INVESTIGATION INTO THE CAUSES OF TAX EVASION

Abstract

Tax evasion and avoidance are the twin devils that confronts and destruct every tax system whether in the developing or developed world. The Nigerian situation seems unique when viewed against the scale of corrupt practices prevalent in the country and the detrimental effects of economic sanctions imposed by the European Union resulting in the country having to rely on internally generated income for its operations including but not limited to tax collections. The study, aims at examining comparatively, the causes of tax evasion. Questionnaires were administered, one to solicit information from companies and the other from FIRS officials. Descriptive statistics and discriminant analysis were used to address the objectives of the study.

CHAPETR ONE

INTRODUCTION 

1.1        Background of the study

1.2        Statement of problem

1.3        Objective of the study

1.4        Research Hypotheses

1.5        Significance of the study

1.6        Scope and limitation of the study

1.7       Definition of terms

1.8       Organization of the study

CHAPETR TWO

LITERATURE REVIEW

CHAPETR THREE

3.0        Research methodology

3.1    sources of data collection

3.3        Population of the study

3.4        Sampling and sampling distribution

3.5        Validation of research instrument

3.6        Method of data analysis

CHAPTER FOUR

DATA PRESENTATION AND ANALYSIS AND INTERPRETATION

4.1 Introductions

4.2 Data analysis

CHAPTER FIVE

5.1 Introduction

5.2 Summary

5.3 Conclusion

5.4 Recommendation

Appendix

CHAPTER ONE

INTRODUCTION

• Background of the study

The concept of taxation has been a concern of global significance as it affects every economy irrespective of national differences (Oboh etal., 2012). According to Omotoso (2001), in his definition of the modern taxes, defined tax as a compulsory charge imposed by a public authority on the income of individuals and companies as stipulated by the government decrees, acts or cases laws irrespective of the exact amount of services rendered to the payer in return. A more recent and comprehensive definition was given by Dr. Ekenze Oliver of Buitas Consultancy to the effect that tax is: “a compulsory levy imposed by an organization or Government on its member citizens, for the sole purpose of providing common goods and services for the benefit of all members”. He continued: “tax is designed to raise revenue required for the expenditure authorized in a government budget expectation. It is also a veritable instrument of promoting social and economic justice and equality amongst citizens of a state or members of an organization”. As could be gleaned from the above definitions, a tax is not therefore a voluntary payment; it is a compulsory pecuniary burden placed upon the subjects of a given country to support the people. Thus, taxes constitute the principal source of government revenue and the beauty of any government is for its citizen to voluntarily execute their tax obligations without much coercion and harassment. Every nation or government depends on taxes for its survival. Without taxes, there is no way a government can operate unless of course it borrows or charges its citizens outrageous fees for the service it renders them. With taxes, government provide amenities and infrastructure for the improvement of its subjects. It is also through taxation that it funds governance for a stable polity.

One of the cardinal factors in evaluating the effectiveness of a government is in its ability to collect taxes. Before the ongoing reforms in the sector, Nigeria’s tax environment was characterized by poor assessment and collection, multiple taxation, misappropriation of tax revenue and general inefficiency in relative terms, the rich Nigerians pay far less tax in comparism with the poorer counterparts.

The desire to uplift one’s society is the first desire of every patriotic citizen (Allingham & Sandmo, 1972). Tax payment is a demonstration of such a desire. The payment of tax is a civic duty and an imposed contribution by government on her subjects and companies to enable her finance or run public utilities and perform other social responsibilities. Taxes, thus, constitutes the principal source of government revenue. However, one of the greatest problems facing Nigerian Tax System as well as Africa is the problem of tax evasion and tax avoidance. While tax evasion is the willful and deliberate violation of the law in order to escape payment of tax which is unquestionably imposed by law of the tax jurisdiction, tax avoidance is the active means by which the taxpayer seeks to reduce or remove altogether his liability to tax without actually breaking the law. These “Twin devils” have created a great gulf between actual and potential revenue. The government has for the umpteenth time complained of the widespread incidence of tax avoidance and evasion in the state as companies and other taxable persons employ various tax avoidance devices to escape or minimize their taxes or deliberately employ fraudulent ways and means of evading tax altogether sometimes with the active connivance of the tax officials. As pointed out by Rynoids (1963), since tax is a principal source of government revenue, if persons are able to escape by legal or illegal means the tax to which they should logically be subject under the general scope of the tax, the theoretical equity of the tax to a large measure is lost.

