TAXATION AND ITS EFFECT ON THE NIGERIAN ECONOMY (A CASE STUDY OF ENUGU STATE TAX SYSTEM).

CHAPTER ONE

1.0 INTRODUCTION

The Nigerian Tax System has undergone significant changes in recent times. The Tax Laws are being reviewed with the aim of repelling obsolete provisions and simplifying the main ones. Under current Nigerian law, tax revenue is enforced by the 3 tiers of Government, which are Federal, State, and Local Government with each having its sphere clearly spelt out in the Taxes and Levies Act, 1998.

The whole essence of tax revenue is to generate revenue to advance the welfare of the people of a nation with focus on promoting economic growth and development of a country through the provision of basic amenities for improved public services via proper administrative system, and structures. Tax revenue plays a crucial role in promoting economic activity growth and development. Through tax revenue, government ensures that resources are channeled towards important projects in the society, while giving succor to the weak. The role of tax revenue in promoting economic activity and growth may not be felt if poorly administered. This calls for a need for proper examination of the relationship between revenue generated from taxes and the economy, to enable proper policy formulation and strategy towards its efficiency. According to Olashore (1999), the Nigerian economy has remained in a deep slumber with macroeconomic indicators reflecting an economy in dire need of rejuvenation, revival and indeed radical reform. Also in the view of Oni (1998), tax administration needs to be revamped and refunds of taxes as well as duty drawbacks administration are inefficient.

A critical challenge before tax administration in the 21st century Nigeria is to advance the frontiers of professionalism, accountability and awareness of the general public on the imperatives and benefits of tax revenue in our personal and business lives which include: promoting economic activity; facilitating savings and investment; and generating strategic competitive advantage. If tax administration does not for any reason meet the above challenges, then there is a desperate need for reform in the area of the tax regime, and in the administration of taxes.

A country‘s tax system is a major determinant of other macroeconomic indexes, specifically, for both developed and developing economies; there exists a relationship between tax structure and the level of economic growth and development. Indeed, it has been argued that the level of economic growth has a very strong impact on a country‘‘s tax base (Kiabel, 2009, and Vincent, 2001), and tax policy objectives vary with the stages of development. Similarly, the economic criteria by which a tax structure is to be judged and the relative importance of each tax source vary over time (Vincent, 2001). For example, during the colonial era and immediately after the Nigeria‘‘s political independence in 1960, the sole objective of tax revenue was to raise revenue. Later on, emphasis shifted to the infant industries protection and income redistribution objectives. In his discussion of the relationship between tax structure and economic development, (Vincent, 2001) divided the period of economic development into two, the early period when an economy is relatively underdeveloped and the later period when the economy is developed. During the early period, there is limited scope for the use of direct taxes because the majority of the populace resides in the rural areas and is engaged in subsistence agriculture. Because their incomes are difficult to estimate, tax assessment at this stage is based on presumptions prone to wide margins of error.

Tax revenue is a powerful tool of economic reform and a major player in every economy of the world. It is never static but dynamic and should reflect current realities prevailing in the economy. The tax system is an opportunity for government to collect additional revenue besides other sources of income, which is needed in discharging its pressing obligations. A good system of tax also offers itself as one of the most effective means of mobilizing a nation's internal resources and it lends itself to creating enabling and conducive environment to the promotion of economic growth and development (Ogbonna, 2010).

Further, the rudimentary nature of the economy precludes retail form of taxes. At this stage also, taxes are difficult to collect because of the lack of skills and facilities for tax administration (Kiabel, 2009). Given this, a complicated tax structure is not feasible and the amount of revenue from personal income tax will depend on taxpayers ‘‘compliance and the efficiency of the tax collector. An important source of government revenue during the early stage of economic development is the foreign trade sector because exports and imports are readily identifiable and they pass through few ports. However, revenue from export and custom duties is not stable because of periodic fluctuations in the prices of primary products. This tends to complicate plan implementation in many developing countries (Kiabel, 2009).

