ABSTRACT
The aim of this study was to examine the impact of tax revenue
collected by federal government on the economic growth of Nigeria, while
looking at the specific objectives which include: assess the impact of
companies’ income tax on economic growth of Nigeria; ascertain the influence of
Petroleum Profit Tax on economic growth of Nigeria; examine the impact of custom and
excise duties on economic growth of Nigeria and determine the impact of VAT on
the economic growth of Nigeria.
Ex -post facto and
survey research designs was adopted in the work to investigate reasons for
consistent low tax contributions to GDP in Nigeria over a period of 35 years.
Secondary data were obtained from FIRS and Bureau of Statistics for the purpose
of this research. Method of analysis include ordinary Least square regression
model was estimated to examine the individual effects of tax revenue proxies of
Value Added Tax (VAT), Petroleum Profit Tax (PPT), Customs and Excise Duties
(CED), and Companies of Income tax (CIT) on Gross Domestic Product (GDP),
Auto-regressive distributed lag (ARDL) model was adopted to determine the
combined effect of tax revenue proxies on GDP of Nigeria.
The study revealed
that the GDP is strongly impacted upon by VAT, PPT, CED, and CIT. In summary,
the simple regression analysis shows thatabout 75% variations in GDP can be
attributed to changes in PPT; also, Value Added Tax (VAT) was discovered to be
responsible for about 95% changes in GDP. The average contribution of tax
revenue to GDP for the thirty five year period was computed at mere 7.8%, which
is still far below the acceptable global average of 20%. Although the
simple regression showed that CIT and CEDindividually has positive effect on
GDP, the multiple regression analysis through long run estimation indicated
that in the long run, CIT and CED have negative effects on GDP and PPT and VAT
have positive effects on GDP.
The study
concluded that tax revenue combined have significant effect on the economic
growth of Nigeria, although Companies Income Tax (CIT) and Custom
Excise Duties (CED) have not contributed positively to economic growth of this
nation over the period of study, hence government need to reposition the tax
administrative system and sufficiently equip them to deal with complexities of
technological advancement in global commerce, enforce compliance and track
all taxable persons in order to generate sufficient revenue needed to foster
economic growth in Nigeria.
TABLE OF
CONTENTS
Title
Page
Abstract
Table
of Contents
List
of Tables
List
of Figures
CHAPTER ONE: INTRODUCTION
1.1
Background
to the Study
1.2
Statement
of the Problem
1.3
Objective
of the Study
1.4
Research
Questions
1.5
Hypotheses
1.5.1
Rationale for Hypotheses
1.6
Significance of the Study
1.7
Scope
of the Study
1.8
Operationalization of Variables
1.10
Operational Definition of Terms
CHAPTER TWO:
REVIEW OF LITERATURE
2.1
Conceptual
Review
2.1.1
Historical Background of
Taxation in Nigeria
2.1.2
Taxation
2.1.3
Nigerian Tax System
2.1.3.1Relevant
Tax Authorities
2.1.3.1.1The
Federal Inland Revenue Service Board (FIRSB)
2.1.4Nigeria National Tax Policy
2.1.5Revenue Generation of Nigerian Government
2.1.6Reasons for Insufficiencies of Tax Revenue
2.1.7Problems of Tax
Administration in Nigeria
2.1.8Problems of Tax Collection in Nigeria
2.1.9The Role of Taxation on
Economic and Social Development Sustainability
2.1.10 Tax reforms in Nigeria
2.1.11. Economic growth
2.2 Theoretical Review
2.2.1 Deterrence Theory
2.2.2 Behavioural Economics
2.2.3Risk Management Theory
2.2.4Other Theories of Taxation
2.2.4.1 Benefit Received Theory
2.2.4.2 Cost of Service Theory
2.2.4.3 Responsive Regulation Theory
2.2.5 Theoretical Framework
2.3 Empirical Review
2.3.1 Tax Reforms and Economic
Growth in Nigeria
2.3.2Tax Revenue and
Economic Growth in Nigeria
2.3.2.1 Company Income Tax
and Customs and Excise Duties and Economic Growth
2.3.2.2 Petroleum Profit Tax and Economic Growth in
Nigeria
2.3.2.3 VAT and Economic Development
2.3.2.4 Customs and Excise
Duties and Economic Development
2.4Gaps in Literature
CHAPTER THREE: METHODOLOGY
3.1Research Design
3.2Population
3.3 Sample size and sampling
Technique
3.4Sources of Data
3.4.1 Validity of the Research
Instrument
3.5Model specification
3.6. Method of Data Analysis
3.7Model Estimation and
Evaluation Technique
3.8Apriori Expectation
3.9Ethical Considerations
CHAPTER FOUR:DATA ANALYSIS, RESULTS AND
DISCUSSION
OF FINDINGS
4.1Descriptive
Analysis
4.2Empirical Analysis
4.2.1. Correlation Analysis
4.2.2. Regression Analysis
4.2.2.1. Test of Hypothesis One (H01)
4.2.2.2.