In Nigeria, the taxation system dates back to 1904 when the personal income tax was introduced in northern Nigeria before the unification of the country by the colonial masters. It was later implemented through the Native Revenue Ordinances to the western and eastern regions in 1917 and 1928 respectively. Among other amendments in the 1930s, it was later incorporated into direct taxation Ordinance No. 4 of 1940. Since then different governments have continued to try to improve on Nigeria’s taxation system. The general opinion among scholars is that Nigeria’s fiscal regime is characterized by unnecessary complex, distortion and largely equitable taxation laws have limited application in the formal sector that dominates the economy.

There are two elements in a tax, the tax base and the tax rate. The tax base is the object which is taxed i.e. incomes, profits, property etc. the tax rate on the other hand is the amount of the tax base which is paid in tax, and it is usually in form of a flat or a percentage.

Tax evasion is the failure to disclose the correct income that should be assessed either by misstatement of facts, falsification of figures, filing of incorrect returns or by misrepresentation of tax liabilities. Thus, through the employment of criminal or fraudulent means, the tax payer pays less tax than he ought to pay. Tax evasion is accomplished by deliberate act of omission or commission which themselves constitutes criminal acts under the tax laws. These acts of omission or commission might include failure to pay tax; failure to submit return; omission or misstatement of items from returns; claiming illegal reliefs; understating income; documenting fictitious transactions; overstating expenses; failure to answer queries and so on. Tax evasion involves willful default and is therefore a criminal offence.

The greatest puzzle facing the Nigerian tax system is the threat of tax evasion and tax avoidance. It is widely believed that there is a substantial difference between estimated revenue from taxation every year and what is actually collected.

Tax evasion is a major problem plaguing many emerging economies across the globe and Nigeria situation seems unique when viewed against the scale of corrupt practices evident in the country. Under the direct personal taxation as practiced in Nigeria, the major problem lies in the collection of the taxes especially from the self-employed such as the businessmen, contractors, professional practitioners like lawyers, doctors, accountants, architects and traders in shops among others (Kiabel and Nwokah, 2009). As observed by Ayua (1999) cited in Kiabel and Nwokah (2009) these persons blatantly refuse to pay tax by reporting losses every year. Ayua (1999) further asserts that many of these professionals live a lifestyle inconsistent with reported income, which is usually unrealistically low for the nature of their businesses. The only categories of individuals who fulfill their tax obligation in Nigeria are civil servants and other salaried workers.

1. Statement of the problem

Tax evasion in Nigeria has been a cause for a serious concern; this is because it has led to the depletion in the internally generated revenue which has by extension adversely affected our economic growth and development.

1. Objectives of the study

The following are the aims and objectives of this study

1. To examine the major causes of tax evasion in Nigeria.
2. To examine the relationship between tax evasion penalty and tax evasion in Nigeria.
3. To examine the relationship between high tax rate and tax evasion in Nigeria.
4. To know if many business owners pay tax.
5. Research questions
6. What are the major causes of tax evasion in Nigeria?
7. What is the relationship between tax evasion penalty and tax evasion in Nigeria?
8. What is the relationship between high tax rate and tax evasion in Nigeria?
9. Do many Nigerian business owners pay tax?

1.5   Research hypotheses

Ho: There is no significant relationship between high tax rates and tax evasion in Nigeria

Hi: There is no significant relationship between high tax rates and tax evasion in Nigeria

Ho: There is no significant relationship between weak penalties and tax evasion in Nigeria.

Hi: There is no significant relationship between weak penalties and tax evasion in Nigeria.

1. Significance of the study

This study would be important to tax authorities in Nigeria as it would unravel the main causes of tax evasion in Nigeria with a view to creating tax policies that would encourage more people to pay tax.

1.7   Scope/Limitations of the study

This study on causes of tax evasion in Nigeria with Ikeja LGA in Lagos state serving as the case study

Limitations of study

1. Financial constraint– Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).
2. Time constraint– The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

1.8   Definition of terms

Tax:A compulsory contribution to state revenue, levied by the government on workers’ income and business profits, or added to the cost of some goods, services, and transactions.

Evasion: To escape or avoid (someone or something), especially by guile or trickery.

Revenue: The income generated from sale of goodsor services, or any other use of capital or assets, associated with the main operations of an organization before any costs or expenses are deducted.

1.8 ORGANIZATION OF THE STUDY

This research work is organized in five chapters, for easy understanding, as follows

Chapter one is concern with the introduction, which consist of the (overview, of the study), historical background, statement of problem, objectives of the study, research hypotheses, significance of the study, scope and limitation of the study, definition of terms and historical background of the study. Chapter two highlights the theoretical framework on which the study is based, thus the review of related literature. Chapter three deals on the research design and methodology adopted in the study. Chapter four concentrate on the data collection and analysis and presentation of finding.  Chapter five gives summary, conclusion, and recommendations made of the study

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