The Challenges of Capital Gains Tax in Nigeria 74

The Challenges of Capital Gains Tax in Nigeria

Joseph C. Ezemma
&
Kolo Mohammed

Abstract
Capital Gains Tax is a very important source of revenue to the
government hence this paper ‘capital gains tax and its challenges in
Nigeria’. Two research questions guided the study. The study used
descriptive survey design. The instrument for the study was structured
questionnaire designed by the researchers. The questionnaire was
administered personally by the researcher with the help of one assistant. A
total of 100 copies out 110 copies of questionnaire administered were
returned and analyzed for the study. The study found that lack of data;
bureaucratic laziness and inflation were current challenges to capital
gains tax. It was also found that maintenance of good data of the
transaction on the asset; good management capacity and proper
utilization of tax proceeds by the government should be mechanisms to
ameliorate the administrative challenges of capital gains tax. The paper
recommends that Federal Inland Revenue Service (FIRS) and State Board
of Internal Revenue (SBIR) should ensure that the owners of assets should
maintain good data of their transaction on the assets and fill tax returns
faithfully.

Introduction
Every country is made up of citizens and the government. Government has the
responsibility of managing the economic resources of the country on behalf of the
citizens. It is also the responsibility of government to provide social and economic
infrastructures to make life comfortable for the citizens. However, the resources at the
disposal of government to discharge these responsibilities are limited hence the need for
government to ask citizens to contribute. The contribution made by citizens to enable the
government to provide the needed social and economic infrastructures is called tax while
the processes involved in its collection is referred to as taxation.
Edotsu (2008) defines tax as a compulsory levy imposed by the government on
the income, profits or wealth and property of individuals, partnerships, businesses and
corporate organizations without the taxpayer expecting commensurate benefits from the
government. Sharma (2016) viewed tax as financial charge by government at predefined
rates periodically on individuals and corporate organizations to enable it provide various
kinds of services to the tax payers and other citizens. Tax may therefore, be regarded as a
compulsory levy imposed by government on the incomes of individuals and corporate
bodies or organizations in order to defray government expenditure. This means that
individuals or organizations that generate taxable income must pay tax.
International Journal of Communication. Published by Communication Studies Forum, Department of
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The Challenges of Capital Gains Tax in Nigeria 75

In Nigeria, like in other countries of the world, there are different types of tax and these
include personal income tax, petroleum profit tax, companies income tax, value added tax
and the capital gains tax. One of these taxes (the capital gains tax) and its challenges is
the focus of this paper.
Capital gains tax
Capital gains tax has been defined by different authorities. According to Embuka (2014),
capital gains tax is the type of tax levied on individuals and corporate bodies when gains
arise from the disposal of capital assets. Such assets which attract capital gains tax on
disposal include: plant and machinery, land and buildings, good wills of business and
many others.
Capital gains tax was first introduced in Nigeria under the provisions of capital
gains tax Act No. 44 of 1967 and it applied throughout the Federation and companies
inclusive (Edotsel, 2008). Decree No. 30 of 1999 now applies throughout the Federation
and relates to individuals, partnerships and companies. The rate of capital gains tax
(CGT) was reduced from 20% to 10% with effect from 1st January, 1996.
The purpose of the administration of capital gains tax is to ensure that every disposal of
taxable capital assets either by individuals or corporate organizations are effectively
taxed. The Federal Inland Revenue Service (FIRS) and States Board of Internal Revenue
(SBIR) were entrusted with the responsibility of collecting the capital gains tax. Ifekwuna
(2014) states that States Board of Internal Revenue (SBIR) collects capital gains tax from
individuals while the Federal Inland Revenue Service (FIRS) collects from corporate
bodies and other individuals resident in the Federal Capital Territory, including members
of the Armed Forces, the Police and foreign serving officers.
However, collection of capital gains tax involves some challenges. Adebayo
(2017) stated that lack of data or record keeping in order for the tax authorities to be
aware of when a capital gain has been made and liable to pay this tax is problem.
Adebayo explained that in real practice, what is charged by the tax authorities, as capital
gains tax, is the entire amount or capital derived by the owner of the asset when disposing
off that asset. This, he further explained, contrast with the provision of the Law which
requires that only the exact gain, after deducting the allowance amounts stated above, are
chargeable to capital gains tax. Again, Adebayo pointed out that another problem is lack
of reliable and genuine data and typical bureaucratic laziness to investigate what capital
gain is. Ipaye (2017) stated that the high rate of inflation in Nigeria wipes out the real
value of the asset such that the owner is at the losing end in real terms when disposing off
the asset. He explained that the rate during the time of inflation is high which encourages
many to avoid paying tax. Ipaye (2017), therefore, advised that allowance should be
made for inflation when paying this tax as is done in some countries.