Test of Hypothesis Two (H02)
4.2.2.3 Test of Hypothesis Three (H03)
4.2.2.4 Test of Hypothesis Four (H04)
4.2.3
The Main Model
4.2.3.1
Diagnostic Test
4.2.3.2
Regression Result
4.2.3.3
Post Estimation Test
4.3 Discussion of Findings
CHAPTER
FIVE: SUMMARY, CONCLUSION
AND
RECOMMENDATIONS
5.1Summary
5.1.1.
Summary of Findings
5.1.2Implications
of Findings
5.2Conclusion
5.3Recommendations
5.4Contribution
to Knowledge
5.5Limitation of the Study
5.6Suggestion
for Further Studies
References
CHAPTER
ONE
INTRODUCTION
1.1 Background to the Study
Effective
tax administration is an issue as old as taxation itself. The balancing act between maximizing tax
revenues and minimizing the impact on the populace in which the state must
engage was evident as early as 2350 BC. The responsibility shouldered by the
government of any nation, particularly the developing nations, is enormous. The
need to fulfil these responsibilities largely depends on the amount of revenue
generated by the government through various means.
Taxation
is one of the oldest means by which the cost of providing essential services
for the generality of persons living in a given geographical area is funded.
Globally, governments are saddled with the responsibility of providing some
basic infrastructures for their citizens. Functions or obligations the
government may owe her citizens include but are not restricted to:
stabilization of the economy, redistribution of income and provision of
services in the form of public goods (Abiola & Asiweh, 2012). Taxation is a major source of government
revenue all over the world and governments use tax proceeds to render their
traditional functions, such as: the provision of roads, maintenance of law and
order, defence against external aggression, regulation of trade and business to
ensure social and economic maintenance (Appah & Eze, 2013). The primary
function of a tax system is to raise enough revenue to finance essential
expenditures on the goods and services provided by government; and tax remains
one of the best instruments to boost the potential for public sector
performance and repayment of public debt as enunciated by (Okoye & Raymond,
2014).
According
to Azubike (2009), a system of tax avails itself as a veritable tool that
mobilizes a nation’s internal resources and it lends itself to creating an
environment that is conducive for the promotion of economic growth. Therefore,
taxation plays a major role in assisting a country to meet its needs and
promote self-reliance. In Nigeria, tax revenue has accounted for a small
proportion of total government revenue over the years compared with the bulk of
revenue needed for development purposes that is derived from oil (Uremadu &
Ndulue 2011). The serious decline in the prices of oil in recent times has led
to a decrease in the funds available for distribution to the federal, state and
local governments as noted by (Nzotta, 2007). Consequently, dependence on oil
as a particular or main source of revenue in Nigeria has become risky and not
beneficial for sustainable economic growth. It is worse for Nigeria where there
are fluctuations in prices in the oil market; thereby creating concerns amongst
Nigerians and indeed the Nigerian government on the need to diversify the
economy.
