The Impact Of Tax Avoidance And Evasion On Income Generation

Project and Seminar Material for Accountancy / Accounting

The Impact Of Tax Avoidance And Evasion On Income Generation


Chapter One


1.0 Introduction

1.1 Background of the Study

Tax is a financial issue and its payment is a civil duty. It is the imposition of a financial burden for the government on individual firm and companies. In general based, the word tax means any contribution imposed by the government upon individual and companies for the use of government to provide facilities or services as rendered by the state. It is not a voluntary payment or donation but an enforced contribution made on the pronouncement or directive of legislative authorities.

Osita (2004:1) stated that taxation may be defined as the compulsory levy by the government through her various agencies on the income of an employee, capital or on other subjects such as salaries, business profits, interest, dividends, commission regularities, rent etc.

However, It could be said that there are three main methods of financial economic expedition opened to meet developing countries. These are:-

  1. LOANS
  2. GRANT
  3. TAX AND OTHER CURRENT RECEIPT

Out Of these sources, tax is perhaps the most important since the level of government expenditure is to a great extent dependent on the ability of the tax system to generate the required revenue at the disposal of the government.

In spite of this benefit from tax most people still indulge in tax evasion and avoidance. Attempt to avoid some portion of liability or not to pay tax will affect the revenue of the government that is the reason why the government frowns at the issue of tax evasion and avoidance by using her authorities to enforce compliance.

ARONOMOLE and OLUWALAYODE (2006:39). Define tax avoidance as legal ways by which a tax payer reduces in tax liabilities. Tax evasion is a deliberate on the part of the tax payers to reduce their tax liabilities through illegal means or an attempt not to pay tax due.

The distinction between this tax avoidance and tax evasion is that tax avoidance is not considered a criminal offence where as tax evasion is a criminal offence.

According to ANYAELE (1990:225) a tax may be defined as a compulsory contribution imposed by a government authority on goods, individual and co-operate bodies irrespective of the exact amount of services rendered to the tax payer in return and not imposed as a penalty for our legal offence. Both direct and indirect taxes are collected for the government inform of income tax, excise duty, import and export duties. Purchase and sales taxes and so on help the government to generate a lot of revenue for the smooth running of government’s administration.

Moreover, there are two elements in every form of taxation and these are the BASE AND RATE. The tax base is the object which is taxed or a measure of the private sector income or wealth that can be taxed, while the tax rate is the percentage of the measured amount taken off from the tax base. In this case the money realized from it is used to provide social services, so that everybody both the rich and poor will have equal chances of making use of them. These services include provision of good pipe borne water, electricity, good roads, hospital, schools etc.

Most people in Nigeria nurse the habit of evading or avoiding tax payment i.e. they always avoid paying their taxes. With this state of affairs, the various tiers of government in the country don’t usually generate enough revenue that could enable them to effectively execute all the developmental projects highlighted in their budgets.

Alas, it has to be pointed out that the successive Nigeria governments have not made adequate and sincere efforts toward informing the tax dodger or evader on the need for them to pay the taxes. All attentions have been directed on the revenue from oil sector while taxes on agricultural produce, which supposed to be generating a lot of revenue to the country, are deliberately over looked.

Due to the immensely felt impact of taxes on development of our immediate community, the researcher wishes to look into the problems of paying tax by the public citizens, such problems are Tax evasion and tax avoidance by the public, Poor system of tax collection and lastly the Inability of the government to prosecute tax avoidance.


1.2 Statement of the Problem

It has been noted that taxation practice in Nigeria has come to play a significant role as a major source of revenue to the federal government by way of imposing tax on her citizens directly or indirectly. 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 to the populace. People naturally prefer to reduce their tax liabilities by deliberately overstating their expenses and make false entries and fictions in their books of account.

Thus, their act however, causes tremendous reduction in the revenue accruable to the government which eventually shrinks revenue to the treasure of government. 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 department in collecting taxes and levies under their jurisdiction with a view to indentifying possibilities at minimizing or even eradicating tax evasion and avoidance.


