The Impact Of Tax As A Source Of Revenue

Project and Seminar Material for Accountancy / Accounting

The Impact Of Tax As A Source Of Revenue


Abstract


It is widely known that taxation is a source of revenue to the government and it is also a coercive exploration to the payers. It is also an instrument for the fiscal policy either for expectionary or contractionary.

When it is expectionary the government expenditure increases, the income increases, the consumption increases, thus resulting to investment multiplier and employment increase. In other way, increase in government expenditure lead to increase in taxation which can lead to reduction in investment and consumption reduce and employment reduces.

In every society, there exists a direct relationship between the levels of needs and the amount of resources of its socio-economic development. For this reason taxation, has become what might be called a necessary evil”, this is so because the burden of development is shared among the populace according to their incomes expectedly earned during a given period their property and/or their consumption. It is “evil” in the sense that, it is inconvenient to part with an amount of money which cannot decide.

As society continues to grow in size and the levels of needs of the populace increases man began to adopt system of taxation that is equitable of generating sufficient revenue that is commensurate to the need level. As a result of growth of fiscal group, governments have been encouraging individuals and corporate bodies to undertake certain community development projects and services as part of their social responsibility initiatives.

The purpose of this project is to examine the impact of tax as a source of revenue with reference to Lagos State Board of Internal Revenue.

This objective of the project is to evaluate the economic implication of taxation in the state. It also examine the effectiveness of Lagos State Board of internal Revenue.

Each chapter contains comprehensive statement and principle together with relevant references.


Chapter One


Introduction

1.0 Background of the Study

Every known society (ancient or modern) prides its development and progress on the amount of wealth it could generate sustain and multiply for effective social, economic and political development.

Sometimes, leaders are observed to maximize these wealth for their personal glory and ambition. History is replete with tales of races, tributes and tolls period by a colonized ex-defeated people to their invader. In modern times, such inversion has taken another name colonialism.

For colonialism, the essence shifts from existing tributes from the host community to appropriating the vast resources of the colonies the colonialists have ruled over. The research for invasion is not different from the reasons for colonialism. Both forms are carried out in order to undertake some kind of development (social or economic) basic home or abroad. The colonialization of Nigeria in the early 20th century by Britain was not to carry out an expansionist programme, but was in part or plan to ensure that factories and plants in British cities and towns are not short down due to inadequate supply of raw materials. A clear case of developing a foreign economy with local resources are the concept of social or economic development thrives on the principles of resources generation.

In every society, there exists a direct relationship between the levels of needs and the amount of resources of its socio-economic development. For this reason taxation, has become what might be called a necessary evil”, this is so because the burden of development is shared among the populace according to their incomes expectedly earned during a given period their property and/or their consumption. It is “evil” in the sense that, it is inconvenient to part with an amount of money which cannot decide.

As society continues to grow in size and the levels of needs of the populace increases man began to adopt system of taxation that is equitable of generating sufficient revenue that is commensurate to the need level. As a result of growth of fiscal group, governments have been encouraging individuals and corporate bodies to undertake certain community development projects and services as part of their social responsibility initiatives. These initiative come in various forms such as:

  1. Sponsorship of games and sports
  2. Sponsorship of educational programme through scholarship for indigenous students
  3. Underwriting medical bills for helpless victims of fire or chemical bias, or those with debilitating aliments.
  4. Construction of water and electrical projects.
  5. Offering material and financial assistance to orphanages, deshire homes etc.
  6. Road or bridge construction for resurfacing.
  7. Classroom or school blocks construction and donation of books and reading material for libraries.
  8. Adoption, beautification word junctions and round about etc.

The financial implications of these activities are that they are tax deductible. In other words, the taxable income of the individual or organization are exclusive of the costs of these projects.

Thus, since governments have the responsibility to provide social amenities for her citizens the purpose of the tax system is to enable it spread this burden among all its people in an acceptable way. According to the fairness or equitability of the tax system is best evaluated on the principles of the payer’s benefits and the ability to pay. As a general rule. Daughters et al (1980), suggest that income tax records and returns should be kept together with major expenditures which would verifiable before they are substrated from income to lower the amount of taxes to be paid to the government.


1.1 Statement of Problems

The statement of problems could be stated below:

  1. Lack of compliance by tax payers and
  2. Challenges of tax evasion and avoidance
  3. Ineffectiveness of machineries put in place for tax collection and administration.
  4. Sharp practice by tax efficient leading to reduction in tax remittance.

1.2 Objective of the Study

The objective of this study shall be based on the following:

  1. To evaluate the economic implication of taxation in the state.
  2. To determine why government tax officials are collaborators in tax evasion, avoidance and officer economic malpractices.
  3. To evaluate the extent to which the tax system is boosting economic activities.
  4. To find out why only corporate bodies take social responsibility initiative.
  5. To assess the social welfare maximization of the people, the social marginal cost of taxation, SMC(I) and the social marginal benefit of expenditure SMB(E).

