TAXATION OF THE CONSTRUCTION SECTOR IN NIGERIA
All you need to know about taxation of the construction sector in Nigeria
In its most widely used context, construction covers the processes involved in delivering buildings, infrastructure, industrial facilities and associated activities through to the end of their life. It typically starts with planning, financing, and design, and continues until the asset is built and ready for use; construction also covers repairs and maintenance work, any works to expand, extend and improve the asset, and its eventual demolition, dismantling or decommissioning. Construction industry refers to the industrial branch of manufacturing and trade related to building, repairing, renovating, and maintaining infrastructures. It is a determinant of the country's technological and technical advancement, often regulating the growth of the country's infrastructural development that often directs to the country's advancement in terms of sustainability assurance.
The principal objective of taxation is to raise revenue for the government, redistribute the wealth obtained from such collection and plough the revenue into economic growth and development. An efficient tax system is one in which the tax is certain, progressive, easy to understand and its payment easy to administer. The construction industry is not exempt as the payment of taxes and other levies is a prerequisite to any dealings with the government. The Nigeria construction industry is a large and significant sector of the Country’s Economy as it provides Infrastructural development as well as housing which provides for a vibrant economy. Taxes in Nigeria are administered either by the Federal government through the Federal Inland Revenue Service (FIRS) or the State government through the State Inland Revenue Service.
In Nigeria, the construction industry is susceptible to the payment of the following taxes depending on the objective of the company and the annual turnover of the company;
1. Personal Income Tax (PIT): PIT is the tax paid on the income of Employees engaged by the Construction company. It is usually charged on a graduated scale and not a fixed percentage as obtained in other taxes; that is the higher you earn, the higher your PIT. PIT is accessed and remitted via the Pay as You Earn (PAYE) method of assessment. This means that the employer deducts the tax payable by the Employee from the source, that is before payment to the Employer and withholds the deducted tax for onward remittance to the state/ federal government. The responsibility for remitting the tax to the State Inland revenue Service rests with the Employer and he commits an offence punishable under the law for failure to deduct or for failure to remit after deducting.
2. Company Income Tax (CIT): Company Income tax is a tax charged on the gross turnover of companies incorporated and resident in Nigeria or derives profits in Nigeria although not resident in it. The tax is charged at 30% for large companies that earn a gross turnover of 100,000,000.00 (one hundred million naira) and above per annum, 25% for medium-sized companies earning a gross turnover greater than 25,000,000 but less than 100,000,000 per annum and 0% for small-sized companies earning a gross turnover of 25,000,000 0r less per annum. CIT is assessed and remitted by the construction company to the Federal Inland Revenue Service (FIRS).
3. Value Added Tax: with the signing into law of the Finance Act 2020, VAT is now charged at 7.5% and payable on all supplies of goods and services in Nigeria other than the goods and services expressly exempted from the tax or taxed at zero rate the Value Added Tax Act. VAT as an indirect tax does not place the burden of the tax on the person making payment. In the construction Industry, VAT is charged by the contractor or consultant at the time of preparing the invoice for payment of work done which is ultimately borne by the Employer on the total construction cost of the project.
4. Education Tax: Charged at 2% of the accessible profits accruing or received by a construction company undertaking public procurement in a financial year. Education tax is chargeable on all companies registered in Nigeria. It is chargeable on their profits as a social contribution towards the education tax fund to support the educational facilities in Nigeria. The tax is administered and collected by the Federal Government. The tax is paid within two months of an assessment notice of the FIRS.
5. Stamp Duties: Stamp duties is charged and administered by the Federal and State Government. Stamp duties on corporate documents are administered by the Federal Government while stamp duties on other state-issued documents are administered by the State. The tax is charged ad valorem that is according to the type of document and the value of the transaction evidenced by such documents. The construction company usually pays stamp duties on the registration of title deeds at the land registry.
6. Withholding Tax: Withholding tax is not a tax in itself but an advance payment of income tax withheld by a paying party in a transaction to offset future tax liabilities of the receiving party. Withholding tax is not charged on all transactions but only specified transactions as provided by the Act. The tax is charged at varying rates ranging from 5%- 10%. On construction contracts, withholding tax is charged at 5% of the contract sum.
In summary, taxation is an important aspect of the construction industry in Nigeria, and companies should ensure compliance with tax laws and take advantage of available tax incentives.
Science Direct: The Construction Industry, An Overview (3 May 2023). https://www.sciencedirect.com/topics/earth-and-planetary-sciences/construction-industry
Linkedin: Taxation in the Construction Industry, T. Ajakaiye (24 October 2021). https://www.linkedin.com/pulse/taxation-construction-industry-space-tosin-ajakaiy