TAXATION OF BANKS

1.0 INTRODUCTION

Bank’s taxation falls within the provisions of the Companies Income Tax Act of 1993 (CITA). Therefore, it shares the same corporation tax rate prevailing in every fiscal year with other companies. However, banks pay extra tax on any excess profit that emanates from their assessments.
Therefore in this unit, you will be exposed to the computational aspects of bank taxation.

2.0 OBJECTIVES

At the end of this unit, you should be able to:

1. explain the term “excess profit” 
2. identify the provisions of CITA that relate to the banking sector  compute taxable and excess profits for tax purposes 
3.  ascertain tax liability of banks. 

3.0 MAIN CONTENT

3.1 Banks’ Excess Profit

CITA, 1979 provides that banks shall pay tax for each year of assessment in respect of any taxable profit computed. In addition to this tax which applies to all companies under CITA, there shall, as from the year of assessment commencing on 1st April, 1978, be levied and paid a special levy of 10% on excess profits of all banks as defined by section 41 of the Banking act, 1969.

3.1.1 Meaning of Excess Profit

Excess Profit means the difference between taxable profits as computed, using approved incomes and expenses, and the expected normal profit which ascertaining it is based on some prescribed percentages of all capital sources of the business (bank).

3.1.2 Excess Levy (Tax)

After the ascertainment of excess profit, by comparing the taxable profit with the normal profit, an excess levy rate of 10% is applied and excess tax emerges. When this occurs, the excess tax is added to the corporation tax, which rate has fluctuated between 30% and 45% over the years, to arrive at the total tax liability (tax due). However, with effect from 1st January 1991, the excess profit tax was abolished.

SELF-ASSESSMENT EXERCISE 1

Explain how excess tax liability is determined.

3.2 Interest Exempted from Tax

Banks in Nigeria are encouraged to grant agricultural loans to farmers at low interest rates. It is on this note that the Central Bank of Nigeria (CBN) has selected some commercial banks as channels for the issuance of agricultural loans to farmers in Nigeria. The banks are also encouraged to grant loans to exporters.