THE EFFECTIVENESS OF TAXATION ON GOVERNMENT PROVISION FOR INFRASTRUCTURE FOR BENUE STATE A STUDY OF BIRS
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THE
EFFECTIVENESS OF TAXATION ON GOVERNMENT PROVISION FOR INFRASTRUCTURE FOR BENUE
STATE A STUDY OF BIRS
ABSTRACT
Revenue generation through taxation
is the nucleus and the path to modern development. Thus, this study assessed
the effect of internal revenue generation on infrastructural development
through provision from the government. The research methodology entailed the
use of survey research design and purposive sampling method to select
respondents from Benue State Inland Revenue Office.. Questionnaires and
statistical data were instruments used for the study. Descriptive and inferential
statistics were the statistical tool used for the analysis. The descriptive
statistics involves the use of simple percentages while the inferential
statistics involved the use of Spearman’s Rank, which is to show the direction
of relationship between variables in the study and to show the scale for the
data that is interval. Two hypotheses were formulated and the Spearman’s rank
correlation analysis was used to test the relationship between internally
generated revenue and infrastructural development. The result showed that there
is a positive relationship between internally generated revenue and
infrastructural development. The study also revealed the various methods of
generating internal revenue, which are the enforcement of tax personnel,
contribution, and creating awareness to the public. The findings of the study
however show that revenue administration agencies need to be reviewed to
generate more revenue in the country.
CHAPTER ONE
1.0 Introduction
One of the
major functions of the government especially developing countries such as
Nigeria is the provision of infrastructural services such as electricity,
schools, hospitals, pipe-borne water, good roads and as well as ensure a rise
in per-capital income, poverty alleviation to mention a few.
For these
services to be adequately provided, government should have enough revenue to
finance them. The task of financing these enormous responsibilities is one of
the major problems facing the government. Based on the limited resources of
government, there is need to carry the citizens (governed) along hence the
imposition of tax on all taxable individuals and companies/organizations to
augment government financial position is essential.
To this end,
government have always enacted various tax laws and reformed existing ones to
stand the taste of time. These laws include: Income Tax Management Act (ITMA),
Companies Income Tax Decree (CITD) etc.
All these
are aimed at ensuring adherence to tax payment and discouraging tax evasion and
avoidance. For the purpose of this study, the researchers would be concerned
with the impact of taxation on Nigeria economy.
The Nigerian Tax System has undergone
significant changes in recent times. The Tax Laws are being reviewed with the
aim of repelling obsolete provisions and simplifying the main ones. Under
current Nigerian law, tax revenue is enforced by the 3 tiers of Government,
which are Federal, State, and Local Government with each having its sphere
clearly spelt out in the Taxes and Levies Act, 1998.
The whole
essence of tax revenue is to generate 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 proper 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.
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. Also in the view of Oni (1998), tax administration needs
to be revamped and refunds of taxes as well as duty drawbacks administration
are inefficient.
A critical
challenge before tax administration in the 21st century Nigeria is to advance
the frontiers of professionalism, accountability and awareness of the general
public on the imperatives and benefits of tax revenue in our personal and
business lives which include: promoting economic activity; facilitating savings
and investment; and generating strategic competitive advantage. If tax
administration does not for any reason meet the above challenges, then there is
a desperate need for reform in the area of the tax regime, and in the
administration of taxes.
A country‘s
tax system is a major determinant of other macroeconomic indexes, specifically,
for both developed and developing economies; there exists a relationship
between tax structure and the level of economic growth and development. Indeed,
it has been argued that the level of economic growth has a very strong impact
on a country‘‘s tax base (Kiabel, 2009, and Vincent, 2001), and tax policy
objectives vary with the stages of development. Similarly, the economic
criteria by which a tax structure is to be judged and the relative importance
of each tax source vary over time (Vincent, 2001). For example, during the
colonial era and immediately after the Nigeria‘‘s political independence in
1960, the sole objective of tax revenue was to raise revenue. Later on, emphasis
shifted to the infant industries protection and income redistribution
objectives. In his discussion of the relationship between tax structure and
economic development, (Vincent, 2001) divided the period of economic
development into two, the early period when an economy is relatively
underdeveloped and the later period when the economy is developed. During the
early period, there is limited scope for the use of direct taxes because the
majority of the populace resides in the rural areas and is engaged in
subsistence agriculture. Because their incomes are difficult to estimate, tax
assessment at this stage is based on presumptions prone to wide margins of
error.
