AN APPRAISAL OF TAX EVASION AND AVOIDANCE IN NIGERIAN TAX SYSTEM (A SURVEY OF LAGOS STATE)
ABSTRACT
ABSTRACT
Taxation is a tool use by government
to raise revenue. It is also used as an instrument of economic and social
policy.
Tax
evasion and tax avoidance are evil twins that have however eaten into the
fibric of the Nigerian economy. They have eroded the advantage of taxation in
our economy.
The
basic purpose of carrying out this research is to critically examine the causes
of tax evasion and avoidance in our society and to find out ways of blocking
these loopholes.
Questionnaires
and personal interview were used as a basis for gathering data for answering
research operations. The respondents were various tax payers in Lagos state, perceived to
have knowledge about the subject.
The
findings of this research work indicated that the problem of tax evasion and
avoidance is caused by some of the following reason, inadequate infrastructure,
corrupt tax officer, badly worded tax laws, amongst others.
On
this note, it is vital for federal government to provide adequate amenities for
its citizenry, educate its citizens on the importance of paying tax. Better
equipment should be provided to tax officials to track tax evaders, these
changes are necessary if there is to be an increase in revenue generated by
taxation in Nigeria.
TABLE
OF CONTENTS
Pages
Title
Certification
Dedication
Acknowledgements
Abstract
Table of Contents
CHAPTER ONE
1.0
Introduction
1.1
Background
of the Study
1.2
Statement
of the Problems
1.3
Objectives
of the Study
1.4
Significance
of the Study
1.5
Research
Questions/Hypothesis
1.6
Research
Methodology
1.7
Scope
and Limitation of the Study
1.8
Definition
of the Terms
1.9
Organisation
of the Study
End of Chapter of the Study
CHAPTER TWO
2.0
Literature
Review
2.1
Research
into Current Literature
2.1.1
Meaning of Tax and Taxation
2.1.2
Purpose
of Taxation
2.2
Conceptual
Explanations
2.2.1
The
Nigeria
Tax System
2.2.2
Tax
Principles
2.3
Meaning of Tax Evasion and Avoidance
2.3.1 Tax Evasion
2.3.2 Method of Tax Evasion
2.3.3 Reasons for high Rate of the Tax
Evasion in Nigeria
2.3.4 Possible Solutions to Tax Evasion in Nigeria
2.3.5 Instance when Tax can be Avoided in Nigeria
2.3.6 Tax Avoidance
2.4
Legislative
Meaning
2.5
Judicial
Meaning
2.6
Method
of Tax Avoidance
2.7
Extent
of Tax Avoidance Evasion in Nigeria 45
2.8
Reason
for Tax Evasion and Avoidance in Nigeria 48
End of Chapter References 54
CHAPTER THREE
3.0
Research
Methodology
3.1
Research
Focus
3.2
Research
Instruments
3.3
Restatement
of Research Question/Hypothesis
3.4
Description
of the Population and Sample of the Study
3.5
Sources
of Data Collection
3.6
Description
of Questionnaire
3.7
Method
of Data Analysis and Description of Tools of Analysis
End of Chapter References
CHAPTER
FOUR
4.0
Data
Analysis, Interpretation and Discussion of Findings
4.1
Analysis
of Respondents Bio – Data
4.2
Analysis
of Research Data
4.3
Test
of Hypothesis
End of Chapter References
CHPATER FIVE
5.0
Summary,
Conclusion, Recommendation and Suggestion
for Further Studies
5.1
Summary
5.2
Conclusion
5.3
Recommendations
5.4
Further
Area of Studies
Bibliography
Appendix
Questionnaire
CHAPTER
ONE
1.0
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
Every
nation or government depends on taxes for its survival. Without taxes, there is
no way a government can operate unless of course it borrows or charges its
citizens outrageous fees for the services it renders them. With taxes
government provides amenities and infrastructure for the improvement of its
subjects. It is also through taxation that it funds governance for a stable
polity.
One
of the cardinal factors in estimating the effectiveness of a government is its
ability to collect taxes. Before the ongoing reforms in the sector, Nigeria’s
tax environment was characterized by poor assessment and collection, multiple
taxation, misappropriation of tax revenue and general inefficiency. In relative
terms, the rich, Nigerians pay far less tax in comparison with the poorer
counterparts.
