The Effect of Taxation on the Nigerian Economy(2001-2010)
Chapter One
Objectives of The Study
The main objective of this study is to assess the impact of tax revenue on economic growth in Nigeria
Other specific objectives include
- To assess the impact of Petroleum Profit Tax on the economic growth in Nigeria
- To investigate the impact of company income tax on the economic growth in Nigeria.
- To investigate the impact of custom and excise duties on the economic growth in Nigeria.
- To investigate the impact of value added on the economic growth in Nigeria.
CHAPTER TWO
LITERATURE REVIEW
INTORDUCTION
Tax revenue is a veritable source of government revenue; however, it is still debatable in the literature especially in determining the optimal tax revenue to be imposed to enhance development without unjustly inflicting welfare cost. Economic theories of taxation approach the question of how to minimize the loss of economic welfare through taxation and also discuss how a nation can perform redistribution of wealth in the most efficient manner. This research work focuses on the effect of taxation on economic growth in Nigeria. This chapter provides reviews of diverse literatures as well as the theoretical and conceptual frame work of the study.
CONCEPTUAL FRAME WORK
CONCEPT OF TAXATION AND TAX ADMINISTRATION IN NIGERIA
According to the (black law dictionary, 1999), tax is a ratable portion of the produce of the property and labor of the individual citizens, taken by the nation, in the exercise of its sovereign rights, for the support of government, for the administration of the laws, and as the means for continuing in operation the various legitimate functions of the The Institute of Chartered Accountants of Nigeria, (2006) and the Chartered Institute of Tax Revenue of Nigeria, (2002) view tax as an enforced contribution of money, enacted pursuant to legislative authority. If there is no valid statute by which it is imposed, a charge is not tax. Tax is assessed in accordance with some reasonable rule of apportionment on persons or property within tax jurisdiction.
Anyanwu, (1997) defined tax revenue as the compulsory transfer or payment from private individuals, institutions or groups to the government. Sanni, (2001) advocated tax as an instrument of social engineering which can be used to stimulate, general or special economic growth. From Onairobi, (1994), taxes are generally either of two types: Direct and Indirect taxes. A direct tax is levied on income or profit while an indirect tax is levied on goods and services. Good examples of Direct Tax include Personal Income Tax, Capital Gain Tax, Profit Tax and Wealth Tax. Examples of Indirect Tax include Excise Taxes, Export Taxes, Import Duties, Expenditure Tax, Sales Tax and Value Added Tax.
Jarkir, (2011) stated that tax is a contribution exacted by the state; it is a non-penal but compulsory and unrequited transfer of resources from the private to the public sector, levied on the basis of predetermined criteria. The classical economists were of the view that the only objective of tax revenue was to raise government revenue. But with the changes in circumstances and ideologies, the aim of taxes has also been changed. These days apart from the objective of generating. revenue, taxes is levied to affect consumption, production and distribution with a view to ensuring the social welfare through the economic development of a country.
According to Nzotta, (2001), four key issues must be understood for tax revenue to play its functions in the society. First, a tax is a compulsory contribution made by the citizens to the government and this contribution is for general common use. Secondly, tax imposes a general obligation on the tax payer. Thirdly, there is a presumption that the contribution to the public revenue made by the tax payer may not be equivalent to the benefits received. Finally, a tax is not imposed on a citizen by the government because it has rendered specific services to him or his family. Thus, it is evident that a good tax structure plays a multiple role in the process of economic development of any nation which Nigeria is not an exception Appah, (2010).
In the words of Enegbu, (2011), the Nigerian tax system has undergone several reforms geared at enhancing tax administration with minimal enforcement cost. The recent reforms include the introduction of TIN, (Taxpayer Identification Number), which became effective since February 2008, automated tax system that facilities tracking of tax positions and issues by individual tax payer, E-payment system which enhances smooth payment procedure and reduces the incidence of tax touts, Enforcement scheme which engages special tax officers in collaboration with other security agencies to ensure strict compliance in payment of taxes
Section 8 of FIRS Establishment Act 2001 has led to an improvement in the tax administration in the country, thus, the integrated tax offices and authorities now have autonomy to assess, collect and record tax. Despite this improvement, there are still a number of contentious issues that require urgent attention and among them are appropriate tax authority to administer several taxes, the issue of multiple taxes severally administered by all the three tiers of government which sometimes imposes welfare cost and the issue of the paucity of data base, which contributes to tax avoidance in the country. Tanzi, (1995)
The concepts of tax and tax revenue in prior researches have been largely discussed in different contexts by tax experts, academic scholars, international organizations as well as different governments. For example, (The World Bank, 2000) noted that taxes are a compulsory transfer of resources to the government from the rest of the economy, while Jakir, (2011) described tax as a liability on account on the fact that the taxpayer has an income of a minimum amount and from certain specified source(s).