Tax revenue
is a powerful tool of economic reform and a major player in every economy of the
world. It is never static but dynamic and should reflect current realities
prevailing in the economy. The tax system is an opportunity for government to
collect additional revenue besides other sources of income, which is needed in
discharging its pressing obligations. A good system of tax also offers itself
as one of the most effective means of mobilizing a nation's internal resources
and it lends itself to creating enabling and conducive environment to the
promotion of economic growth and development (Ogbonna, 2010).
Further, the
rudimentary nature of the economy precludes retail form of taxes. At this stage
also, taxes are difficult to collect because of the lack of skills and
facilities for tax administration (Kiabel, 2009). Given this, a complicated tax
structure is not feasible and the amount of revenue from personal income tax
will depend on taxpayers ‘‘compliance and the efficiency of the tax collector.
An important source of government revenue during the early stage of economic
development is the foreign trade sector because exports and imports are readily
identifiable and they pass through few ports. However, revenue from export and
custom duties is not stable because of periodic fluctuations in the prices of
primary products. This tends to complicate plan implementation in many
developing countries (Kiabel, 2009).
Tax revenue
mobilization as a source for financing development activities in Nigeria has
been a difficult issue primarily because of various forms of resistance, such
as evasion, avoidance and corrupt practices attending to it. These activities
are considered as sabotaging the economy and are readily presented as reasons
for the underdevelopment of the country. (Adegbie et al, 2010:2). Government
exists in order to effectively collect taxes from available economic resources
and make use of same to create economic prosperity such that available and
willing human and other resources are
gainfully employed,
infrastructures provided, essential public services (such as the
maintenance of law and order) are put in place etc. Tax resistance only makes
the development process unattainable. (Onairobi, 1998). It could be deduced
that changing or fine-tuning, tax rates is used to influence or achieve
macroeconomic stability. Some of the most recently cited examples are the
governments of Canada, United States, Netherland, United Kingdom, who derive
substantial revenue from Company Income tax, Value Added Tax, Import Duties and
have used same to create prosperity (Adegbie et al, 2010:3). Thus it can be
said that the economic development of a country depends on various reasons one
of which is the presence of an effective and efficient tax revenue policy. In
Nigeria the contribution of tax revenue has not met the expectations of
Government. Government has equally expressed this disappointment and has
accordingly vowed to expand the non-oil tax revenue. (Festus and Samuel, 2007).
It is in the light of the foregoing that this study examines the extent to
which the tax system has contributed to economic growth of Nigeria.
1.1 Background of Study
The earliest
trace of any form of direct taxation in Nigeria even before the British
Administration was in Northern Nigeria. The North was favored for this because
it had a form of organized central administration under the Emirs unlike the
south which except in few places in the west was not as organized. Furthermore,
the Muslin religion adhered to by the people approved of taxation as being
consistent with the demand of Islam. Thus taxes such as Zakka, Gada, Kindin,
Kararat and Jangoli which were typical forms of taxes on agricultural products
and livestock.
With the
coming of the British and their consequent colonization of Nigeria they took
advantage of tax system that was existing in the Northern part of the country
to introduce direct taxation into the area since that was the only alternative
available to them to arise fund to administer the region.
Taxation is
the system of raising money in form of taxes paid by the citizens of the
country in return for the services rendered by the government.
It could be
recalled that taxation is instituted by God, this is traced back to “Mattew
chapter 22 vs. 17-21”, when the Pharisees asked Jesus whether it is lawful to
pay taxes or not. The Pharisees were later told render therefore to Caesars the
things that are Caesar’s and to God the things that are to God.
According
to Lekan .S. etal (2006), tax was
described and not defined in the statues, but according to Cambridge
international dictionary of English, it is “an amount of money paid to the
government usually a percentage (%) of personal income or company profits”.
