CHAPTER ONE
1.0 INTRODUCTION
1.1 BACKGROUND OF THE STUDY
The desire to uplift one’s society is
the first desire of ever patriotic citizen. Tax payment is a demonstration of
such desire. The payment of tax is a civic duty and an imposed contribution by
the government on her subjects and companies to enable her fiancé or run public
utilities and perform other social responsibilities. Taxes thus constitute the
principal source of government revenue. However, one of the greatest problems
facing the Nigerian Tax system is the problem of tax evasion and avoidance. While
tax evasion is a willful and deliberate violation of the law in order to escape
payment of tax which is unquestionably imposed by the law of the tax
jurisdiction, tax avoidance is the active means by which the taxpayer seeks to
reduce or remove altogether his tax liability without actually breaking the
law.
These “Twin devils” have created gulf
between actual and potential revenue. The government has for meantime
complained of the widespread incidents of tax avoidance and evasion in the
country as companies and other taxable persons employ various tax avoidance
devices to escape or minimize their taxes or deliberately employ fraudulent
ways and means of evading tax altogether, sometimes with the active connivance
of the tax officials.
As pointed out by Reynoids (1993),
since tax is a principal source of government revenue, if persons are able to
escape by legal or illegal means the tax to which they should logically be
subject under the general scope of the tax, the theoretical equity of the tax
to a large measure is lost. Tax evasion and avoidance no doubt deny any
government the tax revenue due to her, which results in a gap between the
potential and actual tax collection.
This is a threat to
Nigeria's economic development most especially as oil production has commenced.
Nigeria has had a stern warning from the Organization for Economic Co-operation
and Development to ensure that its emergence as a tax haven does not fuel
corruption and crime in West Africa. A tax haven is a country or territory
where certain taxes are levied at a low rate or not at all. Individuals and/or
corporate entities can find it attractive to move themselves to areas with
reduced or very low taxation levy.
This creates a situation
of tax competition among governments. Different jurisdictions tend to be havens
for different types of taxes, and for different categories of people and or
companies. Aside from the general social costs associated with the operation of
tax havens globally, in the absence of a very strong regulatory framework and
very strong standards of transparency there is a particularly high risk that a
tax haven in West Africa which is home to major oil wealth and high levels of
corruption, could facilitate large-scale corruption and tax evasion, and pose a
correspondingly large risk to good governance and economic growth in the
region.
For each tax
administration in the world, taxing informal businesses is a hard job that is a
major problem for Nigeria. Cumbersome registration procedures and sluggish
official institution discourage even conscientious entrepreneurs from
registering and formalizing their business. Other entrepreneurs may take
advantage of the lacking administrative capacity and remain purposely
unregistered and unknown to the revenue agencies. The economy of Nigeria is
dominated by the activities of enterprises in the informal sector.
It is estimated that, in
terms of economic activity, about 86.3% is carried out by the self-employed
sector mostly operating informal structures. Out of the total self-employed
registered in the informal sector less than 30% have been registered and are
being assessed to tax.
Most predominantly the
issue of bridging the gap between the formal and informal sectors to reduce tax
evasion engineered the present administration to establish the Nigeria Revenue
Authority (NRA).
This step is expected to
promote efficiency in the tax administration. Although this reform, just like
previous ones, has outlined specific action areas, less has been heard about
the issue of tax evasion which if NRA noted pastures will sink the economy in
no time.
Today in Nigeria, where the greater
majority of people disregard and abuse countless public laws and policies,
taxation is not an exception. The population in Nigeria so far is 24,500,000
(Bediako, 2010) people but less than half of this great number respond
favorably to this civil responsibility of paying their taxes. A report in 2008 by Christian Aid drawing on a research by
Raymond Baker estimates that low-income countries, like Nigeria, lose over
$22.4 billion in tax revenue annually to tax evasion, which was comparable to
the total amount of foreign aid received by these countries.
Though tax avoidance is legal in
Nigeria, it is not to the advantage of the Nigeria economy in the sense that,
it brings about reduction in government revenue which would have been used; to
improve the lives of its citizens, provide better infrastructure and basic
utilities, aided poverty reduction, provide a higher standard of educational
system and provide meaningful programmes in the development of the country.
This problem is eminent because
proper measures have not been put in place to eradicate tax avoidance and tax
evasion. However unreformed tax laws, ineffective legislation, poverty,
corruption, illiteracy also contributes to the problem of tax avoidance and tax
evasion. More emphasis can be placed on illiteracy due to lack of public
education to create awareness in order for those who lack formal education and
are ignorant of the law and the importance of taxation to the Nigeria economy. Just like any national and economic issue, tax evasion in
the country must be given the appropriate attention and adequate resources must
be directed to address it. First of all, in order to be able to collect taxes
and reduce evasion, the government must educate the masses about the need for
taxes. The average person must be made to understand that tax evasion is a
threat to national development as the government cannot undertake projects the
citizen’s demand without money.