However, in a simple term for the purpose of this study, tax is a compulsory fee individuals as well as corporate bodies are obliged to comply with as stipulated by the tax laws, while tax revenue is the process of administering the tax laws in the way that achieves government objectives. And so, tax revenue is a major source of fund for any government and the availability of fund is a very crucial aspect of running a State. Although, several options according to Soyode and Kajola, (2006) are available to governments for raising fund, tax revenue remains the principal source Phillips, (2001).
CHAPTER THREE
RESEARCH METHODOLOGY
INTRODUCTION
This chapter gives the methodology employed in this study, involving a discussion of data collection analysis techniques. This chapter presents the research design, methods of data collection and techniques analysis of data to be used in the study. Effort is made to describe different tools or techniques employed while analyzing the work. The research focuses on tax revenue and economic growth in Nigeria.
AREA OF STUDY
Tax system of Nigeria dated back to 1904 when the personal income tax ordinance was introduced in the northern part of the country before the unification of the country by the colonial masters. It was later implemented through the Native Revenue Ordinance to the western and eastern regions in 1917 and 1928 respectively. Coupled with other amendments in the 1930s, it was later incorporated into Direct Tax revenue Ordinance No. 4 of 1940. Since then, different governments have continued on the improvement of the tax system in Nigeria Soyode, (2006).
Although the Nigerian tax system has undergone several reforms geared toward enhancing tax collection and administration with minimal enforcement cost, there is still non-voluntary compliance of the taxpayers due to the meager nature of the system leading to an extensive practice of tax evasion and avoidance. Some of the major tax reforms put in place by the government in addressing the problems of tax administration in Nigeria include: the introduction of Taxpayer‘s Identification Number (TIN) which became effective since February 2008.
RESEARCH DESIGN AND SOURCES OF DATA
A research design is the framework or the plan of study that is used as a guide in collecting data and analyzing the data. Also, research design is the plan and structure of investigation conceived so as to obtain answers to research questions. In order words research design is the base method or a tool that is applied in the collection of data that is relevant to provide solution to the research problem Ndagi, (1999).
This study adopts the Ex-post facto method of research. This is because data needed for analysis already exists. The study will cover Nigeria‘s economy with time series rather than cross- sectional data being used. Data relating to revenues from different tax components, investment expenditure and GDP will be collected for the years 1997-2010. The study uses Correlation and regression analysis technique to examine the effect of taxation on the economic growth in Nigeria which will be measured using its Gross Domestic Product (GDP). The various resources of data for this research study were mainly secondary. Data were obtained from Federal Board of Inland Revenue, State of Inland Revenue, Joint Tax Board, Nation Bureau of statistics, internet and certain journals and publications.
CHAPTER FOUR
DATA ANALYSIS AND PRESENTATION
INTRODUCTION
This chapter presents the result of data analysis and tests of hypotheses formulated earlier in the studies. Multiple linear regression and correlation was used for data analysis and the result was explained so as to establish the effect of taxation on economic growth in Nigeria.
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATIONS
SUMMARY OF FINDINGS
The research work focuses on the examination of the effect of taxation on the economic growth in Nigeria. The first chapter began with providing a background on the Nigerian tax system and the changes that it has gone through as well as providing details of tax revenue in an economy.
It was stated that tax revenue plays a crucial role in the economy by promoting economic activity and making funds available in the government purse that can be used to adequately execute massive projects to the benefit of the society. Despite the massive income realized via tax revenue in the economy, it was opined by Olashore, (1999) that the economy still needs radical reform as the impact of tax revenue is not properly felt, hence, the economy is still in a state of slumber.
The main problem that necessitated this research work was deduced from past studies with the aim of finding out the current state of things and also to see the position as it upholds in Nigeria. The objective of the research work is to critically identify the impact of tax revenue on Nigerian economic growth from 2001-2010 and to ascertain the relationship that exists between revenue generated from taxes and the Nigerian economy.
The main significance of this study lies in the fact that the study serves as an update on the work done on developed and developing economies; Nigerian economy is the main focus of this study. Therefore this study adds to the body of knowledge by investigating the deficiency in the findings of previous researchers on the impact of tax revenue on Nigerian economic growth.