According to
Okpe I.I (2000) tax is the transfer of resources and income from the private
sector to the public sector in order to
achieve some of the nation’s economic and social goals.
Taxation is
universally accepted as a powerful tool in the hands of any government to raise
income for its services and to ensure equitable distribution of income among
its citizens.
Therefore,
in every modern communities, a large amount of taxation is necessary for a
public expenditure increases to promote social progress, taxation which is the
main sources of funds also increases.
The present
tax laws in Nigeria emanated from the Raismais commission in 1957. Before this
time we only had what was called the income tax ordinance for the colonies and
which was rather common in all the colonies and the provisions were very similar. Raim’s recommendation was the basis
of provision in the Nigerian constitution order council of 1960 section 70(1)
which conferred an exclusive power upon the parliament to make laws for Nigeria
or any part thereof with certain uniform principles in respect of personnel
income tax.
During 1963
when Nigeria became a republic, the mid-western region was created out of the
western region and they adopted the western region tax law accordingly with the
amendments, the position under the republican constitution of 1963 and that the
regions (now divided into states) assumed jurisdiction over the income tax of
person other than companies. While the federal government assumed jurisdiction
over the taxation of companies, the uniform principles under the income tax
management act and the regional taxes in the federal territory of Lagos.
Thus, after
the creation of former 12 states in 27th may 1967, the state assumed the tax
laws of the regions in which they were before the creation of such states. The
uniform principle covered by the income tax management act of 1961 were as
follows:
(i) Specifies what income are exempted from
tax.
(ii) What constitute income for tax purposes.
(iii) Upholds residence on the basis for taxation
or in the alternative, the principal place of business.
(iv) And recently prescribed the rates of tax
and personal reliefs.
Nigeria as a
nation has the vision of becoming one among the world’s 20 largest economies in
the year 2020; this obviously is the brain behind the priority attention the
present administration is directing at infrastructural development which is
essential for economic growth. A developed economy is one with the ingredient
to stimulate investment and create wealth, this by implication offers an
atmosphere that is business friendly and has the potentials for the
actualization of the vision 2020.The desired outcome requires a lot of money to
put the economy in a position that stimulates investment, therefore, tax
policies need to attract potential investors, and the revenue from tax should
be sufficient enough to meet the infrastructural expenditures of the government.
Apere (2003) notes that taxation is a microeconomic and fiscal policy
instrument; it involves the transfer of resources from the private to the
public sector for the accomplishment of economic and social goals. It is an
instrument the government uses to measure, access and control the informal
sector that dominate developing economies of the world (Wambaiand Hanga, 2013).
Development
is a sine qua non for modern civilization. In order to carryout development at
all nooks and crannies of the society, it is the responsibility of the Benue
State Government to provide direct development to people to a certain level.
Development is associated with funds and much revenue is needed to plan,
execute and maintain infrastructures at the state level. The needed revenue
generated for such developmental
projects, like construction of accessible roads, building of public
schools, health care centres, construction of bridges are generated from taxes,
royalties, haulages ,fines, and grants from the states, national and
international governments. These funds could either be obtained internally or
externally. Thus, the Benue State Government cannot embark, execute and
possibly carryout the maintenance of these projects without adequate revenue
generation or taxation.
The Benue
state government announced its decision to spend N390b ($3 billion) on
infrastructural development in the state over the next couple of years.
Speaking during the town hall meeting of the Benue State Internal Revenue
Service (BIRS) for market associations, general merchants, skilled technicians
among others, the Governor of Benue State, Mr Georgie Akume disclosed that huge
funds are required to put in place the necessary infrastructure that will make
life easier in the state.
He said,
"The project on the agenda of the state government requires huge funding.
Over the next two decades, Benue State needs to spend at least N390 billion ($3
billion) annually to expand and improve its water supply network. N2.6 trillion
($20 billion) to provide qualitative and efficient network of roads and
drainage; N1.3 trillion ($10 billion)
for power supply; N650 billion ($5 billion) for information and computer
technology; and N1.2 trillion ($9.3 billion) for inter-modal transportation
system."