Naturally,
and globally, there is a paradigm shift to taxation revenue as an alternative
source of revenue. Nigeria is not an exception. The machinery and procedures
for implementing a good tax system in Nigeria are inadequate; hence tax evasion
and avoidance of the self-employed individuals and organizations whose data
base is not captured in the relevant tax authority’s data system poses a great
challenge and impediment to national economic growth as submitted by (Angahar
& Alfred, 2012). In the findings of (Edemode 2009), the need for the
government to generate adequate revenue from internal sources has therefore
become a matter of extreme urgency and importance. The desire of any government
to maximize revenue from taxes collected from tax payers cannot be over-
emphasized. This is because, as it well-known, the importance of tax lies in
its ability to generate revenue for the government, influence the consumption
trends and grow and regulate economy through its influence on vital aggregate
economic variables (Leyira, Chukwuma & Asian 2012).
According
to Ariwodola (2001), tax is a compulsory levy imposed by the government
authority through its agents on its subjects or his property to achieve some
goals. Tax is the transfer of resources from the private sector to the public
sector. Okezie (2012) noted that tax is the price everyone must pay for an
egalitarian society. The tax administration in any country does not only
encompass the procedures of imposing these compulsory levies but also the
establishment of tax laws and ensuring its compliance. Despite the millennia
that have passed and the quantum of academic research work, Chandler (2013)
opined that today's policymakers are still grappling with the questions of
effective tax administration leading to adequate tax revenue.
Empirical
studies have shown that the quantum of revenue available to any government
needed to meet the social and capital expenditure in a country depends on its
ability to harness funds from internal and external sources and channel it
towards national development and economic prosperity. Appah
(2010), in his findings, stated that revenue from taxation
forms the bedrock of the revenue base of most governments all over the world.
The extent to which a government can provide social, economic and
infrastructural development is a function of the amount of funds at its
disposal.
It has
been observed that in Nigeria, the quantum of income generated from non-oil tax
over the years by the federal government is grossly insufficient in relation to
the ever increasing social, political and infrastructural developmental needs
of the country. As noted by Odusola (2006), Nigeria economy has thrived largely
on oil revenue in the past three decades. In essence, Nigeria runs a monolithic
economy which is subject to international oil price mechanism far beyond the
control of the government, thereby exposing the economy to global market
fluctuations, distorting budgetary projections, and renders meaningful
developments improbable. The current budget of borrowing in Nigeria is a fall
out of the dwindling oil revenue that has sank into abysmal low prices in the
international market and has thrown the Nigeria budget for 2016 into serious
crisis.
Appah (2010) further stated that the economic
growth and development of any nation depends on the amount of revenue generated
by the government for the provision of infrastructural facilities. The highway of economic growth of most developed nations of the
world is paved with revenues derived from efficient taxation system as implied
by Enahoro
and Olabisi, (2012). The provision of public services
such as power, roads, efficient transportation system, healthcare facilities,
schools, security of lives and properties and defence against internal and
external aggression, are the exclusive responsibility of governments all over
the world. According to Worlu and Emeka
(2012), to meet these responsibilities, governments need to harness all sources
of revenue available to it nationally and internationally. Reliance on external
sources of revenue for developmental purposes has proved unproductive for many
countries over the years, and those countries which experienced rapid social
and infrastructural development around the world were found to have leveraged
on revenue from efficient tax system.
The
International Monetary Fund (2012), observed that the developing countries must
be able to raise the revenues required to finance the services demanded by
their citizens and the infrastructure (physical and social) that will enable
them to move out of poverty (economic growth). Tax Justice Network (2012),
Stated that taxation is expected to play an important role in this revenue
mobilization. The structure of tax must be
strengthened rather than tax administration and geared towards generating more
revenue from existing tax sources by being more efficient and effective
according by Oloidi and Oluwalana (2014), who describe efficiency as the
ability to utilise available resources for optimal results while effectiveness
is the ability to be able to functionally produce expected results.
From
above, it can be deduced that efficient taxation system capable of generating
greater amount of the revenue needed for social and infrastructural development
purpose is of primary importance in Nigeria. According to McPherson (2004),
efficiency and effectiveness is the benchmark for designing a good tax
administrative system.In the opinion of Tanzi and Zee (2000) efficient tax
administration plays vital role to revenue collection of any country. In the
acclaimed study, they posited that the formation of tax policy capable of raising
sufficient revenue to meet the social an infrastructural development of the
citizen in equitable and minimum tax disincentives on the polity is of great
essence. Four critical areas which are inimical to the formation of a national
tax policy such as economic structure
that makes the imposition and collection of certain taxes impossible;
limited capacity of tax administrators; paucity or poor quality of data and the political set up in
developing countries. They further said that it
is difficult to create an efficient tax administration without a well-educated
and well-trained staff. Where money is lacking to pay good wages to tax
officials and to computerize the operation (or even to provide efficient
telephone and mail services), and where taxpayers have limited ability to keep
accounts, inefficiencies will definitely thrive. As a result, governments often
take the path of least resistance, developing tax systems that allow them to
exploit whatever options are available rather than establishing rational,
modern, and efficient tax systems. So tax
administrations must be strengthened to accompany the needed policy changes.
