Previously, section 3 of the Personal Income Tax Act of 1993 (PITA 1993) – i.e. the charging section – imposed tax on gratuities, and the 3rd Schedule to the Act exempted gratuities up to N100,000 from tax. The implication was that gratuities in excess of N100,000 were subject to tax.
However, section 3 of PITA 1993 was subsequently amended by the Finance (Miscellaneous Tax Provisions) (No.3) Decree (1996 Decree) removing “gratuities” from taxable income. However, the exemption under the 3rd Schedule was not amended. This created an apparent conflict in that while on one hand section 3 did not specifically mention gratuities as taxable, the 3rd Schedule inferred that gratuities in excess of N100,000 are taxable. This conflict created an uncertainty as to whether gratuities are subject to tax or not.
The Abia State Board of Internal Revenue (ASBIR) subjected Nigerian Breweries (NB) to tax on gratuities paid to the latter’s former employees. ASBIR also computed interest and penalties against NB. The ASBIR argued that based on Paragraph 18 of the 3rd Schedule to PITA 2011 only gratuities not exceeding N100,000 were tax exempt.
NB’s position was that the intention of the law was to exclude, in its entirety, gratuity from tax because “gratuities” was deleted from the charging section. Also where there was a conflict between a section in a statute and a provision in the Schedule, the section would prevail.
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