Problem of the study

The situation discourages investment since the tax is charged on the profits realized from
the sale of capital assets and the burden is to be borne by the buyer as a result of high
prices of property cited by the seller to cover up for the tax. Marotta (2017) stated that
there are many ways of avoiding paying capital gains tax. Marotta (2017) explained that
International Journal of Communication. Published by Communication Studies Forum, Department of
Mass Communication, University of Nigeria, Nsukka
The Challenges of Capital Gains Tax in Nigeria 76

investors can realize losses to offset and cancel their gains for a particular year. Kenyan
Academia (2017) pointed out that it is difficult to levy tax on non-resident persons in one
country who own property in another country since there is no system of withholding tax
that would oblige the buyer to remit the tax from the proceeds of the sale of such
property.
There is need to keep proper record of the property so that if the tax authorities
charge more than what is meant to be capital gains tax, the tax authorities could be
challenged. The availability of record would also help the tax authorities to know those
who are to pay capital gains tax. In Enugu state there is no available record on the
challenges of capital gains tax. In view of the importance of tax in any government
system this, paper attempts to assess the capital gains tax and its challenges Enugu Urban
and six Local Government Areas in Enugu North Senatorial Zone. Specifically, it
identifies current challenges to capital gains tax administration. It also ascertains the
mechanisms which would ameliorate the administrative challenges of capital gains tax.
The remaining part of this paper is organized into four sections. Section two looks into
conceptual issues. Section three discusses empirical results and section four gives
summary and recommends.

Conceptual Issues
Taxation is the main source of revenue to governments all over the world. It is used as a
major instrument for revenue generation. Ezemma (2013) stated that tax system is a
forum for government to collect additional revenue needed to discharge its pressing
obligations like building schools and hospitals, construction and maintenance of roads for
its citizens. According to Abata (2014), the tax system is one of the most powerful
sources of revenue available to any government to stimulate and develop its economy.
Taxation is considered very important when Federal Government of Nigeria is preparing
its budget (Samuel and Tyokoso, 2014).
Capital gains tax (CGT) is a tax on profits accruing from the disposal of assets. It
is charged at a flat rate of 10 percent. Embuka (2014) pointed out that capital gains tax is
levied on individuals and corporate bodies when gains arise from the disposal of capital
assets. Aguolu (2014) stated that capital gains tax is chargeable in respect of: options, any
form of property created by a person disposing of it; stocks and shares of all descriptions.
There are relevant Tax Authorities responsible to assess and collect the tax.

Tax Administration
Administration is a process of implementing decision. Raymond (1980) quoted in
Ezemma (2013) described administration as a systematized process of implementing the
policies of the government. Tax administration is conveniently divided into different
authorities. They include States Board of Internal Revenue (SBIR) and Federal Board of
Internal Revenue (FBIR) (Ahmad 2005). The State’s Board of Internal Revenue Service
is responsible for collecting capital gains tax accruing to individuals while Federal Inland
Revenue (FIRS) which is and an arm of (FBIR) collects capital gains tax accruing to

International Journal of Communication. Published by Communication Studies Forum, Department of

Mass Communication, University of Nigeria, Nsukka
The Challenges of Capital Gains Tax in Nigeria 77

companies and the residents of Federal Capital Territory or non-residents of the Federal
Republic of Nigeria.

