CHAPTER TWO

LITERATURE REVIEW

2.1. Conceptual Review

2.1.1. Taxation And Tax Administration In Nigeria

According to the (black law dictionary, 1999), tax is a ratable portion of the produce of the property and
labor of the individual citizens, taken by the nation, in the exercise of its sovereign rights, for the support
of government, for the administration of the laws, and as the means for continuing in operation the
various legitimate functions of the state. The Institute of Chartered Accountants of Nigeria, (2006) and
the Chartered Institute of Tax Revenue of Nigeria, (2002)view tax as an enforced contribution of money,
enacted pursuant to legislative authority. If thereis no valid statute by which it is imposed, a charge is
not tax. Tax is assessed in accordance withsome reasonable rule of apportionment on persons or
property within tax [Link], (1997) asserted tax revenue as the compulsory transfer or
payment from private individuals, institutions or groups to the government. Sanni(2007) advocated tax
as an 11instrument of social engineering which can be used to stimulate, general or special economic
growth and development. According to Onairobi (1994), taxes are of two types: Direct and Indirect
taxes. A direct tax is levied on income or profit while an indirect tax is levied ongoods and services. Good
examples of Direct Tax include Personal Income Tax, Capital GainTax, Profit Tax and Wealth Tax.
Examples of Indirect Tax include Excise Taxes, Export Taxes,Import Duties, Expenditure Tax, Sales Tax
and Value Added [Link], (2011) stated that tax is a contribution exacted by the state; it is a non penal
butcompulsory and unrequited transfer of resources from the private to the public sector, levied onthe
basis of predetermined criteria. The classical economists were of the view that the only objective of tax
revenue was to raise government revenue. But with the changes in circumstances and ideologies, the
aim of taxes has also been changed. These days apart from the objective of generating revenue, taxes
are levied to affect consumption, production and distribution with aview to ensuring the social welfare
through the economic development of a country.

According to Nzotta(2007), four key issues must be understood for tax revenue to play its functions in
the society. First, a tax is a compulsory contribution made by the citizens to the government and this
contribution is for general common use. Secondly, tax imposes a general obligation on the tax payer.
Thirdly, there is a presumption that the contribution to the public revenue made by the tax payer may
not be equivalent to the benefits received. Finally, a tax is not imposed on a citizen by the government
because it has rendered specific services to him or his family. Thus, it is evident that a good tax structure
plays a multiple role in the process ofeconomic growth of any nation which Nigeria is not an exception
Appah (2010). According to Enegbu(2011), the Nigerian tax system has undergone several reforms
geared at enhancing tax administration with minimal enforcement cost. The recent reforms include the
12 introduction of TIN, (Taxpayer Identification Number), which became effective since February 2008,
automated tax system that facilitates tracking of tax positions and issues by individual taxpayer, E-
payment system which enhances smooth payment procedure and reduces the incidence of tax touts,
Enforcement scheme which engages special tax officers in collaboration with othersecurity agencies to
ensure strict compliance in payment of taxesSection 8 of Federal Inland Revenue Service,(FIRS)
Establishment Act 2007 has led to an improvement in the tax administrationin the country, thus, the
integrated tax offices and authorities now have autonomy to assess,collect and record tax. Despite this
improvement, there are still a number of contentious issuesthat require urgent attention and among
them are appropriate tax authority to administer several taxes, the issue of multiple taxes severally
administered by all the three tiers of government which sometimes imposes welfare cost and the issue
of the paucity of data base, which contributes to tax avoidance in the country. Tanzi(1995)The concepts
of tax and tax revenue in prior researches have been largely discussed in different contexts by tax
experts, academic scholars, international organizations as well as differentgovernments. For example,
(The World Bank, 2000) noted that taxes are a compulsory transferof resources to the government from
the rest of the economy, while Jakir, (2011) described tax as a liability on account on the fact that the
taxpayer has an income of a minimum amount and from certain specified source(s).However, in a simple
term for the purpose of this study, tax is a compulsory fee individuals aswell as corporate bodies are
obliged to comply with as stipulated by the tax laws, while tax revenue is the process of administering
the tax laws in the way that achieves governmentobjectives. And so, tax revenue is a major source of
fund for any government and the availabilityof fund is a very crucial aspect of running a State.

