The Impact Of Taxation On Economic Development In Nigeria (2003 – 2012)

Project and Seminar Material for Economics

The Impact Of Taxation On Economic Development In Nigeria (2003 – 2012)


Abstract


The purpose of this study is to find out if actually there is an impact of taxation as aid to economic development and my study is based on the survey of Enugu State, using Oji River as a case study. This research also became necessary in order to bring to the proper understanding of the enquirer the best ways to solve such problems connected with the taxation especially: what is taxable, which system of tax is acceptable, the rate of tax evasion and avoidance and the assessment of Nigeria tax system. The primary function of every government is to make provision for its citizens in terms of infrastructural facilities. The provision of this enormous work cannot be carried out adequately by the government due to its limited resources therefore, there is the imposition of tax on all citizens, companies to augment government financial position. Government have always enacted various tax laws and reformed to stand the taste of time.


Chapter One


1.0 Introduction:

1.1 Overview:

One of the major functions of any government especially developing countries such as Nigeria is the provision of infrastructural services such as electricity, pipe-borne water, hospitals, schools, good roads and as well as ensure a rise in per capital income, poverty alleviation, maximize the utility of its citizens, improve their standard of living and so on.

According to Azubike (2009), tax is a major player in every society of the world. The tax system is an opportunity for government to collect additional revenue needed in discharging its pressing obligations. A tax system offers itself as one of the most effective means of mobilizing a nation’s internal resources and it lends itself to creating an environment conducive to the promotion of economic growth. Nzotta (2007) argues that taxes constitute key sources of revenue to the federation account shared by the federal, state and local governments. This is why Odusola (2006) stated that in Nigeria, the government’s fiscal power is divided into three-tiered tax structure between the federal, state and local governments, each of which has different tax jurisdictions. The system is lopsided and dominated by oil revenue.

For these services to be adequately provided, government should have enough revenue put in place to finance them. The task of financing these enormous responsibilities is one of the major problems facing the government of which it is of great necessity for these services to be provided to citizens of a state. Based on the limited resources of government, there is need to carry the governed (citizens) along via the imposition of tax on all taxable individuals and companies to augment government financial position. To this end, government have enacted various tax laws and reformed existing ones to stand the taste of time. They include: Federal Inland Revenue Service (FIRS), State board of internal revenue (SBIR), Income Tax Management Act (ITMA), Companies Income Tax Decree (CIID), Joint Tax Board (JIB) etc.

All these are aimed at ensuring adherence to tax payment and discouraging tax evasion and avoidance by citizens. For the purpose of this study, the researcher would be concerned with the impact of taxation on economic development in Nigeria.


1.2 Statement of the Problem:

Obviously, the first need of any modern government is to generate enough revenue which is indeed “the 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.

It is good to note that no tax succeeds without the taxpayer’s co-operation and that every government expects its citizens to see it as a duty to pay up their taxes. Here, we can ask some thought-provoking questions such as: what makes taxation such a difficult issue? Why do people feel cheated when it comes to tax? Is government making judicious use of taxpayer’s money? In view of these questions above, this study is being carried out to offer solution to them.

We shall also look at the following issues and offer recommendations.

  1. Problems affecting the successful operation of tax system in Nigeria.
  2. How to determine the Assessable income.
  3. Process of tax administration in Nigeria.

1.3 Objective of the Study:

The general objective of the study is to assess the contribution of taxes towards the growth and development of the Nigerian economy.

However, the specific objective of the study includes:

  1. To examine the relevance of taxation in Nigeria.
  2. To determine why people feel cheated when it comes to paying their taxes.
  3. To determine the extent to which federal government has been using the revenues generated from tax.
  4. To examine how tax rate affects the rate of investment in the Nigeria economy.
  5. To know general desirability of firms to invest as a result of tax incentive measures. Generally, this study is carried out to know if tax constitutes the bulk of government revenue and to erase the erroneous that is the exploitation by government for their selfish interest.

1.4 Research Question:

Upon completion of this research, the following are the questions generated from the above research objectives:

  1. Is taxation relevant in Nigeria?
  2. Do people feel cheated when it comes to paying their taxes?
  3. What is the extent to which federal government has been using the revenues generated from tax?
  4. How does tax rate affect the rate of investment in the Nigeria economy?
  5. Do firms generally desire to invest as a result of tax incentive measures?

1.5 Significance of the Study:

One of the most frequently discussed issues in Nigeria is how to solve the economic hardship in the country and how to create an industrial base that can be guarantee self sustaining economic development. Also one wonders why a country which is richly endowed with the necessary human and material resources and which the people pay tax has been turned a heavily indebted country.