Methodology
The study used descriptive survey design to identify current challenges to capital gains
tax. The design was also adopted to ascertain the mechanisms which would ameliorate
the administrative challenges of capital gains tax. The study used tax inspectors and
accountants.
Population for the study is made up of sixty tax inspectors from Federal Inland
Revenue Service (FIRS) and States Board of Internal Revenue (SBIR) Enugu and forty
accountants from six Local Government Areas in Enugu North Senatorial Zone.

Instrument
Structured questionnaire titled ‘Capital Gains Tax: its challenges’ was designed and
developed by the researchers based on literature reviewed (Edotsel 2008; Ezemma 2013;
Embuka 2014; Aguolu 2014; Adebayo 2017; Ipaye 2017; Marotta 2017; Kenya 2017,
Marotta 2017, Samuel and Tyokoso 2014, Sharma 2016). Instrument was sub-divided
into three sections and section A is on general information. Section B is a 8-item
statement that sought information on ‘current challenges to Capital Gains Tax
administration’. Section C sought information on the ‘mechanisms to ameliorate the
administrative challenges of Capital Gains Tax’. The sections used a 4-point rating scale
which ranges from 4 – 1 (strongly agree = 4; Agree = 3; Disagree = 2; Strongly disagree
= 1).

Procedure
The questionnaire was administered to the respondents by the researchers with one
research assistant. The research assistant distributed the questionnaire to Enugu State
University of Technology, Enugu while the researchers distributed the questionnaire to
University of Nigeria, Nsukka and did the collation. One hundred and ten copies were
administered and one hundred copies were retrieved. The one hundred copies returned
were analyzed which represents 90%. The two research questions were analyzed using
mean and standard deviation. Mean scores of 2.50 and above were regarded as accepted
or agreed while mean scores below 2.50 were regarded as not accepted or disagreed.
Standard deviations of .10000 to 1.19 were regarded as not being far from the mean and
from each other in their opinions.

Research Question 1
What are the current challenges to capital gains tax administration?

International Journal of Communication. Published by Communication Studies Forum, Department of

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The Challenges of Capital Gains Tax in Nigeria 78

Table 1: mean responses on current challenges to capital gains tax administration

Tax Accoun Overall
Inspectors tant

No Std Std Mean Std

Mean Dvtn No Mean Devtn No Dvtn

International Journal of Communication. Published by Communication Studies Forum, Department of

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 The Challenges of Capital Gains Tax in Nigeria 79

Lack of
data or
record
keeping 60 3.04 .87405 40 4.06 .85212 100 3.05 .863085

Heath
Savings 60 3.04 .87405 40 3.06 .85212 100 3.05 .863085
Account

Difficult
to identify
the
subject
matter of 60 3.17 .75424 40 3.05 .86324 100 3.11 .80874
the tax

Inflation
affects 60 3.17 .75424 40 3.18 .76506 100 3.18 .75965
value of
Asset

Lack of 60 3.14 .78738 40 3.07 .84305 100 3.11 .815215

reliable
and
genuine
data 60 3.10 .79424 40 3.00 .89619 100 3.05 .845215

Primary
residence 60 3.04 .87405 40 3.06 .85212 100 3.05 .863085
exclusion

Bureaucr
atic 60 2.64 .99837 40 2.72 .99928 100 2.68 .998825
Laziness

Sell
when 3.04
income is
low
Grand
mean
The mean scores in each of 8 columns are within the boundary limit of 3 to 4. This
implied that Tax Inspectors and Accountants accepted that the statements were current
challenges to capital gains tax administration. Therefore, the grand mean in the table 1
revealed that the statements in each of the 8 columns were current challenges to capital
gains tax administration.
International Journal of Communication. Published by Communication Studies Forum, Department of
Mass Communication, University of Nigeria, Nsukka
The Challenges of Capital Gains Tax in Nigeria 80

