THE IMPACT OF TAXATION ON ECONOMIC DEVELOPMENT IN NIGERIA (2003 - 2012)

1.1 Introduction

Nigerian economy as a number one economy in Africa and emerging economy in the world has many problems militating tax revenue mobilization as a source of financing developmental activities. Federal Inland Revenue Services (FIRS) faces the challenges of widespread tax evasion, which is motivated by a complaint about corruption and poor quality of services. According to IMF “Developing countries must be able to raise the revenue required to finance the services demanded by their citizens and the infrastructure (physical and social) that will enable them to move out of poverty. Taxation will play the key role in this revenue mobilization”.

As a prelude to other parts of this study, this chapter will discuss the background upon which this study was initiated, the statement of problems that led to this study, the Aim and Objectives of the study. Others are Significance of the study, Scope of work, Research hypothesis and questions, Limitations of the Study and Definition of technical terms.

1.2 Background of Study

Tax is a major player in every society of the world. The tax system is an opportunity for government to collect additional revenue needed in discharging its pressing obligations. A tax system offers itself as one of the most effective means of mobilizing a nation’s internal resources and it lends itself to creating an environment conducive to the promotion of economic growth. Nzotta (2007) argues that taxes constitute key sources of revenue to the federation account shared by the federal, state and local governments. This is why Odusola (2006) stated that in Nigeria, the government’s fiscal power is divided into three-tiered tax structure between the federal, state and local governments, each of which has different tax jurisdictions. The system is lopsided and dominated by oil revenue (Azubike, 2009).

One of the major functions of any government especially developing countries such as Nigeria is the provision of infrastructural services such as electricity, pipe-borne water, hospitals, schools, good roads and as well as ensure a rise in per capital income, poverty alleviation, maximize the utility of its citizens, improve their standard of living and so on. For these services to be adequately provided, government should have enough revenue put in place to finance them. The task of financing these enormous responsibilities is one of the major problems facing the government of which it is of great necessity for these services to be provided to citizens of a state. Based on the limited resources of government, there is need to carry the governed (citizens) along via the imposition of tax on all taxable individuals and companies to augment government financial position. To this end, government have enacted various tax laws and reformed existing ones to stand the taste of time. They include: Federal Inland Revenue Service (FIRS), State board of internal revenue (SBIR), Income Tax Management Act (ITMA), Companies Income Tax Decree (CIID), Joint Tax Board (JIB) etc.

All these are aimed at ensuring adherence to tax payment and discouraging tax evasion and avoidance by citizens. For the purpose of this study, the researcher would be concerned with the impact of taxation on economic development in Nigeria. The challenge of Taxation on Economic Development in Nigeria identified according to Oyedele (2011) that the mark-to-market (MTM) or Fair Value Accounting (FVA) of the financial instrument upon adoption of International Financial Reporting Standards (IFRS) would create significant swings in earnings and capital. By extension, it will affect taxable profit been reported by some management of organizations that use discretion in managing profit and tax, companies shelter their taxes at the detriment of tax authority duty of collecting taxes, due to the government.

Therefore, in Nigeria where the research was carried out, the activities that was conducted is to know the Impact of Taxation on Economic Development in Nigeria.

1.3 Statement of Problem

Investigation reveals the challenges of Taxation on Economic Development in Nigeria identified according to Oyedele (2011) that the mark-to-market (MTM) or Fair Value Accounting (FVA) of the financial instrument upon adoption of International Financial Reporting Standards (IFRS) would create significant swings in earnings and capital. By extension, it will affect taxable profit been reported by some management of organizations that use discretion in managing profit and tax, companies shelter their taxes at the detriment of tax authority duty of collecting taxes, due to the government.

Obviously, the first need of any modern government is to generate enough revenue which is indeed “the breath of its nostril”. Thus taxation is by far the most significant source of revenue for the government. Nigerians regard payment of tax as a means whereby government raises revenue on herself at the expense of their sweat.

1.4 Aim and Objectives of Study

The aim of the study is to scrutinize the Impact of Taxation on Economic Development in Nigeria. In achieving this aim, the following specific objectives were laid out as follows:

1. To examine the relevance of taxation in Nigeria.
2. To determine why people feel cheated when it comes to paying their taxes.
3. To determine the extent to which federal government has been using the revenues generated from tax.
4. To examine how tax rate affects the rate of investment in the Nigeria economy.
5. To know general desirability of firms to invest as a result of tax incentive measures. Generally, this study is carried out to know if tax constitutes the bulk of government revenue and to erase the erroneous that is the exploitation by government for their selfish interest.

1.5 Research Questions

The study came up with research questions so as to be able to ascertain the above stated objectives. The specific research questions for the study are stated below as follows:

• Is taxation relevant in Nigeria?
• Do people feel cheated when it comes to paying their taxes?
• What is the extent to which federal government has been using the revenues generated from tax?
• How does tax rate affect the rate of investment in the Nigeria economy?
• Do firms generally desire to invest as a result of tax incentive measures?

1.6 Research Hypothesis

In order to pursue the objective of this study, the following generalized statements have been designed to guide and aids in obtaining the result for the experiment to be conducted. For this work, the null hypothesis will be represented with H0 while the alternative hypothesis will be represented with hypothesis H1.

• H₀1: There is no significant and positive relationship between gross domestic products (GDP) and tax revenue.
• H₀2: Tariff rate does not significantly affect the rate of investment in the Nigeria economy
• H₀3: The relation between company income tax (CIT) and gross domestic product (GDP) has been declined in the post-IFRS period.

1.7 Significance of Study

This study will continue to be of interest to majorly the governments, civil servants, government establishment, agencies, parastatals, and other public corporation in the public sectors. It will also be of great importance to various management of companies, tax administrators, revenue collector, and tax officials and other users of laws and policy; It will also give them general insight on the challenges affecting effective tax reforms and administration in Nigeria.

This research would contribute to the existing literature by focusing on tax administration in Nigeria with a view to identifying the critical problems that are confronting the tax system so that appropriate measures could be taken to tackle them.

1.8 Scope of Study

The study focuses on the Impact of Taxation on Economic Development in Nigeria.

1.9 Limitations of the Study

During the course of this study, many things militated against its completion, some of which are:

1. Time Constraint: The time frame given to accomplish this project was very short due to school academic calendar and it was carried out under pressure which made the researcher not to implement some necessary features.
2. Research material: availability of research material is a major setback to the scope of the study.
3. Frequent power failure: This made the researcher append more money on fuel to ensure sustainable power.
4. 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).

1.10 Definition of Terms

The following terms are defined in respect to the study for quick understanding:

Fairness: This means a good tax system should be one that allows citizens to pay according to their ability. Taxes paid by the rich and the poor must have a clear difference, the rich should pay more than the poor.

Neutrality: This means a tax system that is good must be minimal in its effect on the optimum allocation of resources. It should not alter the market mechanism, that is, its effect may fall on demand and supply. It should not as well lead to loss in total output by adversely affecting.

Convenience: This means the tax payment is a burden at the point of payment, although the payer may accept the fairness of the tax he is paying. To collect tax at the most convenient point and time, reduces losses that may be encountered as a result of evasion and make the whole system simple.