Small and medium enterprises (SMEs) are the bedrock of every economy. According to the Nigeria Bureau of Statistics, SMEs contribute 48% of national GDP, account for 96% of businesses and 84% of employment. Therefore, the importance of SMEs in the economy cannot be over-looked as their business directly affects individuals. It is on this premise that the Federal government of Nigeria is striving to improve tax compliance in this category of business.

As SMEs have the largest group of taxpayers, the government owes its citizens the judicious application of taxpayers’ money in provision of basic social amenities to encourage businesses. It is the uncertainty in the utilization of taxpayers’ money that discourages citizens of a country from tax compliance. Hence, there is a need for tax awareness as multiple obligations, numerous tax types and convoluted tax administration and legislation bewilder the tax system. Tax awareness is a tool necessary to increase voluntary tax compliance culture in Nigeria.  Notwithstanding the obvious challenges, this challenge can be augmented with proper awareness and exposure to tax requirements.

This paper therefore aims to provide knowledge of the basic principles and steps a Small and Medium scale Enterprise (SME) should take in order to determine the appropriate tax for its business. For this purpose, we will define the category of taxpayers covered, regulatory requirements in terms of registration and step by step calculation of the tax on income generated by SMEs.

Category of taxpayers covered

Small and Medium Enterprises Development Agency of Nigeria (SMEDAN defines SME as any businesses with an asset (excluding land and building) less than N500M. SMEs usually operate as sole proprietorship. Taxation of a sole proprietorship will form the crux of the discussion.

Sole proprietor is the simplest form of business structure and requires little start-up income. Usually, the business owner is not distinct from the business, hence, losses and profits are to be accounted for by the individual. From commencement of business, a sole proprietor needs to be registered as a Business Name with the Corporate Affairs Commission (CAC). In the event a sole proprietorship does not desire to be registered, it may still operate as an individual.

The tax regulations governing individuals, partnerships, communities, families and trustee or estates in Nigeria is the Personal Income Tax Act (PITA) 1993. Section 3 of the PITA specifies among others that tax is payable on Gains or profits from any trade, business or vocation for whatever period of time such trade, business, profession or vocation may have been carried on or exercised. Every State in Nigeria, through its Internal Revenue Service, is empowered to administer the provisions of PITA. This implies that the taxes on Business Names are assessed and collected by the State Government where the Business Name is located. So if XYZ & Sons (furniture makers) is located in Jigawa State, Nigeria, then XYZ & Sons will pay its tax to Jigawa State Government through the State Board of Internal Revenue Service.

Examples of a sole proprietorship may include a furniture maker, an event planner, a small supermarket, a food vendor, a firm of lawyers or accountants etc.

Taxation of a Business Name

Record-keeping is very crucial to taxation; as tax is levied on profit or gains of the taxable person. However, due to the nature of the business (sole proprietorship), incomplete records is a common feature for sole proprietors.  It is therefore imperative for a sole proprietor to record its income and expense on which tax can be assessed. A consultant may be contracted to help keep adequate records.

Assessment of taxes are based on a preceding year basis. This means that income for one financial year is assessed to tax in the next year. Sole proprietors are therefore required to assess the business/themselves under the self-assessment scheme and file returns on or before 31 March in the next year regardless of the date the accounts are made up to. For example, if a Business Name makes up its accounts up to 30 September 2018, the returns of the individuals registered under the Business Name should be filed on or before 31 March 2019. 

The concluding part of this article is discussed in the second part of this series