By Peju Kukoyi
Taxation is an essential part of an economy, serving as a key revenue source for governments to fund development projects. Individuals and businesses, regardless of size, are expected to remit taxes periodically. Small and medium-scale enterprises (SMEs) in Nigeria are required to pay various taxes, including income tax, payroll tax, value-added tax (VAT), withholding tax, and tertiary education tax. Every registered company must have a tax identification number (TIN) to ensure smooth tax administration.
Understanding Tax Laws
SMEs must factor taxes into their business costs to accurately assess earnings and profitability. However, many business owners argue that multiple taxation—often levied by federal, state, and local governments—poses a heavy burden. Some attempt to evade taxes, a costly mistake that can lead to severe consequences, including penalties, reputational damage, business closure, or even prosecution.
Entrepreneurs must fully understand their tax obligations to avoid compliance issues. The complexities of Nigeria’s tax system often affect business cash flow and expansion plans. To remain compliant, companies must file annual tax returns, allowing authorities to assess financial performance and determine applicable taxes. Seeking the guidance of a tax professional—whether on an ad-hoc, temporary, or permanent basis—can help businesses navigate taxation efficiently.
Key Taxes SMEs Must Pay
Company Income Tax (CIT)
CIT is levied on business income over a specified period, typically a year. However, businesses earning less than ₦25 million annually are exempt from CIT but must still pay personal income tax.
Payroll Tax (Pay-As-You-Earn – PAYE)
Businesses are required to deduct payroll tax from employees’ salaries at source and remit it to tax authorities. PAYE is a progressive tax ranging from 7% to 25%, depending on an employee’s earnings. While companies do not pay this tax directly, they incur administrative costs for collection and remittance.
Value-Added Tax (VAT)
VAT is a consumption tax levied on VATable goods and services. Businesses act as intermediaries, collecting VAT from consumers and remitting it to the government.
Contributory Pension Scheme (CPS)
Under the CPS, both employers and employees contribute a portion of earnings to a retirement savings account. Employees contribute 8%, while employers match it with 10%. Businesses with at least three employees must comply with this scheme.
Tertiary Education Tax
A 2% tax on company profits, this levy is intended to support funding for Nigeria’s education sector.
Withholding Tax
Companies must deduct withholding tax from payments made to vendors, contractors, and suppliers and remit it to tax authorities.
Arguments Against Taxation
While taxation is necessary for economic growth, excessive tax burdens can stifle business liquidity, limiting expansion and innovation. Many SMEs struggle with multiple taxation, prompting them to operate in the informal sector to avoid heavy levies. Today, more Nigerian SMEs function outside the formal economy than within it.
Government Tax Incentives and Rebates
Recognizing the crucial role SMEs play in economic growth, the government offers various tax incentives, rebates, and breaks to encourage business sustainability. According to the National Bureau of Statistics (NBS), SMEs contribute 48% to Nigeria’s GDP and account for over 80% of employment.
To support businesses, the government has introduced incentives such as:
Road Infrastructure Development and Refurbishment Investment Tax Credit
Export Incentives, Export Expansion Grant, and Tax Holidays
Rural Location Incentives and Tourism Incentives
Investment Allowances
The Importance of Compliance
Business owners must understand their tax obligations and comply as responsible corporate citizens. Tax evasion could lead to severe penalties, including business shutdowns. However, taxation is not entirely burdensome—many government programs support SMEs with tax holidays, rebates, and incentives.
For sustainable business growth, a symbiotic relationship between SMEs and the government is essential. While businesses fulfill their tax obligations, the government must ensure a fair and efficient tax system that fosters economic growth and encourages entrepreneurship.
