THE ECONOMIC EFFECT OF TAX EVASION AND AVOIDANCE IN NIGERIA (A CASE STUDY OF DELTA STATE BOARD OF INTERNAL REVENUE, ASABA)


Content

Abstract

This study intends to evaluate the causes, effects and perpetration of tax evasion and avoidance and their economic and social impacts. The twin devil (tax evasion and avoidance) are problems which seem to have defied solutions and have bedeviled the Nigerian tax system ever since independence which others put the blame on the Nigerian revenue authority for not living up to expectations ever since the inception with regards to tax administration. The broad objective of this study is to examine if tax evasion and avoidance have significant effect on Nigeria as a nation. The primary source of data collection was adopted in the study and the chi-square statistical tool was used to test the stated hypotheses. The findings revealed that the practice of corrupt officials has significant effect on citizens’ willingness to pay tax and also the payment of tax enhances social amenities in Nigeria. The study recommended amongst others that government should device a means to educate and change their orientations regarding the collection of taxes.

 

 

TABLE OF CONTENTS

Title Page                                                                               

Certification                                                                           

Dedication                                                                             

Acknowledgments                                                                 

Abstract                                                                                 

Table of Contents                                                                  

Chapter One: Introduction                                       

1.1    Background to the Study                                                     

1.2    Statement of Problem                                                           

1.3    Research Questions                                                              

1.4    Objectives of the Study                                                         

1.5    Statement of Hypotheses                                                      

1.6    Significance of the Study                                                      

1.7    Scope of the Study                                                                

1.8    Limitations of the Study                                                       

1.9    Definition of Terms                                                                 

 

Chapter Two: Review of Related Literature

2.1    Introduction

2.2    Objectives of Tax Policies

2.3    Types of Tax

2.4    Classification of Tax 

2.5    Principles/Qualities of a Good Tax System

2.6    Economic Effect of Tax Evasion and Avoidance in Nigeria

2.7    Objectives of Tax Policy Reforms

2.8    Strategies for Tackling the Ineffective Tax Administration in Nigeria

2.9    Advantages of Tax Payment

2.10  Comparison between Tax Avoidance and Tax Evasion

Chapter Three: Research Method and Design    

3.1    Introduction                                                                          

3.2    Research design                                                                    

3.3    Description of the Population of the Study                         

3.4    Sample Size                                                                           

3.5    Sampling Techniques                                                           

3.6    Sources of Data Collection                                                   

3.7    Method of Data Presentation                                               

3.8    Method of Data Analysis                                                      

Chapter Four: Data Presentation, Analysis and Interpretation                                                     

4.1    Introduction                                                                          

4.2    Presentation of Data                                                             

4.3    Data Analysis                                                                        

4.4    Hypothesis Testing                                                                                    Chapter Five: Summary of Findings, Conclusion

and Recommendations                                                

5.1    Introduction                                                                          

5.2    Summary of Findings                                                           

5.3    Conclusion                                                                            

5.4    Recommendation                                                                  

References                                                                   

Appendix I

Appendix II


CHAPTER ONE

INTRODUCTION

1.1   Background to the Study

Taxation is enforced by the three tiers of government i.e. federal, state and local government with each having its sphere clearly spelt out in the taxes and levies (approved list for collection). Decree 1998 of importance at this juncture however are tax regulations pertaining to investors both foreign and local. The importance of tax regulations cannot be overemphasized as most transactions with any ministry, department or government agency cannot be concluded without evidence of tax clearance i.e. a tax clearance certificate certifying that all taxes due for the three immediately preceding years of assessment have been settled in full.

Soyede and Kajola (2006) defined tax evasion as a deliberate and willful practice of not disclosing full taxable income in order to pay his tax. Tax evasion is evident in situations where tax liability is fraudulently reduced or false claims are filed on the revenue tax form. It is the outright or deliberate breaking of law to minimize or not to pay tax at all. It is also described as effort outside the law to minimize tax payments. It is the failure to disclose as correct income that should be assessed either by misstatement of facts, falsification of figures, filing incorrect returns or by misrepresentation of tax liability through the employment of criminal or fraudulent means. Tax evasion involves willful default and therefore a criminal offence.

