Investigation Into The Causes Of Tax Evasion In Lagos State (A Case Study Of Selected SMEs In Ikeja LGA)

Project and Seminar Material for Accountancy / Accounting

Abstract

Tax evasion and avoidance are the twin devils that confronts and destruct every tax system whether in the developing or developed world. The Nigerian situation seems unique when viewed against the scale of corrupt practices prevalent in the country and the detrimental effects of economic sanctions imposed by the European Union resulting in the country having to rely on internally generated income for its operations including but not limited to tax collections. The study, aims at examining comparatively, the causes of tax evasion. Questionnaires were administered, one to solicit information from companies and the other from FIRS officials. Descriptive statistics and discriminant analysis were used to address the objectives of the study.

Chapter One

Introduction

1.1 Background of the Study

The concept of taxation has been a concern of global significance as it affects every economy irrespective of national differences (Oboh etal., 2012). According to Omotoso (2001), in his definition of the modern taxes, defined tax as a compulsory charge imposed by a public authority on the income of individuals and companies as stipulated by the government decrees, acts or cases laws irrespective of the exact amount of services rendered to the payer in return. A more recent and comprehensive definition was given by Dr. Ekenze Oliver of Buitas Consultancy to the effect that tax is: “a compulsory levy imposed by an organization or Government on its member citizens, for the sole purpose of providing common goods and services for the benefit of all members”. He continued: “tax is designed to raise revenue required for the expenditure authorized in a government budget expectation. It is also a veritable instrument of promoting social and economic justice and equality amongst citizens of a state or members of an organization”. As could be gleaned from the above definitions, a tax is not therefore a voluntary payment; it is a compulsory pecuniary burden placed upon the subjects of a given country to support the people. Thus, taxes constitute the principal source of government revenue and the beauty of any government is for its citizen to voluntarily execute their tax obligations without much coercion and harassment. The greatest puzzle facing the Nigerian tax system is the threat of tax evasion and tax avoidance. It is widely believed that there is a substantial difference between estimated revenue from taxation every year and what is actually collected.

Tax evasion is a major problem plaguing many emerging economies across the globe and Nigeria situation seems unique when viewed against the scale of corrupt practices evident in the country. Under the direct personal taxation as practiced in Nigeria, the major problem lies in the collection of the taxes especially from the self-employed such as the businessmen, contractors, professional practitioners like lawyers, doctors, accountants, architects and traders in shops among others (Kiabel and Nwokah, 2009). As observed by Ayua (1999) cited in Kiabel and Nwokah (2009) these persons blatantly refuse to pay tax by reporting losses every year. Ayua (1999) further asserts that many of these professionals live a lifestyle inconsistent with reported income, which is usually unrealistically low for the nature of their businesses. The only categories of individuals who fulfill their tax obligation in Nigeria are civil servants and other salaried workers.

1.2 Statement of the Problem

Tax evasion in Nigeria has been a cause for a serious concern; this is because it has led to the depletion in the internally generated revenue which has by extension adversely affected our economic growth and development.

1.3 Objectives of the Study

The following are the aims and objectives of this study

To examine the major causes of tax evasion in Nigeria.
To examine the relationship between tax evasion penalty and tax evasion in Nigeria.
To examine the relationship between high tax rate and tax evasion in Nigeria.
To know if many business owners pay tax.

1.4 Research Questions

What are the major causes of tax evasion in Nigeria?
What is the relationship between tax evasion penalty and tax evasion in Nigeria?
What is the relationship between high tax rate and tax evasion in Nigeria?
Do many Nigerian business owners pay tax?

1.5 Research Hypotheses

Ho: There is no significant relationship between high tax rates and tax evasion in Nigeria
Hi: There is no significant relationship between high tax rates and tax evasion in Nigeria
Ho: There is no significant relationship between weak penalties and tax evasion in Nigeria.
Hi: There is no significant relationship between weak penalties and tax evasion in Nigeria.

1.5 Significance of the Study

This study would be important to tax authorities in Nigeria as it would unravel the main causes of tax evasion in Nigeria with a view to creating tax policies that would encourage more people to pay tax.

1.7 Scope / Limitations of the Study

This study on causes of tax evasion in Nigeria with Ikeja LGA in Lagos state serving as the case study

Limitations of Study

1. Financial constraint

Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

2. Time constrain

The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

1.8 Definition of Terms

Tax:

A compulsory contribution to state revenue, levied by the government on workers’ income and business profits, or added to the cost of some goods, services, and transactions.

Evasion:

To escape or avoid (someone or something), especially by guile or trickery.

Revenue:

The income generated from sale of goods or services, or any other use of capital or assets, associated with the main operations of an organization before any costs or expenses are deducted.

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 on an investigation into the causes of tax evasion.
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 tax evasion in Nigeria.

5.2 Summary

Tax evasion and avoidance is a very serious social menace that is causing a major setback on Nigeria economic development. From all indications it is now clear that if government engages in overhauling the tax administrative machineries, the problems of tax evasion and avoidance will be reduced to the barest minimum. It is also important for the federal government to put in place stiff penalty for corrupt tax officials and made frantic efforts aimed at putting in place adequate enforcement for defaulters. Such penalties and enforcement will help generate more revenue to the coffers of the government. It is hoped that if the measures prescribed in this study are implemented, it will go some way in reducing the problem of tax evasion and avoidance to reasonable dimensions.

5.3 Conclusion

5.4 Recommendation

For the federal Governments to meet her revenue targets it would be appropriate to take a look at the factors responsible for the incidence of tax evasion and avoidance since a check on these factors will go a long way in reducing if not eradicating the problem. Base on this background, the following recommendations are made:

Government should embark upon other means of publicity such as radio messages, television advertisements, post bills as well as the use of town criers to inform taxpayers of changes in tax legislation and need for compliance.
The tax authorities should properly review and evaluate the assessmentand collection procedures so as to encourage compliance by the taxpayers. The usual practice of reprinting parts of the tax laws and sending same to the taxpayers expecting that they would understand is not encouraging since these laws are written in legal jargons or terms that are not easily understood. Moreover, tax forms should be made easy to understand. Vast improvement can be made by improving the design of the forms.
Suitable personnel should be recruited and Revenue personnel generally trained and retrained to cope with the demands of the job.
Staff should also be motivated through good salary package to insulate them from fraud and other corrupt practices.
The setting up of Revenue Courts should be embraced by the federal Government. These Courts should be made to impose heavy monetary penalties and criminal sanctions.
The handling of tax clearance certificates should be well decentralized such that neither the assessor nor the collector can issue tax clearance certificates.
The Audit Unit of the tax authority should be strengthened to always Audit tax remittance by collectors at all levels. This measure will go a long way to curb corrupt practices among tax officials.
A legislation compelling banks to inform the tax authorities, on request, of any income standing in the account of any taxable person (especially the self- employed taxpayers) should be [put in [place by the federal government

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