Taxes are classified as direct or indirect based on the method of payment or in terms of their incidence (i.e. how their burden is shared).
These are taxes levied directly on the incomes of individuals and business enterprises. The burden of direct taxes falls directly on the taxpayers, but they are usually progressive. Examples of direct taxes include personal income tax, company tax, capital gain tax, capital transfer tax, petroleum profit tax.
- Personal Income Tax: It is levied as a tax on the income of individuals after reliefs and allowances in respect of personal needs, wife, children, dependent relatives, pension fund, life insurance, research effort, etc. have been deducted. The pay-as-you-earn (PAYE) scheme is applied to people in employment. The personal income tax satisfies most of the criteria for a good tax system.
- Company Tax: This is levied on the net profits of companies. That is, it is applied to the whole of a company’s profit after deducting depreciation and other allowances.
- Capital Gain Tax: This is a tax on the appreciated value of an asset on disposal. This is usually caused by inflation.
- Capital Transfer Tax: This tax applies to both life-time and after death transfer of wealth.
- Petroleum Profit Tax: This tax is levied specifically on the profits of oil companies. It has been a major source of government revenue in Nigeria since the oil boom started in the early 1970s.