2.1.2 Relationship between government and taxation

To foster economic growth and development governments need sustainable sources of funding for
social programs and public investments. Programs providing health, education, infrastructure and other
services are important to achieve the common goal of a prosperous, functional and orderly society. And
they require that governments raise revenues. Taxation not only pays for public goods and services; it is
also a key ingredient in the social contract between citizens and the economy. How taxes are raised and
spent can determine a government’s very legitimacy. Holding governments accountable encourages the
effective administration of tax revenues and, more widely, good public financial management. All
governments need revenue, but the challenge is to carefully choose not only the level of tax rates but
also the tax base. Governments also need to design a tax compliance system that will not discourage
taxpayers from participating.

2.1.3 Relationship between taxation and Economy

The economic impacts of tax changes on economic growth, measured as a change in real GDP or the
components of GDP such as consumption and investment, are difficult to measure. Some tax changes
occur as a response to economic growth, and looking at a tax cut at a certain point in time could lead to
the mistaken conclusion that tax cuts are bad for growth, since tax cuts are often enacted during
economic downturns. For this reason, most of the literature in recent years, and reviewed below, has
followed the methodology developed in Romer and Romer (2010): Looking at unanticipated changes in
tax policy, which economists refer to as “exogenous shocks.”
There are other methodological challenges as well. Failure to control for other factors that impact
economic growth, such as government spending and monetary policy, could understate or overstate the
impact of taxes on growth. Some tax changes in particular may have stronger long-run impacts relative
to the short run, such as corporate tax changes, and a study with only a limited time series would miss
this effect. Finally, tax reforms involve many moving parts: Certain taxes may go up, while others may
drop. This can make it difficult to characterize certain reforms as net tax increases or decreases, leading
to mistaken interpretations of how taxes impact growth.

2.1.4 Relationship between taxation and economic development

Economic development, among other things, means the attainment of a number of ideas of
modernization such as a rise in productivity, social and economic equalization, improved institutions and
values. It involves something more than economic growth. In short, development means growth plus
change (Aderinto & Abdullahi, 2007). Such qualitative changes include improved performance of factors
of production. It also includes increasing man’s control over nature. It may also reflect in the
development of institutions and a changein the attitudes and values. Although the increase in the real
income per head is one of the primary objectives or goals of economic development, it has also become
common to interpret economic development in terms of a number of other sub goals such as a certain
distribution of income policy objective, a diminution in economic inequality among the citizens,
avoidance of marked disparities in the prosperity and growth of different regions within a country.
Narrowing it down to the state, we will then define state development, as the capacity of a state
economy, whose initial economic condition has been more or less static for a long time to generate and
sustain an annual increase in its gross domestic product (GDP) at 5% to 7% or more. It is the capacity of
increasing the standard of living of the citizens, applying structural and infrastructural change in the
state or nation. It is the freedom for operation as well as greater choice for the general well-being of the
people in the economy.

2.2 Theoretical Review.

According to Bhartia, (2009), a tax revenue theory may be derived on the assumption that thereneed
not be any relationship between tax paid benefits received from state activities. In this group, there are
two theories, namely; Socio-political theory and the expediency theory.

2.2.1. socio_political theory

This theory of tax revenue states that social and political objectives should be the major factors in
selecting taxes. The theory advocated that a tax systemshould not be designed to serve individuals, but
should be used to cure the ills of society as awhole.

