The Effect Of Tax Evasion And Tax Avoidance On Revenue Generation In Nigeria

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The Effect Of Tax Evasion And Tax Avoidance On Revenue Generation In Nigeria


Abstract


The study aims to evaluate the effect of tax evasion and avoidance on revenue generation in Nigeria. The population of the study comprised of the federal Inland Revenue, central bank of Nigeria and national bureau of statistics of which a period of Ten (10) years was used from 2006-2015. The data generated from statistical bulletin and annual reports of the CBN, FIRS and NBS were analyzed by means of descriptive statistics, and regression analysis using Eviews 8.0. The result of the analysis was tested at 0.05 (5%) level of significance. The findings of the study show that tax evasion and avoidance have significant effect on revenue generation and the Nigerian economy. Therefore, the study recommends that, Government should use media platforms to enlighten citizens on the effects of tax evasion and avoidance on socioeconomic development. Furthermore, tax rates should be reduced to enhance and boost revenue generation which will increase the tax net to capture many individuals and small businesses. Also, the insignificance of penalties and tax authority bearing should also be tackled; Changes in tax legislations should also be communicated to citizens on time via any available media platforms. Qualified personnel should be recruited and trained to enhance the efficiency and effectiveness of tax operations. Also, tax authorities should engage in practices that are capable of attracting public confidence in eradicating the evasion and avoidance of taxes, Staff should be motivated to increase their morale in ensuring the insulation of fraud and corruption from tax operations. For example, good salary package should be designed for tax officials to discontinue corrupt practices. In so doing, evasion and avoidance of taxes will be minimal to ensure the socioeconomic development of Nigeria.


Table of Content


  • Title Page
  • Certification
  • Dedication
  • Acknowledgement
  • Table of Content
  • List of Tables
  • Abstract

Chapter One:

Introduction

  • 1.1 Background of the Study
  • 1.2 Statement of the Problem
  • 1.3 Objective of the Study
  • 1.4 Research Questions
  • 1.5 Research Hypothesis
  • 1.6 Significance of the Study
  • 1.7 Scope of the Study
  • 1.8 Limitation of the Study
  • 1.9 Definition of Terms
  • 1.10 Organisations of the Study

Chapter Two:

Review of Literature

  • 2.1 Conceptual Framework
  • 2.2 Theoretical Framework
  • 2.3 Empirical Review

Chapter Three:

Research Methodology

  • 3.1 Research Design
  • 3.2 Population of the Study
  • 3.3 Sample Size Determination
  • 3.4 Sample Size Selection Technique and Procedure
  • 3.5 Research Instrument and Administration
  • 3.6 Method of Data Collection
  • 3.7 Method of Data Analysis
  • 3.8 Validity of the Study
  • 3.9 Reliability of the Study
  • 3.10 Ethical Consideration

Chapter Four:

Data Presentation and Analysis

  • 4.1 Data Presentation
  • 4.2 Analysis of Data
  • 4.3 Answering Research Questions
  • 4.4 Test of Hypotheses

Chapter Five:

Summary, Conclusion and Recommendation

  • 5.1 Summary
  • 5.2 Conclusion
  • 5.3 Recommendation
  • References
  • APPENDIX
  • QUESTIONNAIRE

Chapter One


Introduction

1.1 Background of the Study

Taxation can be defined as the system of imposing a compulsory levy on all income, goods, services and properties of individuals, partnership, trustees, executorships and companies by the government (Samuel and Simon, 2011; Yunusa, 2003).

Government use tax proceeds to render their traditional function of provision of law and order, defense against internal and external aggression, regulation of trade and business, ensure social and economic justice, reduce income inequality among the various citizens, serves as a fiscal weapon to direct the economy, to attract foreign investment into the economy and so on (Abdulrazaq, M.T. 1993).

However, recent developments in the global and local economy which have significantly impacted Government revenue has directed focus on taxation as a sustainable source of income (FIRS, 2009). It is in line with this that the National Tax Policy intends to create awareness on the importance of the role, which taxation can play in securing a stable flow of revenue for Government. Nigeria is currently viewed as a mono-product economy with significant reliance on oil revenue due to historical developments in the Nigerian economy (FGN, 2009).