Tax
is usually imposed on individuals and entity that make up a country. The funds
provided by tax are used by the states to support certain state obligations
such as education systems, health care systems, pensions for the elderly,
unemployment benefits, and public transportation. A nation’s tax system is
often a reflection of its communal values or the values of those in power. To
create a system of taxation, a nation must make choices regarding the
distribution of the tax burden who will pay taxes and how much they will pay
and how the taxes collected will be spent.
In
Nigeria, the taxation system
dates back to 1904 when the personal income tax was introduced in northern Nigeria before
the unification of the country by the colonial masters. It was later
implemented through the Native Revenue Ordinances to the western and eastern
regions in 1917 and 1928, respectively. Among other amendments in the 1930s, it
was later incorporated into Direct Taxation Ordinance No. 4 of 1940. Since then
different governments have continued to try to improve on Nigeria’s
taxation system. The general opinion among scholars is that Nigeria’s
fiscal regime is characterized by unnecessary complex, distortion and largely
inequitable taxation laws that have limited application in the formal sector
that dominates the economy.
Given
the foregoing, a tax can be defined as a compulsory levy on incomes,
consumptions and production of goods and services as provided for by the
legislation. Such levies are for example made on personal income (consisting of
salaries, business profit, interest income dividends, royalty etc); company
profit, petroleum profits, capital gains and capital transfers.
It
must be borne in mind that payment of tax is compulsory because the government
has the force of law and can coerce people into paying it. Non-payment of tax
usually carries penalties. It must also be noted that it is only the government
that can levy taxes and this is done through various government agencies like
the Inland Revenue Division, Internal Revenue Department, Customs and Excise
Department, etc.
Taxation
as have been defined above is the most important source of government revenue,
and it therefore, demands a close analysis both in term of the principle
underlying its impact in the economy. Tax being a compulsory levy imposed by
the government on individuals and business firms are paid by them to the
government. It is a special kind of payment in that it is compulsory and
benefit for payment do not necessarily correspond (in magnitude) to the amount
of tax paid.
There
are two elements in a tax, the tax base and the tax rate. The tax base is the
object which is taxed i.e incomes, profits, property etc. The tax rate on the
other hand is the amount of the tax base which is paid in tax. It is usually in
form of a flat or a percentage.
Government levy tax for different
reasons among which are the following:
i) To meet government’s social, economic and
political obligations such as the construction of roads, building of hospitals,
schools etc.
ii) To discourage consumption of goods that
are considered to be socially
undesirable such as goods that are mimical to health. The imposition of tax
will raise the price of the commodity, the consumption
of which is being discouraged and if the demand is elastic, the quantity demanded will fall.
iii) To re-distribute incomes in a society. In a
society where there is great disparity in income distribution (as a result of
inequality in factor ownership)
aggregate demand will fall. Government can pursue a tax system that imposes
heavy burden on people within high-income brackets and use the tax revenue to
provide subsidy for goods normally
consumed by the low-income earners.
iv) To protect infant industries in the
economy. Industrialized countries have reached a stage where their industries
enjoy economies of scale and can therefore produce and sell cheaply. Their
prices will therefore normally be lower than those of the developing countries
whose industries are still experimenting. The government can use tax to raise
the prices of imported goods so that they can be at the same level (or perhaps
higher in prices) than prices of home made goods. In most cases, the tax has to
be really high to be effective because of the difference in qualities and the
general preference for imported goods. Moreover, such tariffs may need to be
maintained until such industries attain perfection and are in position to move out of import
substitution to being export oriented.
v) To combat inflation through fiscal
measures.
vi) To promote export. Reduction in tax on
exported goods (e.g. Reduction in export duty) will be an additional incentive to
exporters and will create room for more export.
In
almost every tax system that is known to man, the avoidance of tax through
artificial means is a major problem, which is likely to continue for as long as
time itself. Evasion is also a significant problem in most tax systems, even in
developed countries (Bassey 2002). Tax
is not a voluntary payment as some may think and the imposing authority is the
government. The main purpose of taxation is to generate revenue for financing
of government activities. Just as individuals must earn income in order to meet
their expenditures. However, government as an instrument of economic and social
policies also uses taxation (Whittam 2002).
If
all people are honest in dealing with their tax affairs, the tax revenue of
some states will be minimal. However, companies and individual usually arrange
their affairs in such a way to evade or avoid payment of income tax (Rabiu S.A. 2002).