Tax revenue mobilization as a source for financing development activities in Nigeria has been a difficult issue primarily because of various forms of resistance, such as evasion, avoidance and corrupt practices attending to it. These activities are considered as sabotaging the economy and are readily presented as reasons for the underdevelopment of the country. (Adegbie et al, 2010:2). Government exists in order to effectively collect taxes from available economic resources and make use of same to create economic prosperity such that available and willing human and other resources are gainfully employed, infrastructures provided, essential public services (such as the maintenance of law and order) are put in place etc. Tax resistance only makes the development process unattainable. (Onairobi, 1998). It could be deduced that changing or fine-tuning, tax rates is used to influence or achieve macroeconomic stability. Some of the most recently cited examples are the governments of Canada, United States, Netherland, United Kingdom, who derive substantial revenue from Company Income tax, Value Added Tax, Import Duties and have used same to create prosperity (Adegbie et al, 2010:3). Thus it can be said that the economic development of a country depends on various reasons one of which is the presence of an effective and efficient tax revenue policy. In Nigeria the contribution of tax revenue has not met the expectations of Government. Government has equally expressed this disappointment and has accordingly vowed to expand the non-oil tax revenue. (Festus and Samuel, 2007). It is in the light of the foregoing that this study examines the extent to which the tax system has contributed to economic growth of Nigeria.

1.1 BACKGROUND OF THE STUDY

Taxation is the system of raising money in form of taxes paid by the citizens of the country in return for the services rendered by the government.

It could be recalled that taxation is instituted by God, this is traced back to “Mattew chapter 22 vs. 17-21”, when the Pharisees asked Jesus whether it is lawful to pay taxes or not. The Pharisees were later told render therefore to Caesars the things that are Caesar’s and to God the things that are to God.

According to Lekan .S. etal (2006), tax was described and not defined in the statues, but according to Cambridge international dictionary of English, it is “an amount of money paid to the government usually a percentage (%) of personal income or company profits”.

According to Okpe I.I (2000) tax is the transfer of resources and income from the private sector to the public sector in order to achieve some of the nation’s economic and social goals.

Taxation is universally accepted as a powerful tool in the hands of any government to raise income for its services and to ensure equitable distribution of income among its citizens.

Therefore, in every modern communities, a large amount of taxation is necessary for a public expenditure increases to promote social progress, taxation which is the main sources of funds also increases.

The present tax laws in Nigeria emanated from the Raismais commission in 1957. Before this time we only had what was called the income tax ordinance for the colonies and which was rather common in all the colonies and the provisions were very similar. Raim’s recommendation was the basis of provision in the Nigerian constitution order council of 1960 section 70(1) which conferred an exclusive power upon the parliament to make laws for Nigeria or any part thereof with certain uniform principles in respect of personnel income tax.

During 1963 when Nigeria became a republic, the mid-western region was created out of the western region and they adopted the western region tax law accordingly with the amendments, the position under the republican constitution of 1963 and that the regions (now divided into states) assumed jurisdiction over the income tax of person other than companies. While the federal government assumed jurisdiction over the taxation of companies, the uniform principles under the income tax management act and the regional taxes in the federal territory of Lagos.

Thus, after the creation of former 12 states in 27th may 1967, the state assumed the tax laws of the regions in which they were before the creation of such states. The uniform principle covered by the income tax management act of 1961 were as follows:

Specifies what income are exempted from tax.

What constitute income for tax purposes.

Upholds residence on the basis for taxation or in the alternative, the principal place of business.

And recently prescribed the rates of tax and personal reliefs.

Nigeria as a nation has the vision of becoming one among the world’s 20 largest economies in the year 2020; this obviously is the brain behind the priority attention the present administration is directing at infrastructural development which is essential for economic growth. A developed economy is one with the ingredient to stimulate investment and create wealth, this by implication offers an atmosphere that is business friendly and has the potentials for the actualization of the vision 2020.The desired outcome requires a lot of money to put the economy in a position that stimulates investment, therefore, tax policies need to attract potential investors, and the revenue from tax should be sufficient enough to meet the infrastructural expenditures of the government. Apere (2003) notes that taxation is a microeconomic and fiscal policy instrument; it involves the transfer of resources from the private to the public sector for the accomplishment of economic and social goals. It is an instrument the government uses to measure, access and control the informal sector that dominate developing economies of the world (Wambaiand Hanga, 2013).