Aderibigbe and Zachariah (2014) are of the
opinion that tax system is an
opportunity for the government to collect additional revenue needed in
discharging economic development and creating a conducive business environment
for its citizens, they also opined that tax is a major
source of government revenue all over the world. The structure of
Nigerian tax administration is in relation with the system of government in
operation. These include the three tier system comprising of the local
government, state government and federal government structures. Each of these
tiers of government is constitutionally saddled with administration of specific
taxes, while the joint tax board oversees the whole system and resolve disputes
as noted by Akintoye and Dada (2013). The Board of Inland Revenue administers
the federally collected taxes through the Federal Inland Revenue Service
(FIRS), while the board of state internal revenue service administers the taxes
collectible by the state government and the revenue committee administers taxes
and levies collectible by the Local governments (James and Moses, 2012).
The
history of Nigerian tax administration can be traced to the British model tax
administration since 1960 and has been in operation until 1990 when the
self-assessment scheme came into play which seems similar to the American model
of tax administration system (Enahoro and Olabisi, 2012). They further
commented that countries have encountered problems on assessing how efficient
tax administration is, against the quantum of tax revenue collected. In other
words, the process of tax collection is of great importance to developing
nations especially in an economy like Nigeria where great reliance is place on
one source of revenue. Some of the challenges of Nigerian tax administration as
highlighted by McPherson (2004) are;
paucity of tax statistics, unethical practices (corruption), non-prioritization
of tax efforts, poor administrative processes, multiplicity of taxes, economic
structural problems which hinders effective implementation of taxes and the
challenge of underground economy.
A good tax administrative system should have
efficiency and effectiveness as its watch word. According to Kiabel and Nwoka
(2009), the administration of tax is the responsibility of various tax
authorities as established by relevant tax laws. However in Nigeria, the
inefficiencies of tax administration as highlighted above have led to various
tax issues. Abiola and Asiweh (2012) observed that those working in the
informal sector of Nigerian economy do not see the need to pay tax whereas they
dominate the economy leading to tax evasion and tax avoidance. From the above
purview, this study sets out to critically examine the impact of tax
administration and revenue on the economic development of Nigeria.
The whole essence of tax administration is to
generate sufficient revenue to advance the welfare of the people of a nation
with focus on promoting economic growth and development of a country through
the provision of basic amenities for improved public services via efficient
administrative system, and structures. Tax revenue plays a crucial role in
promoting economic activity growth and development. Through tax revenue,
government ensures that resources are channeled towards important projects in
the society, while giving succor to the weak. The role of tax revenue in
promoting economic activity and growth may not be felt if poorly administered.
For business to thrive and compete globally, infrastructural amenities such as
power, roads, telecommunication, water and quality health facilities are
essential, as this will reduce the overhead cost of business owners and give
room for expansion thereby creating wealth for the prosperity of all
citizenries. The provision of these amenities is the primary duty of government
and requires huge capital outlay. Efficient tax administration will enhance the
total revenue available to the government to carry out its role. This calls for
a need for proper examination of the relationship between revenue generated
from taxes and the economy, to enable proper policy formulation and strategy
towards its efficiency.
According to Olashore (1999), the Nigerian
economy has remained in a deep slumber with macroeconomic indicators reflecting
an economy in dire need of rejuvenation, revival and indeed radical reform. Oni
(1998), is also of the opinion that there is the need for tax administration to
be refurbished and refunds of taxes as well as duty drawbacks administration
are inefficient.