Politicians and tax officials spend a lot of time and energy on the problem of
tax evasion and avoidance, but no one seems to have a precise idea of what is
meant by the term “avoidance” but it is different from tax evasion (Abdulrazaq
2002), which is illegal.
Tax
avoidance means the tax regime’s legal use of one’s own personal advantage so
as to lessen the tax amount that is payable to the government by ways that are
legal. The Avoidance of tax is usually done by the people who desire to keep
their money with themselves and not give it to the government.
Tax
Evasion on the other hand entails the efforts that are made by trusts,
individuals, firms, and various other entities to avoid paying taxes by illegal
and unfair means. The Evasion of tax usually takes place when taxpayers
deliberately hide their incomes from the tax authorities in order to reduce their
tax liability.
Tax
Avoidance takes place in situations when people eliminate or reduce tax by
following a transaction or many transactions that are legal. The income tax
department provides many provisions through which the people can go for tax
avoidance such as refunds, credits, benefits, and many other kinds of
entitlements. The various methods of tax avoidance are:
i) Legal
entities
ii) Country
of residence
iii) Double
taxation
Tax Evasion takes place when the people report dishonest tax that includes declaring less gains, profits, or income than what has been actually earned and they even go for overstating deductions. The Evasion of tax level depends on certain factors such as fiscal equation, which means that people’s tendency to pay less tax declines when the payment due from taxes becomes obvious. The level of tax evasion is also dependent on the tax administration’s efficiency and corruption level.
Tax Evasion takes place when the people report dishonest tax that includes declaring less gains, profits, or income than what has been actually earned and they even go for overstating deductions. The Evasion of tax level depends on certain factors such as fiscal equation, which means that people’s tendency to pay less tax declines when the payment due from taxes becomes obvious. The level of tax evasion is also dependent on the tax administration’s efficiency and corruption level.
The
level of tax evasion also depends on the chartered accountants and tax lawyers
who help companies, firms, and individuals evade paying taxes. Tax evasion is a
crime in all major countries and the guilty parties are subject to imprisonment
and fines. The various methods of tax evasion are:
i) Smuggling
ii) Customs
Duty Evasion
iii) Value
Added Tax Evasion
iv) Illegal
Income Tax Evasion
The
importance of tax evasion and avoidance for the present purpose is three fold.
First the wider perspective, it’s not possible to assess the effectiveness of a
tax system unless we can see the degree of evasion and avoidance practical and
permitted by the system. Thus, to have a rule that trading profit charity are
exempted from tax is one thing, to learn that this is routinely avoided by
having a separate trading company which assigns its profit to its charitable
owners, makes the rule less fierce.
Secondly,
while legislation to counter evasion and avoidance can be among the most focus
on in our tax code, it can be case law evasion and avoidance that tells us much
about the problem posed by legislation and statutory purpose (Abdulrazaq 2002).
According
to (Ariyo 2002), successive governments have expressed great concern about the
low level of productivity in the Nigerian tax systems. Moreover, government
expenditure is steadily overshooting revenue, resulting in wide deficit
financing (Aiyiwunmi 1998). Nigeria
is loosing billions of naira to tax evasion and tax avoidance (Jegede and Nwosu 1998). Hence the need for a
control examination of the reasons for tax evasion and avoidance in the Nigerian
tax system, in order to find ways to reduce or eliminate them.
1.2 STATEMENT OF THE PROBLEMS
In
recent times, the upsurge of tax evasion by individuals and corporate
organizations has become a ripe attitude in the Nigerian economy. This led to
the poor contribution of taxation to the Gross Domestic Product (GDP). For
instance, in 1988 Britain
generated 35% if their total GDP from tax collection, compared to the poor 4%
generated in Nigeria
as revenue from tax.
The
major reasons for which tax evasion and avoidance are of serious concern in
Nigeria to win are, they result in loss of revenue, the difficulty in realizing
the distributional or equity goals of taxation given that the opportunity to
evade tax determines the extent to which tax evasion and avoidance have eaten
into the fabric of the Nigerian economy. Moreso, the failure of the
anti-avoidance provisions in the law to discourage the practice and the growing
frustration among revenue official to accurately estimate the extent for the
evasion (Bassey 2002).
