Are Construction Companies Tax Exempt?

This article discusses whether Construction Companies in Nigeria are Tax Exempt and what other levies they have to pay. Like Sunlight, taxation is unavoidable. The construction sector is not excluded, since paying taxes and other levies is a requirement for doing business in the country.

The Nigerian construction industry is a huge and vital component of the country’s economy since it offers infrastructure development as well as housing, all of which are necessary for a thriving economy. 

The primary goal of taxes is to generate income for the government, redistribute the wealth generated by such collection, and invest the revenue in economic growth and development. An effective tax system is one in which the tax is certain, progressive, simple to comprehend, and easy to pay.

Construction Taxes in Nigeria

In Nigeria, taxes are either managed by the Federal government through the Federal Inland Revenue Service (FIRS) or by the state government through the State Inland Revenue Service. Taxes are often submitted and paid online through various financial channels or in person at a bank.

Also in Nigeria, the construction sector is subject to the payment of the following taxes, which vary based on the company’s goal and yearly sales.

1. Company Income Tax (CIT): 

A company income tax is a tax levied on a company’s gross revenue that is incorporated and resides in Nigeria, or that generates profits in Nigeria while not being a resident of the country. 

The tax is charged at 30% for large companies with a gross turnover of ₦100,000,000 (one hundred million naira) or more per year, 20% for medium-sized companies with a gross turnover greater than ₦25,000,000 but less than 100,000,000 per year, and 0% for small companies with a gross turnover of ₦25,000,000 or less per year. 

The construction business assesses and remits CIT to the Federal Inland Revenue Service (FIRS).

2. Education Tax: 

A 2% tax on accessible earnings accruing or received by a construction enterprise engaged in public procurement in a fiscal year. The education tax is levied on all Nigerian-registered businesses. It is levied on their revenues as a social contribution to the education tax fund, which is used to support educational institutions in Nigeria. The federal government is in charge of administering and collecting the tax. 

3. Value Added Tax: 

With the signing into law of the Finance Act 2020, VAT is now imposed at 7.5% and payable on all deliveries of goods and services in Nigeria. Except those specifically exempted from taxation or taxed at zero rates under the Value Added Tax Act. As an indirect tax, VAT does not impose a tax burden on the person making the payment. 

In the construction industry, VAT is levied by the contractor or consultant while generating the invoice for payment of services completed, which the employer ultimately bears on the entire construction cost of the project.

4. Withholding Tax: 

A withholding tax is an advance payment of income tax withheld by a paying party in a transaction to balance the receiving party’s future tax liability. Withholding tax is not levied on all transactions but only on those defined by the Act. The tax is levied at different rates ranging from 5% to 10%. Withholding tax for construction companies is 2.5% of the contract amount.

5. Personal Income Tax (PIT): 

PIT is a tax paid on the earnings of employees employed by construction companies. It is frequently imposed on a progressive scale rather than a flat proportion as in other taxes, thus, the more you earn, the greater your PIT. The Pay as You Earn (PAYE) form of assessment is used to access and remit PIT. 

This means that the employer deducts the tax payable by the employee at the point of payment to the employer and withholds the deducted tax for subsequent employees state government. The employer is responsible for remitting the tax to the State Inland Revenue Service, and failing to deduct or remit after deducting is a serious offense under the law.

6. Stamp Charges: 

The federal and state governments impose and handle stamp duties. The Federal Government administers stamp duties on corporate papers, whereas the state administers stamp duties on other state-issued documents. The tax is levied ad valorem, which means that it is levied based on the kind of document and the transaction value represented by such papers. The building business normally pays stamp duties when title deeds are registered at the land registry.

The Construction Company Pays All Other Deductions

1. Industrial Training Fund: 

A construction business with five or more workers or with less than five employees and a yearly turnover of 50 million naira or more is required to contribute one percent of the company’s total annual payroll in respect of each calendar year.

2. Contributing Pension Fund: 

A construction business with four or more employers is obligated to pay a contributory pension on behalf of the employees. This implies that both the employer and the employee contribute a specific proportion of the employee’s monthly remuneration to a pension fund. The minimum proportion that must be donated is 18% of the monthly salary (with the employer contributing a minimum percentage of 10% and 8% for the employee). However, if the employer bears the burden on behalf of the employee, they will pay 20%. 

3. National Housing Fund: 

The National Housing Fund is available to Nigerians in all areas of the economy. Mostly low- to middle-income people who can’t afford to live in a house. The NHF is a contributory system run by the Federal Mortgage Bank of Nigeria in which participants can acquire a loan to build a house by donating 2.5 percent of their monthly basic wage. The deduction from the source is the employer’s responsibility of labor in construction companies. He withholds it and then makes a monthly contribution to the plan before the due date.

4. National Social Insurance Trust Fund: 

This is a government compensation scheme that provides compensation to insured employees who suffer from occupational injuries or disabilities that occur at work or during the course of employment, regardless of whether the employee is at the usual place of business. The scheme’s funding is based on one percent of Employers’ payroll. The employer is responsible for payment, which must be made when due. After payment, a certificate of conformity for that year is provided and must be renewed each year.

5. Real Estate Development Association of Nigeria (REDAN): 

REDAN is a real estate association to which all corporate companies that have construction (Real Estate) specified in their purposes are required to belong. It is Nigeria’s umbrella organization for real estate development. Membership is obtained by application and payment of the appropriate fee. 

Following payment and compliance with all the rules of the association, Redan issues a certificate of compliance for the year of payment, following which the construction business will pay an annual subscription fee. A REDAN certificate is required for registration with the Special control unit against money laundering, which every construction business must have. 

Although most of the above-mentioned taxes and levies, are statutory payments that put construction companies in good standing with the law. Scenarios abound in which many construction companies are not in compliance with most, if not all, of these payments. The ultimate purpose of a construction business is to bid on and execute government contracts. To do so, you must first get a Bureau of Public Procurement (BPP) certificate. 

You must first upload compliance certifications from the above-mentioned agencies to obtain this certificate. A prospective investor undertaking due diligence in Lagos, Nigeria, where Real Estate and Construction businesses sprout up on every street corner, may obtain these compliance certifications. A corporation that complies with these bodies is less likely to be deceptive.

Conclusion

The Nigerian construction industry is a huge and vital component of the country’s economy since it offers infrastructure development as well as housing, all of which are necessary for a thriving economy. As such the construction sector is subject to the payment of the following taxes, which vary based on the company’s goal and yearly sales; Personal Income Tax (PIT), Company Income Tax (CIT), Value Added Tax, Stamp Charges, and Withholding Tax in addition to other industry deductions.