The serious decline in the price of oil in the world market, has contributed immensely to decrease in the fund available, hence the urgent need for government to generate adequate revenue through taxes especially corporate tax has therefore become a matter of urgency and importance Kiabel (2009).

However, taxation has been identified as an alternative to oil revenue and a more reliable source of revenue (McKerchar, 2003). The tax policy shall therefore promote and encourage a shift in focus from non-tax revenue to tax revenue by Governments at all levels of the Nigerian economy (FGN, 2009).

However, one of the greatest problems facing Nigerian Tax System as well as Africa is the problem of tax evasion and tax avoidance. While tax evasion is the willful and deliberate violation of the law in order to escape payment of tax which is unquestionably imposed by law of the tax jurisdiction, tax avoidance is the active means by which the taxpayer seeks to reduce or remove altogether his liability to tax without actually breaking the law. (Adebisi, J. F, and Gbegi, D.O 2013).

Tax evasion and avoidance have adverse effect on government revenue. Tax avoidance generates investment distortion in the form of the purchase of assets exempted from tax or under-valued for tax purposes (Klabel and Nwokah, 2009).

Therefore, this study seeks to investigate the effect of tax evasion and avoidance on revenue generation and how it affects economic growth and development and will also examines the reasons for the low level of tax collection as well as the challenges facing the federal Inland Revenue service to meet its revenue collection targets.


1.2 Statement of the Problem

Taxation played a vital role as one of the major sources of revenue to federal, state and local governments, not only in Nigeria but the world as a whole.

The act of evading and avoiding tax by most registered companies and some individuals has however affected the revenue base of the government especially in providing essential services in the society. People naturally prefer to reduce their tax liabilities by deliberately overstating their expenses and make false entries in their books of account. Thus, their act however, causes tremendous reduction in the revenue accruable to the government which eventually shrinks revenue in the treasury of government.

Tax evasion and avoidance remains the greatest problem plaguing tax administration in Nigeria. Apart from salaried employees, most citizens in Nigeria pay in adequate taxes or no taxes at all and this has led to a substantial loss of government revenue. The reasons for such behavior could be attributed to several factors; the insufficiencies and complexities of tax legislation coupled with taxpayers taking advantage of loopholes in the tax law, high rates of taxation and a lack of sense of civic responsibility among the taxpayers.

In June 2011, the personal income tax act. (PITA) has been amended with effect from 2012 which lead to increase in tax rates and which may lead to increase in tax evasion and avoidance.

Tax evasion and avoidance have been menace which seems to have defied solution had bedeviled the Nigerian tax system right from colonial times. While some have blamed the situation on tax authorities for not living up to expectation with regards to tax administration, others attribute it to the unpatriotic attitude of the taxpayers.

This negative attitude continues in modern times and with taxpayers perfecting various methods of frustrating the tax authorities. This negative attitude to taxation is unpatriotic in view of the well-recognized role which taxation plays in the economy. It is undeniable today that every government depends to a large extent on taxation not for its socio-economic development but also as a means of eliminating existing inequalities of wealth in the society.

As the Nigerian economy is in the recession period, in which the reduction on total revenue generated and circulated in the economy is one of the factors that brings about the recession, taxation is one of major sources of revenue to the government and which can be significantly affected by tax evasion and avoidance.

The downward movements of Nigerian economy are traceable to inabilities of the government to achieve its potential tax capacity (Madugba, et al 2013).

The decline in price of oil in recent years has led to a decrease in the funds available to the federal government, and for distribution to the State Governments. The need for the federal government to generate adequate revenue from other sources of revenue apart from oil has therefore become a matter of extreme urgency and importance. This need necessitate the federal government to look for new sources of revenue or to become aggressive and innovative in the mode of collecting revenue from existing sources (Aimurie, 2012).

Aguolu (2004) states that though taxation may not be the most important source of revenue to the government in terms of the magnitude of revenue derivable from taxation, however, taxation is the most important source of revenue to the government, from the point of view of certainty, and consistency of taxation. Aguolu (2004) further mentioned that taxation is hence the most important source of revenue to the government. Owing to the inherent power of the government to impose taxes, the government is assured at all times of its tax revenue no matter the circumstances. Over the years, revenue derived from taxes has been very low and no physical development actually took place, hence the impact on the poor is not being felt. The generation of additional revenue is a key function of taxation as additional revenues to government enable the government to provide qualitative and quantitative services and utilities to its people.

