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IMPACT OF
TAXATION ON ECONOMIC DEVELOPMENT
(A STUDY OF
THE RIVERS STATE GOVERNMENT)
CHAPTER
ONE
1.1 OVERVIEW
Late
May 2010, the Federation Account Allocation Commitment (FAAC) meeting ended
before it even started. Reason was that the commitment members which comprises
of the 36 states commissioners of finance had their hope of sharing about 1.1
trillion naira dashed as the Federal Government declare a paltry sun of 452
billion as available disbursement to the states. To most economic watchers in
Nigeria, the message was very clear, hence the paradigm shift to a re-emphasis
on the need to focus more on Internally Generated Revenue (IGR) by state
government which taxation is one of them rather than waiting for the monthly
sharing of the “National Cake”.
Moreover,
the problem of underdevelopment should not be the topic of the day in a
“natural resource blessed country” like Nigeria. Thus the emphasis on taxation
by one and all cannot be overemphasized. Taxation according to Nightingale
(1997) is compulsory contribution imposed by the government on its citizens.
Our quest to ensure economic development shall meet with desired expectation if
all expected tax is paid and as at when due.
From
the forgoing, we can now deduce the need to garnish our understanding with
contemporary knowledge in the area of Taxation, Economic growth so as to
entrench that dependability spirit which can tune around the fortune of our
Government.
Taxes
are levied on individuals, groups, business or corporate organization, by
constituted authority for funds used by state in the maintenance of peace,
security, economic development, and social engineering among others for the
benefit of the citizenship. In this view, the management of a society for
effective growth rest on the who can only discharge such responsibilities
creditably to the citizenry with adequate resources. Therefore, it behaves a
responsible citizenry with to discharge his/her duties to the state through
prompt and regular payment of taxes. The economic history of both developed and
developing countries reveals that taxation is an important weapon in the hand
of the government; not only to generate revenue, but also to achieve goals such
as influencing the direction of investment and taming the consumption of
certain goods and services. A tax is simply a compulsory payment levied on the
citizens by government for the purpose of the government itself.
Traditionally,
taxes are based on income of individuals or profit of an economic entity. Other
bases of taxes are wealth, capital, property and consumption. All forms of
consumption taxes fail within the purview of indirect taxation. Income taxes
and those based on capital, profit and wealth are in the realm of direct
taxation.
The
imposition of a tax is based on certain considerations. One of these is how
effective as well as equitable the tax can be. Since tax can be equitable
without being effective and vice versa, the capacity of the tax base to reflect
both equity and effectiveness becomes a serious subject in taxation. Taxation
as a system has been known to have existed as early as history. In the Bible,
we learnt that even Christ paid tax and also encourage his disciples to follow
suit. According to bible book of Matthew 17:24 & 25 there Christ gave
evidence that there was payment of tax back then. Also in Romans 13:7 also
attested to that. During his missionary days on earth, he saw the need to
support the Roman Government through the payment of tax hence, he advised his
followers to “render therefore, unto Caesar the things which are Caesars”.
In
the same vein Rabiu (1990) states that,” various form of taxes prescribed in
the Holy Koran and which were operative in Northern Nigeria to include “Zakat’,
‘Kurdinkasa’, and Jangali. Zakat is a form of levy on Islamic adherents for
charitable, religious and educational purposes. The proceeds of ‘Zakat’ are
used help the poor and less privilege members of the society. Also, it is used
in “Jihad’ and other forms of religious promotions.
“kusrdinkasa”
and “Shukka-Shukka” are levies imposed on agricultural yields. They are usually
paid during harvest seasons and the proceeds used to finance the Emirate
“administration” “Jangali” is also a form of tax in Northern Nigeria levied on
livestock. It is a form of community tax paid to the Emirate Authority.
In
the Western Nigeria for example, a form of land tax called “Ishakole” was in
force, and heads of families were used as machinery for its collection.
All
these points supportive of the existence of one form of taxation or the other
in Nigeria before the arrival of the colonial masters. Before the advent of
colonialism, eminent scholars and tax experts acknowledge the fact that the
country had a system of taxation that was in operation. Ola (1981) asserts that
“Previously Nigerians cheerfully paid their taxes in kind by rendering free service
such as clearing the bush, digging pit toilets, wells; sweep village squares
etc., for the benefit of the community as whole. Defaulters’ properties are
usually confiscated and can only be redeemed by payment of money or fine.
Historically,
taxation constitutes the oldest instrument of financing the public sector in
times of either peace or war. For sacrificing their private resources to the
state in the form of taxes, citizens expect the government to reciprocate by
spending public revenue in a way that will enhance their welfare. This is why
scholars have almost always collapsed the issue of public finance into two
aspects, what Adebayo Adedeji terms “the principle of expenditure”. Similarly,
economic literature shows that as far back as 1776 during the era of Adams
Smith the place of taxation in public finance has caught the attention of
experts like David Richardo, another classical economist who did, in fact,
argue that “an economic principle could only be considered useful if it directs
government to the right measure of taxation”. Richardo as well as John Stuart
Mill both classical economics too had put revenue first in the division finance
into three via: “revenue, expenditure and public debt”. The issue is that since
access to revenue is basic to the functioning of government, the source of such
revenue including (and most especially) taxation must be prioritized.
