CHAPTER ONE
INTRODUCTION
1.0
BACKGROUND
TO THE STUDY
The
recent global crisis in the world has brought to the fore the need to note that
this overdependence on oil creates unnecessary shocks and thus, the need for
diversification of the nation’s resource base and long term growth path. The
oil is an exhaustible and dwindling resource, while taxation is the only
non-exhaustible veritable source of resource and revenue generation to the
government both at the tiers of government.(Oloyede, 2010:1).
Nigeria
is a monolithic economy with strong dependence on the oil sector; this
over-dependence makes the economy to be more vulnerable to external manipulation
and adversely affects the planning horizons in the country.
Taxation
has rightly been identified as a major tool in the strengthening of domestic
resource mobilization and consequently, the search for ways and means of
expanding the tax base and also strengthening tax administration has been
intensified. Taxation is considered a veritable source of revenue for financing
developmental as well as people oriented programs in virtually all countries,
irrespective of whether they are classified as developed or developing
economies. That taxation has been one of the most important weapon available to
government for marshalling financial resources is undisputable (Atta-Mills,
2002: Teidi, 2003 and Oloyede, 2010).
Nigeria is governed by a federal system; hence its fiscal
operations also adhere to the same principle. This has serious implications on
how the tax system is managed in the country. In Nigeria, the government’s
fiscal power is based on three – tiered tax structure divided between the
federal, state and local governments, each of which has different taxes
jurisdiction. As of 2014, all three levels of government share about 50
different taxes and levies.
It
is needless to emphasize that the existence of well defined tax laws alone
cannot guarantee the success of tax collection effort. There must always exist
an efficient and effective tax administration as a sine qua non to successful
domestic resource mobilization.
In
some developing countries, Governments impose many types of taxes, individuals pay
income taxes when they earn money, consumption taxes when they spend it,
property taxes when they own a home or land, and in some cases estate taxes
when they die. In the United States, federal, state, and local governments all
collect taxes. Taxes on people’s income play critical roles in the revenue
systems of all developed countries.
Taxation
as a major non-oil revenue has been the mainstay of most developed countries,
in contrast to developing countries that still depend on primary products.
Also, indirect taxes appear to be in vogue in developed countries, due to
higher return, lower administration cost and higher compliance rate, however,
most developing countries still rely on direct taxes with lower compliance rate
(Oloyele, 2010: 3).
it
is increasingly apparent, however, that tax administration must receive far
greater attention if the goals of tax reforms and policies are to be achieved
in the face of ever growing economy. Much of tax policy is being directed to
obtaining increased revenues to enable governments and their agencies or
parastatals to carry out their economic planning. Yet it is true in Nigeria
that effective administration of some of the existing taxes would provide a
considerable and reasonable part of the needed revenue.
The
Nigerian tax system has undergone several reforms geared towards enhancing tax
collection and administration with minimal enforcement cost. The recent reforms
include: the introduction of TIN (Tax Payers Identification Number), which
became effective since February, 2008. Automated Tax System (ATS) that
facilitates tracking of tax positions and issues by individual tax payer,
E-Payment System (EPS) which enhances smooth payment procedure and reduces the
incidence of tax touts, Enforcement scheme (special purpose tax officers), all
these have led to an improvement in the tax administration in the country.
Without
recourse to argument, taxation no doubts, remains a veritable and inexhaustible
source of revenue to the government; but Nigeria?s dependence on Oil as the
major foreign exchange earner makes her economy vulnerable to external
manipulations.
An
effective and efficient tax reforms or
administration in the country will go a long miles in helping the governments
in devising means to tax successfully the informal and agricultural sectors of
the economy which has remained largely untaxed in spite of their inherent
potential to provide a reasonable portion of the revenues needed by the
governments. However, one common and easily noticeable feature of the country
is her low tax effort. While the overall average tax effort level of developing
countries
is estimated at about 18% of Gross Domestic Product (GDP), the average for
industrialized countries is around 24% (Atta-Mills, 2002).
It
is in the light of the above therefore, that this work is tailored to bringing
into public domain the critical challenges, problems and prospects of tax
reforms and administration in Nigeria with Ogun State Board of Internal Revenue
as the case study.
1.2.
STATEMENT OF PROBLEM
Aside
from being a major source of revenue to most nations, taxation also plays very
significant roles in the promotion of social and economic welfare, provision of
public goods, redistribution of income, promotion of economic stability, as
well as regulation of economic activities and consumption of goods and
services. Because of the aforementioned importance of taxation, developed
economies have invested considerably on legislative tax reforms, taxpayer
education, and development of new technologies to aid in evolving effective tax
systems, and to boost tax collections.The institutional framework, within which
the revenue administration operates impact directly on the effectiveness and
efficiency of the tax administration. The institutional framework in operation
in Nigeria is many and varied. The general trend has been to have separate
administrations for internal taxes and custom duties. However this policy and
method of operation is common in some other countries.
Another
challenging problems in the administration of tax in Nigeria is the location of the assessment and
collection functions within the tax administration. Problems also emanate from
the frequent changes in the tax laws and policy: Every year the annual budget
estimate introduces new measures and procedures, amends or cancels existing
ones.
These
frequent changes can make the law confusing as well as complicate the tax
structure. After a few years these changes and amendments become so many that
the tax payer finds it difficult to know which laws are applicable.
Another
frequent and alarming problem is, Non-Compliance Strategy: Mamud (2008:2),
observes that the recurring problem with Personal Income Tax (PIT), is the
non-compliance of employers to register their employees so as to remit such taxes
to relevant authorities. According to him, government in 2011 amended the 1973
PIT Act to make non-compliance employers liable to penalties up to #5000.00 as
well as liable for the payment of all tax arrears. Employers that failed to
keep proper records also face a penalty of #10, 000.00. The implication of the
above is that these employers may feel reluctant to remit their employees names
to the relevant authorities hence they may always bribe their way through. This
problem is not limited to PIT but also Pay As You Earn (PAYE), withholding
taxes, and taxes paid by ministries and agencies in the three tiers of
government.
Multiple
Taxes: The study group of 2002 highlighted the multiple taxes in the three
tiers
of government as the most serious problem for the country’s tax administration
system. The group emphasized that companies are subjected to a wide range of
taxes, levies and rates at the state and local levels in addition to the
federal income tax. According to Odusola (2006: 3), the imposition of multiple
taxes in the system imposes restrictions on inter-state commerce and trade,
making locally produced goods uncompetitive and in some instances causing
business closure. The failure of government to address this issue has affected
resources that could have accrued to it as some business organizations have
folded up as a result. Some of those who have remained in business usually put
up hostile and confrontational attitudes when approached to pay these taxes.
Tax
evasion and tax avoidance: 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.
Corruption:
AmartyaSen.argued that corruption or corrupt behaviour involves the violation
of established rules for personal gain and profit. (Sen ,1999) Corruption is
efforts to secure wealth or power through illegal means private gain at public
expense; or a misuse of public power for private benefit. The widespread of
corruption in the tax system in Nigeria and frustrate effective tax
administration and reforms in Nigeria. for example, Taxpayers prefer to bribe
the tax officials than to pay tax and big companies are also not exempted from
this practice. This leads to lack of proper accountability and paucity of funds
as the resources available are not enough to cater for the well being of the
country and thereby leading to loss of revenue.