Tax evasion and tax avoidance are both ways of reducing tax burden of a tax payer. In essence, tax evasion is illegal which tax evasion is not illegal under the ambience of the law. Paying less tax or not at all that what one is legally obliged to is described as tax evasion which tax avoidance is an act of doing everything possible within the confines of the tax law to reduce the tax paid. Therefore, the main difference between them is the legality of the taxpayer’s action.

Daniel (2011) on taxes, also established that a mature U.S. business tax formal lately known this issue; if an “avoidance” framework will depend on misrepresentation, lies and concealment of the complete details, then prohibition is a misnomer. The framework would be more effectively described as scams and would slip to be treated as such.

Daniel (2011) stated also that it is unattainable to demonstrate a specific analysis as to whether individuals have prevented or merely mitigated their tax bills.

1.2   Statement of Problem

As a result of instability of Nigeria economy, the Delta State board of internal revenue has been taking series of actions to curb the practice of tax evasion and avoidance. Tax evasion and avoidance in Nigeria is a serious limitation to the growth and development of Nigeria economy. It is good to note that no form of tax can succeed without the co-operation of tax payers. However, below are some practices leading to tax evasion and avoidance in Nigeria; weak tax administration system, high tax rates, no trust in the government, mismanagement of tax proceeds, bribery and corruption, inadequate facilities for tax assessment and lack of accountability.

1.3   Research Questions

In view to examine critically the effect of tax evasion and avoidance in Nigeria economy, the researcher deemed it necessary to formulate the following research questions suitable for the testing of the hypothesis, these include;

i.      Does the practice of corrupt tax officials have significant effect on citizens’ willingness to pay tax?

ii.     Does tax evasion and avoidance have significant effect on Nigeria as a nation?

iii.    Does the payment of tax enhance social amenities in Nigeria?

iv.    Does the citizens of Nigeria benefit from tax payment?

v.     Is tax evasion and avoidance punishable offence?

1.4   Objective of the Study

The broad objective of this study is to ascertain the economic effect of tax evasion ad avoidance in Nigeria. The following are the sub-objectives of the study;

i.      To ascertain the significant relationship between the practice of corrupt tax officials and citizens’ willingness to pay tax.

ii.     To examine if tax evasion and avoidance have significant effect on Nigeria as a nation.

iii.    To ascertain if the payment of tax enhances social amenities in Nigeria.

iv.    To ascertain if the citizens of Nigeria benefit from tax payment.

v.     To ascertain if tax evasion and avoidance are punishable offences.

1.5   Statement of Hypothesis    

The following are the hypotheses of the study;

Hypothesis One

HO:   There is no significant relationship between the practice of corrupt tax officials and citizens’ willingness to pay tax.

HI:    There is significant relationship between the practice of corrupt tax officials and citizens’ willingness to pay tax. 

Hypothesis Two

HO:   Tax evasion and avoidance does not have significant effect on Nigeria as a nation.

HI:    Tax evasion and avoidance have significant effect on Nigeria as a nation.

Hypothesis Three

HO:   Payment of tax does not enhance social amenities in Nigeria

HI:    Payment of tax enhances social amenities in Nigeria.

Hypothesis Four

HO:   Citizens of Nigeria does not benefit from tax payment.

HI:    Citizens of Nigeria benefit from tax payment.

Hypothesis Five

HO:   Tax evasion and avoidance are not punishable offences.

HI:    Tax evasion and avoidance are punishable offences.

