TAX REVENUE AND ECONOMIC STIMULATION IN NIGERIA

TAX REVENUE AND ECONOMIC STIMULATION IN NIGERIA

ABSTRACT: The contribution of taxation to any economy globally is so much in terms of quantification and cannot be ignored as unimportant. Thus, this study empirically investigated tax revenue on economic growth in Nigeria (1980-2018). To determine to what extent the tax revenue contributes to the achievement of government growth objectives. The study employs the Ordinary Least (OLS) method with the aid of an Econometric package (E-View 7). The analysis reveals that custom and excise duties (CED) retards the economic growth and tax revenue accruing from Petroleum Profit Tax (PPT), Company Income  Tax (CIT) and  Value Added Tax (VAT) promote economic growth in Nigeria. The study concludes that the reason for the failure of tax revenue to meaningfully stimulate the Nigerian economy is linked to the level of tax administrators’ indiscipline, improper tax legislation and it is outrageous to the extent that it serves as backward-drag to the economic growth. Consequently, the study recommends that the Tax Identification Number (TIN) should be mandatory and a prerequisite to operate a bank account like the Bank Verification Number (BVN). This will strengthen tax payment and increase the number of taxpayers. It will further reduce tax evasion to enhance tax operation and management.

OTHER RELATED PROJECT TOPICS

CHAPTER ONE: INTRODUCTION

1.1    Background to the Study

Taxation is a major source of government revenue all over the world and governments at all levels uses tax proceeds to render their traditional functions, such as the provision of roads, maintenance of law and order, defense against insecurities, regulation of trade and business to ensure social and maintenance of economic stability. Thus, the importance of tax as one of the major sources of government revenue in the economy cannot be overemphasized. Furthermore, government, responsibilities have continued to increase over time especially in developing countries like Nigeria due to the increasing size of the population, and infrastructural decay, however, it is disheartening to note that the revenue of the government has not been growing above her expenditure to enable government carries out its basic functions of providing basic amenities.

According to Abomaye, Williams, Michael, and Friday, (2018), a tax system is an avenue for the government to use in collecting additional revenue needed in discharging its pressing obligations. Abomaye et al (2018) further asserted that a tax system is one of the most effective means of mobilizing a nation’s internal resources and it lends itself to creating an enabling environment to promote economic growth. In the same vein, Nzotta (2007), posited that taxes constitute key sources of revenue to the federation account shared by the government at all levels.

Umoru and Anyiwe (2013), also asserted that taxation is a concept and science of imposing a tax on citizens. Umoru and Anyiwe (2013), further stated that tax is itself a compulsory levy that is required to be paid by a country’s citizens. It is generally considered a civic duty. The imposition of taxation is expected to yield income which should be utilized in the provision of amenities, both social and security as well as create conditions for the economic wellbeing of the society.

From the foregoing, tax is one of the most powerful levies available to the government at all levels to stimulate and guide its economic and social development.

Matthew (2014) has it that the Federal Inland Revenue Service (FIRS) is vested with the power to administer tax policies assessment and collection of tax and shall for all amounts so collected in a manner to be prescribed by the Federal Minister of Finance.

Matthew (2014) further stated that the Board has certain reserved power which shall not be delegated to another person to perform, e.g. power to acquire, hold and dispose properties of any company in satisfaction to tax or any judgment debt, and to specify the forms of return claim and notices.

According to Worlu and Emeka (2012), Matthew (2014), Uzoka and Chinedu (2018) have it that the main forms of tax collected in Nigeria are direct and indirect taxes. For the direct taxes, it is levied on individuals, and factors of productions e.g. Personal Income Tax (PIT), Capital Gain Tax (CGT). However, indirect taxes are levied on goods and services e.g. import and export duties. Thus, consumers bear the ultimate burden. However, Worlu and Emeka (2012), further opined that Tax revenues accruing to an economy, such as Nigeria, can be categories into Oil Revenue (includes revenue from royalties, Petroleum Profit Tax (PPT), gas tax) and Non-Oil revenue (includes trade, loans, direct and indirect taxes paid by other sectors of the economy, Aids, agriculture, etc).