1.3 Significance of the Study

One of the consequent elements of taxation to an economy is that the payers spending power is limited or reduced the summary effect of this is that government is exploited to deliver the needed development to boost social and economic life. The emphasis is on the importance of taxation on economic life of the people, will not only be significant for the immediate at future utilization by government and her agencies but also by research students who might evaluate the finding as reference materials.


1.4 Research Question

This study shall provide answers to the following research questions:

  1. What are the sources of government revenue?
  2. What factors guide government consideration when establishing a tax policy?
  3. How does government ensure that tax is paid by all citizens and organization?
  4. What are the penalties for tax evasion and avoidance
  5. What factors influence the willingness to pay tax by some individuals or organizations?

1.5 Statement of Hypothesis

The following hypothesis shall be tested in this research study:

  1. Ho: Taxation has not contributed to the development in the state.
    Hi: Taxation has contributed to the development in the state.
  2. Ho: The role of corrupt government tax officials has not affected the revenue accruable from taxation.
    Hi: The role of corrupt government tax officials has adversely affected the revenue accruable from taxation.
  3. Ho: The imposition of high and multiple local taxes would not discourage investment in the state.
    Hi: The imposition of high and multiple local taxes would discourage investment in the state.

1.6 Scope and Limitation of the Study

The study will embrace mainly officials of governments in such places as the Lagos State Board of internal Revenue who are responsible for tax matters in the state. The research study shall be limited to taxation and its economic effects in Lagos State and government officials only. The research study shall also be restricted only to the Lagos metropolis. Therefore, in the course of carrying out this study, a lot of challenges were prevented and the principal among these were the following: finance, time and lack of relevant materials.


1.7 Definition of Terms

Key terms that would be used and would require further explanation are stated below, these includes:

Aggregate Demand:

This is the total spending on the economy. It is the sum of personal consumption expenditure, business investments and government spending.

Tax Avoidance:

Using loophole in the tax law as a cover in order not to pay tax.

Tax Evasion:

This is the failure of the tax payer to comply with the tax laws. (It is a criminal offence).

Tax Base:

This is the object of taxation i.e. the economic activity upon which tax is levied. It could be household’s income, consumption or wealth.

Personal Income:

The total money income reserved by individuals before taxes are paid.

Fiscal Policy:

Refers to the use of government expenditures, taxation and subsides to influence the level of economic growth and development.

Taxable Income:

The amount of income remaining after subtraction of all allowable deductions and exemptions that are available for taxation.

Diminishing Marginal utility:

The gradual dealing in consumer satisfaction that each additional unit of consumption of a particular goods or services gives.


Chapter Five


Summary, Conclusions and Recommendation

5.1 Summary of Findings

This study revealed the following findings:

  1. That from the regression analysis, taxation has a significant contribution on revenue generation in Nigeria.
  2. That from the regression analysis, taxation has a significant contribution on Gross Domestic Product of Nigeria.
  3. That taxation is the most important source of revenue to the governments in Nigeria from the point of view of certainty and consistency of taxation.
  4. That taxation is regarded as a tool of fiscal policy used by government all over the world to influence positively or negatively particular type of economic activities in order to achieve desired government objectives such as to increase the rate of economic growth and hence per capital income which leads to a higher standard of living.
  5. That taxation is being used to achieve many objectives such as raising of revenue required to meet government expenditure, wealth redistribution, economic price stability, and economic growth and development.

5.2 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. This study also considered the two major categories of tax which are direct and indirect taxes, and the study focused on the various types of taxes collected by the Federal, state and Local Governments.

Furthermore, the study considered other problems militating against effective tax administration in Nigeria such as identification of the person to be assessed, identifying income for tax purpose, personnel problem and low image of tax officials in the eyes of the public, attitudinal problem and cumbersome process of payment.
Finally, the study concludes that taxation has significantly impacted on revenue generation in Nigeria.


5.3 Recommendations

The following recommendations are made:

  1. There is an urgent need for all state governments to clearly state the basic objectives of its tax system and the relationship between these objectives. This will assist to give the tax administrators a sense of direction and make the tax payer see clearly the reasons he/she should pay his/her tax as at when due.
  2. The tax collection mechanism used by tax officials must be free from corruption and embezzlement. If this is not done the revenue collected many not reach the desired point.
  3. The Federal Government, state governments and local governments should urgently fully modernize and automate all its tax system, improve tax payer convenience in the assessment and payment process whilst at the same time entrenching effective and modern human resource management practices in the tax authorities.
  4. Judicious use of tax payers money should be made and be seen to have been properly utilized. This will encourage tax payers to continue to pay taxes.
  5. Effort should be made by the Federal State and Local Government to diversify the main revenue source from oil to other sectors of the economy such as agriculture, extractive industries in order to attract direct and indirect taxes.
  6. The Federal, State and Local Governments should ensure that all collected revenue from either Pay As You Earn, with holding taxes, value added tax etc are paid promptly into designated bank accounts and failure to do so within the stipulated period of time should attract strict penalties to the tax official.

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