1.6   Significance of the Study

This study is of great importance in the following ways;

i.      To highlight the importance of tax payment in Nigeria.

ii.     To educate the citizens of Nigeria on the benefits of responding to tax payment in Nigeria.

iii.    To emphasize on the punishment given to tax evasion.

iv.    To expose some of the corrupt practices of tax authorities.

v.     To highlight on the recent tax reform in Nigeria.

vi.    To evaluate the impact of tax evasion and avoidance in Nigeria economy.  

vii.   To proffer solutions on tax accountability ad accessibility.

viii.  It will serves as basis for further research.

ix.    It serves as literature to students studying social sciences in higher institutions.

1.7   Scope of the Study

This study focuses on the effects of tax evasion and avoidance in Nigeria economy. Delta state board of internal revenue was used as a hub. The researcher could not cover other states in the country as a result of some logistics involved.

1.8   Limitations of the Study

 

 

1.9   Definition of Terms

1.     Tax proceeds: This is the money obtained through tax collection.

2.     Patriotic: Strong support and love for one’s country.

3.     Economy: The state of a country terms of the production and consumption of goods and services and the supply of money.

4.     Tax administration: The board responsible for tax management.

5.     Loopholes: A means of evading a rule or contract.

6.     Revenue: The income received by an organization or by a state from tax.

7.     Property tax: Is a levy on property that the owner is required to pay.

8.     Tax resistance: Is the refusal to pay a tax for conscientious reasons (because the resistors do not want to support the government or some of its activities)        

9.     Tax avoidance: The minimization of tax liability by lawful methods. Tax avoidance is the reduction of tax liability by the tax payers through the exercise of his legal right under the tax law to make the best use of available relief, allowances and exemptions.  

10.   VAT (Value Added Tax): This is a type of consumption tax that is placed on a product whenever value is added at a state of production ad at final sales; assessable at the rate of 5%.

11.   PIT (Personal Income Tax): This is a tax paid on ones personal income as distinct from the tax paid on the firms earnings.

12.   PAYE (Pay As You Earn): This is a tax payment method whereby an employee is required by law to deduct the tax as soon as salaries are carried.

13.   BIR (Board of Internal Revenue): Board collecting money from citizens through imposition of levies and taxes on facilities incomes and sales of goods.

14.   CGT (Capital Gain Tax): It is a type of tax levied on capital gains incurred by individuals and corporations. It is assessable at 10%.

15.   CIT (Company Income Tax): This is a tax on the accounting profits of a company. Its assessable at 30%.

16.   PPT (Petroleum Profit Tax): A direct tax levied annually on net profit of a petroleum tax payer. It is assessable to that of the rate of 85% currently.

17.   Education Tax: It was enacted on 1/2/1993 at the rate of 2%.

18.   Tax Cut: This denote that government takes away less of people’s own money so as to enable them spend more of the money in accordance with their choices.

19.   Imposition of tax: It is the process of assessing an individual or corporate body in any particular year of assessment to know the exact amount of tax to pay by the relevance tax authority.

20.   Provisional tax: This is a tax payable by all companies not filling self assessment returns within three (3) months of the tax year.

21.   Notice of assessment: This is the process of communicating with the tax payer the total income, chargeable income, tax payable and place of payment of tax.

22.   Tax audit and investigation: It is the process of examining the accounts and record of a company in order to confirm that the information state in the financial statements with respect to potential tax liability are correct.

23.   Tax planning: This is a conscious effort on the part of a potential tax payer to organize his or her financial transactions in a way to legitimately minimize his or her tax liability at every point in time.

24.   SBIR: This is responsible for the administration of personal income tax in charge of the state.

25.   FBIR: This is also referred to as the “board”, it give rise to the intervention of special investigation where there has been fraud or concealment of relevant information. They are in charge of the entire country.

26.   Tariff: This is the tax imposed on the commodity traded across the boarder.

27.   Income tax: It means tax or income. It may be personal income or company income tax.

28.   Assessment list: These are list of all companies assessed to tax. They are kept by the board

29.   Original assessment: This is the first assessment raised on a taxpayer in a particular year of assessment.

30.   Inspectors of taxes: They are under the control of the board who receive returns and other information from tax payers and other sources and track down tax evasion. They also act as advisers to taxpayers.