2.2.2 Benefit received theory:

This theory proceeds on the assumption that there is basically an exchange relationship between tax-
payers and the state. The state provides certain goods andservices to the members of the society and
they contribute to the cost of these supplies inproportion to the benefits received Bhartia(2009).
Anyanfo(1996) argues that taxes should be allocated on the basis of benefits received from government
expenditure.

2.2.3 Faculty theory:

According to Anyanfo(1996), this theory states that one should be taxed according to the ability to pay.
It is simply an attempt to maximize an explicit value judgment about the distributive effects of taxes.
Bhartia (2009) argue that a citizen is to paytaxes just because he can, and his relative share in the total
tax burden is to be determined by his relative paying capacity.

2.2.4 Expediency theory:

This theory asserts that every tax proposal must pass the test of practicality which must be the only
consideration when the country government choosing a revenue collection proposal. Economic and
social objectives of the state and the effects of a tax system should be treated irrelevant Bhartia(2009).
Anyafo (1996) Bhartia (2009) asserted that the expediency theory is based on a link between tax liability
and state activities. It assumes that the state shouldcharge the members of the society for the services
provided by it. This reasoning justifiesimposition of taxes for financing state activities by inferences,
provides a basis, for apportioningthe tax burden between members of society. This proposition has a
truth in it, since it is uselessto have a tax which cannot be levied and collected [Link] are
pressures from economic, social and political groups. Every group tries to protect and promote its own
interests and authorities are often forced to reshape tax structure to accommodate these pressures. In
addition, the administrative set up may not be efficient tocollect the tax at a reasonable cost of
collection. Tax revenue provides a powerful set of policytools to the authorities and should be effectively
used for remedying economic and social ills ofthe society such as income inequalities, regional
disparities, unemployment, and cyclicalfluctuations and so [Link] Wagner advocated that social and
political objectives should be the deciding factors inchoosing taxes. Wagner did not believe in
individualist approach to a problem. He wanted thateach economic problem be looked at in its social
and political context and an appropriatesolution found thereof. Accordingly, a tax system should not be
designed to serve individualmembers of the society, but should be used to cure the ills of society as a
whole. The expediency theory relates to a normal development process and represents a benchmark
against which countryspecific empirical evidence may be [Link] study therefore focuses on the
expediency theory which enables us to assess the extent towhich the Nigerian tax system conforms to
this scenario where the link between tax liability andeconomic activities are linked. If applicable, such a
characterization will enhance accurate tax

2.3 Common types of tax in nigeria

Tax types in Nigeria is what many Nigerians are not aware of. This is in spite of the fact thatignorance is
not an excuse of the law. As an individual or a business in Nigeria, you are liable to the payment of any
tax and you fail to pay it, ignorance of the law cannot be used as a genuine excuse for such act of
[Link] is the reason we shall try to do justice to explaining each type of taxes in Nigeria.

Companies Income Tax (CIT): companies Income Tax Act, 1990 is the current enabling law that governs
the collection of taxes on profits made by companies operating in Nigeria excluding companies engaged
in Petroleum exploration activities. This Tax is payable for each year of assessment of the profits of any
company at a rate of 30% Adereti, (2011).According to Ola, (2006),Companies’ income tax
administration in Nigeria does not measure upto appropriate standards. If good old tests of equity,
certainty, convenience and administrative efficiency are applied, Nigeria will score low considering the
following points: Due to inadequate monitoring, persons in the self-employed and unquoted private
companies group evade tax. In a study conducted by Festus and Samuel, (2007) on company Income Tax
and theNigerian economy, they conclude that Company income tax is a major source of revenue
inNigeria but non-compliance with tax laws and regulations by tax payers is deep in the systembecause
of weak control. There is the need for a general tax reform in the Nigerian company's come tax system.

Petroleum Profit Tax (PPT): The Petroleum Profit Tax is subject to any resident company or person in
charge of a non-resident company who are exploring for petroleum or producing it in Nigeria.