The study will afford us the opportunity to know the roles taxation play in the Enugu State economy such roles includes:

  1. Taxation is a major source of revenue to the government.
  2. Revenue generated from tax enables government performs its functions effectively.
  3. Taxation acts as an instrument of fiscal policy.
  4. The impact of tax on small business in the state.
  5. The study will in addition reveal if there are other better sources of government funding.

1.6 Scope of the Study:

The scope of this study covers critical examinations on the impact of taxation on Enugu State economic development. It will also analyse other related issues such as structure and administrative machinery of tax in Enugu State and their associated problems. The essence of this digression is to possibly find out the obstacles if any, that hinder the effective collection and administration of tax in the State.


1.5 Assumptions of the Study:

The researcher in carrying out this study will make the following assumptions:

  1. That the data that will be used are true and fair figures of taxes actually collected by the Federal Government in each year of assessment.
  2. That the data will be authentic and can be relied on for further research work on the topic.
  3. That the data is going to form the basis of the research work.

1.7 Formulation of Hypothesis:

To enable the researcher test if there exist any correlation between revenue generated from tax and its impact on the Enugu State economy, some statistical model will be used based on the response from the oral interview carried out and the questionnaire distributed, the data gathered from here will be used to test the following hypothetical statement (assumption).

Hypothesis I:
  • The Null Hypothesis (Ho): Revenue generated from tax does not make any impact on the economic development of Enugu State
  • The Alternative Hypothesis (HA): Revenue generated from tax has a positive impact on the economic development of Enugu State.
Hypothesis II:
  • The Null Hypothesis (HO): That tax evasion and avoidance do not affect tax revenue.
  • The Alternative Hypothesis (HA): that tax evasion and avoidance do affect tax revenue.
Hypothesis III:
  • The Null Hypothesis (HO): That revenue generated from tax is so merger compared to revenue from other sources as such, government can do with tax.
  • The Alternative Hypothesis (HA): That tax is a major source of government revenue and as such government cannot do without tax.

1.8 Definition of Terms:

Tax:

A compulsory levy by the government on its citizen for the provision of public goods and services.

Tax Base:

The object which is taxed for instance personal income, company profit.

Tax Rate:

The rate at which tax is charged.

Tax Incidence:

It offers to the effect of and where the burden is finally rested.

FBIRS:

Federal Board of Inland Revenue Services. It is an operational arm of Federal Board of Inland Revenue which is responsible for the Federal Tax matters.

CITA:

Company Income Tax Act (CITA) is a federal law operated by the FIRS, which deals with the taxation of all limited liability companies in Nigeria with the exception of those engaged in petroleum operations.

JTB:

Joint Tax Board (JTB) is established under Section 85(1) of Decree 104 of 1993 to arbitrate on tax disputes between one state tax authority and another.

VAT:

Value Added Tax is a multistage tax levied and collected on transactions at all stages of sales and distribution.

CGTA:

Capital Gain Tax Act is an act that stipulates that all capital gains arising on disposal of asset of individual partnership and limited companies should be taxed.

PPTA:

Petroleum Profit Tax Act is an act that regulates the petroleum profit tax and also specifies how profit from petroleum will be taxed.

Withholding Tax:

This is tax charged on investment income namely: rents, interest, royalties and dividends, presently it is charged as the tax offset.

Progressive Tax:

This is a tax incidence that increases as the size of income increases.

Regressive Tax:

A tax is regressive when its tax rate decreases as the income increases.

Excise Duties:

These are taxes on some goods manufactured within a country.

Persons:

It includes all taxable persons whether it be individual or corporate bodies.


Chapter Five


Findings, Conclusion and Recommendations

5.0 Introduction

This chapter includes the findings, conclusion and recommendations of this study. All findings by the researcher on the Impact of Nigeria tax policy on rural farmer are stated clearly in this chapter as well as conclusion and recommendations on the study. All findings, conclusion, and recommendations for this study are based on all data analysed from questionnaires filled by respondents for this study.


5.1 Summary of Findings

The first objective of the study was to identify the challenges of tax policies and administration in Nigeria.
According to the study, the researcher succeeded in achieving this objective by developing both closed and opened ended questionnaires to farmer men and women who pay their taxes and fully understand how tax is administered in Nigeria. The study revealed that tax policies in Nigeria are faced with numerous challenges, as it was rated between poor to average by the respondents when asked to rate the policies used in administering taxes in Nigeria (see table 11). The study went ahead to reveal that high tax rates, numerous taxes, multiple taxation by the government, influx of fake tax officials, complex tax systems and bribery/corruption are the main challenges facing tax systems and administration in Nigeria (see table 12). In view of all these challenges identified in the course of carrying out this study, it also came to light that a bigger challenge the government might start facing in the future is massive tax evasion, as most respondents indicated that since they are not comfortable with tax administration in Nigeria, they try every opportunity they get to evade tax (see table 8). According to the study, majority of the respondents do not pay their taxes regularly, because they are not comfortable with tax administration in Nigeria, hence they see taxation as a big burden and constraint to their farmers (see table 7).