1.2 Statement of the Problem
The revenue accruing to the federal Government of Nigeria from
taxation over the years has remained grossly insufficient to meet the expanding
social and public spending required in fostering economic growth and
development in the country. In the opinion of Ayua
(1996), the tax system is grossly inefficient as it is characterized by tax
evasion, avoidance and record falsifications which have led to consistent low
tax revenue inflow. Gross inefficiency and leakages
have hampered the amount of revenue realized from tax sources over the years
which has been affecting the economy negatively.
The inability of the Federal Inland Revenue Service Board to
ensure total compliance to tax rules by companies and bring all operational
companies into the tax net has significantly limited the contribution of tax
revenue to economic growth. According to James
and Moses (2012), the prevalence of tax evasion in the Nigeria tax system, has
curtailed the amount of revenue collected from tax income, this in no doubt has
effect on the government expenditure and inflation in the economy. Moreover, the revenue generation capacity of the nation’s present
tax administrative system is hampered by challenges such as paucity of data,
inefficient monitoring and enforcement system, and corrupt practices, as noted
by, (Leyira, Chukwuma, and Asian 2012).
All these have impeded the economic growth of Nigeria; which has resulted to
her current state of economic recession with the resultant effect of companies
closing down, hence, reducing the tax revenue of the Government.
In most countries,
tax system is seen as an embodiment of contention and controversy whether in
its policy formulation, legislation or administration as observed by (Bariyama
& Gladson 2009). For example Nigeria government is contemplating to raise
Value Added Tax rate, while the organised private sector is resisting that
attempt and would rather have government bring more companies and individuals
into the tax net as noted by (Alli, 2009). According to Enahoro and Olabisi (2012)
there is a huge scale of corrupt practices prevalent in Nigeria tax
administrative system, this tells to a reasonable extent that the economy is at
a disadvantage position. Ahmad
(2005) pointed out that the objectives of tax system are multi-dimensional in
nature, which includes revenue generation, resources allocation, a fiscal tool
for stimulating economic growth and development and Social functions, like
redressing the rural-urban population drift, and making everybody to be
responsible. Taxes, and tax systems, are fundamental components of any attempt
to build any nations economic growth, and this is particularly the case in
developing or transitional nations like Nigeria. However, given the ever
increasing social and infrastructural expenditure needs of government, greater
tax revenue will be needed to execute or sustain the required level of spending
that can trigger economic growth. These
shortcomings may be more evident where government’s financing relies heavily on
more “distortionary” taxes (e.g. direct taxes) and where public expenditure
focuses on “unproductive” activities. Ayua (1996)
pointed out that the major problem lies in the procedures, machinery and
approaches adopted in collection, assessment and compliance practices of tax,
however, this study seeks to ascertain the effect of poor tax administration
system and assess its impact on economic growth of Nigeria.
The problems associated with the
major tax reforms in Nigeria can be attributed to its inability to achieve its
set objectives towards which it was focused. Ogbonna and Ebimobowei (2012)
identified some of the problems to include the increasing cost of tax
administration by the Federal Government of Nigeria in relation to the tax
revenue collections as evidenced by scholars, which is a major indication of
high level of inefficiency in the tax operations of the country contrary to the
canons of taxation enunciated by Adam Smith. Furthermore, the prevailing
distortions in the tax system have jeopardized some of the purpose of the Nigerian
tax reform agenda resulting in an ineffective tax system.
Companies Income Tax administration
in Nigeria does not measure up to appropriate standards. If good old test of
equity, certainty, convenience and administrative efficiency are applied,
Nigeria will score low as a result of tax evasion and inadequate monitoring.
Non compliance with tax laws and regulations by tax payers is deep in the
system because of weak control, poor tax administration, poor tax education,
inconsistent government policies, lack of adequate statistical data and
corruption among tax officials (Azubuike 2009).
Adegbie and Fakile (2011) found out
that fraud and financial malpractices have negative impact on the contribution
of Customs and Excise duties to Nigerian economic development. The Nigerian
customs service is much criticized for corruption and inefficiency and its
upper echelon is often driven with intrigue and infighting. All these need to
change if the Nigerian dream of economic development is to be achieved. Value
Added Tax rate in Nigeria is one of the factors contributing to the collapse of
the real economy (Odusola 2006). This is because it disrupts the manufacturing
sector by accelerating astronomical increase in the prices of goods and
services. Hence it increases the volume of unsold goods thereby reducing
capacity utilization, increasing poverty levels, increasing unemployment,
discouraging local and foreign investors and subjects the country to economic
volatility.