Festus and Samuel (2007) observed and stated that revenue generated through tax has not met the expectation of the government. The government has equally expressed total disappointment and is working towards expanding the non-oil tax revenue.  Uzoka and Chinedu (2018) asserted that while taxation plays a significant role in income redistribution, protection of the weak and infant industry, the revenue generated through it plays a crucial role in promoting economic growth and development. However, if the tax is poorly administered the revenue generated will not contribute much to economic growth and development.

According to Matthew (2014), Abomaye et al (2018), Khadijat, and Taophic (2018), the mismatch between the performance of the Nigerian economy and the massive government revenue generated through the tax system has continued to raised critical questions and debate among scholars.

It is noteworthy that in Nigeria government tax revenue has metamorphosed from millions to billions and has geometrically progressed to trillions of naira in the last in recent times. It is in light of the foregoing, this study seeks to empirically investigate the extent to which tax revenue has contributed to the stimulation of the Nigerian economy.

1.2     Statement of the Problem

There is general disagreement among scholars on the contribution of tax to economic growth in developed and developing economies including Nigeria. In recent years, revenue accruing from taxes in the Nigerian economy has increased geometrically. In Nigeria, tax revenue contributes the highest revenue to the federation account which is shared by the three tiers of government (federal, state, and local governments). The tax system is a structure in line with the fiscal power of the various tiers of government with each having different tax jurisdictions.

Odusola (2004) observed that the tax system is unequal and dominated by oil revenue which accounted for at least 70% of the revenue; this indicates that non-oil tax revenue has never assumed a strong role in the country’s management of the fiscal policy. Festus and Samuel (2007) asserted that revenue generated through tax has not met the expectation of the government. The government has equally expressed total disappointment and is working towards expanding the non-oil tax revenue.

Abomaye et al (2018) stated that a tax system is one of the most effective means of mobilizing a nation’s internal resources and lending itself to creating an enabling environment to promote economic growth. However, the Nigerian experience is different as there still exists infrastructural decay such as electricity, road, insecurities, which had led to the demise of many corporate bodies both (private and public) thereby resulting in a high rate of unemployment.

Furthermore, tax revenue mobilization as a source of financing developmental activities in developed and developing economies has been a difficult issue, primarily because of various forms of resistance, such as evasion, avoidance 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.

It is in light of the foregoing, this study seeks to investigate whether tax revenue has contributed to the stimulation of the Nigerian economy.

1.3 Aim and Objectives of the Study

The broad aim of this study is to examine the tax revenue and economic stimulation in Nigeria. While the specific objectives include;

1. To examine the relationship between Petroleum Profit Tax (PPT) and the growth rate of the economy.
2. To ascertain the extent of the relationship between Company Income Tax (CIT) and the growth rate of the economy.
3. To examine the relationship between Custom Excise Duties (CED) and the growth rate of the economy.
4. To ascertain the extent of the relationship between Value Added Tax (VAT) and the growth rate of the economy.

1.4 Research Questions

In an attempt to determine the relationship between tax revenue and economic stimulation in Nigeria, the following research questions were formulated for this study.

1. To what extent does Petroleum Profit Tax (PPT) stimulate the economic growth rate in Nigeria?
2. To what extent does Company Income Tax (CIT) impact on economic growth rate in Nigeria?
3. To what extent does Custom Excise Duties (CED) stimulate the economic growth rate in Nigeria?
4. To what extent does Value Added Tax (VAT) affect the economic growth rate in Nigeria?

1.5 Research Hypothesis:

Based on the objectives of this study the following hypotheses were formulated in the null form for this study.

1. There is no significant relationship between the Petroleum Profit Tax (PPT) and the economic growth rate in Nigeria.
2. There is no significant relationship between Company Income Tax (CIT) and the economic growth rate in Nigeria.
3. There is no significant relationship between Custom Excise Duties (CED) and the economic growth rate in Nigeria.
4. There is no significant relationship Value Added Tax (VAT) and economic growth rate in Nigeria.

1.6 Significance of the Study

Tax revenue is one of the major sources of revenue for the government globally. Thus, the revenue accruing from tax if well harness can help the government in achieving its macroeconomic goals such as maintaining economic stability by combating inflation and deflation, build industries to promote employment, achieve equity in income distribution as well as address issues relating to poverty alleviation.

