On 20 June 2019, the Tax Appeal Tribunal presiding in Abia State ruled in Nigerian Breweries Plc. vs Abia State Board of Internal Revenue & Ors that gratuities are tax-exempt under the Personal Income Tax (PIT) Act. The contentious issue was whether the exemption was full or partial.
How it all started
A few years ago, Abia State Internal Revenue Service (ABIAIRS) carried out a tax audit of the accounts and records of Nigerian Breweries Plc. (NB). Thereafter, ABIAIRS assessed NB to tax based on the gratuities paid to its former employees. As the Nigerian tax system allows an aggrieved taxpayer to filed an appeal with the Tax Appeal Tribunal (TAT) within a specified time, NB objected to ABIAIRS’ assessment and made an appeal at the TAT.
NB asserted that gratuities were exempt from PIT as Section 3 of the PIT Act does not include gratuities as chargeable income. ABIAIRS, however, disputed that gratuities were not wholly exempt under Paragraph 18(b) of the Third Schedule to the PIT Act. Rather, it allows for the taxation of gratuities that is above NGN100,000. While Section 3 contains a list of income which is chargeable to tax, the Third Schedule identifies the income which are not taxable.
TAT ruled in favor of NB stating that gratuities were exempt from PIT. In reaching its decision, TAT affirmed that:
- Section 3 did not state that gratuities are subject to PIT. Thus, they belonged to the group of tax-free income.
- The taxation of gratuities of above NGN100,000 can not apply to NB as Paragraph 18(b) of the Third Schedule cannot supersede Section 3 of the Act. Put differently, the provisions of a Schedule cannot take precedence over a Section of an Act.
- Where a tax law is vague, the interpretation of the applicable provision must benefit the taxpayer.
Thus, TAT’s decision on the absolute exemption of gratuities from the PIT Act is valid until a higher court makes a different decision.
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