According to Buba, (2007), Nigerian law by virtue of the Petroleum Profits Tax Act 1990 requires all
companies engaged in the extraction and transportation of petroleum to pay [Link], (2011) further
stated that the taxable income of a petroleum company comprises proceeds from the sale of oil and
related substances used by the company in its own refineries plus any other income of the company
incidental to and arising from its petroleum [Link], (2011) explained that the taxable
income of a petroleum company is subject to tax at 85%, but this percentage is lowered to 65.75%
during the first 5 years of operation but where oil companies operate under production sharing
contracts they will be liable to tax at a rate of 50%.This makes the foreign trade sector the major source
of revenue in the 1960s. Some structural changes emerged in the revenue profile in the early 1970s
whereby indirect taxes gave way to direct taxes with the emergence of the oil boom Egwakhide, (1988).
The fall in non-oil tax revenue due to the neglect of the traditional (agricultural) sources was matched by
an increase in import duties until 1973. Further, there was an appreciable increase in revenue from
excise dutiesin the 1970s due to the enhanced performance of the industrial sector. Buba, (2007)This
overall picture has been sustained up till now given the dominant role of the oil sector as major source
of government revenue. This scenario appears to conform to Musgrave‘s, (1969)theory to the effect that
as an economy develops, more reliance may be placed on direct tax revenue. Some caution is advisable
in confirming the relevance of Musgrave‘s theory to the Nigerian environment.

Value Added Tax

VAT is a consumption tax that is relatively easy to administer and difficult to evade and it has been
embraced by many countries world-wide Federal Inland Revenue Service, (1993). Value-added Tax Act,
1993 is the law that regulates the collection of tax due on vatable goods or services. Adereti, (2011). It
was introduced to replace the old sales tax. It is a consumption tax levied at each stage of the
consumption chain, and is borne by the final consumer. It requires a taxable person upon registering
with the Federal Board of Inland Revenue to charge and collect VAT at a flat rate of 5% of all invoiced
amounts of taxable goods and services. Ariyo, (1998),Adereti, (2011) explained that evidence so far
supports the view that VAT revenue is already a significant source of revenue in Nigeria. For example,
actual VAT revenue for 1994 was N8.189 billion, which is 36.5% higher than the projected N6 billion for
the year. Similarly, actual VATrevenue for 1995 was N21 billion compared with the projected N12 billion.
In terms ofcontributions to total federally collected revenue, VAT accounted for about 4.06 % in 1994
and5.93% in 1995. As much as N404.5 billion was collected on VAT (5.1% of total revenue) in 2008.
Every person, whether resident in Nigeria or nonresident in Nigeria, who sells goods orrenders services
in Nigeria under the VAT Act (as amended) is obligated to register for VAT within six months of its
commencement of business in Nigeria. Registration is with the FederalBoard of Inland Revenue (FBIR).

personal Income Tax: is the most common tax type in the country. A Personal Income Tax is a tax
imposed on individuals or entities (taxpayers) that varies with respective income or profits (taxable
income). Personal Income Tax generally is computed as the product of a tax rate times taxable
[Link] tax is on the Pay As you Earn (PAYE) basis that is the tax payable depend on how much is
earned by the tax payers. The tax is easy to collect from civil servants as it is deducted from source by
the appropriate authorities unlike the private sector who will have to file returns of each tax payer
which is not done in most cases Abu, (2012). Documentations from different scholars indicated that
even with all efforts through the various tax reforms undertaken by Nigerian government to increase tax
revenue over the years, prior statistical evidence has proven that the contribution of income taxes to
the government‘s total revenue remained consistently low and is relatively shrinking. However, of all the
taxes, personal income tax has remained themost disappointing, nonperforming, unsatisfactory and
problematic in Nigerian tax systemAsada, (2005), Specifically, the contribution of personal income tax
remained marginal and comparatively low in Nigeria‘s tax revenue. At the state and local government
levels, where the major source of internal revenue is expected to be individual income tax, its
contribution to thetotal revenue of these levels dropped from 20.18 and 7.7% in 1999 to 12.4 and 1.6%
in 2008,respectively CBN, (2008). The PAYE tax payer is payable to both the Federal Inland Service
andthe state Board of Internal Revenue depending on the sector in which the tax payer is [Link]
tax is regulated by personal Income Tax Act 2004.