In
recent years, the changes in tax practice that have been in operation were a
modification of traditional approaches by the colonial authority. These changes
are majorly centred on different taxes, laws and administration. Nonetheless,
the new system introduced by the colonial authority met with stiff resistance
from the people and this partly might have been due to high rate of illiteracy
among the Nigeria people. The problem still persists till today which such a
resistance is believed to have political undertone. One of such resistance was
the “Aba Women Riot of 1929”
Thus,
the imposition of direct personal income tax by the colonial authority in
Northern Nigeria through the native, the Revenue ordinance of 1917 was nothing
strong to the people. Native Revenue ordinance of 1917 then became the law that
guided taxation in Nigeria the ordinance of 1917, 1918 and 1928 were later
incorporated into direct taxation ordinance No. 4 of 1940, which repealed the
native revenue ordinance. In 1957, there was the Raisman commission; Raisman’s
recommendation was the basis for providing the subsection one of section 70 of
the Nigeria (Constitution) order in council of 1960 and exclusive power upon
parliament to make laws for Nigeria or any part of therefore with respect to
taxes on the income and profit of companies, while subsection (ii) and (iii)
conferred concurrent powers upon parliament to make laws for Nigeria or any
part therefore with respect certain uniform principles in respect or to
personal income tax.
However,
taxation has been used as a tool by government in fashioning various aspects of
our economic growth. It is pertinent to note that the incursion of the military
into the body politics in Nigeria state at intervals between the first and now
fourth republic since 1966 when taxation was placed on the exclusive and
concurrent list of the constitution has left the issue very much at the back
burners. This means that the importance of taxation as a state economic weapon
failed at various times to attract the desired attention in terms of consistent
review reform and or implementation policies etc.
Nearly,
fifty year after, it is therefore not surprising that Nigeria is yet to
appreciate the fundamental of taxation; hence what is in place even now could
at best be described as ad hoc committee and commission charged with realizing
various task objectives.
Today
it is valid to posit that, apart from the provision of money or defence,
security, education, industry, culture, social and other economic
infrastructure, taxation serve as a variable too of fiscal policy. It is used
to objective of fiscal policy. That is, mobilization and allocation of
resources to desired productive sector of the macro-economy; (ie) distribution
of income and wealth among different groups of citizens; and stabilization
effect of market forces on prices, employment, and balance of payment amongst
others.
Increased
taxation on imported goods and services have affected the level of such goods
and services that industrialist within our sovereignty are encouraged to
produce. And because of high import duty on dairy products, textile materials,
food drinks etc; our economic potentials are encouraged through industrial
investment locally and its multiplier effect on employment and national growth.
In this line also, high tax rate imposed on imposed on imported components of
oil industrial inputs and the encouragement of local content in oil industry
input area all geared towards increasing economic growth of our country.
Over
the period with the advent of democracy and effective tax management put in
place, a substantial measure of macro-economic stability has been achieved. For
the first time in Nigeria’s recent history, value of Naira has not fluctuated
so badly but fairly stabilized. The level of inflation is now under control as
a result of stable macro-economic policies. It is worthy of note that there is
significant improvement in industrial capacity utilization as a result of
improvement in electricity with tax payers money that industries were able to
remit taxes as at when due. Also, there has been remarkable improvement in
non-oil sectors, capital market, education, transports, electricity and steel
sector etc.
1.2 STATEMENT OF THE PROBLEM
The
institution of taxation is more or less a permanent feature of any state or
country, which requires a degree of popular acceptance as well as sound
administrative structure capable of regular assessment and collection by the
operations. Investigate reveals that revenue from taxation often fall short of
expectation and besides this; the administration of tax is faced with so many
constraints that it requires re-examination periodically for purposes of
maximizing the gains from that sector in order to reflect a better economic
development.
Consequently
tax administration results in increases revenue yield, but this is not possible
because of the presence of tax evasion and a voidance due to loopholes in the
law. On the other hand, people do expect and rightly so, that for sacrificing
their private resources to the state in form of taxes, government is expected
to reciprocate by spending public revenue in a way that will enhance their
welfare.
But
government and tax collectors have been dubiously mismanaging the public
treasury. Another problem is the presence of persons regarded as above the laws
and they do not pay taxes. These groups of persons can call the sacred cows.
They make so much money and have enormous influence, which they throw around
negatively.
These
sacred cows are not bordered about paying their dues. There is also the
presence of professional touts who connive with unscrupulous tax officers in
government offices to falsify records of those willing to evade taxes. Sometime
even the police aid and abate the activities of these criminals openly. Also,
there is high level of manipulation and diversion of tax revenue by collectors
to satisfy their own personal aggrandizement. The encouragement of the paying
public due to the fact that there is very little evidence to show for taxes
collected. For these reasons therefore, there is an increased cases of tax
evasion.