To this end,
he called on the artisan and other professionals in the state to ensure they
pay their tax so that the government can meet up with plans to develop and
improving on social amenities in the state.
He disclosed
that the state government has put in place measures that will check tax evasion
and ensure that individuals and corporate organizations pay the right tax. He
noted that the new revenue administration law of the state provides for tax
clearance check before any individual or corporate body is allowed to do
business with, obtain any license or enjoy other benefits from the state
government.
Revenue
generation in Nigeria’s local government is principally derived from TAX.
Therefore, taxation is an internal source of government revenue within the
domestic economy. Its collection and service to the government depends largely
on the government itself. Taxation has been described in many ways and for the
purpose of this study it will be seen as compulsory levy imposed on a subject
or upon his property by the government having authority over his property
through its agencies with the aim of providing, maintaining and improving
social facilities in the communities at large and for which the tax payer has
no quid pro que.
1.2 Statement of Problem
The first
need of any modern government is to generate enough revenue which is indeed
“the breath of its nostrils”. Thus, taxation is by far one the most significant
source of revenue for the government. Nigerians regard payment of tax as a
means through which government raises revenue on herself at the expense of
their sweat.
It is good
to note that no taxation succeeds without the tax payers’ co-operation. Here,
we can ask some thought – provoking questions such as:
- What makes taxation such a difficult issue?
- Why do people feel cheated when it comes
to tax?
- Is government making judicious use of
taxpayers’ money?
There is a
general lack of consensus among scholars on the contribution of tax revenue to
the economic growth of nations. For instance, whereas Ariyo (1997) in his study
on productivity of the Nigerian tax system documented a satisfactory level of
productivity of the tax system before the oil boom, Festus and Samuel (2007)
established that the role of tax revenue in promoting economic activities and
growth is not felt in Nigeria. The two studies reflect that the oil boom has
not improved the economic state of the country since before the boom, there was
a level satisfactory and after the boom, the growth of economic activities
deteriorated. The emergence of oil as a major tax revenue is one of the means a
country‘s government devises in solving the economic problems of the country
and to enhance government expenditure which is expected to be beneficial to the
citizens of such country through the provision of social and economic
infrastructures (Adereti et al 2011). In Nigeria, this has not been the case
because despite the tax revenue and expenditure reported year in year out by
the government, the physical state of the nation in terms of infrastructure and
social amenities is backward. This is evident in the lack of electricity
supply, portable drinking water, basic health care delivery, bad roads, just to
mention but a few.
The gap in
terms of the period covered is also a contributory factor to the disparity in
the outcomes of relationship between tax revenue and an economy. The advent of
the oil boom encouraged some laxity in the management of non-oil revenue
sources like the company income tax and custom and excise duties. This calls
for an urgent need in the improvement of the tax system to enhance the
evaluation of the performance and facilitate adequate macroeconomic planning
and implementation (Adereti et al 2011).
Bonu and
Pedro (2009) investigated the impact of income tax rates (ITR) on the economic
development of Botswana which shows that the impact of income tax revenue over
the nations GDP is not impressive in developing nations. This calls for the
need to further investigate the current tax performance vis-à-vis the Nigerian
economy.
There is
high incidence of tax evasion and avoidance by tax payers. This may affect the
amount of revenue collectible by the government for the running of
administration.
Furthermore,
it is hoped that people were wrongly assessed and the assessment sometimes
result to regressive taxation.
1.3 Objective of Study
The general
objective of the study is to assess the effect that taxation has towards the
development/growth/provision Benue state and on infrastructure in Benue state.
However, the
specific objective of the study includes:
To highlight the effects of poor revenue
generation through taxation on the development of Benue State.
How poor infrastructures has contributed to
so many loss of lives in Benue state.
To highlight the importance of training of
tax personnel as a means for effective and lasting solution to the problem of
revenue generation and taxation
To suggest important policy tools that can
be used to in generating revenue through taxation that will be effective.
1.4 Research Question
This study
will examine the effects of revenue generation on infrastructural development
in Benue State by providing answers to the following research questions:
What are the impacts of poor revenue
generation on the development of Lagos State?