Although the Petroleum Profit Tax
serves as the instrument of redistribution between the industrialized economies
who own the technology and the emerging economies from where the petroleum
resources are extracted, most of the objectives of Petroleum Profit Tax in
Nigeria are not achieved (Uremadu and Ndulue 2011). This is because of several
challenges such as lack of adequate trained tax inspectors and officials;
inadequate application of technology; poor assessment of tax payers; tax
evasion and avoidance and ineffective tax laws and regulations
Likewise, the problem associated
with tax justice in Nigeria was addressed as against economic growth in
Nigeria. The tax administration system is seen as a central pillar of any
national development strategy, Action Aid (2013) defined tax justice as a
transparent, accountable and efficient set of arrangements that raises
substantial revenue for needed public services, development and government
infrastructure through a broad tax base, with the proportionally largest
contributions coming from those with the greatest wealth and income. Corruption
and corrupt practices have eaten deep into this nation; therefore, the Nigerian
tax justice is tainted with lack of transparency, unaccountability and
inefficient administration system, which on the other hand has a negative
effect on the economic growth of our nation. Globally , a tax contribution of
20% to a nation’s Gross Domestic Product is acceptable ,however in Nigeria ,
tax contribution to Gross Domestic Product is about 0.7% as submitted by Okonjo
Iweala (2013).
This is quite unacceptable.
Therefore this research work was designed to unravel the problem of low tax
yield to Nigeria’s economy and proffer immediate solutions. The problem of poor
economic growth due to insufficient revenue collection from the non-oil tax
sector and inefficient administrative framework by federal government of
Nigeria were the major issues this research work investigated. The immediate
and remote causes or reasons for poor/little tax revenue contribution to
economic growth (below expected), in Nigeria is therefore a fundamental problem
that must be solved if the vision 20 2020 would be realized.
1.3 Objective of the Study
The main objective of this work was to examine the impact of tax
revenue collected by federal government on the economic growth of Nigeria. The
specific objectives are to:
i.
assess the impact of companies’
income tax on economic growth of Nigeria;
ii.
ascertain the influence of Petroleum Profit
Tax on economic growth of Nigeria;
iii.
examine the impact of custom and
excise duties on economic growth of Nigeria and
iv.
determine the impact of VAT on the
economic growth of Nigeria.
1.4 Research Questions
Research questions were employed to pilot this research, testing
for the efficiency and effectiveness of tax revenue to produce the desired
economic growth. The following questions were developed:
i.
What is the impact of companies’
income tax on economic growth of Nigeria?
ii.
What is the influence of Petroleum Profit
Tax on economic growth of Nigeria?
iii.
In what ways has custom and excise
duties impacted the economic growth in Nigeria?
iv.
To what extent does VAT impact the
economic growth of Nigeria?
1.5 Hypotheses
The following hypotheses were tested at 5% level of significance
in this study:
Ho1: Companies
income tax has no significant impact on the economic growth of Nigeria.
Ho2: Petroleum Profit
Tax has no influence on the economic growth of Nigeria.
Ho3: Custom
and excise duties have no significant impact on the economic growth of Nigeria.
Ho4: VAT
has no significant impact on the economic growth of Nigeria.
1.5.1 Rationale for Hypotheses
The role and strategic importance of the
petroleum industry to the Nigerian economy cannot be over-emphasized, as it is the
main fulcrum around which the entire economy revolves. Petroleum Profit Tax is
payable by companies which are engaged in petroleum operations. The fundamental
objectives of petroleum taxation is to ensure a fair share of wealth accruing
from the extraction of the petroleum resource, while also providing sufficient
incentives to encourage investment and optimal economic recovery of the
hydrocarbon resource (Sanni, 2011).