Secondly, the government
must build a data base to collect information about citizens and expatriate in
the country which can inform the revenue agencies about whom and who have not
paid tax. We also need the technical infrastructure to track the population in
the country. Again, one sure way of reducing tax evasion is to change the
perception of people with respect to corruption in the government and the
revenue agencies. It is perceived that if tax levels are high then tax evasion
will also be high. If the need to pay tax can be appropriately justified to the
populace then it will also go a long way to reduce tax evasion in the country. Furthermore, tax evaders do not
disclose their real assets and properties in order to also reduce their tax
liabilities.
Government authorities do not
implement the law set to eradicate tax evasion effectively. Tax avoidance and
tax evasion have not been completely eliminated on the Nigeria economy despite
the efforts of the IRS and their reform programmes.
The government and the
entire board of the Nigeria Revenue Authority will have to adopt the necessary
measures over the short and long term to alleviate this economic pandemic,
which is fast draining our national coffers.
1.2 STATEMENT OF THE PROBLEMS
Taxation, besides being a major
source of revenue to the government, also serves as means by which government
actualize macro-economic objectives in areas of monetary and fiscal policies.
It is therefore a major tool used by government to promote economic growth and
development.
However, these functions have been
greatly impaired due to the menace of tax evasion and avoidance. For instance,
under the direct personal taxation as practiced in Nigeria, collection of taxes
from the self employed such as businessmen, contractors, professional
practitioners like doctors, accountants just to mention a few, has been a
problem. As observes by Ayua (1999), these persons blatantly refuse to pay tax
by reporting losses every year. Similarly, Duni (2009) asserted that many
individuals and corporate bodies setup non-profit making organizations
including Non-Government Organization (NGOs) and religions bodies and siphoned
profit recorded by various corporate bodies through donations to such
organizations purposely to reduce the amount of tax paid. Also Jayeala Olabisi
(2010) in his article “An assessment of tax evasion and avoidance in Nigeria”
added that even the civil servants and other salaried workers are equally
guilty of this nefarious practice of tax evasion in the manner in which they
abuse the personal allowances and reliefs statutorily provided by law.
Furthermore the activities of trade union in the formal sector do not pave way
for successful tax policy implementation.
The continued existence of these ills makes
one thinks that tax administration in Nigeria, and of course, Oyo State lacks
the ability to convert inputs of funds into programme and projects that
enhances development. It is the potential defect to government monetary and
fiscal policies and the meager contribution of tax revenue to government
coffers that inspires the current study to investigate why people evade and
avoid taxes in Oyo State.
1.3 OBJECTIVES OF THE STUDY.
The objectives of this study are
stated thus;
·
To
distinguish between tax avoidance and tax evasion
·
To
measure and evaluate some of the reform programmes of the IRS that aimed at
reducing or eliminating Tax avoidance and tax evasion
·
To
identify some methods used in tax avoidance and tax evasion
·
To
highlight on the consequent penalties for evading tax
·
To
uncover some of the resultant effect or impact of tax avoidance and tax evasion
in the Nigerian economy
·
To
examine some of the obstacles militating against effective tax collection in
Nigeria
·
To
suggest some of the civil ways to remedying the increasing rate of tax
avoidance and tax evasion.
1.4 RESEARCH QUESTIONS.
(a)
Why
potential tax payers evade tax in Oyo State?
(b)
Why
potential tax payers indulges in tax avoidance in Oyo State.
(c)
Why
did people avoid payment of tax and evasion
(d)
Why
tax evasion affect system of tax payment
1.5 SIGNIFICANCE OF THE STUDY.
This research is expected to be of
benefit to revenue officials who are saddled with the responsibility of
ensuring that taxpayers are not negligent in paying their taxes. It will also
assist in knowing why taxes are evaded and avoided. The outcome of this
research will enable them to have a better understanding of why tax payers
evade taxes. Therefore, when these reasons are adequately appraised. It is
expected that it will in turn translate to the provision of necessary
infrastructure for the society when the resource are judiciously utilized.
This research is also expected to be
of benefit to researchers and students of accounting since it is an important
aspect of taxation. Hence, it serves as a reference point for future
researchers and a blue print for policy makers.
1.6 SCOPE AND LIMITATION OF THE
STUDY
Tax evasion and avoidance are
problems faced by every tax system. Hence one cannot possibly undertake a study
on tax evasion and avoidance concerning every Tax system. This research will
therefore be restricted to why people evade and avoid taxes in Nigeria, to be
specific Oyo State. This restriction is due to time, finance manpower and
logistics. These are constraints outside the control of the researcher. The
study is also limited to the necessary data available on demand from the office
of the State Board of Internal Revenue.
1.7 HYPOTHESIS OF THE STUDY
Tax avoidance and tax evasion is one
of the numerous means of government generating revenue and is the focus of the
research work to draw a reasonable conclusion on this research work. The
following assumptions and hypothesis will be made. (Ho and Hi represents the
flow variables used in hypothesis)
Ho: Tax avoidance and tax
evasion have a positive impact/contribution to the revenue generation for the
Nigerian government.
Hi: Tax avoidance and tax
evasion do not contribute to the revenue generation for the Nigerian
government.
Data for this research work will be
gathered from interviews and questionnaires and also from the library including
the internet.
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