1.3 Objective of the Study

The objectives of this study are as follow

  1. To analyze the various causes of tax evasion and avoidance
  2. To identify the factors or problems militating against the tax assessment and collection in Nigeria.
  3. To identify possible effects of the tax evasion and avoidance on the economic development of the country and Ogbomosho south local government in particular.
  4. To analyze the effectiveness and flaws of various tax in the country
  5. To examine ways in which tax evasion and avoidance can be reduce with the new reforms.
  6. 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:

  1. What are the causes of tax evasion and avoidance?
  2. What are the factors or problems militating against the tax assessment and collection in Nigeria?
  3. What are the possible effects of tax evasion and avoidance on the economy development of the country and Ogbomosho local government in particular?
  4. Are tax laws in the country effective?
  5. Has new tax reform reduce tax evasion and tax avoidance in Nigeria ?
  6. 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”

  1. 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
  2. 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.
  3. 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 the Study

This research work would be relevant to various tax authorities; the Federal Board of Inland Revenue, Local Government revenue committee as well as their tax officials who are responsible to collect tax on individual or corporate bodies. It gives them insight on how to improve the tax administration.

The research would also help the professional bodies like the Chartered Institute of taxation of Nigeria and the institute of chartered accountants of Nigeria as well as their members to see the areas of deficiency in the collections and call for improvement in tax revenue.

This research would also be relevant to the future researchers and the students of accounting, economics, business administration and other social and management sciences as well as the legislative body which can also benefit immensely from this research because it will form basis of tax policy formation, implementation and administration.


1.7 Scope of the Study

Since no single research can validly cover all areas of the topic, the researcher tends to limit the strength of the work done within the scope of how tax payers’ performances are influenced by the choice of the tax system. The study will focus primarily on Ogbomosho south local government in precise to enable the researcher carryout an extensive investigation on the subject matter within the chosen host community


1.8 Limitation of the Study

It is not always unusual for researchers to encounter some difficulties in the course executing their primary assignment. However, in this research, the researcher was saddled with the following challenges:

Finance:

This is always a major limitation in a study of this nature, since the individual may not have enough money to carry out all the necessary procedures that are due to be fully observed.

Lack of Data:

There are areas where data are considered unavailable and which the researcher cannot lay hand on because the relevant information is sometimes termed confidential by the officials and unavailable to the outsiders.

Lack of Co-Operation:

By some of the respondents whom the questionnaires were been administered to. Some felt reluctant to supply vibrant answers to some questions supplied in the questionnaire


1.9 Definition of Terms

In order to aid understanding of this research work by the user/reader, special terms used in this study are:

Tax:

This is a compulsory contribution imposed by government on individuals and corporate bodies for the use of government to provide facilities or service to her citizens.

Tax Evasion:

This is the attitude adopted by tax payers to deliberately misrepresent the true state of their affairs to the tax authorities or include dishonest tax report such as declaring less income, profit or gains to escape tax liability (wholly or partially) by breaking the law.

Tax Avoidance:

This is a legal way by which a tax payer reduces his tax liabilities.

Tax Liability:

This is the amount that is borne by the tax payer

PAYE (Pay As You Earn):

This type of tax is based on the earnings of the tax payer.

Capital Gain Tax:

This is the type of tax that is based on the gain realized from the sale of capital goods.

Corporate Tax:

This is the type of tax that is based on the profit recorded within a company of corporate bodies

Casino Revenue:

This is the amount of the levy paid by people who operate at public places been rented to gamblers or for other amusements.

Tax Laws:

These are acts decree or regulations guiding the assessment and collection of taxes in the country.

State Inland Revenue:

The body responsible for the collection of tax at state level.

Federal Inland Revenue:

The body responsible for the collection of tax at federal level

Revenue:

Amount of money realized by an individual or group or company

Personal Income Tax Decree 1993:

The law guiding the assessment and collection of personal income tax

Company Income Tax Act 1990:

The law regulating the assessment and collection of tax of corporate bodies.


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:

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

  1. Tax laws should be properly implemented by pushing the offenders
  2. The tax law should be moderate because it is not high tax rates that generate income but a moderate rate with full enforcement.
  3. 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.
  4. 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.
  5. 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.
  6. Government should provide infrastructure facilities like water, good, roads and electricity for those in the rural areas.
  7. The direct bank lodgment system should be put in place for all taxes collection by all ties of government in order to prevent fraud.
  8. 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.
  9. 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.

The Impact Of Tax Avoidance And Evasion On Income Generation


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The Impact Of Tax Avoidance And Evasion On Income Generation


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