All
these have resulted in the government falling to improve the welfare of the
people. Government is unable to provide basic amenities like healthcare, good
roads, among others. This has led to over dependence on oil reserve.
1.3
OBJECTIVES OF THE STUDY
The
main objective of the study is to know why people evade and avoid tax and how
the practice can be minimized in our society.
Tax
evasion and avoidance have constituted serious problems in the Nigerian tax
system and if a solution is not found now, it may create leakages that are
beyond repair.
The
specific objectives of the study include:
i) To
examine the reasons why people evade tax
ii) To
suggest ways by which tax evasion and avoidance can be minimized or eliminated from our society.
iii) To
examine whether tax evasion and avoidance are peculiar to a class of income
earners.
iv) To
examine the effect of tax evasion in the Nigerian economy.
v) To
examine the percentage of tax paid to tax that was evaded.
1.4 SIGNIFICANCE OF THE STUDY
It
is important to know that research work are generally carried out to find
solution to existing and anticipated problem in a particular environment.
Therefore, this study as outlined in the introduction to the study is of a
great significance to the ailing Nigerian economy, its significance cannot be
over-stated. The Nigerian government has consistently failed in fulfilling its
obligations to the citizens. A critical study of tax evasion and avoidance in Nigeria will
help us to understand why taxpayers continuously engage in the practice of
outright evasion of taxation and the growing culture of tax avoidance.
If
these leakages are plugged, there will be a rise in revenue to finance
government business, control of consumer demand, encouraged investment and
savings and in the process curb economic depression, inflation and deflation,
it will also ensure equitable distribution of finance and wealth and ensure proper
allocation of natural resources that are increasing its revenue base.
A
study aimed at critically examining the causes of low taxes revenue base of the
government will help in deciding on:
i) Whether
to pursue a policy of deliberate movement of emphasis in tax law formulation from income tax to
consumption tax, which is less prone to
evasion.
ii) Whether
to adopt a policy of operation low tax regime.
iii) Review
the efficiency of the self-assessment scheme in tax collection.
iv) Ensure
the effective use of due process of law and the mechanism of an efficient tax administration to curb
evasion and avoidance.
v) Creation
of a healthy tax environment where people are able to appropriate tax as a civil responsibility rather than an act of injustice.
vi) Efficient
use of revenue generated from tax through the provision of social amenities so that the people can benefit from tax paid
and appreciate it as a means of
social improvement.
It
cannot be underscored that the best approach to the elimination of a problem is
not to address the symptom but to know the cause and the reasons of such
ailment. Only then, will reliable and effective solution or remedy be devised
for solving such a problem.
1.5 RESEARCH
QUESTIONS/HYPOTHESIS
RESEARCH QUESTIONS:
The
purpose of this study is to find out the cause of tax evasion and avoidance and
the means by which these leakages can be blocked. The following questions will
form the pivot of the study:
i) Why
do many people evade tax?
ii) How
can tax evasion and avoidance be minimized?
iii) Are
tax evasion and avoidance peculiar to a class of income earners?
iv) What
is the effect of tax evasion in the Nigerian economy?
v) What
is the percentage of the paid tax to tax that was evaded?
RESEARCH HYPOTHESIS
In
an attempt to reach a decision, statistical hypothesis are formulated to guide
the problem statement identified. Therefore, Hypothesis is defined as a
tentative answer to a problem.
Hypothesis are divided into two
namely null and alternative hypothesis. “Ho” denotes null hypothesis while “Hi”
denotes alternative hypothesis. The two hypothesis describes the difference
that exists between facts. In essence, the hypothesis drawn in this research
work is:
i) Ho =
There will be no need for people to evade tax
Hi =
There will be need for people to evade tax
ii) Ho =
There will be no way by which tax evasion and avoidance can
be
minimized or eliminated from our society.
Hi =
There will be way by which tax evasion and avoidance
can be minimized or eliminated from our society.
iii) Ho =
Tax evasion and avoidance will not be peculiar to a class of income earners.
Hi=
Tax evasion will be peculiar to a class of income
earners.
iv) Ho= There
will be no effect of tax evasion on the Nigerian
economy.
Hi=
There will be effect of tax evasion on the Nigerian
economy.
v) Ho= There
will be no percentage of tax paid to tax that was
evaded.
Hi=
There will be percentage of tax paid to tax that was
evaded.