Empirical
evidence on the relationship between other fiscal policy tools and economic
growths exist but such evidence on the relationship between taxation and
economic growth is lacking. Hence the choice for this topic to fill the
existing gap.
1.3 PURPOSE OF THE STUDY
Exhaustive
investigation into taxation and economic growth in Nigeria can play an
important role in propelling our environment in the right direction while also
consolidating our efforts in investment and economic independence. Every
citizen and corporate organization should see taxation as a responsibility and
sacrifices as his/her own little way of contributing to our great nation. At
this juncture, it’s important to state that economic growth and economic
development will be used interchangeably.
To
meet the general objective of the study the following areas of specification
were considered.
i. To
critically evaluate the utilization of tax revenue in the provision of basic
infrastructures.
ii. To
investigate and analyze the problems militating against effective tax
administration.
iii. To
analyze the impact of tax revenue on the growth of the economy.
iv. To
review of the administrative machinery of the Rivers State Board of Internal
Revenue.
1.4 RESEARCH QUESTIONS
In
order to have a direct and approach to carrying out the study, the following
research questions were drawn. They include,
i. To
what extent does personal income tax influence tax revenue?
ii. To
what extent does economic growth affect gross domestic investment?
iii. To what
extent doe taxation respond to the measures taken by government to improve
economic growth?
iv. What
are the impact of taxation on investment in particular and the growth of the
economy generally?
1.5 RESEARCH HYPOTHESES
To
conduct this study the following hypotheses have been posited
H01:
b1= 0 There is no significant relationship between economic growth and personal
income tax.
H02:
b1=0 There is no significant relationship between economic growth and VAT.
H03:
b1=0 There is no significant relationship between economic growth and
withholding tax.
H04:
b1=0 There is no significant relationship between economic growth and other
taxes.
1.6 SIGNIFICANCE OF THE STUDY
The
result of the study i.e. taxation and economic growth, and investigation of
Nigeria’s experience will provide basic panacea for effective tax system and
economic growth in Nigeria. Virtually, this study will analyze the vital role
of taxation and its contribution to economic growth. With an efficient tax system
in place, in the economic potentials of the nation becomes realizable and
guaranteed on a fast lane since tax reforms if properly implemented, will
increases resources at both the disposal of government and individuals which in
turn translate to benefit in terms and will create a better stock of knowledge
for tax consultants and tax managers in their quest for tax reform. It is
imperative at this juncture that the study provides ingredient for awareness of
taxation which will go a long way to educate the society on strategies for
investment drive in addition to all else.
Secondly,
occasional reviews of best fitted tax management approaches make for inclusive
of new knowledge in the tent. Such new knowledge will keep investors,
government, students and the general public abreast with current research
findings that guarantees continuity of sustainable investment in our economy.
1.7 DEFINITION OF TERMS
The
following concepts/ terms have been defined in relevance to the context in
which they were used in this work.
Tax:
This is an obligation and transfer of resources from the private to the public
sector in other to accomplish some of the nation’s economic and social goals.
Administration:
Is that part of management which is concerned with the installation and
carrying out of the procedures by which the programme laid down are
communicated and the progress of activities is regulated and checked against
plans.
Taxation:
This is the transfer of resources from the private to the public in accomplish
some of the nation’s economic and social goals.
Economy:
Is the collection of all productive activities in the society.
Economic Growth/Development:
It refers to the increase overtime of an economy’s capacity to produce those
goods and services needed to improve the wellbeing of the citizen in increasing
numbers of diversity.
Tax Rate:
This refers to the percentage of the net value of the tax base.
1.8 LIMITATION AND SCOPE OF THE STUDY
As
usual with most research work, time and finance is one of the challenges of
this research work.
Since
tax control and administration is the responsibility of the Federal Republic of
Nigeria, through its agencies like Federal Board of Inland Revenue, Central
Bank of Nigeria, Federal Office of Statistics, Department of Petroleum
Resource, Customs and Immigrations etc, a lot will be borrowed from them and
using the Rivers State Government as a study tool, I shall beam my searchlight
on the Rivers State Board of Internal Revenue during the field work. I will
also scoop several tax materials concerning Nigeria in the library to aid my
research.
1.9 ORGANIZATION OF THE STUDY
This
study is drawn into five chapters. Chapter one is more or less an introductory
chapter, which dwells on context of the problem, statement of the problem,
purpose of the study, research questions, hypotheses, significance of the
study, definition of terms, limitations and scope of the study, and the
organization of the study.
Chapter
two is the review of related literature. It studies how tax and economic
development are congruently required for our national growth, through a
literature review which explains empirical evidence of already published books
by scholars both theoretically and practically.
Chapter
three focuses on research design, sampling procedure/sample size determination,
method of data collection, also test of validity and reliability, operational
measures of the variables and data analysis technique(s).
Chapter
four dwells on presentation and analysis of data on taxation and economic
growth.
Finally,
the analysis are being discussed, conclusion(s) made and recommendation made.
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