disallowable expenses to the figure (these are expenses not allowable for tax purposes e.g. personal expenses, depreciation, penalty, capital expenses like the purchase of an asset);
- Subtract exempted income – includes interest from treasury bill, profit on disposable fixed assets etc, this leads to an adjusted profit;
- Deduct losses brought forward (from the previous year) to arrive at a new profit for the year;
- Take your tax off this new figure.
N.B: Small business who do not make a profit initially are not expected to pay this tax. This is the CIT.
Seeking professional advice from a tax consultant at this point is very crucial because the tax is a legal issue that requires help with interpretation. The laws surrounding taxation are also updated from time to time and a consultant will be abreast of these changes.
What are the Consequences for Not Paying Tax?
Because of the legality surrounding tax, consequences for not paying your tax can lead to very dire penalties. For instance, failure to file VAT returns will lead to NGN 50,000 for the first month and NGN 25,000 for subsequent months as long as the default continues.
Interests and penalties at CBN rates are paid for every type of tax defaulting.
How Often Should I Pay Tax and Where To?
VAT, WHT and PAYE are to be paid on a monthly basis while CIT is to be paid on a yearly basis.
VAT and WHT are to be remitted on or before the 21st day of the month after the month of transaction and PAYE is to be remitted 10 days after payment of salary.
Tax payment should not be done at the tax office but at a bank. After paying, either by going to a physical bank or making a bank transfer, you should get your evidence of payment for future purposes.
For more information about tax and tax payment online you can visit the Federal Inland Revenue Service (FIRS) website.
It is your civic duty as a citizen of any country to pay your tax to enable the government to do the things they need to do for you and for me.
Trying to grow your fashion business? Check out our article on growing a fashion brand.