Tax Revenue And Infrastructural Development In Nigeria

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Tax Revenue And Infrastructural Development In Nigeria


This study investigated the impact of tax revenue on economic growth.

The Ex post facto research design was adopted for the study. The Central Bank of Nigeria (CBN) and Federal Inland Revenue Service (FIRS) was chosen for the purpose of the study, The data used in the study was obtained majorly from secondary sources. The research employs quantitative method of data analysis, it was done in four folds: firstly, the descriptive analysis was performed using the mean, maximum, minimum, skewness, kurtosis and the probability of jarque-berra statistics.

The result of the regression analysis reveals petroleum profit tax and customs and excise duties were not statistically significant at 5% level of significance, this means that irregular fluctuation in this revenue did not allowed for significant contribution to gross fixed capital formation, hence infrastructural development expected, in the same vein value added tax and company income tax has significant impact on economic growth during the period under review. This can be attributed to the continuous and steady increase in the value of revenue from this area.

The study concludes that federally collected revenue has significant role in government decision to invest in infrastructural development. Te study ereby recommends tdat; There should be stringent penalty imposed on any individual or corporate body who indulge in any form of tax malpractices irrespective of states; Efforts should be intensified by the government towards increased collection of tax revenue this is due to the low contribution of tax revenue to GDP over the period of study; Government should be able to use taxpayers’ monies in the provision of infrastructural facilities.

Chapter One


1.1 Background to the Study

Infrastructure is very significant to a country’s developmental prospect, the adequacy of infrastructure may determine a country’s success of failure in diversifying production, coping with population growth, reducing poverty, improving welfare of citizens (Mobolaji & Wale 2012). One of The major roles of any government particularly in developing countries such as Nigeria is the provision of infrastructural services like effective roads, power supply, telecommunication, good education, health services, pipe-borne water as well as to ensure an increase in per capita income, reduction in poverty rate to mention a few, for these services to be sufficiently made available, the government must have sufficient revenue to finance them. Financing these services is a major problem for the government.

In Africa, research has shown that there is deficiency in infrastructure which has subdued growth and development in the continent.

Revenue generation is the core path to modern development. In recent times, revenue mobilization in developing countries has become essential, it is a major requirement needed by the government for sufficient finance. Nigeria was primarily an agrarian economy whose revenue was based on agriculture. This was before the discovery of oil by the british in the Niger Delta in the late 1950’s (Onaolapo, Fasina, & Adegbite, 2013). Due to instability in oil prices, globalization and forces of demand and supply of oil, the Nigerian government has been forced to seek other sources of revenue. One of these sources is Taxation.

Taxation has been a vital source of revenue to the government because of its consistency (Anyaduba & Wale 2015). In Nigeria, taxation has been in existence even before the coming of the colonial men or the British (Samuel & Tyokoso 2014). According to Oriakhi (2013), the revenue from taxes contributes to the federally collected revenue since independence. Tax is seen as a burden which every citizen must bear to maintain his or her government because the government has certain functions to carry out for the benefits of those it governs (Afuberoh & Okoye 2014). Such functions include the provision of infrastructure. Taxes are not only imposed for revenue generation sake, but also to influence economic activities (Oriakhi 2013). Tax is also imposed to influence economic activities like correction of inflation and deflation, balance of payment deficit and redistribution of income among others.

Nightingale (1997) describes tax as a compulsory contribution imposed by the government and concludes that even though tax payers may receive nothing identifiable in return for their contributions, they nevertheless have the benefit of living in a relatively educated, healthy and safe society.

According to Soyode & Kajola (2006:4), taxation is defined as “the process of levying and collection of tax from taxable persons”. Taxation has been one of the ways in which government is able to finance its activities. Government imposes levies on individuals, companies; organizations in the form of tax so government, namely the federal government, state government and the local government. The role of tax cannot be underestimated at all. In some developed economies, that has no mineral resources to which they can tap into and make considerable gains. However, in less developed economies like Nigeria the tax system keeps getting reviewed from time to time and keeps getting updated. Some of these reviews include the introduction Tax Identification Number (TIN) in 2008.

