- 20 Marks
Question
Mr. Ade is a Nigerian who has lived in Europe for a very long time. He is now planning to return to Nigeria to set up a business which he considers to be profitable in a developing country like Nigeria. Despite the appeal of the business in terms of profitability, he is skeptical about the perceived harsh tax environment in the country. He has approached you to explain some fundamental areas of taxation in Nigeria.
You are required to:
(a) Identify five major objectives and purposes of taxation. (5 Marks)
(b) Compare direct and indirect taxes, giving four examples of each. (6 Marks)
(c) In relation to an incorporated company carrying on business in Nigeria, explain to Mr. Ade the:
(i) Documents to be filed as annual returns to the Federal Inland Revenue Services (FIRS). (3 Marks)
(ii) Time limit for filing annual tax returns. (3 Marks)
(iii) Penalties prescribed by law for a company which failed to file its income tax returns on the due date. (3 Marks)
Answer
(a) Five Major Objectives and Purposes of Taxation:
- Revenue Generation: To provide the government with funds to finance public services and development projects.
- Redistribution of Income and Wealth: To reduce income inequality by taxing high-income earners more and using the revenue to support low-income earners.
- Economic Stabilization: To control inflation and stabilize the economy by regulating the amount of money circulating in the economy.
- Resource Allocation: To influence the allocation of resources by taxing certain industries or granting tax incentives.
- Encouragement of Savings and Investments: To encourage savings and investments by offering tax incentives to investors and businesses.
(b) Comparison of Direct and Indirect Taxes:
| Direct Taxes | Indirect Taxes |
|---|---|
| Levied directly on individuals or organizations | Levied on goods and services consumed |
| Paid by the person or entity on whom it is imposed | Can be passed on to the final consumer in the form of higher prices |
| Progressive in nature | Generally regressive, affecting lower-income earners proportionally more |
| Examples: Personal Income Tax (PIT), Companies Income Tax (CIT), Capital Gains Tax (CGT), Petroleum Profits Tax (PPT) | Examples: Value Added Tax (VAT), Customs Duties, Excise Duties, Stamp Duties |
(c) Explanation to Mr. Ade regarding Incorporated Companies in Nigeria:
(i) Documents to be Filed as Annual Returns to the Federal Inland Revenue Services (FIRS):
– Audited financial statements.
– Annual tax computation based on the audited financial statements.
– Tax returns form (Form CAC10).
(ii) Time Limit for Filing Annual Tax Returns:
– Within six months after the end of the company’s accounting year.
(iii) Penalties for Late Filing of Income Tax Returns:
– Late filing penalty: N25,000 for the first month of default and N5,000 for each subsequent month the failure continues.
- Tags: Annual Tax Returns, Corporate Tax, Direct Taxes, Indirect Taxes, Objectives of Taxation, Penalties
- Level: Level 2
- Topic: Introduction to Taxation
- Series: MAY 2019
- Uploader: Kwame Aikins