Effects Of Tax Evasion And Avoidance On Economy Of Nigeria

Project and Seminar Material for Economics

Abstract

This Research work attempts to look at the effect of Tax evasion and avoidance on economy of Nigeria and its capacity to reduce tax revenue growth (A case study of Lagos State Internal Revenue Service). Tax is a compulsory levy imposed by government on income individual, firms and household. It was also find out that an individual tax evader or avoider may engage in it simply because he is unable to appreciate any benefit that would accrue to him after payment of such tax. The study made use of secondary data obtained from Lagos internal revenue service on total revenue from taxation and total value of tax evasion. Questionnaires were also used to gathered information on the effect tax administration on tax evasion and avoidance.

Data collected were analyzed using both Ordinary Least Square and Descriptive statistics (Chi-square) were used to analyze the questionnaire administered to Lagos state internal revenue service staff. Hypothesis on was tested using OLS while hypothesis two was tested using Chi-square techniques. Empirical results shown that increasing tax evasion and avoidance reduce government revenue growth in Lagos .It was also found that Tax Administration is responsible for the tax evasion and avoidance in Lagos State.

This was due to lack of enforcement machineries which include, adequate manpower, computers and effective postal and communication system. Finally, it is therefore recommended that the government should create awareness in the mind of tax payers about the importance of taxation in development of national economy and the effects of tax evasion and avoidance in government revenue growth.

Chapter One

Introduction

1.1. Background of the Study

Nigeria is richly blessed with oil and gas among other mineral resources, but the over dependence on oil revenue for the economic development of the country has left much to be deserved. According to Ariyo (1997) Nigeria’s over dependence on oil revenue to the total neglect of other revenue source was encouraged by the oil boom of 1973/74. This is unsustainable due to the fluctuation in the oil market which have in most cases plunged the nation into deficit budgets. It was the view of Popoola (2009) that Nigerian tax administration and practice be structured towards economic goal achievement since government budget for the year centres on the oil sector.

While decrying the low productivity of the Nigerian tax system, “deficiencies in the tax administration and collection system, complex legislations and apathy on the part of those outside the tax net” were identified as some of the root causes says Ijewere 1991 and Ndekwu 1991 as cited in (Ariyo 1997). Those working in the informal sector of Nigerian economy do not see the need to pay tax whereas they dominate the economy. To them only, civil servants should pay tax on their earnings and this amount to over flogging the willing horse. Besides, the activities of the strong union in the formal sector do not even pave way for a successful tax policy implementation in the formal sector (Ayodele 2006).

Even revenue collection officers seem to be lenient or even connive with those in the informal sector during enforcement of tax policies. All this leads to revenue loss. In other to reawaken the consciousness of Nigerian government and citizens on the effective use of taxation as a developmental tool, and examine the effect the tax system have so far on the economy; this research work becomes very relevant. There is no doubt that taxation must have affected the economic development of Nigeria. Effort shall therefore be made in this research to see how much Nigeria have been able to achieve her economic goals with her tax policies and administration. The administrative role of the Federal, state and local government shall as well be examined in other to identify the causes of tax evasion and avoidance.

1.2 Statement of the Problem

The first need of any modern government is to generate enough revenue which is indeed lithe breath of its nostril”. Thus taxation is by far the most significant source of revenue for the government. Nigerians regard payment of tax as a means whereby government raises revenue on herself at the expense of their sweat. The issue of Tax evasion and avoidance and its effect on the Nigerian economy and revenue generation has lately drawn concerns to many Nigerian.

In an attempt to find out how taxation can be used to boost revenue generation or revive the Nigerian economy, tax evasion and avoidance were noted to be on the increase in the Nigerian economy. Tax avoidance and tax evasion are sensitive issues in taxation therefore making the study a very sensitive one too.

Therefore the above mention problems motivated the researchers to carry a research work on the effects of tax evasion and avoidance on Nigeria economy.

1.3 Objectives of the Study

The general objective of this study is to assess the effect of tax evasion and avoidance on the Nigerian economy, its role in expanding the revenue base of the government and the overall economic development of the country.

The objectives of this study are as follow

To analyze the various causes of tax evasion and avoidance
To identify the factors or problems militating against the tax assessment and collection in Nigeria.
To identify possible effects of the tax evasion and avoidance on the economic development of the country and Lagos state Inland Revenue service in particular.
To analyze the effectiveness and flaws of various tax in the country
To examine ways in which tax evasion and avoidance can be reduce with the new reforms.
To examine tax reforms in Nigeria

1.4 Research Question

For this research work to be effective, the researcher has being able to draft out the following questions:

What are the causes of tax evasion and avoidance?
What are the factors or problems militating against the tax assessment and collection in Nigeria?
What are the possible effects of tax evasion and avoidance on the economy development of the country and Lagos state Inland Revenue particular?
Are tax laws in the country effective?
Has new tax reform reduce tax evasion and tax avoidance in Nigeria ?
Do the loopholes in the tax laws encourage tax evasion and tax avoidance in Nigeria?