1.2: STATEMENTOF THE PROBLEM

There is a general lack of consensus among scholars on the contribution of tax revenue to the economic growth of nations. For instance, whereas Ariyo (1997) in his study on productivity of the Nigerian tax system documented a satisfactory level of productivity of the tax system before the oil boom, Festus and Samuel (2007) established that the role of tax revenue in promoting economic activities and growth is not felt in Nigeria. The two studies reflect that the oil boom has not improved the economic state of the country since before the boom, there was a level satisfactory and after the boom, the growth of economic activities deteriorated. The emergence of oil as a major tax revenue is one of the means a country‘s government devises in solving the economic problems of the country and to enhance government expenditure which is expected to be beneficial to the citizens of such country through the provision of social and economic infrastructures (Adereti et al 2011). In Nigeria, this has not been the case because despite the tax revenue and expenditure reported year in year out by the government, the physical state of the nation in terms of infrastructure and social amenities is backward. This is evident in the lack of electricity supply, portable drinking water, basic health care delivery, bad roads, just to mention but a few.

The gap in terms of the period covered is also a contributory factor to the disparity in the outcomes of relationship between tax revenue and an economy. The advent of the oil boom encouraged some laxity in the management of non-oil revenue sources like the company income tax and custom and excise duties. This calls for an urgent need in the improvement of the tax system to enhance the evaluation of the performance and facilitate adequate macroeconomic planning and implementation (Adereti et al 2011).

Bonu and Pedro (2009) investigated the impact of income tax rates (ITR) on the economic development of Botswana which shows that the impact of income tax revenue over the nations GDP is not impressive in developing nations. This calls for the need to further investigate the current tax performance vis-à-vis the Nigerian economy.

There is high incidence of tax evasion and avoidance by tax payers. This may affect the amount of revenue collectible by the government for the running of administration.

Furthermore, it is hoped that people were wrongly assessed and the assessment sometimes result to regressive taxation.

1.3 AIM AND PURPOSE OF THE STUDY

The purpose of this study include the following:

To examine the causes and reasons for high tax evasion and avoidance.

To investigate the impact of value added tax on the growth of the economy of Nigeria.

To generate revenue to help the government to finance ever-increasing public sector expenditure.

To promote social, economic, and good governance through provision of merit goods.

To examine the effect on economy, the high incidence of tax evasion and avoidance.

To examine people’s perception on taxation.

1.4: SIGNIFICANCE OF THE STUDY

The topic “taxation and its effects of the Nigerian economy”, will educate the entire public on how the federation could encourage economic development and also how a reduced tax could promote the standard of living of the tax payer and increases his capital formation and investment thereby, resulting in a higher gross National Product(GNP) of the economy(country) and also promote the industrial development of the nation and Enugu state in particular.

The study will be of immense benefit to the following group of persons.

(a) Government of the federation of Nigeria, especially the Enugu State Government.

(b) The business community for the purpose of companies income tax.

(c) The tax experts especially the practicing professional accountants.

(d) Enugu state university community.

(e) The Nigerian Institute of Management and Nigerian Statisticians.

(f) The economist and financial analysts or capitalist.

(g) The students of Accountancy profession and other allied professions.

(h) The tax-payers, especially the employers of labour and the employees of various organisations.

(i) Tax researchers.

1.5 RESEARCH QUESTION

In the light of this study, this research work will be guided by some of the following research questions which will be administered to the people and treated. Samples of the research questions are:

How many times have you petitioned the state board of internal Revenue on the objectives and appeals as regards your notice of assessment?

Does tax revenue have any significant impact on the economy of Nigeria?

How do people react towards tax payment? 

What do you thinks should be the qualities of a good tax system

Is tax the most effective source of revenue to the government?

Do the taxes you pay affect your productivity in your place of work?

Apart from the tax evasion and avoidance, what do you consider the greatest hindrance to improve revenue collection by the Board of Internal Revenue?