The inability of the revenue board to collect substantial amount of money from tax is as a result of evasion and avoidance of tax. This research work examines the problems facing the revenue board in collecting taxes and levies under its jurisdiction with a view to identifying possibilities of minimizing or even eradicating tax evasion and avoidance in Nigeria.


1.3 Objectives of the Study

The main objective of the study is to assess the effect of tax evasion and avoidance on revenue generation in Nigeria.

Sub- objectives: The specific objectives of the study are to:

  1. To find out the effect of tax evasion and avoidance on total revenue generation in Nigeria.
  2. To find out the possible effects of tax evasion and avoidance on the Nigerian economy.
  3. To find out the impact of tax revenue on the Nigerian economy.

1.4 Research Question

The study will be guided by the following questions;

  1. What is the effect of tax evasion and avoidance on total revenue generation in Nigeria?
  2. What is the possible effects of tax evasion and avoidance on the Nigerian economy?
  3. What is the impact of tax revenue on the Nigerian economy?

1.5 Research Hypotheses

To aid this research work the following hypotheses has been formulated, the null hypothesis is denoted by “H0” while the alternative hypothesis is denoted by “HI”

  1. H0: Tax evasion and avoidance does not have significance effect on total revenue generation in Nigeria.
    HI: Tax evasion and avoidance have significance effect on total revenue generation in Nigeria.
  2. H0: Tax evasion and avoidance does not have effect on the Nigerian economy. HI: Tax evasion and avoidance have effect on the Nigerian economy.
  3. H0: Total Tax Revenue Generated does not have any impact on the Nigerian Economy.
    HI: Total Tax Revenue Generated has impact on the Nigerian Economy.

1.6 Significance of the Study

The greatest puzzle facing the Nigerian tax system is the threat of tax evasion and tax avoidance. It is widely believed that there is a substantial difference between estimated revenue from taxation every year and what is actually collected.

This research study shall seeks to identify the role of professionals in facilitating tax evasion and avoidances, and which has been a damaging effect on the growth and sustainability of development of Nigeria.

It shall also assess the significant detrimental effect of tax evasion/avoidance on the provision of infrastructures, public services and public utilities.

It will also be useful to the government, tax authority who are key actor in the collection of taxes/levies, tax payer such as individuals, corporate bodies, multinational companies, investors whose tax are used in the growth and development of the country and other parties involved.

The study will also be of immense benefit for future users as well as other researchers, scholars and students. The study will also provide members of the public knowledge on the importance of taxation in Nigeria and on the effective utilization of taxation to promote fiscal redistribution of income.


1.7 Scope of the Study

This study is to critically assess the effect of tax evasion and avoidance on revenue generation in Nigeria. The study will make use of secondary data from federal Inland Revenue, central bank of Nigeria and national bureau of statistics within the period of Ten (10) from 2006-2015.


1.8 Limitations of the Study

Like in every human endeavour, the researchers encountered slight constraints while carrying out the study. The significant constraint was the scanty literature on the subject owing to the nature of the discourse thus the researcher incurred more financial expenses and much time was required in sourcing for the relevant materials, literature, or information and in the process of data collection.


1.9 Definition of Terms

Tax

Tax is defined as a levy imposed by the government against the income profit or wealth of the individuals, partnership and organization, also it is a levy the government makes no direct benefit to the tax payer.

Additionally, the researcher will simultaneously engage in this study with other academic work. More so, the choice of the sample size was limited as few respondent were selected to answer the research instrument hence cannot be generalize to other secondary schools. However, despite the constraint encountered during the research, all factors were downplayed in other to give the best and make the research successful.


1.9 Definition of Terms

Accounting:

The process of recording, summarizing, analysis and interpreting financial (money-related) activities to permit individuals and organizations to make informed judgments and decisions.

Financial Ratio:

A proportion, fraction, or percentage expressing the relationship between one item ion sett of financial statements and another item in the same financial statements.

Financial Statement:

Quantitative information on the economic activities of an organization prepared to show the result and the financial position of the entity, often presented in terms of Balance Sheet, Income Statement, Funds flow statement, and so on.

Income Statement:

A financial statement often referred to as the trading and profit loss account, matching revenues against expense to show the profitability or operational results of an enterprise over a period of time, such as a month or year.