Has poor infrastructures contributed to the
loss of lives?
To what extent is the training of tax
personnel the only effective and lasting solution to the problem of revenue generation?
To what extent has the various policy tools
used in generating revenue being effective?
1.5 Research Hypothesis
To determine
whether internal revenue is being generated effectively in Benue State and if
adequately used for infrastructural development, the following hypothesis would
be tested:
H0:
Effective internal revenue generation leads to the development of
infrastructure.
H1:
Effective internal revenue generation does not lead to the development of
infrastructure.
H0: There is
internal control measures put in place to ensure effective utilization of revenue
generated.
H1: There is
no internal control measures put in place to ensure effective utilization of
revenue generated.
H0: There
are significant relations on effective taxation on government provision for
infrastructure in Benue State
H1: There
are no significant relations on effective taxation on government provision for
infrastructure in Benue State
1.6 Significance of the Study
One of the
most frequently discussed issues in Nigeria is how to solve the economic
hardship in the country and how to create an industrial base that can guarantee
self-sustaining economic development. Also one wonders why a country which is
richly endowed with the necessary human and material resources and which the
people pay tax has been turned a heavily indebted country. The topic “taxation and its effects to
development”, will educate the entire public on how the federation could
encourage economic development and also how a reduced tax could promote the
standard of living and also promote the industrial development of the nation
and Benue state in particular.
The study
will afford us the opportunity to:
i. Know the roles taxation play in the
Nigerian economy.
ii. Ascertain how government has been
using tax generated revenue.
iii. The study will also reveal if there
are other better sources of government funding.
1.7 Scope
and Delimitation.
This topic,
the effectiveness of taxation on government provision for infrastructure for
Benue state a study of BIRS should have been expected to cover all the 16 local
government of Benue State but the writer intends to limit this topic to only
Makurdi LGA due to financial handicap, distance and time constraints.
Therefore,
since the same tax Acts are applied throughout the federation Republic of
Nigeria, the study of Makurdi-Benue tax system shall be deemed to serve other
LGA in the state. Thus, the writer will rely heavily on the board of internal
Revenue since they have adequate information and data on the government of
Benue state of Nigeria.
Since there
are often changes in the tax laws of Acts both at the state and federal level
of government, the writer may wish to visit the chief inspector of taxes of
some urban and rural areas in Makurdi in other to confirm the information or
data so collected from the Board of Internal Revenue.
1.7 Definition of Terms
Tax: A
compulsory levy by the government on its citizens for the provision of public
goods and services.
Tax Base:
The object which is taxed for instance personal income, company profit.
Tax
incidence: This is the effect and where the burden of taxation is finally
rested.
FBIRS:
(Federal Board of Inland Revenue Services): It is an operational arm of Federal
Board of Inland Revenue which is responsible for the Federal Tax Matters.
CITA: (Company Income Tax Act) It is a Federal Law
operated by the FIRS, which deals with the taxation of all limited liability
companies in Nigeria with the exception of those engaged in petroleum
operations.
JTB: (Joint
Tax Board) Is established under section 85 (2) of Decree of 104 of 1993 to
arbitrate on tax disputes between one state tax authority and another.
VAT: (Value
Added Tax) is a multistage tax levied and collected on transactions at all
stages of sales and distribution.
CGTA:
(Capital Gain Tax Act) is an act that stipulates that all capital gains arising
on disposal of assets of individuals, partnership and limited companies should
be taxed.
PPTA:
(Petroleum Profit Tax Act) is an act that regulates the petroleum profit tax
and also specifies how profit from petroleum will be taxed.
Withholding
Tax: This is tax charged on investment income namely: rents, interest,
royalties and dividends. Presently it is charged as the tax offset.
Progressive
Tax: This is a tax incidence that increases as the size of income increases.
Regressive
Tax: A tax is regressive when its tax rate decreases as the income increases.
Excise
Duties: They are taxes levied on some goods manufactured within a country.
Persons: It
includes all taxable persons be it individual or corporate bodies.
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