1.6 FORMULATION OF HYPOTHESIS

To enable the researcher test if there is any impact taxation has on the Nigeria Economy; some statistical model will be used based on the responses from oral interview carried out and the questionnaires distributed and also statistical data generated from the appropriate sources. The data generated from all these will be used to test the following hypothetical statements. And will be tested with 0.5 degree significance using the chi-squire formula.

Hypothesis 1:

The alternative hypothesis (H1): Tax payers are said to be dishonest

The null hypothesis (Ho): Tax payers are not said to be dishonest.

Hypothesis 2:

The alternative hypothesis (H1): A tax defaulter when caught, he should pay double the amount involved rather than going to court.

The null hypothesis (Ho): A tax defaulter when caught he should not pay double the amount involved rather than going to court.

Hypothesis 3:

The null hypothesis (Ho): Deficiencies contribute to fraud and dishonesty in the tax assessment and collection.

1.7: SCOPE AND DELIMITATION.

This topic, taxation and its effect on the Nigerian economy (A case study of Enugu state tax system and economy) should have been expected to cover all the 36 states of the federation and Abuja and the entire economy but the writer intends to limit this topic to only Enugu state due to financial handicap, distance and time constraints.

Therefore, since the same tax Acts are applied throughout the federation Republic of Nigeria, the study of Enugu tax system and economy shall be deemed to serve other states of the federation. Thus, the writer will rely heavily on the board of internal Revenue and state ministry of finance and Economy planning since they have adequate information and data on the government of Enugu state of Nigeria, thereby covering all the local government areas of the state.

Since there are often changes in the tax laws of Acts both at the state and federal level of government, the writer may wish to visit the chief inspector of taxes of some urban and rural local government areas in the state in other to confirm the information or data so collected from the Board of Internal Revenue and the state Ministry of Finance and Economy Planning.

1.8 ASSUMPTIONS OF THE STUDY

The researchers in carrying out this study, will make the following assumptions: That the data that will be used are true and fair figures actually collected by the Federal Government each year of assessment.

That the data will be authentic and can be relied on for further research work on the topic. 

That the data is going to form the basis of the research work.

1.9 DEFINTION OF TERMS.

I.T.M.A: Income tax management Act of 1961, which deals with chargeable income and how they are administered.

C.I.T.A: Companies income tax Acts of 1979 which deals with profit chargeable in respects to companies.

P.I.T.D: Personal income tax degree/Act of 1993 as amended deals with profit chargeable in respect of individuals.

HYPOTHESIS: It is an idea or suggestion put forward for reasoning or explanation .subject to confirmation or rejection.

LAW OF TERRITORY: This means any enforce in a particular territory example, state, or country.

METHODOLOGY: It is the science or study of methods or ways to be adopted in a given direction.

TAX EVASION: This means trying to escape tax liability by an individual.

DIRECT TAXES: This means that taxes are levied on income and property of individuals or group of individuals who bears their full burden.

INDIRECT TAXES: These are the taxes levied on goods and services and are paid by individuals by virtue of their associating with the goods and services.

EARNED INCOME: It is the income which the tax payer actually earned, which may require mental and physical exercise such as salaries, wages, e t c.

UNEARNED INCOME: This income accrue whether or not the tax payer is there or not, example, rent, interest, royalties, and dividends.

OTHER INCOMES: It is the income which comes once in a while and they are not regular, thereby undetermined example, gift of windfall income, lottery winnings e t c.

TAX: A compulsory levy by the government on its citizens for the provision of public goods and services.

TAX BASE: The object which is taxed for instance personal income, company profit.

Tax incidence: This is the effect and where the burden of taxation is finally rested.

VAT: (Value Added Tax) is a multistage tax levied and collected on transactions at all stages of sales and distribution.

WITHHOLDING TAX: This is tax charged on investment income namely: rents, interest, royalties and dividends. Presently it is charged as the tax offset.

PROGRESSIVE TAX: This is a tax incidence that increases as the size of income increases.

REGRESSIVE TAX: A tax is regressive when its tax rate decreases as the income increases.

EXCISE DUTIES: They are taxes levied on some goods manufactured within a country. 

PERSONS: It includes all taxable persons be it individual or corporate bodies.