CHAPTER ONE
INTRODUCTION
1.0. BACKGROUND TO THE STUDY
Taxation is not a new word in Nigeria or the world as a whole. In
Nigeria, taxation has been in existence even before the coming of the
colonial men or the British. Taxation can be defined as the system of
imposing a compulsory levy on all income, goods, services and properties
of individuals, partnership, trustees, executorships and companies by
the government (Samuel and Simon, 2011;Yunusa, 2003). Income tax is one
of the major sources of revenue to all government. In Nigeria, it is a
factor to be reckoned with in Federal Government’s budget the taxes so
collected come back to the taxpayer in form of services. This has over
the years encouraged or discouraged some activities in the private
sector; though, this depends on whether the policy of the government is
towards discouraging or encouraging such companies (Ola, 1999). Taxation
is recognized as a very important tool for national development and
growth in most societies. It has viewed as a major vehicle for long
term development of infrastructures of the state.
With the growth and increasing globalisation of businesses (including
the increased mobility of capital and rise of e-commerce), the
opportunities for taxpayers to violate tax laws are expanding, prompting
the need for the tax administration to continually update and broaden
the strategies it uses to deal with this problem.
Tax fraud occurs when an individual or business entity willfully and
intentionally falsifies information on a tax return in order to limit
the amount of tax liability . Tax fraud essentially entails cheating on a
tax return in an attempt to avoid paying the entire tax obligation.
Examples of tax fraud include claiming false deductions; claiming
personal expenses as business expenses; and not reporting income.
Most developed countries are characterized by a broad base for direct
and indirect taxes with tax liability covering the vast majority of
citizens and firms. Developing countries, in contrast, are confronted
with social, political and administrative difficulties in establishing a
sound public finance system. As a consequence, developing and emerging
countries are particularly vulnerable to tax fraud activities of
individual taxpayers and corporations. This can be considered one of the
primary reasons for large differences in the ability to mobilize own
resources between developed and developing countries.
Detecting and preventing tax fraud and making sure that it cannot be
repeated is not solely the responsibility of tax authority and tax
officials. Without the cooperation of general public working in high
risk areas, it is very difficult to detect illegal tax malpractice and
illegitimate personal gain. Therefore, it is up to all levels of
hierarchy in public institutions to create an environment of
transparency, ethical conduct and accountability in order to ensure
proper handling of the very important issues of prevention, detection
and handling of tax fraud cases in among the general taxpayer.
The doctrine describes tax fraud as a form of deliberate evasion of
tax which is generally punishable by law. The term ‘tax fraud’ includes
situations in which deliberately false statements are submitted, fake
documents are produced, etc. Sanctions may include civil or criminal
penalties
Finally, the revenue generated by the government from taxation forms a
major source of finance to the federal government capital expenditure
which is crucial to sustainable economic development. A major challenge
to the government in generating this revenue has been the increasing
rate of tax fraud offences committed by both tax payers and tax
officials.
Therefore tax fraud and other related tax offences are important
factors to be considered as they affect both the volume and nature of
government finances which is the key to economic development.
1.2. STATEMENT OF PROBLEM
Tax Fraud and other tax offences perpetrated by tax payer heavily
harm the economy, lower investment levels and reduce government revenue
generation. Anti-tax fraud and tax authority strategies are often not
effective enough. Damages done to economy and their budgets as a result
of tax fraud can be enormous ranging from financial loss to reduction of
economy performance, reputation, credibility and public confidence.
Tax systems in many developing countries are characterized by tax
structures being not in line with international standards, by lack of
tax policy management, low compliance levels and inappropriate
capacities in tax administration. The difference in revenue mobilization
also stems from economic conditions (size of the informal sector).
In fact, most developing countries show a trend towards the
prevalence of indirect taxation. Many of them rely to a great extent on
indirect taxes such as value-added taxes (VAT) with indirect taxes
amounting for up to two-thirds of total tax revenues, yet it is not new
that, the negative menace of tax fraud deprives governments of revenues
needed for public spending Forces honest taxpayers to pick up the tab
Erodes community confidence in the equity of the revenue system.
Finally, the current method of collecting taxes/levies from tax
payers lack proper organization and prone to obvious fraudulent
activities, thereby resulting to loss of funds by the State Government.
This however, leads to the inability of the Government meeting the basic
projects requirements like rehabilitation of roads, building/
renovation of hospitals, schools and so on.
The tax administration system does not clearly states the strategy
that is being used to apportion taxes or levies or charges to some key
business enterprise like electronic shops, saloon, hawkers, petty shops,
barbing saloon, recharge card resellers, cosmetics shops, super markets
etc. Random amount is being collected as taxes/levies from these
business enterprises, which might be below or over charged taxes; and
most times the levies/taxes might not be remitted to the state
Government or if remitted, a reasonable amount would have been diverted
by the officers in charge of the collection. This situation occurs
because there is no proper structure on ground to determine the exact
monies and the number of petty shops or saloons in a given location, to
enable the State Government to ascertain the actual figures, in terms of
Naira and Kobo that is generated from most small scale businesses
majority of who are individual taxpayers.
1.3. OBJECTIVES OF THE STUDY
The main objective of this research work is to assess the role of tax
officials in the prevention and detection of tax frauds in Nigeria.