In chapter two, diverse literatures were reviewed and a lot of things were uncovered. Tax revenue was said to be a veritable source of government revenue, it is as certain as death. However, it is still debatable in the literature the optimal tax revenue to be imposed to enhance development without unjustly inflicting welfare cost. Also, level of spending in any economy is affected by the level of tax revenue. To progress further, the literature review looked into tax revenue administration across the globe, role of tax revenue in economic development, how the Nigerian tax system function and the major challenges it is faced with.
The researcher also made frantic efforts to discuss some of the various taxes that form the independent variables of this research work. The researcher concluded the review of literatures by adopting the expediency theory which lays emphasis on the fact that tax revenue should be able to link its activities to outcomes evident in a state (Country or Nation). This implies that tax revenue is very important to the growth and development of any country as tax proceeds helps in rural and urban development in the form of road constructions, hospitals, schools and other social amenities.
In chapter three, efforts were made to describe different tools or techniques that were employed in analyzing the result of the functional test carried out on the hypothesis. The study adopted an econometric method of analysis and data were sourced largely from secondary means comprising of the data obtained from the Federal and State Inland Revenue Service. In this chapter, details of the source of data, data estimation criteria, method of data analysis were discussed.
In chapter four which is the analysis and interpretation of data, the chapter presents data used to empirically investigate the impact of tax revenue on the Nigerian economy. Data were collected from secondary sources ranging from the year 2001-2010. The data were analyzed with ANOVA using Microsoft excel where multiple regression and correlation analysis was carried out.
Results showed that there is a positive relationship between the contribution of taxes revenue and GDP and that tax revenue has a great impact on the GDP of Nigeria. The Null hypothesis which states that taxation does not have any significant impact on the growth of the Nigerian economy is hereby rejected. It can therefore be said that there is a strong positive relationship between the contribution of revenue from taxes and GDP as shown in the result presented where an R2 78.5% and adjusted R2 of 76% was reported. This signifies that tax revenue has a very high impact on the economic growth of Nigeria as a source of revenue available to government for the purpose of Growth and development.
The test carried out on the various tax revenues to determine their individual impact on GDP shows that petroleum profit tax, custom and excise duty, company income tax and value added tax have a positive impact on Nigeria‘s economic growth development.
CONCLUSION
The findings of this study contribute towards a better understanding of tax revenue and economic growth in Nigeria. GDP and four other variables that represent petroleum profit tax, company income tax, custom and excise duties, and value added tax were developed to test which factors best describes economic growth in Nigeria.
The result shows that petroleum profit tax, company income tax, custom and excise duties, and value added tax are significant variables in explaining the economic growth in Nigeria. The implication of the findings is majorly for policy makers, especially the Federal Board of Inland Revenue as most of the variables shows a positively significant relationship with economic growth, meaning that there should be no area in tax collection that should be taken lightly as they have all proven to be major variables in connection to the growth of the economy. Also, for researchers, the study will re-introduce them to a different direction of ways in which tax revenue can contribute to the economic growth in Nigeria and add to the existing literatures on this subject matter and also ensure that the regulatory body implement policies that will reduce the loop holes in tax laws which tax payers capitalize on to evade tax.
One of the main purposes of tax revenue is to raise revenue that the government can use to provide adequate amenities and infrastructure for its citizens as well as enhance growth and development but the case seems to be different in Nigeria as the physical evidences does not show that funds generated from tax revenue are used for this purpose.
Analysis has thrown some light on the impact of tax revenue on Nigeria‘s economy. It is glaring that the Nigerian total tax revenue generated has a significant impact on the economy and development in general.
RECOMMENDATIONS
The following recommendations emerged from the findings and conclusions of the study:
- The introduction of the Tax Identification Number (TIN) which is a registration and storage oftax payers‘data in Nigeria is a welcomed idea but for it to be successful it should be structured in such a way that will make all potential tax payers Citizens and companies should be able to operate bank accounts only if they have TIN numbers. Government parastatals, multinationals, conglomerates and companies in the country should not engage any vendor who does not have a TIN number. This will go a long way in reducing Tax evasion.
- The tribunal recommended by the Tax Act 1993 should be established to reduce cases of taxevasion and remittance of tax collections especially. Only professionals and trustworthy hands should be responsible for tax
- All taxes should be remitted via an e-payment system or via direct payment to the various taxauthorities ‘accounts. This will enhance and support the cashless economy system introduced
- Tax Clearance Certificates and other tax documents usedin government transactions should be referred back to the relevant revenue authority for
- The government should ensure that taxes are accounted for to the public via print and electronic media. The intent of government with such tax should be communicated to the general In so doing, a separate body should be set up to inspect and ensure that the funds generated by government through tax at each level of government is properly used and any level of government that fails to utilize such taxes as communicated to the public should be charged to court.
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