Taxes are generally grouped into two, direct and indirect taxes. Direct taxes are taxes from income and wealth rather than consumption and expenditure. Income tax is payable by both physical persons and legal entities (companies) including associations of persons, etc. The rates payable is determined for each year of assessment and are prescribed in the yearly budgets.

A company, being a legal entity with management distinct and separate from individual shareholders that own it, also pays income tax called company income tax. Other direct taxes include provisions for taxation of capital gains and gifts, an annual tax on wealth and estate duties. These taxes are more subject to evasion and avoidance than indirect tax. This is one of the reasons for looking for the optimal structure of taxation that will raise the highest amount of revenue without distorting the ability to pay.

The earliest trace of any form of direct taxation in Nigeria even before the British administration was in the northern Nigeria. The north was favored for this because it had a form of organized central administration under the emirs unlike the south which except in few places in the west was not organized. In 1904, Late Lord Lugard introduced income tax in Nigeria. It started as a community tax which later culminated in the Native Revenue Ordinance in 1917. In 1918, an amended ordinance extended the provisions of 1917 Ordinance to Southern Nigeria. The first Ordinance applied to Abeokuta in Ogun state and to Benin City in Edo state and in 1928, it was extended to the Eastern Nigeria. The Nigeria income taxation did not start until 1940 when the Native Revenue Ordinances of 1917, 1918 and 1928 were incorporated in the direct taxation

Under Ordinance No 4 of 1940 cap. 54, (hereinafter referred to as the Ordinance) which repealed the Native Ordinance, cap 74 in the 1923 edition and the Native Direct Taxation (Colony) – Ordinance No. 41 of 1937. This Ordinance was however discriminatory as it applied to natives in Nigeria elsewhere, that is, other than in the township of Lagos. However, a more comprehensive Income Tax Ordinance No. 29 of 1943 which came into effect on 1st April 1943 governed the assessment of the income of non-Africans resident outside Lagos as well as Africans and non-Africans resident in Lagos. After the Income Tax Ordinance of 1943, there was no significant change in the tax system until 1956.

However, the Northern Region did not pass its own personal income tax law until 1962. All the regional tax laws later formed the basis of personal income taxation in all the states that were created out of the Regions. In the Federal Territory of Lagos, the Income Tax Ordinance, 1943, remained in force until the Personal Income Tax (Lagos) Act 1961 enacted by the Federal Government. It was the 1961 enactment that gave birth to separate laws on income and profit of both individuals and companies namely Income Tax Management Act (ITMA); and Companies Income Tax Act (CITA). The Petroleum Profit Ordinance was passed in 1959 but took effect from 1st January 1958. So many laws have been passed to date on taxation in Nigeria.

In spite of the amount of money generated by the government through tax revenue, development in Nigeria continues to be a fantasy. Poverty, low standard of living, unemployment, to mention a few are still at a very high rate.

1.2 Statement of the Problem

Infrastructural development is the foundation of good democratic governance, there has been a history of infrastructural decay in the country. The state of infrastructure of any state is directly related with the quality of life (Olufemi 2012). “According to recent statistics, the quality of life for most people in Africa appears to have either not improved or only done so marginally. This situation arose from the misrule of early leaders most of whom spearheaded the struggle for independence” (Eregha 2007). No nation can develop without infrastructural development. Studies have shown that infrastructure in Nigeria has not been adequate to support industrial development. The housing system is in a sorry state, roads are bad which has led to countless number of accidents, general hospital buildings and facilities are in bad shape, there are no drugs, education is poor, universities continue to use old facilities and stale curriculum, power is not adequate to support economic development which results in companies shutting down and some moving to other countries.