The research study will highly focus on specific objectives particularly which will be to:
- Identify the concept of taxation and tax fraud offences under Nigeria tax system;
- Identify legal and administrative measures used to address tax frauds.
- Evaluate the techniques/modes adopted by the taxpayers in committing tax fraud.
- Identify weaknesses in addressing tax fraud by tax authority.
- Examine the impact of tax fraud offence on the revenue of the
Government in particular and the economy of the country, as a whole.
- Recommend mechanisms that should be used to control and curb tax fraud offences.
1.4. RESEARCH QUESTIONS
People talk about tax matters, complain about them and try to dodge
them when they can. Some always pay; some always cheat; and some cheat
when they think they can get away with it. Businesses also react to
taxes, both in how they organize their activities and, perhaps, in where
they carry them out.
This research is intended to find the possible solutions for the following questions:
- Concept of taxation and tax fraud offences under Nigeria tax system?
- What are the legal and administrative measures used to address tax frauds?
- What are the various techniques/modes adopted by the taxpayers in committing tax fraud?
- Weaknesses in addressing tax fraud by tax authority?
- Are there any effect of tax fraud offence on the revenue of the
Government in particular and the economy of the country, as a whole?
- Recommend mechanisms that should be used to control and curb tax fraud offences.
1.5. STATEMENT OF HYPOTHESIS
The following null hypotheses were formulated and tested:
Hypothesis one
Hi: Tax officials plays a significantly role in the reduction/prevention of tax Fraud among taxpayers.
Hypothesis two
Hi: Tax fraud has drastically reduced revenue generation in Nigeria.
1.6. SIGNIFICANCE OF STUDY
Tax fraud is a general phenomenon that is probably as old as taxation
itself. Wherever and whenever authorities decide to levy taxes,
individuals and firms try to avoid paying them. Though this problem has
always been present, it becomes more pressing in the course of
globalization as this process extends the range of opportunities to
circumvent taxation while simultaneously reducing the risk of being
detected.
For the purpose of this study, this research study would contribute
to the existing literature on tax fraud by focusing on reform of tax
laws and policy in Nigeria with a view to identifying the critical
problems on the collection of tax levy and causes of tax fraud among
taxpayers so that appropriate measures could be taken to tackle them.
This study shall also seeks to set out, a concrete analysis of other
tax fraud offences such as tax evasion/avoidance perpetrated by
individual tax payers and corporations, and it will also consider the
‘dark’ side of professional practice by examining the involvement of tax
officials in facilitating tax fraud, tax avoidance, tax evasion and
other related tax offences in Nigeria.
Finally this study will be of great significance to government, tax
officials, tax authority, small scale entrepreneur, investors, corporate
organizations, schools and students who are regular taxpayers, it will
serve as a reference point for student who would like to make future
research or contribute to the existing literature.
1.7. SCOPE OF THE STUDY
In the light of broad coverage, the researcher focuses on the role of
tax authority in detection and prevention of tax fraud in Nigeria,
particularly among small tax payers in Ibadan, Oyo State.
The researcher limit his research to small scale entrepreneur in
Ibadan Metroplis because they constitute 50percent of taxpayers in the
states, some of which are used to avoiding the payment of tax, thereby
reducing internal revenue generated by the state government.
1.8. LIMITATION OF THE STUDY
Little time and inadequate funds: the researchers was not able to
generate complete and concrete research material, this is because of
time and money constraints at the disposal of the researchers, on one
hand, and the unwillingness and the busy schedule of the Tax officials,
in the other, in order to provide us with more appeal cases and their
valued opinions.
However, we had to convince the respondents by giving gentlemen word
that the names of the corporate firms would not be disclosed in our
study and the materials would be used for this study purpose only.
Not enough previous research work has been carried out on this study,
thus creating a lump sum of work for the researcher, and extending the
duration initially budgeted for the completion of the research study.
1.9. DEFINITION OF TERMS
1. Tax fraud: tax fraud occurs when an individual or
business entity wilfully and intentionally falsifies information on a
tax return in order to limit the amount of tax liability.
2. State Taxes: Personal Income Tax, Road Taxes,
Pools betting and lotteries, Business premises registration, Development
Levy, Naming of street registration in state capitals, Right of
occupancy on land owned by state, and Market taxes on state financed
taxes.
3. Tax Evasion: Tax evasion is a deliberate and wilful practice of not disclosing full taxable income so as to pay less tax.
4. Tax Avoidance: Tax avoidance has been defined as
the arrangement of tax payers’ affairs using the tax shelters in the tax
law, and avoiding tax traps in the tax laws, so as to pay less tax than
he or she would otherwise pay
5. Non-Compliance: can be defined as the failure on
the part of a taxpayer to correctly file returns, report actual income,
claim the correct deductions, reliefs and rebates and remit the actual
amount of tax payable to the authority on time.
6. Tax: is a compulsory levy payable by individual
economic units or corporate bodies to government without any direct quid
pro quo from the government.
7. FRAUD: is an act or course of deception, deliberately practiced to gain unlawful or unfair advantage; at the detriment of another.
8. Direct and Indirect Tax: direct taxes are levied
on persons or property, while indirect taxes are levied on manufacture,
sale, consumption, and the like, and are indirectly paid by the
consumer.