1.10 Organization of the Study

The study is categorized into five chapters. The first chapter presents the background of the study, statement of the problem, objective of the study, research questions and hypothesis, the significance of the study, scope/limitations of the study, and definition of terms. The chapter two covers the review of literature with emphasis on conceptual framework, theoretical framework, and empirical review. Likewise, the chapter three which is the research methodology, specifically covers the research design, population of the study, sample size determination, sample size, abnd selection technique and procedure, research instrument and administration, method of data collection, method of data analysis, validity and reliability of the study, and ethical consideration. The second to last chapter being the chapter four presents the data presentation and analysis, while the last chapter(chapter five) contains the summary, conclusion and recommendation.


Chapter Five


Summary, Conclusions and Recommendations:

5.1 Introduction

This chapter summarizes the findings on the effect of tax evasion and tax avoidance on revenue generation in Nigeria. The chapter consists of summary of the study, conclusions, and recommendations.


5.2 Summary of the Study

In this study, our focus was to examine the effect of tax evasion and tax avoidance on revenue generation in Nigeria. The study was specifically carried out to find out the effect of tax evasion and avoidance on total revenue generation in Nigeria, find out the possible effects of tax evasion and avoidance on the Nigerian economy, and find out the impact of tax revenue on the Nigerian economy.

The study made use of secondary data from federal Inland Revenue, central bank of Nigeria and national bureau of statistics within the period of Ten (10) from 2006-2015.


5.3 Conclusion

In this study, effort has been made to analyze taxation as a tool for revenue generation in Nigeria in the three tiers of government namely: Federal, State and Local Governments for structural and economic developments. In this study, issues relating to taxation as a tool for wealth creation and employments, the role of taxation in wealth creation and employment, the role of taxation on economic and social development sustainability and government revenue generation were considered.

The study finds out why people evade and avoid taxes and suggested ways of minimizing the practice. The study established a relationship between tax avoidance, tax evasion Total Revenue generation in Nigeria. It also emphasized on the relationship between tax avoidance, tax evasion and Nigerian Economy (GDP). The government should therefore embark upon public enlightenment campaign and adequate utilization of tax revenues on public goods to discourage tax avoidance and tax evasion and also the reduction in tax rate. This will certainly enhance and boost revenue generation in Nigeria as is being pursue with vigor so as to survive in the present day economic meltdown, and inflationary setbacks. For Nigeria Government to meet up with its revenue targets especially now that the services of tax consultants have been discontinued it would be appropriate to take a look at the factors responsible for the incidence of tax evasion and avoidance since a check on these factors will go a long way in reducing if not eradicating the problem.

The research findings are in line with Adebisi, J. F and Gbegi, D.O 2013 whose conducted researchon the effect of tax evasion and avoidance on personal income tax administration in Nigeria, and also in line with Bismark A, Bismark A, Eric A and Isaac Q 2015The Effects of Personal Income Tax Evasion o Socio-economic Development in Ghana:
Onyeka, Virginia Nnenna 2016 conducted a research on the effect of tax evasion and avoidance on economic development in Nigeria, and concluded that tax evasion and avoidance has effect on the Nigerian economy as was concluded in this research.

Finally, the study concludes that tax evasion and avoidance has significantly impacted on revenue generation in Nigeria, and the Nigerian economy.


5.4 Recommendations

In the light of the findings the following recommendations are made:

  1. Government should use media platforms to enlighten citizens on the effects of tax evasion and avoidance on socioeconomic development. Furthermore, tax rates should be reduced to enhance and boost revenue generation which will increase the tax net to capture many individuals and small businesses. Also, the insignificance of penalties and tax authority bearing should also be tackled.
  2. Changes in tax legislations should also be communicated to citizens on time via any available media platforms. Qualified personnel should be recruited and trained to enhance the efficiency and effectiveness of tax operations. Also, tax authorities should engage in practices that are capable of attracting public confidence in eradicating the evasion and avoidance of taxes.
  3. Staff should be motivated to increase their morale in ensuring the insulation of fraud and corruption from tax operations. For example, good salary package should be designed for tax officials to discontinue corrupt practices. In so doing, evasion and avoidance of taxes will be minimal to ensure the socioeconomic development of Nigeria.

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