As Benjamin Franklin once said, “In this world, nothing can be said to be certain except death and taxes”. So, if tax, like death is a constant in human affairs, you should certainly know all that can be known about it! In this regard, let’s start with the bare basics.
What is Direct Tax?
Direct Taxes are the taxes that governments, through their tax agencies impose directly on individuals and businesses.
The payment of a direct tax goes straight to agencies such as the Federal Internal Revenue Service (FIRS) or State Internal Revenue Service. In the case of Lagos State, that is the LIRS.
A direct tax cannot be shifted to another entity. A direct tax can also be applied progressively. For example, if someone earns a monthly income of ₦100,000, the first ₦50,000 of an income might be taxed at 10%. The next ₦30,000 at 12%, and the next ₦20,000 at 15%. Also, the higher you earn, the more you pay.
Direct taxes are usually transparent and certain since individual taxpayers submit their tax payments directly to the government through its agencies. It’s important for businesses and individuals to know the direct taxes they will owe each year so they can plan ahead.
What is Indirect Tax?
Indirect taxes are levied directly on goods or services, not an individual or company. This is what separates direct tax from indirect tax. An example of an indirect tax is the sales tax that customers pay for items they purchase for their personal use, like items bought at places like Shoprite, Mr Biggs, etc.
This is how it works, the supermarket collects an indirect tax from each customer in the form of an additional amount placed on the item bought, and sends that money to the FIRS or LIRS. It is the federal or state government that determines this amount, which is normally calculated as a percentage of the total cost of items bought.
So, the next time you get anything from a seller who issues receipts – let’s assume it’s a total of ₦3,000, check your receipt, and you will find the real cost of the item you bought and the sales tax on the item – also called VAT – all of which will add up to the total, ₦3,000.
Indirect taxation tends to take a greater toll on people with less money, because the poor pay the same amount for the same goods as others who have more resources.