Taxation is a stabilization weapon used by any government to stabilize a distressed economy. It is a known fact that the Nigerian government have been relying a great deal on the oil sector and recent studies have shown that the oil sector is no longer sufficiently supporting the economy. Tax policy of 2006 that started its administration in 2007 has redirected the government to divert from oil sector to taxation. In taxation, government is focusing on the policy and tax revenue. There are two types of taxes which are direct and indirect taxes. Direct taxes are charged on income while indirect taxes are charged on consumption. The following taxes were looked into: Petroleum Profit Tax, Company Income Tax, Value Added Tax, Custom and excise duties.

Infrastructural development requires a lot of resources and funding. In many rich countries, tax constitutes 30-40 percent of the GDP (Golit, 2008 & TJN, 2012). However, in Nigeria the contribution of tax revenue has not been encouraging, thus, expectations of the government are being cut short (Worlu, Christian N. & Emeka Nkoro, 2012). Corruption, evasion, avoidance and tax haven indicators are strongly associated with low revenue (Attila, Chambas, and Combes, 2008).

The lack of awareness and understanding of the importance of taxation in the country has resulted in the greater desire and opportunities for tax evasion, avoidance and non-compliance with relevant tax laws. It has been observed that revenue derived from income taxes has been grossly understated due to improper tax administration, under assessment and inefficient machinery for collection. The difficulty in funding long term development has made the government resort to foreign capital, making loans and aids the primary means to achieve rapid economic growth, thereby accumulating huge external debt which in turn increases poverty rate.

1.3 Objective of the Study

The main objective of this study is to evaluate the effect of tax revenue on infrastructural development in Nigeria.

The specific objectives are to:

  1. Evaluate the impact of Petroleum Profit tax on infrastructural development in Nigeria.
  2. Access the impact of Company Income Tax on infrastructural development in Nigeria.
  3. Determine the impact Value Added Tax on infrastructural development in Nigeria.
  4. Access the impact of Custom and Excise Duties on infrastructural development in Nigeria.

1.4 Research Questions

  1. What impact does Petroleum Profit Tax have on infrastructural development in Nigeria?
  2. In what way does Company Income Tax impact infrastructural development in Nigeria?
  3. To what extent does Value Added Tax impact infrastructural development in Nigeria?
  4. What impact does Custom and Excise Duties have on infrastructural development in Nigeria?

1.5 Research Hypotheses:

Ho1: Petroleum profit tax has no significant impact on infrastructural development in Nigeria.

Ho2: Company income tax has no significant impact on infrastructural development in Nigeria.

Ho3: There is no significant relationship between value added tax and infrastructural development in Nigeria.

Ho4: Custom and Excise duties have no significant impact on infrastructural development in Nigeria.

1.6 Significance of the Study

Tax revenue is one of the sources of government revenue which is used to achieve balance of payment equilibrium, redistribution of income, provision of welfare services, addressing issues of poverty and promoting socioeconomic development by battling elements of depression, inflation or deflation.

This study will assist the federal government to develop an effective policy framework which would assure quality tax administration and foster development in the country.

This study will also assist the government to know how to generate income from taxes and not rely on income from just the oil sector.

Policy makers at national level will find this study important as they design policies aimed at enhancing economic growth and infrastructural development through a better tax revenue system.

This study will enlighten and serve as a guide to individuals, organizations, students, and other scholars who wish to do a further study or research on taxation.

1.7 Scope of the Study

The scope of this study covers the impact of taxation revenue on infrastructural development in Nigeria over a period of twenty four years (1994-2017). The trend of petroleum profit tax, company income tax, value added tax, custom and excise duties are examined for the period to determine their correlation with infrastructural development in Nigeria. The focus was based on the data obtained at the Federal Inland Revenue Service (FIRS).

The three major tiers of government: Federal Government, State Government and Local Government have been saddled with the responsibility of collecting taxes in Nigeria. The Federal Government uses the Federal Inland Revenue Service (FIRS) to deal with taxes that are paid by companies and Federal Capital Territory. Under this research, we examined the federal taxes collected by the government and its contribution to infrastructural development in the Nigerian economy.

