Direct and Indirect Taxes In Nigeria

Taxes are one of the sources of revenues required by every modern state or nation to provide essential services for its citizens. A tax is defined as an involuntary fee that is levied on corporate organizations and individuals and is enforced by a government entity, to finance government activities, Taxes has always been a cheaper source of finance as compared to alternative sources such as the sale of assets, public debt, the printing of currency and drawing down of cash reserve with the central bank.

Apart from raising revenue for the government, the tax system in every nation has important uses. The tax system is used to ensure the optimal allocation of available resources, the achievement of redistribution of wealth. In promoting the economic development of a country, tax plays vital roles which include regional development, resource mobilization, and improvement in social welfare, income inequalities reduction, inflation control, and foreign exchange. As tax have vital roles, countries such as Nigeria is yet to take full advantage of it.

The Nigerian tax system has undergone significant changes in recent times, based on incidence, taxes can be structured into direct and indirect taxes. Incidence of tax, in this case, is an economic term for understanding the division of a tax burden between stakeholders, such as buyers and sellers or producers and consumers.

Direct taxes are taxes imposed on income and profit. Direct taxes are paid in entirety by a taxpayer directly to the government. The taxpayer could be an individual or a corporate body. In direct taxation, the liability, as well as the burden to pay it, resides on the same individual. Direct taxes may be adjusted to the individual characteristics of the taxpayer and due to this fact, it is at the mercy of subjective assessment of the individual paying the tax. As a result, tax evasion and tax avoidance tend to abound. According to previous studies, direct taxes account for two-thirds of the total tax revenue generated by the government. There are different components of direct taxes in Nigeria, namely:

  • Personal income tax
  • Companies’ income tax
  • Petroleum profit tax
  • Education tax


The personal income tax act governs tax charged on the income of individuals, families, bodies of individuals, and trustees. This act provides that the tax is an obligation, paid to the state internal revenue service where the individual resides. The tax is charged on gain or profit from any trade business, profession, or vocation: salary, wage, fee, allowance, or other gain or profit from compensations, bonuses, etc.  The personal income tax act provides that the tax is deducted from the salary or wages of the employer and further remitted to the appropriate tax authority


The principal law that governs the taxation of companies in Nigeria is the company’s income tax act. CIT is a tax imposed on the profit of a company from all the sources and it is also imposed on foreign businesses operating a business in Nigeria. the rate of tax is 30% of the total profit earned by the company in the accounting year preceding assessment. Some profits are exempted from CIT provided they are not derived from the business or trade activities carried out by the company.


The petroleum profit tax act governs taxes that are imposed on the income of companies in the petroleum operations (upstream) sector of the economy. The act regulated the financial operations of oil companies comprising of those in crude oil production, petroleum marketing and also servicing companies involved in the survey, drilling, and data collection.

The profit of an accounting period under review is the aggregate of the proceeds of the sale of chargeable oil sold by the company in that period, the value of chargeable oil disposed of by the company in that period, and any income of the company that arises from one or more petroleum operations.

The petroleum tax is currently charged at 85% except for companies under a production sharing contract, which is 50%.


This tax is imposed on every Nigerian resident company at the tax rate of 2% of all assessable profit for each year of assessment. It is regulated by the Education tax act.

Indirect taxes are those taxes levied on transactions irrespective of the circumstances of the buyer and the seller. Indirect taxes are levied on goods and services. In indirect taxation, there is generally an intermediary to collecting indirect taxes from the end customer. What this means is that the individuals, organizations act as indirect collecting agents on behalf of the federal government.

The prime difference between indirect and direct taxes is the ability of the taxpayer to shift the burden of the tax to others. Indirect taxes, unlike direct taxes, are imposed on expenditure. They are imposed initially on the manufacturer and the wholesaler but are ultimately paid by the final consumer. While developed countries derive much of their tax revenue from direct taxes, developing nations such as Nigeria have been advised to focus on indirect taxes for revenue creation.

Indirect taxes in Nigeria are

  • Value-added tax
  • Custom excise duties


VAT is an indirect tax levied on all merchandise and amenities manufactured or rendered in Nigeria except for supplies and facilities that are VAT exempted. VAT is a tax on some products and services that the end-user ultimately endures and its collection is designed and made possible at each phase of the manufacturing and delivering sequence.

VAT was introduced to replace the sales tax. Since its introduction in 1993, VAT has remained at 5%, one of the lowest globally. Section 3 of the finance act of 2020 increased the VAT rate from 5% to 7.5&.

The administration of VAT in Nigeria is with the Federal Inland Revenue service.


Custom and excise duties are administered through the Nigerian custom services. Custom duties are classified into two: import and export duty. Import duties are taxes on Nigeria’s imports from other countries, charged either as a percentage of the value of the imports or as a fixed amount contingent on quality. Export duty is a tax on the goods exported to other countries, from Nigeria.

Excise duties are an ad valorem tax on the output of manufactured goods and are administered by the country’s customs services. These taxes are levied on locally made goods.


1 thought on “Direct and Indirect Taxes In Nigeria”

  1. Sir,
    I appreciate the write up you circulated on direct and indirect tax in Nigeria. I would be glad if you can create a space in your subsequent publication by forwarding articles which you think is beneficial to me.
    Thank you.
    Amaihian Evans

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