31.   Tax default: Is a situation where a taxpayer refuses for one reason or the other to pay his assessed tax in full.


 

This study intends to evaluate the causes, effects and perpetration of tax evasion and avoidance and their economic and social impacts. The twin devil (tax evasion and avoidance) are problems which seem to have defied solutions and have bedeviled the Nigerian tax system ever since independence which others put the blame on the Nigerian revenue authority for not living up to expectations ever since the inception with regards to tax administration. The broad objective of this study is to examine if tax evasion and avoidance have significant effect on Nigeria as a nation. The primary source of data collection was adopted in the study and the chi-square statistical tool was used to test the stated hypotheses. The findings revealed that the practice of corrupt officials has significant effect on citizens’ willingness to pay tax and also the payment of tax enhances social amenities in Nigeria. The study recommended amongst others that government should device a means to educate and change their orientations regarding the collection of taxes.

 

 

TABLE OF CONTENTS

Title Page                                                                               

Certification                                                                           

Dedication                                                                             

Acknowledgments                                                                 

Abstract                                                                                 

Table of Contents                                                                  

Chapter One: Introduction                                       

1.1    Background to the Study                                                     

1.2    Statement of Problem                                                           

1.3    Research Questions                                                              

1.4    Objectives of the Study                                                         

1.5    Statement of Hypotheses                                                      

1.6    Significance of the Study                                                      

1.7    Scope of the Study                                                                

1.8    Limitations of the Study                                                       

1.9    Definition of Terms                                                                 

 

Chapter Two: Review of Related Literature

2.1    Introduction

2.2    Objectives of Tax Policies

2.3    Types of Tax

2.4    Classification of Tax 

2.5    Principles/Qualities of a Good Tax System

2.6    Economic Effect of Tax Evasion and Avoidance in Nigeria

2.7    Objectives of Tax Policy Reforms

2.8    Strategies for Tackling the Ineffective Tax Administration in Nigeria

2.9    Advantages of Tax Payment

2.10  Comparison between Tax Avoidance and Tax Evasion

Chapter Three: Research Method and Design    

3.1    Introduction                                                                          

3.2    Research design                                                                    

3.3    Description of the Population of the Study                         

3.4    Sample Size                                                                           

3.5    Sampling Techniques                                                           

3.6    Sources of Data Collection                                                   

3.7    Method of Data Presentation                                               

3.8    Method of Data Analysis                                                      

Chapter Four: Data Presentation, Analysis and Interpretation                                                     

4.1    Introduction                                                                          

4.2    Presentation of Data                                                             

4.3    Data Analysis                                                                        

4.4    Hypothesis Testing                                                                                    Chapter Five: Summary of Findings, Conclusion

and Recommendations                                                

5.1    Introduction                                                                          

5.2    Summary of Findings                                                           

5.3    Conclusion                                                                            

5.4    Recommendation                                                                  

References                                                                   

Appendix I

Appendix II


CHAPTER ONE

INTRODUCTION

1.1   Background to the Study

Taxation is enforced by the three tiers of government i.e. federal, state and local government with each having its sphere clearly spelt out in the taxes and levies (approved list for collection). Decree 1998 of importance at this juncture however are tax regulations pertaining to investors both foreign and local. The importance of tax regulations cannot be overemphasized as most transactions with any ministry, department or government agency cannot be concluded without evidence of tax clearance i.e. a tax clearance certificate certifying that all taxes due for the three immediately preceding years of assessment have been settled in full.

Soyede and Kajola (2006) defined tax evasion as a deliberate and willful practice of not disclosing full taxable income in order to pay his tax. Tax evasion is evident in situations where tax liability is fraudulently reduced or false claims are filed on the revenue tax form. It is the outright or deliberate breaking of law to minimize or not to pay tax at all. It is also described as effort outside the law to minimize tax payments. It is the failure to disclose as correct income that should be assessed either by misstatement of facts, falsification of figures, filing incorrect returns or by misrepresentation of tax liability through the employment of criminal or fraudulent means. Tax evasion involves willful default and therefore a criminal offence.

