The Effect Of Indirect Taxation On Consumption In Nigeria

Project and Seminar Material for Accountancy / Accounting

Abstract

Tax has been one of the major revenue sources in Nigeria. The taxes paid come back to the taxpayers in the form of social amenities. However experience has shown that most Nigerians (both individual and corporate citizens) avoid or evade tax obligation for reason that it negatively affects their consumption. The study was carried out to critically assess the effect of indirect tax on consumption of goods and services in Nigeria. Sample survey design was adopted and instrument used for data collection was structured questionnaire. The population of the study consists of 60 residents in Enugu North Local Government Area. Taro Yamane (1964) formula was used to determine the sample size of 52. Data was presented using frequency and simple percentage analysis. The hypotheses were tested using Chi-square(X2) statistical model. The result emanating from this study revealed that Sales tax, VAT and Per Unit tax negatively affect consumption in Nigeria. The study thus concludes that while government pursues higher revenue generation through taxation, cost-benefit analysis should be done to avoid killing businesses at the altar of growing wealth of the nation especially in this recession era. It is therefore recommended among others that government should increase tax education, double taxation should be discouraged, government should embark on people-oriented projects, endemic corruption and leakages in tax administration should be permanently eliminated.

Chapter One

Introduction

1.1 Background of the Study

Taxation is a major instrument for the conduct of both developed and developing countries. Taxation is known to accomplish a number of objectives such as revenue generation for government, economic stabilization and income re-distribution. Taxation as an instrument of public policy is essentially concerned with the manipulation of financial operations of both the government and private sectors with a view to furthering certain economic objectives.

In Nigeria, these economic objectives include the attainment of appreciable level of full employment, avoidance of excessive inflation, achievement of satisfactory balance of payment position, appreciable increase in the national income and a reduction of extreme inequality among the citizens, provisions of essential necessities of life like water, school, building of bridges, roads and others.

In every country, there are certain services which the government must provide to the citizens because of their essential nature. The services are so indispensable in life that individuals or corporate bodies are not allowed to provide them or where they are allowed, they are not allowed to monopolize the supplies or the production. Government does this to ensure that the supply of such goods and services are evenly distributed in any given society so that the rich and the poor alike may benefit.

The provision of such essential goods and services involve huge expenditure. One may ask; how does government get such huge amounts to finance the supply of such essential goods and services to her citizens? It is true that government mints money but there are other important economic factors that should be considered so that excessive money is not in circulation in an economy. For an economic balance to be maintained in an economy, government must find ways of financing her activities. One source of such finance is the contribution made by the private sector to government coffers in form of fees, levies or taxes.

Question now arises, how does the funding of these activities come about?

The primary source of government revenue is tax. Taxes which loyal citizens pay account for more than seventy percent of government revenue in Nigeria.

The private sector is not left out in the fund generation because their own fund comes in form of borrowing and private savings etc.

The absence of well-organized and locally controlled money market for borrowing has faced private sectors in most developing countries especially Nigeria to rely primarily on fiscal measures to mobilize domestic monetary resources for revenue generation. For instance, if profit on taxation and the marginal efficiency of investment is not well declined, these will consequently bring a fall on investment and as well affect the economy especially where there is decrease in tax rate. (i.e. number of tax payers)

However, Dukeman (2003) said that for an effective tax system that government should encourage investors or individuals to pay tax to some extent for that will adhere to high rates of income thereby enabling government to carry out its function.

So therefore, as long as this is significantly quantitative and psychologically substantial, the suggestion may not augur well for investment activities especially where retained profit and savings from the bank of capital formation exaggerated.

Realizing the importance of tax to finance as the transfix of economic growth the government should initiate financial policies through annual budgets extension services for these business enterprises and also through several government financial enterprises.

We are now convinced that with all these sources of revenue by government they should contribute the largest proportion. With the consideration above, attention has been focused on the fiscal policy best suited to the economic development of the country. As part of the search for desirable fiscal policies high consideration is placed on the value of goods and services payable by the final consumers.

Nevertheless, the implementation of various governments is measured by the effects at most times, at variance with the objective of government. Some of the revenue collection agencies are either ill equipped to carry out their functions effectively or equipped with person of dubious character who trust laudable objectives of the government. Mostly, some tax payers don’t pay willingly, some take laws into their hands to either evade or avoid tax while others collide with some tax officials as well as employ the services of tax experts to explore the tax loophole. As a result of such ill activities towards taxation there is always a short fall in the government projected revenue.

In view of the importance to taxation as a principal source of government revenue as well as a powerful instrument in the conduct of public policies, all this fraudulent acts should be resolved.

1.2 Statement of the Problem

Tax constitutes the greatest percentage of the internally generated revenue in Enugu State and as well the major source of revenue for the government in financing its activities.

Tax however has its fundamental problems in the area of administration.

There is some problem in planning, control and adequate information flow of tax collection generally. Since the government financial policy and objectives are to ensure adequate revenue and conducive environment for the people’s satisfaction through progressive taxation and other fiscal measures designed to aid the rapid growth and development of the society for the benefit of the citizenry.

It is therefore necessary that these avenues of fund are solidified. But on the other way round the implementation of the government taxation policy and the realization of the taxation goal most a times run at variances with the policy outlined in the annual as well as the tax laws provision.

Many individuals as well as organizations see taxation policy as being harsh and unfavorable. They argue that while few enterprises especially large company continues to benefit from the government support through grants, subsidiaries and other tax incentives, others find the policies unbearable and as a result any little opportunity by such people to evade or avoid tax is highly utilized.

