June 28, 2019
On 20 June 2019, the Tax Appeal Tribunal (TAT or the Tribunal) sitting in Abia State held that gratuities are tax exempt under the Personal Income Tax (PIT) Act. The decision was reached in the case between Nigerian Breweries Plc (NBP or the Company) vs Abia State Board of Internal Revenue & Ors. According to the Tribunal, Section 3 of the PIT Act excludes “gratuities” from chargeable income, thus exempting gratuities from PIT.
Following an audit of the books of NBP in 2016, the Abia State Internal Revenue Service (ABIRS) issued an assessment of over N3 million to the Company. In arriving at the assessment, the ABIRS subjected gratuities paid by NBP to its retired employees to tax. NBP, however, objected to the assessment and subsequently filed an appeal at the TAT.
The crux of the issues at the TAT was whether gratuities are wholly tax exempt under the PIT Act.
NBP contended that gratuities are exempt from PIT because Section 3 of the PIT Act Cap P8 LFN 2004 does not list gratuities as chargeable income upon which PIT may be imposed. On the other hand, ABIRS argued that gratuities are not fully exempt under Paragraph 18(b) of the Third schedule to the PIT Act, which provides for the taxation of gratuities that exceed N100,000.
The Tribunal, however, ruled in favour of NBP stating that gratuities are tax exempt under the PIT Act. In reaching its decision, the Tribunal explained that although gratuities were taxable under Section 3 of the PIT Decree of 1993, they are no longer chargeable to tax under the PIT Act of 2004. This is because the Finance (Miscellaneous Taxation Provisions) (No 3) Decree of 1996 deleted “gratuities” from the list of income chargeable to PIT and “gratuities” were also not included in Section 3 of the PIT Act consolidated in the Laws of the Federation of Nigeria in 2004. Applying the mischief rule of statutory interpretation, the Tribunal further stated that the deletion of gratuities in the PIT Act of 2004 was a remedy to provide for the exemption of gratuities from PIT.
In addition, the Tribunal held that Section 18(b) of the Third schedule to the PIT Act, which provides for the taxation of gratuities that exceed N100,000 could not apply to NBP because it cannot override Section 3 of the Act, which does not list gratuities as chargeable income. In reaching this conclusion, the TAT relied on the dictums of the Supreme Court in cases between Balarabe Musa v INEC and Adebusuyi v INEC which states that the provisions of a Schedule cannot override provisions contained in the body of a legislation.
Furthermore, the Tribunal stated that Section 3 is the “charging section” of the PIT Act of 2004, and given that “gratuities” were not mentioned in the charging section, they are automatically excluded from the charge of PIT.
The decision of the Tribunal in this case implies that “gratuities” are exempt from PIT; thus, settling the conflict created by Section 3 and Paragraph 18(3) of the Third Schedule to the PIT Act except a contrary decision is reached by a superior court.
In addition, given that this decision exempts gratuities wholly from PIT, it estops the Lagos State Internal Revenue Service (LIRS) and other States Internal Revenue Services from recovering PIT on gratuity payments.
In 2017, the LIRS had issued a Circular titled “Exemption of Compensation for Loss of Employment”. In that Circular, the LIRS had explained that PIT would be payable on gratuities if such gratuities are paid outside an approved Pension Scheme and fall under the conditions listed in Paragraph 18 of the Third Schedule to the PIT Act. However, with the decision of the Tribunal in this case, the LIRS’ position would not be tenable because all gratuity payments are to be exempt from tax according to the Tribunal.
Furthermore, it is important to note that the Finance (Miscellaneous Taxation Provisions) (No 3) Decree of 1996 not only deleted gratuities from the charging section of the PIT Act but also deleted the provisions of Paragraph 18 of the Third Schedule to the PIT Act, which provides for the instances where gratuities may be taxed. However, the provisions of Paragraph 18 of the Third Schedule, which provided a limitation on the amount of gratuity that would be tax exempt, were not deleted in the compilation of PITA in the 2004 Laws of the Federation. Notwithstanding, given that the compilation of the 2004 laws were not amendments but mere compilations, the decision of the Tribunal is in tune with the provisions of the Decree which exempts gratuities from income liable to PIT.