Tax evasion and tax avoidance are both ways of reducing tax burden of a tax payer. In essence, tax evasion is illegal which tax evasion is not illegal under the ambience of the law. Paying less tax or not at all that what one is legally obliged to is described as tax evasion which tax avoidance is an act of doing everything possible within the confines of the tax law to reduce the tax paid. Therefore, the main difference between them is the legality of the taxpayer’s action.

Daniel (2011) on taxes, also established that a mature U.S. business tax formal lately known this issue; if an “avoidance” framework will depend on misrepresentation, lies and concealment of the complete details, then prohibition is a misnomer. The framework would be more effectively described as scams and would slip to be treated as such.

Daniel (2011) stated also that it is unattainable to demonstrate a specific analysis as to whether individuals have prevented or merely mitigated their tax bills.

1.2   Statement of Problem

As a result of instability of Nigeria economy, the Delta State board of internal revenue has been taking series of actions to curb the practice of tax evasion and avoidance. Tax evasion and avoidance in Nigeria is a serious limitation to the growth and development of Nigeria economy. It is good to note that no form of tax can succeed without the co-operation of tax payers. However, below are some practices leading to tax evasion and avoidance in Nigeria; weak tax administration system, high tax rates, no trust in the government, mismanagement of tax proceeds, bribery and corruption, inadequate facilities for tax assessment and lack of accountability.

1.3   Research Questions

In view to examine critically the effect of tax evasion and avoidance in Nigeria economy, the researcher deemed it necessary to formulate the following research questions suitable for the testing of the hypothesis, these include;

i.      Does the practice of corrupt tax officials have significant effect on citizens’ willingness to pay tax?

ii.     Does tax evasion and avoidance have significant effect on Nigeria as a nation?

iii.    Does the payment of tax enhance social amenities in Nigeria?

iv.    Does the citizens of Nigeria benefit from tax payment?

v.     Is tax evasion and avoidance punishable offence?

1.4   Objective of the Study

The broad objective of this study is to ascertain the economic effect of tax evasion ad avoidance in Nigeria. The following are the sub-objectives of the study;

i.      To ascertain the significant relationship between the practice of corrupt tax officials and citizens’ willingness to pay tax.

ii.     To examine if tax evasion and avoidance have significant effect on Nigeria as a nation.

iii.    To ascertain if the payment of tax enhances social amenities in Nigeria.

iv.    To ascertain if the citizens of Nigeria benefit from tax payment.

v.     To ascertain if tax evasion and avoidance are punishable offences.

1.5   Statement of Hypothesis    

The following are the hypotheses of the study;

Hypothesis One

HO:   There is no significant relationship between the practice of corrupt tax officials and citizens’ willingness to pay tax.

HI:    There is significant relationship between the practice of corrupt tax officials and citizens’ willingness to pay tax. 

Hypothesis Two

HO:   Tax evasion and avoidance does not have significant effect on Nigeria as a nation.

HI:    Tax evasion and avoidance have significant effect on Nigeria as a nation.

Hypothesis Three

HO:   Payment of tax does not enhance social amenities in Nigeria

HI:    Payment of tax enhances social amenities in Nigeria.

Hypothesis Four

HO:   Citizens of Nigeria does not benefit from tax payment.

HI:    Citizens of Nigeria benefit from tax payment.

Hypothesis Five

HO:   Tax evasion and avoidance are not punishable offences.

HI:    Tax evasion and avoidance are punishable offences.

1.6   Significance of the Study

This study is of great importance in the following ways;

i.      To highlight the importance of tax payment in Nigeria.

ii.     To educate the citizens of Nigeria on the benefits of responding to tax payment in Nigeria.

iii.    To emphasize on the punishment given to tax evasion.

iv.    To expose some of the corrupt practices of tax authorities.

v.     To highlight on the recent tax reform in Nigeria.

vi.    To evaluate the impact of tax evasion and avoidance in Nigeria economy.  

vii.   To proffer solutions on tax accountability ad accessibility.

viii.  It will serves as basis for further research.

ix.    It serves as literature to students studying social sciences in higher institutions.