The results of all these tax evasion and avoidance are that less revenue than envisaged is collected through tax by the government and thereby less social amenities than proposed are carried out.

It is in this regard that this study seeks to assess the effects of indirect taxation on consumption in Nigeria.

1.3 Objective of the Study

The objectives of the study are;

To ascertain the effect of indirect taxation on consumption in Nigeria
To ascertain the effect of indirect taxation on Nigeria economy
To ascertain the relationship between indirect taxation and consumption

1.4 Research Hypotheses

For the successful completion of the study, the following research hypotheses were formulated by the researcher;

H0: there is no effect of indirect taxation on consumption in Nigeria
H1: there is effect of indirect taxation on consumption in Nigeria
H02: there is no effect of indirect taxation on Nigeria economy
H2: there is effect of indirect taxation on Nigeria economy

1.5 Significance of the Study

This study will give a clear insight on the effect of indirect taxation on consumption in Nigeria. The study will be beneficial to students and the government of Nigeria. The study will also serves as a reference to other researchers that will embark on this topic.

1.6 Scope and Limitation of the Study

The scope of the study covers the effect of indirect taxation on consumption in Nigeria. The researcher encounters some constrain which limited the scope of the study;

a) Availability of Research Material:

The research material available to the researcher is insufficient, thereby limiting the study

b) Time:

The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.

c) Organizational Privacy:

Limited Access to the selected auditing firm makes it difficult to get all the necessary and required information concerning the activities

1.7 Definition of Terms

Indirect Taxation:

An indirect tax is a tax collected by an intermediary from the person who bears the ultimate economic burden of the tax. The intermediary later files a tax return and forwards the tax proceeds to government with the return

Consumption:

Consumption is a major concept in economics and is also studied in many other social sciences. Economists are particularly interested in the relationship between consumption and income, as modeled with the consumption function. Different schools of economists define production and consumption differently.

1.8 Organization of the Study

This research work is organized in five chapters, for easy understanding, as follows

Chapter one is concern with the introduction, which consist of the (overview, of the study), historical background, statement of problem, objectives of the study, research hypotheses, significance of the study, scope and limitation of the study, definition of terms and historical background of the study.
Chapter two highlights the theoretical framework on which the study is based, thus the review of related literature.
Chapter three deals on the research design and methodology adopted in the study.
Chapter four concentrate on the data collection and analysis and presentation of finding.
Chapter five gives summary, conclusion, and recommendations made of the study

Chapter Five

Summary, Conclusion and Recommendation

5.1 Introduction

It is important to ascertain that the objective of this study was the effect of indirect taxation on consumption in Nigeria. In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing the challenges of the effect of indirect taxation on consumption in Nigeria

5.2 Summary

This study was on the effect of indirect taxation on consumption in Nigeria. Three objectives were raised which included: To ascertain the effect of indirect taxation on consumption in Nigeria, to ascertain the effect of indirect taxation on Nigeria economy, to ascertain the relationship between indirect taxation and consumption.In line with these objectives, two research hypotheses were formulated and two null hypotheses were posited. The total population for the study is 200 staff of federal Inland Revenue service. The researcher used questionnaires as the instrument for the data collection. Descriptive Survey research design was adopted for this study. A total of 133 respondents made tax officers ii,tax officers i, senior officers and junior officers were used for the study. The data collected were presented in tables and analyzed using simple percentages and frequencies

5.3 Conclusion

One of the most important resources of revenue for every Government is tax; tax payment became a compulsory contribution by every citizen to Government to enable the Government to fulfill its commitments towards society. In all countries tax policy is at the heart of the political debate on the level of public services that should be provided and who should pay for them. Taxation has either direct or indirect effects on almost every aspect of production and distribution in modern economies and is therefore an important aspect in economic research. Taxes are classified according to the point, which they are paid, and by who is paid. Direct taxes are paid to the Inland Revenue by the individual taxpayer according to whom the tax is levied. Indirect taxes are paid by the consumer according to the goods that they are purchased. Direct and indirect taxation have different impacts on the consumer, they have advantages and disadvantages in the same time. Direct taxation is equitable for consumers because higher incomes are taxed more heavily and lower incomes slightly. Furthermore, direct taxes satisfy the condition of certainty because tax payer is certain as to how much he is expected to pay, and similarly the state is certain as to how much it has to receive income from direct taxes. Disadvantages from direct taxation identified that it is possible for tax payers to make evasion, because people in the higher income groups do not reveal their full income. They do not hesitate to fill up false returns. One advantage of indirect taxes is the solution to the problem of externality, because increases in indirect taxation will push up prices, decrease consumption and hence reduce the effects of negative externalities such as damage to the environment.

5.4 Recommendation

The government should adequately make provision for retrieving the proceeds of VAT from companies and other gents of collection.

From the above, it is expected that in a given tax system such as VAT an effective tax administration would yield maximum revenue with a minimum cost. This however depends on the quality of the machines for tax administration which include manpower devoted to tax collection and assessment, the equipment and VAT Decree. When the people come to understand VAT better and it’s benefit, the economic compliance would be greater and therefore compliance cost would be smaller on the other hand, when the voluntary compliance is great, the VAT administration would be easier and giving the tax structures, the greater revenue yield.

Seminars and workshops so far organized on this issue are narrow in its scope and design. There should be functional VAT offices n every council area to coordinate a vigorous campaign to educate people and seek their cooperation. This will no doubt erode the negative attitude that some of the consumer’s have developed towards, VAT.