Value Added tax
has become one of the major sources of tax revenue for financing government
expenditure. However, there are several issues emanating from the operation of
VAT in the country, which has made many analysts to submit that the operation
of VAT is far from what is desirable. Firstly, VAT rate in Nigeria is one of
the factors contributing to the collapse of the real sector of the economy,
because it disrupts the manufacturing sector by accelerating astronomical
increase in the prices of goods and services. This is in addition to other
teething problems already plaguing the sector such as inadequate power supply,
poor transportation network, multiple taxation, etc. If consumption among
individuals and companies is reduced, this could have a knock-on effect on
economic growth, profitability and employment, leading to less personal income
taxes (Oyedele, 2011). Furthermore, the operation of VAT in Nigeria is capable
of causing inflation because VAT is a consumption tax and as such increases the
prices of goods and services. The real income of the final consumers is reduced
leading to low purchasing power and further compound the poverty situation in
the country.
Companies Income
Tax has significant impact on the economy of any nation because it serves as a
stimulus to economic growth in the areas of fiscal and monetary policies. But
the Nigerian case is difference because the revenue derived from CIT has been
grossly understated as a result of several challenges. The factors responsible
for the poor performance of CIT revenue in Nigeria include: high rate of tax
evasion and avoidance by companies, poor tax administration, poor taxpayers
education, inconsistent government policies, and lack of adequate statistical
data, inadequate manpower and corruption among tax officials.
Customs and
excise duties are the country's highest yielding indirect tax and are
administered by the Nigerian Custom Service. Like PIT, CIT and PIT, the
operation of custom duties in Nigeria is characterized by multidimensional
challenges. These include; porous borders, problem of smuggling, security
challenges, poor custom duty administration, inadequate data, shortage of
adequately trained personnel, etc. these factors have contributed to the slow
rate of growth of custom duties in Nigeria and has therefore affected the
economy negatively.
Consequently, it
becomes imperative to examine the effect of federal government tax revenue on
Economic growth of Nigeria.
1.6 Significance of the Study
The aim of the study was to empirically review
the effect of tax revenue on the economic growth of Nigeria. The result of this
study provides empirical evidence and contributes to the body of existing
literature.
Specifically it assists the Federal Government
of Nigeria in the light of dwindling oil revenue in Nigeria. This study would
assist the government to block revenue leakages, harness greater revenue
sources, evolve an effective policy framework which would guarantee quality tax
administration and foster economic prosperity on the citizenry. So this
research gives useful opinion to the government on how to generate more income
from tax so as to be less dependent on income from the unstable oil sector
alone. Nigeria oil which had been the main source of revenue earner for Nigeria
government over the years has suffered serious price decline in the global
market with adverse effect on Nigeria budget for year 2016 which has led the
government to make huge provisions for borrowing with the attendant borrowing
costs, which is inimical to development. The government would therefore greatly
benefit from this research project through a more efficient and effective tax
administration.
Also, the findings of this study serve as
bedrock to the general public in order to discourage tax evasion as it provides
empirical evidence of the percentage contribution of tax revenue to GDP below
the normal threshold of 20%. This study educates tax payers on the benefit of
remitting tax especially in the area of economic benefit of tax revenue, not
failing to advice on the negative effect of evading tax on both the tax payer
and on the economy in general.
The study also provides a holistic approach to
tax administration in the country; therefore assisting the tax administrators
by shedding light on existing loopholes that tax evaders explore. In addition,
researchers and academic community would also draw inspiration from the
in-depth analysis and articulation of the research work. Finally, the study provides necessary
information to Joint Tax Board and Federal Board of Inland Revenue concerning
effective tax administration strategies that could be employed to reduce the
number of tax evaders and secure tax payers loyalty to their constitutional
duty and civic responsibility, thereby increasing the tax revenue
generated.
1.7 Scope
of the Study
This study focused on
the examination of the effect of tax revenue on economic growth of Nigeria as
such, the scope of this study is defined from three dimensions namely,
geographical area of coverage, time period and the data. The geographical scope
of this study is Nigeria which represents both the study’s population and
sample size. The time period is thirty-five years (1981-2015). This period is
considered reasonable to establish the consistency and effectiveness of tax
revenue generated on the economic growth of Nigeria. This study is restricted
to secondary data which were obtained from the statistical bulletin from
Central Bank of Nigeria (CBN) and reports of Federal Inland Revenue Service
(FIRS). This provided data that was used to measure the tax revenue
(independent variable) and economic growth (dependent variable) of Nigeria. The
tax revenue was measured by Companies
Income Tax (CIT), Petroleum Profit Tax (PPT), Custom, Excise Duties (CED) and
Value Added Tax (VAT) and Gross Domestic Product (GDP) was used as a proxy
for economic growth over the period of study. Using data from these sources
enhanced the reliability and validity of data used in this study. Ordinary
Least Square was the statistical tool used in this research.