1.8 Operationalization of Variables

The purpose of this study was to examine the impact of tax revenue on infrastructural development in Nigeria.

To achieve this, two variables were identified in the study; these are Independent and dependent variables. The independent variables are the Tax revenue generated in Nigeria in the following dimensions as surrogates: Companies Income Tax (CIT), Petroleum Profit Tax (PPT), Custom and Excise Duties (CED), and Value Added Tax (VAT). The dependent variable on the other hand is Infrastructural development in Nigeria.

The following model has been adopted


X=x1, x2, x3, x4

Y= y1, y2, y3, y4


Y= Infrastructural Development (ID)

y1= Roads and Housing (RH)

y2= Health Care (HC)

y3= Education (ED)

y4= Power (PW)

X= Federally Collected Taxes (FCT)

x1= Companies Income Tax (CIT)

x2= Petroleum Profit Tax (PPT)

x3= Value Added Tax (VAT)

x4= Custom and Excise Duties (CED)

Functional Relationships

ID=f (CIT)………………..1

ID=f (PPT)………………..2

ID=f (VAT)……………….3

ID=f (CED)……………….4

ID= f (CIT, PPT, CED, VAT)…………5

The above functional relationships are the underlying functions of the impact of tax revenue on the infrastructural development in Nigeria.

1.9. Operational Definition of Terms


Nightingale (1997) describes tax as a compulsory contribution imposed by the government and concludes that even though tax payers may receive nothing identifiable in return for their contributions, they nevertheless have the benefit of living in a relatively educated, healthy and safe society


Taxation is defined as the process of levying and collection of tax from taxable persons.

Nigeria Tax Authorities:

This refers to the revenue collection, agencies of the federal government represented by the Federal Inland Revenue service (FIRS), State Inland Revenue Service (SIRS) and Local Government Revenue Committee.

Infrastructural Development:

One of the major roles of any government particularly in developing countries such as Nigeria is the provision of infrastructural services like effective roads, power supply, telecommunication, good education, health services, pipe-borne water as well as to ensure an increase in per capita income, reduction in poverty rate.

Chapter Five

Summary of Findings, Conclusion and Recommendations

5.1 Summary of Findings and Conclusion

This study revealed a significant relationship exists between Petroleum Profit Tax and Gross Domestic Product Growth measuring economic development. However, the positive relationship between petroleum profit tax and GDPG is not that significant compared to other variables under study. This is as a result of OPEC production/sales quota as well as continuous drop in crude oil prices at the international market over a decade now which is impacting negatively on the profits subject to tax of the oil companies operating in Nigeria. There is also a significant relationship between Company Income Tax and GDPG. Similarly, there is a significant relationship between Value Added Tax and GDPG. This significant result can be attributed to enhanced efficiency in VAT revenue collection, administration, advocacy and the recent broadening of tax base for VAT collection. The ratio of tax revenue to GDPG is still very low compared to other economies as Nigeria depends largely on crude oil export.

Although taxation remains a strong socio-political and economic tool for economic development but Nigeria experience is adverse due to tax leakages arising from tax evasion, avoidance and low tax base. This study found that tax leakages are of global concern but the Nigerian experience is cancerous due to corruption in the system. The study collaborated other studies that belief what triggers the noncompliance to a large extent is expedited by the lack of transparency and good governance on the part of the state which highly discourages tax/potential tax payers from complying willingly with their tax obligations.

5.2 Recommendations

It is recommended that Nigerian government should restructure its petroleum sector by intensifying efforts at processing the crude oil and only selling processed oil to the international market. This will overcome the present effect of external shocks arising from price fluctuation of crude oil due to gloat or quota restrictions by OPEC or financial crises in the international market.

Secondly, there should be greater transparency by government on the management and utilization of tax resources so has to give tax payers greater assurance of its application. Also there should be an enhancement of Nigeria’s tax administrative management efficiency by blocking leakages in tax revenue collection and the expansion of the nation’s tax base to attract more tax revenue.

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