EFFECT OF TAX EVASION AND TAX AVOIDANCE ON NATIONAL BUDGET (A CASE STUDY OF FEDERAL INLAND REVENUE SERVICE (FIRS), ABUJA)

CHAPTER ONE

INTRODUCTION

1.1. BACKGROUND OF THE STUDY

Tax evasion is defined as a deliberate and wilful practice of not disclosing full taxable income so as to pay less tax and as a contravention of tax laws whereby a taxable person neglects to pay tax due or reduces tax liability by making fraudulent or untrue claims on the income tax form (Olabisi, 2010). This is not new to the world, but it differs from country to country. Tax avoidance and tax evasion brings with it a lot of economic challenges, for instance tax avoidance causes investment distortions and thus companies and individuals would undervalue or even have some of their assets exempted from tax purposes. Whereas tax evasion on the other side would cause twists in business morals or ethics are destroyed as people look for loopholes in the system (Dalu et al., 2012) DFID (2009) emphasized that the obtainable knowledge on tax revenue losses in developing countries caused by tax evasion and tax avoidance is very limited. This is partially due to the lack of data and partially due to methodological shortcomings of existing studies. Some of the existing evaluations of tax revenue losses due to tax avoidance and evasion by firms systematically overestimate the losses. Other theories are based on assumptions which are so restricting that the results are difficult to interpret. Overall, it is fair to conclude that most existing assessments of tax revenue losses in number of countries due to evasion and avoidance are not based on reliable methods and data. However tax evasion and avoidance are both phenomena that are probably as old as taxation itself. Whenever authorities decide to levy taxes, individuals and firms try to avoid paying them. Though this problem has always been present, it becomes more pressing in the course of globalization as this process extends the range of opportunities to circumvent taxation while simultaneously reducing the risk of being detected. According to Tulsa (2012), the goal of budget implementation was to assure citizens that funds were used legally and efficiently, as directed by the Legislature and Government, to provide effective public services for. Before the fiscal year begins, agencies were required by law to submit a budget work program to ministry of finance. This program allocated all spending, including appropriations federal funds and revolving funds (which collect fees and other dedicated revenue) to programs and specified planned spending by month of the fiscal year. The budget work program would be consistent with all budget actions by the Legislature, including limits on appropriations and how much can be spent from non-appropriated funds, as well as how spending was to be allocated between agency programs and the maximum number of employees that can be hired. Tax collection and budget implementation processes are interdependent two sides of the same coin, for example both require reliability, enough information on actual revenues and expenditure, and record keeping on sales and payroll (Herman, 2006). Lack of a comprehensive budget may complicate implementation for example separate timetable and rules for capital budget, extra-budgetary funds and have spending ministries been fully involved in their budget formulation so that they understand and own their budget, as soon as funds released control and monitoring of expenditure, monitoring of revenues, cash and debt management, Internal controls, including over payroll and procurement carried out by ministry of finance (MOF) and finally reporting externally on budget implementation Problems in budget implementation systems may reflect lack of incentives for good budget implementation, rather than lack of capacity. Tax evasion affects the effective administration of tax systems by decreasing the budget, producing a system that leaves insignificancies in its operation (Adebisi and Gbegi, 2013). An important contributing factor to weak tax administration in Nigeria was the excessive complexity of tax laws. Furthermore there were a number of causes for tax evasion such as Inadequacy of powers assigned in the hands of personnel to gather facts to determine the tax liability of taxpayer, Shortage of experienced tax personnel, and absence of proper punishments for those who evade tax. As explained by Siehl (2010), tax evasion refers to illegal practices to escape from taxation, taxable income, profits liable to tax or other taxable activities hided or concealed. In the process of tax evasion, the amount of the source of income is misrepresented, or tax reducing factors such as deductions, exemptions or credits are deliberately overstated. In Nigeria, there is lack of clear procedures and policies on tax investigation and audits. Many tax payers are not registered; some of them who are prone to the eyes of tax authorities hide and sometimes understate their incomes due to the lack of proper book keeping amongst a majority of business people. There is no tax education on the accrued benefits of tax payment and citizens do not look at taxation as being important to the economy of Nigeria. Notwithstanding, the government budgets continue to be affected in terms of deficits even when the actual estimates on how the government will raise funds is real. This has resulted to lack of rapid development which can be seen by poor road constructions, shortage of clean supply of water, shortage of social amenities such as hospitals and schools among other lagged development. Although tax evasion is a normal reason as to why many African nations are lagging behind, there exist very few studies on this topic. Many of the current studies have concentrated on the effect of tax evasion on economic growth and development without a specific focus unto effective budget implementation since it’s from the lack of effective budget implementation that economic growth is never achieved. This study sought to determine the effect of tax evasion and tax avoidance on national budget.

