Fiscal policy measures in
Africa have been largely driven by the need to promote such macroeconomic
objectives as raising revenue to finance rapid economic growth of
theireconomies, generating employment, maintaining price level and exchange
rates stabilityand balance of payments equilibrium. To achieve these objectives
one of the ways of dealing with taxation problems is to deal with harmful taxes
practices. The two harmful practices that readily come to mind are tax evasion
A decline in price of oil in
recent years has led to a decrease in the funds available for distribution to
the Federal Government and to the State Governments. The need for state and
local governments to generate adequate revenue from internal sources has therefore
become a matter of extreme urgency and importance. This need underscores the
eagerness on the part of state and local governments and even the federal
government to look for new sources of revenue or to become aggressive and
innovative in the mode of collecting revenue from existing sources (Aimurie,
2012). Aguolu (2004) states that though
taxation may not be the most important source of revenue to the government in
terms of the magnitude of revenue derivable from taxation, however, taxation is
the most important source of revenue to the government, from the point of view
of certainty, and consistency of taxation. Aguolu (2004) further mentioned that
taxation is hence the most important source of revenue to the government. Owing
to the inherent power of the government to impose taxes, the government is
assured at all times of its tax revenue no matter the circumstances.
Tax evasion in general refers to
illegal practices to escape from taxation. To this end, taxable income, profits
liable to tax or other taxable activities are concealed, the amount and/or the
source of income are misrepresented, or tax reducing factors such as
deductions, exemptions or credits are deliberately overstated (see Alm and
Vazquez, 2001 and Chiumya, 2006). Tax evasion can occur as an isolated incident
within activities that are – in other aspects – legal. Or tax evasion occurs in
the informal economy where the whole activity takes place in an informal manner
– this means the business is not only evading tax payments but is also not
registered as formal enterprise at all.
Tax avoidance, in contrast,
takes place within the legal context of the tax system that is individuals or
firms take advantage of the tax code and exploit “loopholes”, i.e. engage in
activities that are legal but run counter to the purpose of the tax law.
Usually, tax avoidance encompasses special activities with the sole purpose to
reduce tax liabilities. An example for tax avoidance is strategic tax planning
where financial affairs are arranged such in order to minimize tax liabilities
by e.g. using tax deductions and taking advantage of tax credits.
Tax evasion and its sister tax
avoidance are key fundamental problems of tax administration in a developing
country like Nigeria. All forms oftaxes in Nigeria are to some extent avoided
or evaded because the administrative machinery to ensure effectiveness is weak.
As a result of thediversities and complexity in human nature and activities, no
tax, law can capture everything hence; loophole will exist and can only be
reducedor eliminated through policy reforms.
Thus, besides generating public
revenues, strengthening tax systems in developing countries is equally
important from a governance or state-building perspective. Thirdly, revenue
raising systems typically include the entire population, thereby exhibiting a
direct effect on the poor and their household income. Designing a tax system in
a pro-poor way can e.g. be achieved by including a redistributive component.
All in all, collecting a sufficient amount of revenues is essential for a
country to fund pro-poor programs, built effective government institutions and
strengthen democratic structures, stimulate sustainable economic growth and
reach national and international development goals. To reach these goals it is,
however, essential that the tax system is implemented the way it was designed.
Thus, counterproductive activities like tax evasion and avoidance practices,
that undermine the intentions of the system, need to be reduced.
Despite the emphasis on the importance
of taxation and the efforts made at improving its efficiency, citizens’
aversion to taxes have remained a problem that most tax authorities have to
grapple with. This is because individuals will always look for a means –legal
or otherwise–to reduce or even completely avoid paying taxes. This result in
heavy revenue losses to governments and ultimately affects their ability to
meet their obligations.
1.2. STATEMENT OF PROBLEMS
Over the years,
revenue derived from taxes has been very low and no physical development
actually took place, hence the impact on the poor is not being felt. It is the view of many people that the loss
of revenue caused by widespread tax evasion and tax avoidance in Nigeria is due
to inefficient and inept tax administration. Omorogiuwa (1981) has opined that
ineffective tax administration is the main factor responsible for large scale
tax evasion in Nigeria. Philips (1973) corroborates this view when he states
that tax evasion is due principally to administrative ineffectiveness
Nigeria is losing
billions of Naira every year to illicit financial tax fraud as individuals and
corporate firms engage in fraudulent tax schemes aimed at avoiding tax payments
to some of the developing countries, impeding development projects and denying
poor people access to crucial services.
The primary way
which money flows out of these countries is through tax offset. In its simplest
form this entails three steps. Firstly, a corporation working in a developing
country sets up a subsidiary in a tax haven. Secondly, they sell their product
at an artificially low price to this subsidiary – enabling them to declare
minimal profits and consequently pay very little tax to the government of the
developing country. Thirdly, their subsidiary in the tax haven sells the
product at the market price – for comparatively huge profits coupled with a low
tax rate (or none at all). In other words, corporations are manipulating prices
to pay minimal taxes.
evasion and tax avoidance are major facilitator of poverty, crime, and
corruption in a developing countries like Nigeria. Tax haven secrecy drains
nearly $1 trillion from each year from the country. This is money that could
have been spent on health care, education, and infrastructure, while banks play
a critical role in the global economy and many countries’ tax systems; many
have also played a significant part in facilitating tax evasion and avoidance
schemes, thereby reducing revenue generated by government both at the federal,
state and local government level.
1.3. OBJECTIVES OF THE STUDY
The main objective of this research
work is to assess the economic effect of tax evasion and avoidance on economic
growth and development of the country.
Specifically, this study attempt
1. Examine the contribution of
taxation on revenue generation in Nigeria
2. Ascertain the extent to which tax
evasion and tax avoidance has affected negatively on revenue generation in
3. Assess the meaning of tax evasion,
avoidance and the causal reason for engaging in such tax offences.
4. Examine the extent to which taxation
has contributed to the steady growth in Gross Domestic Product in Nigeria.
Identify the problems created to the
economy by taxpayers and their facilitators operating in Nigeria through tax
evasion and tax avoidance.
The research question
provides a framework and guidelines through which substantial knowledge of the
research study can be understood.
This study sets out to
address the following questions.
1. To what extent has taxation
contributed to revenue generation in Nigeria?
2. To what extent has tax evasion and
tax avoidance affected negatively on revenue generation in Nigeria?
3. What are the causal reasons for
engaging in such tax offences?
4. To what extent has taxation
contributed to the steady growth in Gross Domestic Product in Nigeria?
What are the problems created to the
economy by taxpayers and their facilitators operating in Nigeria through tax
evasion and tax avoidance?
1.5. STATEMENT OF HYPOTHESIS
The following null hypotheses
were formulated and tested:
Ho1: Tax avoidance and tax
evasion are not caused by weak tax policy and administration.
Ho2: Taxation has not
contributed significantly to revenue generation in Nigeria.