The Impact Of Taxation As A Tool Of Fiscal Policy In Nigeria

The Impact Of Taxation As A Tool Of Fiscal Policy In Nigeria

Abstract

This research work was undertaken to examine the impact of taxation as a tool of fiscal policy. The study is aimed at putting together those factors that constitute those variables which the government uses to manipulate the economy. The source of data to this research work are both from gathered from Secondary data, which is from various text books, internet materials and primary data through the use of questionnaires that was filled by various respondent. The result of the research shows that in this country, a great proportion of government revenue, which should have been proportion of government revenue, which should have been generated from taxation, are lost through an ineffective system of tax administration. Hence, making it difficult for taxation to be used as a tool of fiscal policies. Effective tax administration should be put in place to ensure that everybody is brought to the tax net. They should be transparency in the part of the government in providing the social amenities to the populate to encourage people to pay their tax.

Chapter One

Introduction

1.1 Background of the Study

The major source of government revenue in any country is from taxation. Any government, that really wants to succeed and fulfill its economic, legal, political, and technological objectives must ensure that its taxation system is not only expansive but rather possesses the principles of equity, certainty, convenience, economy, simplicity, neutrality and efficiency as propounded by Adam Smith (1776) and other modern experts in public finance. Federal, State and Local Governments have Constitutional powers to assess, impose or levy taxes, collect, account for such taxes and utilize the taxes so collected for the administration of government activities as stipulated by the Constitution. The tax system therefore should be robust enough to generate adequate revenue to be used to finance public utilities and perform other government social-cultural responsibilities. Taxation is a powerful tool of economic reform and a major player in every economy of the world. It is never static, but dynamic and should reflect current realities prevailing in the economy.

The tax system is an opportunity for government to collect additional revenue besides other sources of income, which is needed in discharging its pressing obligations.

A good system of tax also offers itself as one of the most effective means of mobilizing a nation’s internal resources and it lends itself to creating enabling and conducive environment for the promotion of economic growth and development. A tax is a compulsory payment imposed on income, profits, wealth, estate, property, goods and services for individuals and corporate bodies by the government for the sustenance of the government and for which there is no guaranteed direct benefit.

Taxes represent a potent instrument of fiscal policy used by government to manage the economic development of the state. Payment of taxes is considered a primary civic responsibility of every citizen and foreigner who do business in Nigeria.

As the saying goes, among the American, “the only sure things in life are death and taxes.” Hence, Halliburton (1992) states that Taxes and Death are inevitable in America and that is how it should be in Nigeria. Taxation is a veritable and sustainable source of revenue for government and a tool for fiscal policy and macro-economic management. This fact was underscored by Okezie (2003) who states that tax is a burden which every citizen must bear in order to sustain his or her government, thus enabling that government perform certain basic functions to the benefit of those it governs. It follows that for any public payment to qualify as a tax, it must be backed by an enabling law and has an element of compulsory imposition. Generally, the tax is indeed a licentious octopus and a potent tool of economic and social reform and development. It pervades every aspect of the economy and individuals, companies, citizens and foreigners, manufacturers and marketers, workers and pensioners etc. It can be used positively in the interest of the people or otherwise.

Fiscal policy is concerned with deliberate actions which the Government of a country take in the area of spending money and/or levying taxes with the objective of influencing macro-economic variables, such as the level of national income or output, the employment level, aggregate demand level, the general level of prices etc. in a desired direction.

Taxation been a fiscal measure used not only to provide the much needed revenue for socioeconomic development, but also to reduce the inequalities of wealth in the society. Therefore, every citizen, foreigner and the company owe civic duty to pay tax to enable government to fulfill its various economic, socio-political and administrative obligations.

Thus, this research work is an attempt to critically review the evolution and development of taxation in Nigeria, rules, concepts and objectives of taxation. Identify the attendant problems in the tax system and the manner in which taxation is being used as a fiscal policy instrument for economic development as well as offer suggestion at all Nigeria tax system in order to enhance its effectiveness and efficiency.