1.6 RESEARCH METHODOLOGY
This
explains the methods used in conducting the research work. The methods used are
as follows:
STUDY POPULATION
This
represents a census of all items or subjects that possess the knowledge of the
phenomenon being studied. In this case. The study population cuts across all
eligible tax payers in Lagos
State, whether self-employed
or employed.
SAMPLE POPULATION
The
sample population which is a representative part of the population was drawn
from eligible taxpayers that reside in Lagos State.
It was limited to those who were adjudged to be more conversant with the issue
at hand.
SAMPLING TECHNIQUES AND PROCEDURES
The
random sampling method will be employed because of its use of randomization
which is a procedure of giving every subject in the population an equal chance
of appearing in the selection.
DATA COLLECTION PROCEDURE
The
research work was carried out using eligible tax payers whether employed or
self-employed to obtain information needed. Information was collected from both
primary and secondary data sources.
The
primary source of information was derived from administering questionnaires,
designed to get vital information from respondents.
The
secondary data was obtained from published sources like periodicals, journals,
textbooks, newspapers and internet.
RESEARCH INSTRUMENT
The main research instrument used in
the study was the structured questionnaire. It was divided into two main parts:
Part A: Respondents Demographic Data
Part B: Research Questions
DATA ANALYSIS AND PRESENTATION
This forms the bedrock of any
research. Therefore, in order to make data analysis meaningful, it must focus
on testing the hypothesis of the research so as to enable in determining
whether to accept or reject the hypothesis.
After the collection of the needed
and relevant information and data, an analysis of the information collected
will be carried out using quantitative discrete analysis of data and by using
simple percentage in analyzing the research questions/ demographic data of
respondents, while chi-square test will be used to analyze the hypothesis to
either accept or reject the null hypothesis.
1.7 SCOPE AND LIMITATION OF THE
STUDY
The
scope of the study shall be limited to tax evasion and avoidance of taxpayers
in Lagos State with respect to personal income
tax. Much emphasis will be placed on tax evasion because it is illegal while
tax avoidance is legal. There exist some limitations to this study which
include time constraint, the few textbooks that were available during the time
of the study, some people consulted for information were reluctant to give adequate
information, while some responded positively. In addition, the subject of the
study is relatively a new area in which few books have been written on, hence
limited references were obtained.
1.8 DEFINITION
OF TERMS
i) Economy: This is the whole system of
inter-relationship between the private and public government and
non-governmental organizations.
ii) Gross Domestic Product (GDP): The total
money of all final goods and services produced within the geographical
boundaries of the country during a specific period usually a year.
iii) Government Revenue: There is the income
accruing to the government from various sources like the custom and excise
duties, taxes.
iv) Incident of Tax: This refers to who bears the final burden of the tax.
v) Tax: It is a compulsory levy on income,
imposed by the government to generate revenue for its various responsibilities.
vi) Tax Authority: This authority has the whole
responsibility for the collection and administration of taxation. It is also
responsible for giving penalties due to defaulters.
vii) Tax Avoidance: Is the legal exploitation of
the regime to one’s advantage in attempt to reduce the amount of tax payable.
1.9 ORGANISATION OF THE STUDY
This
study will be divided into five chapters which are stated as follows:
Chapter
one of this study is devoted to introduction and background to the study.
Chapter
two has to do with literature review which deals with research into current
literature and conceptual explanations.
Chapter
three of this study deals with research methodology which has to do with
research questions, hypothesis, research instruments, sources of data
collection, methods of data analysis and description of tools of analysis.
Chapter
four talks on data analysis, interpretation and discussion of findings.
Chapter
five of this chapter is the last chapter and this deals with summary,
conclusion, recommendations and suggestions for further studies.
END OF CHAPTER REFERENCES
Abdulrazaq, M.T. (2002): Tax
Evasion and Avoidance. Lagos CITN (Charted
Institute of Taxation
of Nigeria)
Publications.
Bassey, O.U. (2002): Foundation of Personal Income
Tax in Nigeria.
Brand Pius Limited, Educational Publishers Ogba-Aguda, Ikeja, Lagos.
Osula, J and Nwosu, T. (1998): Five
Billion Naira Lost Through Tax Evasion. The President, 31 July,
1998.
Rabiue S.A.
(2002): “Essay on Nigerian Taxation” Lagos Chartered Tax Practitioners.