1.7   Scope of the Study

This study focuses on the effects of tax evasion and avoidance in Nigeria economy. Delta state board of internal revenue was used as a hub. The researcher could not cover other states in the country as a result of some logistics involved.

1.8   Limitations of the Study

 

 

1.9   Definition of Terms

1.     Tax proceeds: This is the money obtained through tax collection.

2.     Patriotic: Strong support and love for one’s country.

3.     Economy: The state of a country terms of the production and consumption of goods and services and the supply of money.

4.     Tax administration: The board responsible for tax management.

5.     Loopholes: A means of evading a rule or contract.

6.     Revenue: The income received by an organization or by a state from tax.

7.     Property tax: Is a levy on property that the owner is required to pay.

8.     Tax resistance: Is the refusal to pay a tax for conscientious reasons (because the resistors do not want to support the government or some of its activities)        

9.     Tax avoidance: The minimization of tax liability by lawful methods. Tax avoidance is the reduction of tax liability by the tax payers through the exercise of his legal right under the tax law to make the best use of available relief, allowances and exemptions.  

10.   VAT (Value Added Tax): This is a type of consumption tax that is placed on a product whenever value is added at a state of production ad at final sales; assessable at the rate of 5%.

11.   PIT (Personal Income Tax): This is a tax paid on ones personal income as distinct from the tax paid on the firms earnings.

12.   PAYE (Pay As You Earn): This is a tax payment method whereby an employee is required by law to deduct the tax as soon as salaries are carried.

13.   BIR (Board of Internal Revenue): Board collecting money from citizens through imposition of levies and taxes on facilities incomes and sales of goods.

14.   CGT (Capital Gain Tax): It is a type of tax levied on capital gains incurred by individuals and corporations. It is assessable at 10%.

15.   CIT (Company Income Tax): This is a tax on the accounting profits of a company. Its assessable at 30%.

16.   PPT (Petroleum Profit Tax): A direct tax levied annually on net profit of a petroleum tax payer. It is assessable to that of the rate of 85% currently.

17.   Education Tax: It was enacted on 1/2/1993 at the rate of 2%.

18.   Tax Cut: This denote that government takes away less of people’s own money so as to enable them spend more of the money in accordance with their choices.

19.   Imposition of tax: It is the process of assessing an individual or corporate body in any particular year of assessment to know the exact amount of tax to pay by the relevance tax authority.

20.   Provisional tax: This is a tax payable by all companies not filling self assessment returns within three (3) months of the tax year.

21.   Notice of assessment: This is the process of communicating with the tax payer the total income, chargeable income, tax payable and place of payment of tax.

22.   Tax audit and investigation: It is the process of examining the accounts and record of a company in order to confirm that the information state in the financial statements with respect to potential tax liability are correct.

23.   Tax planning: This is a conscious effort on the part of a potential tax payer to organize his or her financial transactions in a way to legitimately minimize his or her tax liability at every point in time.

24.   SBIR: This is responsible for the administration of personal income tax in charge of the state.

25.   FBIR: This is also referred to as the “board”, it give rise to the intervention of special investigation where there has been fraud or concealment of relevant information. They are in charge of the entire country.

26.   Tariff: This is the tax imposed on the commodity traded across the boarder.

27.   Income tax: It means tax or income. It may be personal income or company income tax.

28.   Assessment list: These are list of all companies assessed to tax. They are kept by the board

29.   Original assessment: This is the first assessment raised on a taxpayer in a particular year of assessment.

30.   Inspectors of taxes: They are under the control of the board who receive returns and other information from tax payers and other sources and track down tax evasion. They also act as advisers to taxpayers.

31.   Tax default: Is a situation where a taxpayer refuses for one reason or the other to pay his assessed tax in full

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