1.2 Statement of the Problem:

Fiscal policy been widely recognized as a potent tool for economic growth and development of Nigeria, which the key instrument is taxation, has been over the years observed that most critical challenges facing Nigerian government is that

1. Manufacturers are groaning under the burden of multiple or double taxation.
2. The local, state and federal governments rarely utilize tax revenue judiciously to provide sufficient basic amenities for the benefit of taxpayers.
3. There have been incidents of high rate of forgery of official documents such as tax receipts and other fraudulent practices in the issuance of tax clearance certificate, collection and accounting for taxes.
4. The prevalence of tax evasion and tax avoidance is on the increase. Most of the tax laws in Nigeria are outdated and do not reflect the realities on the ground.
5. The administration of taxes in Nigeria has mainly been focused on revenue generation to the detriment of stimulating economic development, providing infrastructure and basic social amenities.

1.3 Objectives of the Study

The purpose of this research is to examine the impact of fiscal policy on the Nigerian economy (1994-2014). In pursuit of the above, the specific objectives this study seeks to achieve include:

1. To determine the extent to which capital expenditure affects the growth of the Nigerian economy as represented by the real GDP (1994-2014).
2. To assess the extent to which current expenditure affects the growth of the Nigerian economy as represented by the real GDP (1994-2014).
3. To evaluate the extent to which tax revenue affects the growth of the Nigerian economy as represented by the real GDP (1994-2014).
4. To appraise the extent to which external debts affects the growth of the Nigerian economy as represented by the real GDP (1994-2014).

1.4 Research Questions

To achieve the above objectives, the following research questions have been raised:

1. To what extent does capital expenditure affect the growth of the Nigerian economy as represented by the real GDP (1994-2014)?
2. To what extent does current expenditure affect the growth of the Nigerian economy as represented by the real GDP (1994-2014)?
3. To what extent does tax revenue affect the growth of the Nigerian economy as represented by the real GDP (1994-2014)?
4. To what extent do external debts affect the growth of the Nigerian economy as represented by the real GDP (1994-2014)?

1.5 Research Hypotheses

The following research hypotheses have been formulated for testing this study:

Ho1: There is no significant relationship between capital expenditure and growth of the Nigerian economy as represented by the real GDP (1994-2014).

Ho2: There is no significant relationship between current expenditure and the growth of the Nigerian economy as represented by the real GDP (1994-2014)

Ho3: There is no significant relationship between tax revenue and the growth of the Nigerian economy as represented by the real GDP (1994-2014)

Ho4: There is no significant relationship between external debts and the growth of the Nigerian economy as represented by the real GDP (1994-2014)

1.6 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 Nigeria economy such roles includes:

1. Taxation as being a tool in fight poverty, and means of income re- distribution among Nigerian.
2. Revenue generated from tax enables government performs its functions effectively through the provision of social welfares.
3. Taxation through an increase in import duties in the country have caused an intensification of smuggling and underutilization of some productive capacities
4. In fact, taxation in recent times is one of the instruments for promoting foreign investments in Nigeria since it‟s a „push‟ or „pull‟ factor for migration because businesses relocate to areas with smaller taxes.

1.7 Scope of the Study:

The scope of this study covers critical examinations on taxation as an instrument of fiscal policy in economic development of Nigeria. It will also analyze other related issues such as structure and administrative machinery of tax in Nigeria 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 country within the period of 2003 to 2012.

1.8 Definition of Terms

Tax

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

Direct Taxes

A direct tax is a tax levied on the income of individuals and corporate bodies, and which is actually paid by the person or business firms on which it is legally imposed. It is directly because when it is imposed on the payee, it cannot be shifted to another person. Examples of direct taxes are as follows:

Personal Income Tax

These are taxes imposed on the income of individual, e.g. Employees (PAYE- i.e. Pay As You Earn), sole traders, partnerships, and pensioners.

Company Income Tax (CITA)

This is a tax imposed on profits or income derived by corporate bodies excluding petroleum profit tax.

Petroleum Profits Tax

This is a tax paid by companies engaged in petroleum operations such as prospecting for, exploration and extraction activities in Nigeria.

Capital Gain Tax

This is a tax which is imposed on any amount exceeding the cost of an asset on the disposal of such asset. It is also a tax that affects companies, individuals and non- corporate bodies on the gains arising from the disposal of fixed assets. It is not used for recurring purposes. Government does not realize much income from it.
Hence, the rate of 20%, which was in force up to 1995 was reduced to 10% and commenced from 1996.