The overall standard deviation in the 8 columns range from .75965 to .998825 and were
below 1.96. This indicated that the respondents were not far from the mean and from
each other in their opinions.
What are the mechanisms to ameliorate the administrative challenges of capital gains tax?
Table 2: Mean responses on the mechanisms to ameliorate the administrative challenges
of capital gains tax
Columns Tax Accounta Overal
Inspectors nts l

Std Std Std

No Mean Dvtn No Mean Dvtn No Mean Dvtn
Maintenance of
good data of
the transaction 60 3.44 .63702 40 3.15 .65914 100 3.30 .64808
on the asset

Rejection of
assessment that 60 3.01 .74810 40 3.51 .49824 100 3.26 .62317
is contrary
tothe provision
of law
60 3.77 .45913 40 3.00 .76324 100 3.39 .61115
Maintaining
good
management
capacity
60 3.18 .65780 40 3.20 .63889 100 3.19 .64835
Engaging in
aggressive
enlightenment
campaign

Proper 60 3.45 .48760 40 3.90 .40010 100 3.68 .44386

utilization of
tax proceeds by
the government 3.36

Grant mean

The data presented in table 2 above showed that the 5 columns had mean scores ranging
from 3.19 to 3.68 which were within the boundary limit of 3 to 4. This implied that Tax
Inspectors and Accountants accepted that all the statements were mechanisms that should
ameliorate the administrative challenges of capital gains tax. The grand mean of 3.36
revealed that all the statements were mechanisms that should ameliorate the
administrative challenges of capital gains tax.

International Journal of Communication. Published by Communication Studies Forum, Department of

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The Challenges of Capital Gains Tax in Nigeria 81

The standard deviation in first four columns range from .44386 to 648345 and
were below 1.96. The range in the response was not far. This implies that the respondents
were not far from each other in their opinions.
Summary of Findings
The findings of the research were summarized according to the research questions as
follows:
1. It was found that lack of data or record keeping; health savings account; difficult
to identify the subject matter of the tax; inflation; lack of reliable and genuine
data; primary residence exclusion; bureaucratic laziness and selling when income
is low were current challenges to capital gains tax administration.
2. It was found that maintenance of good data of the transaction on the asset;
rejection of assessment that is contrary to the provision of law; maintaining good
management capacity; engaging in aggressive enlightenment campaign and
proper utilization of tax proceeds by the government were mechanisms that
should ameliorate the administrative challenges of capital gains tax.

Conclusion
Purpose of the study was to determine the ‘Capital Gains Tax: Its Challenges’. Total of
two research questions were examined: one was on current challenges to capital gains
tax’; the second on the mechanisms to ameliorate the administrative challenges of capital
gains tax’. In order to answere the research questions, a self-designed questionnaire was
adopted as the research instrument. The questionnaire was administered to 60 tax
inspectors and forty accountants randomly selected from Federal Inland Revenue Service,
States Board of Internal Revenue and Local Government Areas in Enugu North
Senatorial Zone.
The tax inspectors and accountants unanimously accepted that lack of data or
record keeping; health savings account; difficult to identifying the subject matter of the
tax; inflation; lack of reliable and genuine data; primary residence exclusion; bureaucratic
laziness and selling when income is low were current challenges to capital gains tax
administration.
Tax Inspectors and Accountants accepted that maintenance of good data of the
transaction on the asset; rejection of assessment that is contrary to the provision of law;
maintaining good management capacity; engaging in aggressive enlightenment campaign
and proper utilization of tax proceeds by the government were mechanisms that should
ameliorate the administrative challenges of capital gains tax.
Recommendation
Both Federal Inland Revenue Service (FIRS) and States Board of Internal
Revenue (SBIR) should ensure that owners of assets should maintain good data of their
transaction on the assets and fill tax returns faithfully. This would (i) ensure that owners
of assets should pay tax (ii) it would enable the owners of the assets challenge any
assessment that is contrary to what the law provides.

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Mass Communication, University of Nigeria, Nsukka
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International Journal of Communication. Published by Communication Studies Forum, Department of

Mass Communication, University of Nigeria, Nsukka