Custom and excise duties tax

Customs duties in Nigeria are the oldest form of modern tax revenue. Their introduction datesback to
1860 known as import duties, which represents taxes on imports into Nigeria,charged either as a
percentage of the value of imports or as a fixed amount of contingent on quantity Buba, (2007).
Customs duty is a major source of revenue for the Federal Government which ispayable by importers of
specified goods Buyonge, (2008).Adegbie, (2011) studied the Customs and Excise Duties Contribution
towards the developmentand growth of Nigerian economy. The study reveals that there is a strong
relationship betweencustoms and excise duties and economic development of Nigeria. This shows that
this is a sourceof income that Nigeria should develop. Also, the study further shows that fraud and
financialmalpractices have negative impact on the contribution of customs and excise to
Nigerianeconomic development. Going by the statement of Buba, (2007), excise duties were
alsointroduced on several goods to broaden the revenue base in Nigeria in 1962. Customs and
exciseduties is an important component of the non-oil revenue and has remained an important source
ofrevenue before and after the discovery of oil in Nigeria and over the years contributedsignificantly to
national development. He further stated that the Nigeria Custom Service issaddled with the
responsibility of collecting duties, excise, fees, tariffs, and other levies imposedby the Federal
Government on imports, exports and statutory rates. It is a crucial facilitation oftrade and key
instrument of state sovereignty. However, the institution is much criticized forcorruption and
inefficiency and its upper echelon is often driven with intrigue and [Link] these need to change if
Nigeria dream of economic development is to be achieved.

Withholding Tax (WHT): The Withholding Tax deductions are regarded as advance payments (or
payments on account) of the relevant tax liability that will arise from the tax returns of the period
concerned.

Educational Tax (EDT): Stamp Duties (STD): Items or persons subject to Stamp Duties tax are written
documents relating things between individuals or companies or group of soles. Stamp Duties may
include instruments such as financial transaction, article of association between companies, statements,
deals, bonds etc.

Capital Gains Tax (CGT): All the companies registered in Nigeria which earn any capital gains are ln-
developmental but essential obligations to the citizens of the [Link] Tax to FIRS through
Designated Bank.

2.3.1 Tax administration in Nigeria.

The administration of tax is vested in various tax authorities depending on the type of tax under
consideration. In Nigeria, there are three (3) authorities namely;

[Link](Federal Board of Inland [Link] Federal Government collects taxes through the Federal
Board of Inland Revenue; the agency administers Revenue laws that deal with taxes paid by the
residents of the Federal Capital Territory and taxes that are paid by corporate bodies (Limited Liability
Companies). They are responsible for accounting for the Federal Government for all taxes collected.

[Link] State Inland Revenue [Link] State Governments collect taxes through the State Board of
Internal Revenue; the agency primarily administers the Personal Income Tax Act, and however, some
states of the federation have instituted additional revenue statutes, which they administer. They are
responsible for accounting to the State Government for all revenue collected.

2.3.1.3Local Government Revenue [Link] Local Government collects taxes through the Local
Government Revenue Committee; they are responsible for the assessment and collection of all taxes,
fines, and rates under its jurisdiction and account for all revenue collected to the chairman of the Local
Government.

2.4 Tax Rates In Nigeria.

Not all nairas earned are equal as far as the taxman is concerned. Nigerian tax rates vary according to
the amount of income you earn, and you pay different rates on different portions of your income.

2.4.1 Corporate tax

Nigerian Companies pay 30 percent of their worldwide profit while foreign companies pay 30 percent of
only the profit made in Nigeria. The educational charge is pegged at 2 percent of the assessable profit
while a 10 percent withholding tax is deducted from dividend payments to companies and individuals.