Capital Transfer Tax

Capital Transfer Tax was introduced in 1979. It is imposed on property transferred from one person to another. The transferee does not pay any price to the transferor. Because of the cost-free nature of the transaction and in order to encourage the beneficiaries to do other work on their own instead of depending solely on inherited capital goods transferred to them, the government feels that the transferee must pay tax for such free gift.

Indirect Tax

These are taxes that are imposed on goods and services. They are indirect because the person who initially pays the tax has the opportunity of shifting the burden to the person who finally consumes the goods or makes use of the services. Examples of indirect taxes are: import duties, export duties, custom duties, excise duties, entertainment, pool and casino taxes and Value Added Tax (VAT).

Value Added Tax

Value Added Tax (VAT) is a charge at 5% on all “vat-able” goods and services as prescribed by law establishing it. It was decree 102 that provided for the Value Added Tax in 1993 but it actually became effective in 1994. Recently, a bill has been proposed for an increase from 5% to 10%.

Property Tax

This is tax on property such as tenement rate.

Tenement

A tenement is anything of a permanent nature that can be held, e.g. building, land, warehouse, house or structure attached to a land. It could be direct or indirect taxed. If it is paid by the owner of the property not the person temporarily making use of the property, it is a direct tax. However, if the owner rents it to another person, he can add the tax element to the rent by so doing, he can shift the tax burden. While the former is a direct tax, the latter is an indirect tax.

Education Tax

This is a tax on assessable profits of companies. It is normally paid at the rate of 2%. The Education Tax Act was promulgated in 1993 with the sole aim of rehabilitation, restoration, consolidation of education in Nigeria. It is paid on assessable profits or adjusted profit because companies may not have total profits, but they must have assessable profit upon which education tax must be paid.

Import Duties

These are duties on goods imported into the country. They can be called tariffs. An import duty can be specific when imposed on specific quantity, weight, or size or Ad Valorem (i.e. According to value).

Export Duties

These are duties or taxes imposed on exports. An export duty on raw materials is usually imposed for the protection of the infant or home industries. For example, an export duty on cocoa and palm oil may be imposed for the purpose of protecting the domestic chocolate beverage and vegetable producers within the country.

Excise Duty

These are commodity taxes on locally produced good within a country. They are usually imposed in order to control or prevent the consumption of such goods, e.g. undesirable or sin goods, alcoholic drinks beverages etc.

Chapter Five

Summary of Findings, Recommendation and Conclusion

5.1 Summary of Findings

Presented below is a summary of both the descriptive and empirical findings from this study:

