One of the fundamental changes introduced by the Personal Income Tax (Amendment) Act 2011 (“PITAM”) is the introduction of a new Consolidated Relief Allowance (CRA) which replaced the old Personal Relief. We will deal with the controversy around the computation of CRA in this edition and discuss other controversies in the days ahead.
Based on the old law that was available up to June 2011, taxpayers are entitled to personal relief of N5,000 plus 20% of earned income. Section 5 of PITAM which amended Section 33 of the Principal Act (PITA) replaced this old basis for computing personal relief with the new CRA.
Section 5(a) of PITAM provides that “there shall be allowed a consolidation relief allowance of N200,000 subject to a minimum of 1% of gross income whichever is higher plus 20% of the gross income and the balance shall be taxed in accordance with the income table in the Sixth Schedule to the Act”.
The general understanding from this provision is that in computing CRA, Taxpayers would claim the higher of N200,000 or 1% of gross income and then add such to 20% of the gross income. Put in another way, for Taxpayers with gross income in excess of N20m, CRA would be computed as 21% while for those with gross income of not more than N20m, it would be N200,000 plus 1% of gross income.
However, the provision of the new Sixth Schedule appears to be in conflict with the analysis above. Paragraph one of the Sixth Schedule stated that CRA shall be granted on income “at flat rate of N200,000 plus 20% of gross income”. This confusion was also repeated in paragraph 3 of the Sixth Schedule where the basis for computing CRA was stated as “N200,000 plus 20% of gross income”.
Whilst opinions are divided on the correct basis for calculating CRA, it is perhaps easy to predict the direction towards which the Tax Authorities may move. They would prefer that the controversies be resolved in favour of the provisions in the Sixth Schedule. However, taxpayers (especially those with the current or anticipated annual income in excess of N20m) will pray to have the phrase “or 1% of gross income which is higher” to be retained.
It is regrettable to have this type of obvious confusion in our tax laws. Nonetheless, it is a general principle of law that the provisions of a Schedule to an Act cannot override the provisions in the main body of the Act. This is trite law. Consequently, any inconsistency between the provisions of the main Act and its accompanying Schedule would have to be resolved in favour of the former.
To that extent, I will pitch my tent with the provisions of Section 5(a) of PITA. By that provision, CRA is to be computed as “N200,000 subject to a minimum of 1% of gross income whichever is higher, plus 20% of the gross income”.
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