2.4.2 individual Tax

Nigerians under the law are to pay 25% of their total worldwide income while foreign individuals are to
pay 25% of the profit made in Nigeria only.

2.5 Tax Identification Number (TIN) In Nigeria, every citizen of Nigeria working with the Government,
the private sector or owns a business in operation or with an intent to start up one is expected to obtain
a Tax Identification Number (TIN). A TIN must be furnished on Returns, Statement, and other Tax related
[Link] TIN number is a unique number issued and allocated to individuals or companies to
identify them as registered taxpayers in Nigeria. Some companies like to use fully-verified service, to
help verify and protect their identity.

2.6 ROLE OF TAX REVENUE IN ECONOMIC GROWTH AND DEVELOPMENT

A country‘s tax system is a major determinant of other macroeconomic indices. 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 development
has a very strong impact on a country‘s tax base and tax policy objectives vary with the stages of
development. Vincent. (2001).

According to Olopade and Olopade, (2010) Growth means an increase in economic [Link],
(1999) defined a country‘s economic growth as a long-term rise in capacity to supply increasingly diverse
economic goods to its population, this growth capacity is based on advancing technology and the
institutional and ideological adjustment that it demands.

Economic growth represents the expansion of a country‘s potential GDP or output. Rostow,(1999)
carried out a research on growth of public expenditure where he focused mainly on the utilization of
taxes as the major revenue source, concluded that, at the early stages of economic development, the
rate of growth of public expenditure will be very high because government provides the basic
infrastructural facilities (social overheads) and most of these projects are capital intensive, therefore,
the spending of the government will increase steadily. The investment in education, health, roads,
electricity, water supply are necessities that can launch the economy from the practitioner stage to the
take off stage of economic development, making government to spend an increasing amount with time
in order to develop an egalitarian [Link] in human society is a one-sided process; this in
turn remains the goals of everysociety at all times.

The term‘development’ until recently meant growth measured by GNP orrise in per capital income.
Yet development is not growth. Perhaps it could be growth coupled with social justice, Kayode, (1993).
Development implies changes that lead to improvement orprogress; it is believed that an economy that
raises its per capita level of real income over timewithout transforming its social and economic structure
is unlikely to be perceived as [Link] main purpose of tax is to raise revenue to meet
government expenditure and to redistributewealth and manage the economy Ola, (2001). Jarkir (2011)
outlined that for economic growth of a country, tax can be used as an important tool in the following
manner:

[Link] allocation of available resources: Tax is the most important source of publicb revenue.
The imposition of tax leads to diversion of resources from the taxed to the non-taxed sector. The
revenue is allocated on various productive sectors in the country with aview to increasing the overall
growth of the country. Tax revenues may be used toencourage development activities in the less
developments areas of the country wherenormal investors are not willing to invest.

2.6. [Link] of inequalities in income and wealth:Through reducing inequalities in income and
wealth by using an efficient tax system, government can encourage people tosave and invest in
productive sectors.

2.6.3 Acceleration of Economic Growth and Price Stability:Tax policy may be used to handle critical
economic situation like depression and inflation. In depression, tax is setto increase the consumption
and reduce the savings to increase the aggregate demand andvice verse. Thus the tax policy may be
used to strengthen incentives to savings andinvestment. In under developed countries, there is another
role to maintain price stabilityto ensure growth with stability.

[Link] mechanism:Tax policy is also used as a control mechanism to check inflation,consumption

of liquor and luxury goods and to protect the local poor industries from theuneven competition. Tax
revenue is the only effective weapon by which privateconsumption can be curbed and thus resources
transferred to the state. Thus the economycan ensure sustainable developments.

[Link] of local industries: there is always a strong tendency for local industries tostrive in a
country if taxes are effectively administered. The use of custom duties and others taxes could prevent
local industries from facing strong competition from other industries in developed countries