1. The summary statistics of all the variables under study were described in their raw form and transformed series, this was done in order to be able to describe the data in naira and to determine the normality of the series. Specifically, the mean values of the Companies Income Tax (CIT), Value Added Tax (VAT), Petroleum Profit Tax (PPT), and Customs and Excise duty (CED) stood at about ₦223,463m, ₦294,450m, ₦761,107m, and
   ₦85,295m respectively. While the mean value of Gross Domestic Product (GDP) stood at about ₦17,452,216m. These mean values were used in determining the tax revenue contribution to GDP.
2. Furthermore, the average contribution of tax revenue to GDP was computed, which indicates that on the overall tax revenue has contributed to about 7.8% of GDP in the thirty- five years of study. This shows a low percentage compared with the global average of 20%.
3. The variable with a higher degree of dispersion from the mean is the Gross Domestic Product (GDP), this further explains its variations over the years under study. Their respective minimum and maximum values are equally shown indicating variations over the years for the respective series, this is further shown in the trends of GDP and each of the independent variables provided in the Figures 4.1.1, 4.1.2, 4.1.3, and 4.1.4.
4. The trend analyses further indicate that for the period under study, there has been consistent growth in the GDP and tax revenue except for PPT and CED that showed evidence of fluctuation for the period under study. Specifically, there is a sharp increase in Gross Domestic Product (GDP) in 2009 following the period of global economic recession in 2008. The fluctuations in the global oil prices have affected the tax revenue associated to petroleum profit tax (PPT), this is evident in 2006, 2008, and 2014 showing indications of sharp decline in PPT in Naira Million. Also, Custom and Excise Duties (CED) declined in 2005 and 2007 due the federal government waiver policy for Dangote Nigeria plc.
5. Also, the probability of the Jarque berra statistics of the transformed series of all variables showed that the series are normally distributed. Thus, the regression model is estimated using the transformed series as one of the assumption of Ordinary Least Square Regression is normality of series which have been met.
6. 6. The correlation analysis shows that each of the measures of tax revenue has a positive relationship with GDP.
7. The regression analysis on Table 4.2.2.1 shows that 0.967 representing 97% of the variations in the Gross Domestic Product can be explained by Company Income Tax. This indicates that 97% of changes in the government revenue and economic growth can be explained by changes in the Company Income Tax. Companies Income Tax shows a significant positive effect on the Gross Domestic Product (α = 0.837922). This indicates that when there is an increase in the company’s income tax, the reported government revenue also increases.
8. Petroleum Profit tax shows a significant positive effect on the Gross Domestic product (α
   = 0.149199). This is also shown in Table 4.2.2.2. Hence the amount of the petroleum profit tax collected by the government positively increases the revenue.
9. Customs and Excise Duties shows a significant positive effect on the Gross Domestic Product (α = 1.073179). This is captured in Table 4.2.2.3. Hence when the necessary government authorities and parastatals are efficient and effective in collecting this duty from importers and local producers, the Gross Domestic Product increases which will consequently snowball into higher revenue for the government.
10. There is a significant positive effect of Value Added Tax on the Gross Domestic Product of Nigeria (α = 0.884017). This implies that the higher the Value Added Tax, the higher the National income as evidenced by the Gross Domestic Product.
11. In order to achieve the main objective of examining the effect of tax revenue on economic growth, long run was estimated for the main model which shows that Petroleum Profit Tax (PPT) measured by Log(PPT) and Value Added Tax (VAT) measured by log(VAT) have positive effects on Gross Domestic Product (GDP) measured by Log(GDP), while Companies Income Tax (CIT) measured by log(CIT) and Customs and Excise Duties (CED) measured by log(CED) have negative effects on GDP. This implies that some sources of tax revenue in Nigeria such as CIT and CED have not contributed positively to economic growth of this nation over the period of study.

5.2 Implications of the Findings

The findings of this study have implications for the government, general public, and researchers. These implications are outlined below:

1. The empirical results show that tax revenue contribute less than the acceptable 10% to Nigeria’s GDP, this implies that Government need to implement policies that will attract her citizens to pay tax and ensure appropriate utilization of the taxes collected.
2. In this era of globalization, unfriendly tax policies may create room for capital flight from Nigeria to other countries with more relaxed tax policies. The move towards borderless world has opened up new opportunities for taxpayers to minimise their tax liabilities. Government should not only create an enabling environment for business establishment but also give all necessary support for its survival because profits of businesses are one of the major sources of tax revenue.
3. In order to build and maintain the culture of sustainable development, there is urgent need for a review and restructure of the nation’s tax policy and administrative system. Why government takes step to address the perennial annual budget deficits and tax gap, the citizens should wake up to their civic responsibilities in terms of tax compliance. Unless the citizens work in hand with the government, every effort of the later to better their lives may prove abortive. Inequitable tax which is one of the major problems in taxation was promoted by the actions of those in the informal sector. However, government should note that it is not possible to tax a nation into prosperity. High tax rates will not only increase evasion but will equally discourage investment. This is the case of fiscal neutrality. Economic decisions may be influenced due to high tax rates and that may impact negatively on the nation’s economy. This is because the higher the marginal tax rate, the higher the likelihood of evasion.
4. There is a need for public private partnership in decision making process for good governance. Just like every other profit oriented businesses, the structure of tax administration should be customer oriented. Measures to assessing customer’s satisfaction, employee’s satisfaction and business oriented results should be put in place. In order to encourage voluntary compliance, tax policy formulation should be after due consultation with all the stakeholders. The gap between the citizens and the government is so wide that policies are made and forced down on the people without due consultation. For there to be a good tax administration, tax policies must be welcomed by all the citizens. Besides, the involvement of all stakeholders may further foster the sincerity of the government thereby reducing the problem of trust which had be devilled tax administration.
5. Most Nigerian companies treat their VAT expenses as input costs and pass these on to the consumer. On its part, the government injects VAT revenue back into the system as consumption expenditures. Because this combination results in a serious negative impact on the economy, it is necessary to consider strategies for ensuring that companies treat VAT properly and that government directs its expenditure towards sectors that are most likely to lessen the adverse effects of VAT on consumer welfare, production, employment and income.
6. Evidently, budgetary constrain has hindered the employment of highly paid personnel by Nigerian tax administration. Literature shows that most of the tax laws are obsolete and have not been reviewed. The requirements of such laws no doubt cannot match up with the current trend of economic changes. This calls for a review of such laws to meet the prevailing situation on a regular basis. Taxation as a means of revenue generation is like a double edge sword. A carefully planned tax policy which is consciously and faithfully implemented can help to generate revenue that can transform a nation in totality. But where the reverse is the case, a selected few will divert the good intention of the government by enriching themselves with the public fund which was supposed to be used to better the life of the people through the provision and maintenance of social infrastructure.
7. By encouraging artisans in particular to form associations through which government can reach their members, improvement in tax generation from this category of self-employed persons can be achieved. Similarly, all other category of self-employed individuals should be encouraged to form unions in their respective localities. They can always hold government accountable for non provision of infrastructure necessary for their operation through their respective unions and they will be heard only and if only they can live up to their own civic responsibility by paying their taxes promptly.
8. Concealment of taxable items and income should be discouraged via quality reporting. To this end, the Financial Reporting Council of Nigeria and other regulatory bodies should make it a point of duty to ensure that financial reports are presented without material misstatements.
9. Consideration of a nation’s tax policy influences multinational firms decisions on setting up of their businesses or firms in a particular country, thus most countries attract multinational firms through general and generous tax incentives and holidays. Investment decisions by companies are also affected by taxation. Taxes also influence the types of physical investments that businesses make. This is because the government taxes return on some types of investment are at higher rates than others. By distorting physical investment decisions, the tax system may sometimes lead to an inefficient pattern of investment.