1.8
Operationalization of Variables
The purpose of this study was to examine the
impact of tax revenue collected by Federal Government on economic growth in
Nigeria.
To achieve this, two variables were identified
in the study, these are: independent and dependent variables. The independent
variables are the Tax Revenue generated in Nigeria in the following dimensions
as surrogates: Companies Income Tax (CIT), Petroleum Profit Tax (PPT), Custom,
Excise Duties (CED) and Value Added Tax (VAT). The dependent variable on the
other hand is Economic Growth (EG) measured by Gross Domestic Product (GDP) of Nigeria for the period under study
(1981—2015).
The following model has been adopted.
Y = f(X)
Y = y1
X = x1, x2,
x3, x4
Where;
Y= Economic Growth (EG)
y1 = Gross Domestic Product
(GDP)
X = Tax Revenue (TAR)
x1= Companies Income Tax (CIT)
x2 = Petroleum Profit Tax (PPT)
x3= Custom and Excise Duties (CED)
x4= Value Added Tax (VAT)
Functional
Relationships
GDP = f(CIT)...............................................1
GDP = f(PPT)...............................................2
GDP = f(CED)..............................................3
GDP = f(VAT)..............................................4
GDP = f(CIT, PPT, CED, VAT)..............................................4
it is expected that β1-8 > 0.
The above functional relationships are the
underlying functions of effects of tax revenue on economic growth of Nigeria
for the period of study. This functional relationship shows that economic
growth is a function of tax revenue, which likewise is a function of company
income tax, petroleum profit tax, customs and excise, value added tax.
Associated regression models were developed in
chapter three under methodology of the study and employed in chapter four to
investigate the effects.
1.9
Operational Definition of Terms
Nigeria
Tax Authorities: This refers to the revenue collection agencies
of the Federal Government of Nigeria represented by the Federal Inland Revenue
Service (FIRS), State Internal Revenue Service (SIRS) and Local Government
Revenue Committee.
Joint
Tax Board (JTB): This is the supervisory and regulatory body
that defines the scope of operation and administrative system between the
various tiers of tax authorities.
Revenue:
Implies resources or pool of funds available to
the Federal Government of Nigeria from internal and external sources.
Tax: Obligatory transfer of financial resources from
the private organisation to the public sector for common pool
Tax
Administration: Refers
to tax management process and procedures for the effective and efficient
transfer of financial resources from the private organisation to the public
pool.
Board: This refers to the Federal Board of Inland
Revenue (FBIR)
Service: This refers to the Federal Inland Revenue
Service (FIRS)
Tax
Justice: This refers to the tax
administration transparency issues in Nigeria.
Tax
Reform Policies: These
are policies established by the Federal Government in Nigeria on tax
administration and implementation.
Tax
Consultants: These
are firms employed by the Federal Government of Nigeria charged with the duties
of tax administration and collection.
Tax
Evasion: This refers to the
deliberate failure to pay taxes usually by making false reports. It is using illegal means to avoid paying taxes.
Typically, tax evasion schemes involve an individual or
corporation misrepresenting their income to the Inland Revenue Service.
Tax
Avoidance: This refers to the
minimization of tax liability by tax payers through lawful methods. This is the legal usage of the tax regime to one's own advantage
to reduce the amount of tax that is payable by means that are
within the law.
Oil
Revenue: This is revenue generated
through oil exploration and production in Nigeria.
Non-oil
Revenue: This is revenue generated from other sources apart from oil sector
in Nigeria. An example is tax.
Thin
Capitalization: This
is a situation where firms are heavily financed through debt with the aim to
pay less tax since interest on debt is an allowable expense under tax laws
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