The second objective of the study was to identify the impact of these challenges on rural farmer in Nigeria.
The researcher however, succeeded in achieving this objective in the study by asking the right questions to the people who actually feel the impact directly (rural farmer), since most of the tax laws and policies are relevant to small farmer owners. According to the study, it was revealed that the current tax policy in Nigeria actually have great impact on rural farmer as it has its negative and positive impacts. One major impact of Nigeria’s tax policy is multiple taxation (see table 15). Multiple taxation which is a feature in the Nigeria tax policy is indicated to be a burden to rural farmer as organizations are taxed as well as employees in the organization. The Nigeria tax policy has opened a lot of ways for fake tax officials who exploit rural farmer for their selfish reasons to operate comfortably, due to the inability of the government to develop a tighter control measures in administering taxes.

This has created a loophole where revenue meant for the development of the economy now go to the pockets of crooks who pose as tax officials (see table 15). Another big impact revealed by the study is stunted growth to rural farmer brought about by the new policy (see table 15). Due o the state in which Nigeria’s economy is now, some of the tax laws like education tax, industrial training tax etc do not encourage rural farmer to grow. Some rural farmer are small in nature-both financially and operationally, hence they need a lot of time to cover initial costs they incur, and these tax policies do not allow for them to recover fully. However, if farmers fail, then the economy is in trouble. As the government try to increase its revenue it might destroy the main engine that runs the economy.

The third objective of the study was to identify ways of addressing the challenges tax policies and administration in Nigeria face.

The study revealed that in order to tackle these challenges properly and squarely, the government must create a committee to draft new tax policies that favor rural farmer in Nigeria, simplify the existing tax system and policies in Nigeria, give free or cheap tax consultancy to small farmer owners, draft tax policies that will encourage human capital, reduce tax rates for rural farmer in particular as well as exempt rural farmer from paying numerous kinds of taxes in the system (see table 19). It also went ahead to reveal that another way of addressing the challenges of tax policies and administration in Nigeria is to educate small farmer owners on the need to pay their taxes as this will go a long way in changing the perspective of those who intentionally evade taxes (see table 19). Establishment of tighter control measures will also go a long way in eliminating fake tax officials as well as reduce bribery and corruption. Other ways of tackling the problem is to use tax proceeds from rural farmer to develop development programs for rural farmer.


5.2 Conclusion

Evidence from this study and other from economic research indicates that tax policies—and, in particular, regressive tax policies—do indeed influence small and medium scale farmers when it comes to working, investing, saving, and entrepreneurship. Perhaps most importantly, high and increasing marginal taxes contribute to lower rates of economic growth, reduced rates of personal income growth, lower rates of capital formation, lower than expected aggregate labor supply, and reduced entrepreneurship.

In short, high and increasing marginal tax rates reduce economic growth by creating strong disincentives to hard work, savings, investment, and entrepreneurship.


5.3 Recommendations

  1. Tighter control measures should be put in place to eliminate the activities of fake tax officials who exploit small farmer owners and steal from the government. Tax policies in Nigeria cannot succeed fully in improving the economy and developing rural farmer if fake tax officials keep hampering the activities of tax administrators and making tax payers to lose faith/trust in the government of Nigeria and choosing tax evasion.
  2. A committee should be set up to look into how best they can incorporate a more friendly tax policy for small farmer owners, since the current policy is not favorable to them. Tax practitioners, small farmer experts and economist should come together and draft a better tax policy that does not only favor rural farmer, but also brings constant revenue to the government for economic development.
  3. The government of Nigeria, federal, state and local governments should develop a more simple tax system that eliminates red tape, delay and complications. More tax officials should also be employed to educate small farmer owners on the need to pay their taxes, as well as all the procedures necessary for filling a tax return in order to eliminate complications when administering taxes in Nigeria.
  4. Tax rates should be restructured to fit rural farmer as well as encourage new farmers. The current tax rate charged to rural farmer is not favorable as most farmers still struggle to survive due to increased tax rates, rural farmer do not have much retained earnings to develop new products, be innovative and creative and employ more Nigerian youths.
  5. A special trust fund should be set up for rural farmer in Nigeria. Tax proceeds from rural farmer should be used exclusively for small farmer development as this will go a long way in economic growth and small farmer development.

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