5.2 Conclusion

This study has examined the impact of taxation as a fiscal policy tool on economic growth of Nigeria. All the independent variables (Companies Income Tax, Petroleum Profit Tax, Valued Added Tax, Customs and Excise Duties) have statistical significance on the dependent variable (Gross Domestic Product). A graphical representation of the movement and variations in the values of Companies Income Tax, Petroleum Profit Tax, Valued Added Tax, Customs and Excise Duties for the 35 year period was captured to depict the movement of values and also to compare the influence of each of the independent variables on the dependent variable.

Findings of this study therefore provide insight into the effect of tax administration and federal government tax generation on government revenue. It further provided an insight as to the extent to which each of the independent variables affects the dependent variable through the graphical corroboration and also provides an affirmation of the extent to which the variations in the dependent variable are caused by the independent variables covered in the models as depicted by the R-square and adjusted R-square.

The study concludes that tax revenue combined have significant effect on the economic growth of Nigeria, although Companies Income Tax (CIT) and Custom Excise Duties (CED) have not contributed positively to economic growth of this nation over the period of study.

5.3 Recommendations

In the light of the findings and based on the conclusions, the following recommendations are hereby adduced:

1. Fiscal policy application has a good chance of working in Nigeria. If it receives the cooperation of government policy implementers and is adopted effectively and efficiently and stop from being lukewarm to allow for meaningful achievement in government progrmmes and projects.
2. Government should have the political will to enforce penalties and addition returns assessment provision on the tax collectors; this will go a long way in enhancing tax collection.
3. Fast disposition of tax cases will help administration machinery. A good tax system most ensure that tax laws which include tax laws must satisfy the basic principles of taxation.
4. The list of tax exemption items should be clearly defined in simple language. This should be properly articulated to ensure those goods that are taxable and those goods that must be exempted.
5. Government through Federal Inland Revenue Service should create an effective and reliable data base for every taxable persons to minimize (if not eliminate) the incidence of tax evasion.
6. Government should establish a strong fiscal accountability and transparency scheme in the country, adopt tax reforms that would support increase in investment, fight corruption, and ensure that government debts are used to invest in critical infrastructure and reduce external debt collections.
7. Government should use fiscal policy to complement the adoption of effective monetary policy and maintain the rule of law to promote stability in the Nigerian economy.
8. Government should ensure that capital expenditure and recurrent expenditure are properly managed in a manner that it will raise the nation’s production capacity and accelerate economic growth.

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