1.2. STATEMENT OF THE PROBLEM

Despite the presence of governing Acts and administrative structures for tax collections purposes, tax avoidance and evasion continue to cripple Governments efforts in gathering enough financial resources for the betterment of their respective nations. It includes dishonest tax reporting such as declaring less income, profits or gains than the amounts actually earned or overstating deductions. Tax avoidance on the other hand is the legal use of tax laws in order to reduce one’s tax burden through deliberate omission of income on a tax return, non-payment of taxes owed or not filing a tax return altogether to avoid having to pay taxes to the Government. Tax evasion and avoidance both have negative implications on the economy as they hamper governmental efficiency engaging in beneficial programs and result in an eroded tax base which in turn widens the national budget deficit. According to Adegbile & Fakile (2011), Nigeria citizens lack knowledge and education about taxation. Thus, there is greater desire for tax evasion, avoidance and non-compliance with relevant tax laws. In this respect, the country has been more adversely affected because of absence of tax conscience on the part of individuals and companies and the failure of tax administration to recognize the importance of communication and dialogue between the government and the citizens in matters relating to taxation. Although tax evasion and avoidance are problems that face every tax system, the Nigerian situation seems unique when viewed against the scale of corrupt practices prevalent in the country (Adebisi & Gbegi, 2013). This study therefore intends to examine the impact of tax evasion and tax avoidance on budget implementation in Nigeria.

1.3. AIMS AND OBJECTIVES OF THE STUDY

The major aim of the study is to examine the effect of tax evasion and tax avoidance on national budget. Other specific objectives of the study include;

1. To examine the nature of tax Administration in Nigeria.
2. To determine the effects of tax payers’ record keeping on effective budget implementation in Nigeria.
3. To examine the impact of tax evasion and avoidance on national budget implementation.
4. To examine how the information provided by tax payers affect effective budget implementation in Nigeria.
5. To examine the relationship between tax evasion/avoidance and performance of national budget implementation.
6. To recommend policies for the Nigerian government to use and solve the problems of tax evasion and tax avoidance.

1.4. RESEARCH QUESTIONS

1. How is the nature of tax Administration in Nigeria?
2. What are the effects of tax payers’ record keeping on effective budget implementation in Nigeria?
3. What are the impacts of tax evasion and avoidance on national budget implementation?
4. How is the information provided by tax payers affect effective budget implementation in Nigeria?
5. What is the relationship between tax evasion/avoidance and performance of national budget implementation?
6. What are the recommended policies for the Nigerian government to use and solve the problems of tax evasion and tax avoidance?

1.5. RESEARCH HYPOTHESES

HYPOTHESIS 1

1. There is no significant impact of tax evasion and avoidance on national budget implementation.
2. There is a significant impact of tax evasion and avoidance on national budget implementation.

HYPOTHESIS 2

H0: There is no significant relationship between tax evasion/avoidance and performance of national budget implementation

H1: There is a significant relationship between tax evasion/avoidance and performance of national budget implementation

1.6. SIGNIFICANCE OF THE STUDY

The relevance of this study can first be appraised in the light of its usefulness to the Nigerian nation as a whole. This study, among other things, will expose the effect of tax evasion and avoidance on National budget and economic growth. Concern over the economy wide effect of Tax is important because of the possibility that the tax evasion and avoidance may cause government to cut some expenditure of certain essential services, hence affecting government effectiveness and efficiency. Essentially, this research work is intended to expose the role of Taxation in the budget development of Nigeria, the knowledge of which therefore makes the research important to policy makers, Federal Inland Revenue Service (FIRS), Tax administrator, students as well as the general public who may require information about Taxation and its performance.

1.7. SCOPE AND LIMITATION OF THE STUDY

The study is restricted to the effect of tax evasion and tax avoidance on national budget, a case study of Federal Inland Revenue Service (FIRS), Abuja.

1.8. LIMITATION OF THE STUDY

Financial constraint: Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview)

Time constraint: The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

1.9. DEFINITION OF TERMS

Tax: This is a compulsory contribution imposed by government on individual and corporate bodies for the use of government to provide facilities or service in the nation.

Tax Evasion: This is the attitude adopted by tax payers to deliberately misrepresent the true state of their affairs to the tax authorities or include dishonest tax report such as declaring less income, profit or gains to escape tax liability (wholly or partially) by breaking the law.

Tax Avoidance: This is a legal way by which a tax payer reduces his tax liabilities.

National Budget: The national budget is an instrument through which Government policies are translated into action. In general, a government budget is the financial plan of a government for a given period, usually for a fiscal year, which shows what its resources are, and how they will be generated and used over the fiscal period. The budget is the government's key instrument for promoting its socio-economic objectives.