1.5 Statement of Hypotheses

To aid the research work the following hypotheses have been postulated. The null hypothesis is denoted by “Ho” while the alternative hypotheses is denoted by “H1”

H0: There is no significant difference between the expected tax revenue and the amount actually paid by those who evade and avoid tax
H1: There is a significant difference between expected tax revenue and the amount actually paid by those who evade and avoid tax
H0: There is no significant difference between the number of people who are due to pay personal income tax and those that actually pay tax
H1: There is a significant difference between number of people who are due to pay personal income tax and those that actually pay tax.
H0: There is no significant difference between numbers of registered enterprises that pay tax in the country
H1: There is a significance difference between numbers of registered enterprises that pay tax in the country or state

1.6 Significance of 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 government revenue 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 economic development of Nigeria, the knowledge of which therefore makes the research important to policy makers, the Lagos State Internal Revenue Service (LIRS), Tax administrator, students as well as the general public who may require information about Taxation and its performance.

1.7 Scope of the Study

This research work covered the effect Tax evasion and avoidance on the Nigerian economy, its role in expanding the revenue base of the government and the overall economic development of the country using Lagos internal Revenue Service as A case study.

1.8 Limitation of the Study

Among the factors limiting and constraining the scope of this study are:

The inadequacy of data and relevant literature on the subject;
Insufficient financial resources;
The poor response to questionnaires by respondents and sometimes-outright refusal;

There is also the issue of lack of time to carry out a more in-depth study.

However, since these factors were foreseen, proper care was taken in constructing the questionnaires so that the questions asked were not so exact or direct is warrant reluctance in their response.

Also, all efforts were made to ensure that correct information was gathered and adequate provisions were made for errors so that the authenticity and credibility of the research finding are not several affected.

Chapter Five

Summary of Findings, Conclusion and Recommendation

In this chapter, an attempt is made to discuss the findings of this study, conclusion drawn and recommendation made are hoped to help to reduce, eliminate the problem at tax evasion and avoidance in the state and nation.

5.1 Summary of Findings

Some findings were obtained from the questionnaire and the hypotheses are they the answers to our research question and problem.

They are as follows:

High tax rate, ignorance on part of tax payers and loopholes in tax are the causes of tax evasion and tax avoidance.
Tax evasion and tax avoidance has a negative effect on the state government revenue.
There has been a difference between expected tax revenue and the amount actually paid by those who evade and avoid tax.
There has been much difference the tax office and the registration of business unit.
All the registered companies and enterprises do pay their tax.
Punishments are not given to those companies and individuals that refer to pay their tax.
That poor revenue gotten for development is due to the major effect tax avoidance and tax evasion.
All business in this country are actually registered.
Everybody pays their personal income tax monthly
Shortage of road and electricity, built from taxation are due to low revenue following tax evasion and tax avoidance.
Social security required, like employment etc are not provided by the government due to tax evasion and tax avoidance.
There has been effect of tax avoidance and tax evasion on capital formation.
A new reform will reduce tax evasion and tax avoidance in Lagos state.
There is a significance difference between the member of register enterprises and the member of registered enterprises that pays tax to the country or state.

5.2 Conclusion

Tax evasion and tax avoidance in this country, especially Lagos state has been a serious problem to the revenue profit of the government to be very low and hence it earn be easily execute. It is not known how much tax lost by “artificial” as opposed or “legitimate” tax avoidance scheme or tax evasion there is little direct evidence that avoidance lead to evasion although the resentment that comes from watching others same tax may cause a decline in tax payer morality.

A proposition which leads to an examination of the tax base and of those item of income tax altogether just as much as those who escape tax through artificial devices causes more increase in the burden on other tax payer. It would be unities to leave this problem without nothing, the commit of the royal commission that the existence of widespread of tax avoid once and tax evasion an evidence that the system has the tax payers and is in need of radical reform.

5.3 Recommendation

In the light of the finding the following recommendation are made although these recommendation are not conclusion but are supplement to the already suggested measures by the federal and state government of Lagos state and other tax expect in the state.

Tax laws should be properly implemented by pushing the offenders
The tax law should be moderate because it is not high tax rates that generate income but a moderate rate with full enforcement.
The internal revenue service should require some class of self employed to submit to them statement of fixed period containing details of accuracy of the tax payers returns.
The tax authorities should organize educative program to enlighten the tax payers above the different law guiding the Nigeria tax system why he/she should pay tax and the effect of non-payment of tax.
In order to ensure that he incidence of tax evasion and avoidance is minimum and members of registered enterprises is brought into the tax bracket there should be better co-ordination between the own of government which is responsible for the registration of business unit and internal revenue services.
Government should provide infrastructure facilities like water, good, roads and electricity for those in the rural areas.
The direct bank lodgment system should be put in place for all taxes collection by all ties of government in order to prevent fraud.
A special monitoring unit should be created daily monitoring and collecting examine bank lodgment and bank statement, in order to prevent delays by tax officials in paying gains collected from government revenues, also a tax artificial must be present in the bank to issue receipts on the spot to persons who pay in taxes.
The prospect for a better tax administration in Nigeria will be bright, when the recommendation made are implemented. The setting up of the study group on the review of Nigeria tax system is a step in the right direction which will enable government to establish the designed reflective and efficient tax administration which Nigeria needs.