In light of the above, therefore, it is hoped that the findings of this study will provide a broader view of the efficiency of government revenue generation through a better tax system in Nigeria. The study will also be of immense importance to tax policymakers to design tax policies aimed at enhancing economic growth through a better tax system. This study will contribute to the existing literature on the topic herein under investigation to close the gap in this area. Also, the study will be a useful resource for further research on the area herein considered.

1.7 Scope of the Study

This study examined the relationship between tax revenue and economic stimulation in Nigeria using time series data from 1980 – 2018 (38 years). The proxies for tax revenue such as Petroleum Profit Tax, Company Income Tax, Custom Excise Duties, and Value Added Tax are examined for the period to determine their correlation with the Nigerian economy which will be measured as Gross Domestic Product (GDP) growth rate. Data were sourced from the Federal Inland Revenue Service (FIRS) and Central Bank of Nigeria (CBN) Bulletin.

1.8 Limitations of the Study

The Nigerian tax system is large with diverse components that are revenue-generating which can contribute to economic stimulation in Nigeria, however, this study look at only revenue from Petroleum Profit Tax, Company Income Tax, Custom Excise Duties, and Value Added Tax as a key government revenue for the implementation of government proposed project. Furthermore, this study was restricted to the period of 1980 to 2018 and only secondary data were used as an effort to access data to cover the recent development in the economy was futile.

1.9 Organization of the Study

This study is divided into five (5) chapters and it is organized as follows; in chapter one, the background to the study is presented followed by a person in the statement of problems, the purpose of the study, its significance, research questions, research hypothesis, the scope of the study, limitations and organized of the study.

Furthermore, in chapter two previous studies and related theories to this study are reviewed. Chapter three embraces the methodology of this study. In chapter four analysis of data, use was presented and chapter five is devoted to discussion of findings, conclusion, and recommendations.

1.10 Definition of Terms

Economic Stimulation: Bhartia (2009) viewed economic stimulation as the continuous increase of economic activities of a Nation. Furthermore, Joseph, Ikechukwu, Amah (2016) opined that economic stimulation refers to a long-term rise in the capacity to supply increasingly diverse economic goods to its citizens. Joseph et al (2016) further asserted that the stimulating capacity is based on advancing technology, institutional and ideological adjustments. Thus, Economic stimulation indicates the expansion of a country‘s potential Gross Domestic Product.

Petroleum Profit Tax (PPT): Ogbonna & Appah, (2016), Umeora (2013)  and  Odusola (2006) have it that Petroleum profit tax involves the charging of tax on the income accruing from petroleum operations. It can also be a tax applicable to upstream operations in the oil industry. Petroleum Profit Tax (PPT) is the tax imposed on companies that are engaged in the extraction and transportation of petroleum products. It is particularly related to rents, royalties, margins, and profit-sharing elements associated with oil mining, prospecting, and exploration leases.

Value Added Tax (VAT): According to Umeora (2013) VAT was introduced by The Federal Government of Nigeria in January 1993. Value Added Tax (VAT) is a tax on estimated market value added to a product or service at each stage of its manufacture or distribution and the additions are ultimately added to the goods and services because they cannot recover the tax paid on the consumption of goods and services.

Personal Income Tax (PIT): Ogbonna & Appah, (2016) viewed Personal Income Tax (PIT) as a type of tax charged on the income of individuals. The chargeable income of an individual is the aggregate amount from all sources (whether from employment, investment, profit from trade, profession or vocation, etc) after deducting all non-taxable incomes and relief granted Personal income tax (PIT). Furthermore, Illyas and Siddiqi (2010) defined personal income tax as a tax on the Pay As you Earn (PAYE) basis that is the tax payable depends on how much is earned by the taxpayer.

Company Income Tax (CIT): Ogbonna and Appah (2016), Chigbu, and Njoku (2015) have it that company income tax was introduced in Nigeria in1961. They see it as a tax imposed on the profit of companies (excluding profit from companies engaged in petroleum operations) received in Nigeria in respect of any trade or business, rent, premium, dividends, interest, loyalties, and any other source of annual profit. The rate of CIT varies according to operation and size of turnover per annum.

Custom and Excise Duties: Umoru & Anyiwe (2013) asserted that the custom and excise duties are regulated by the Custom and Excise Management Act of 1990. The duty is chargeable on all goods and services imported into Nigeria. The tax is administered by the Nigeria Customs Services and is also referred to as import duties. Currently, the duties ranged between 2.5 percent to 100 percent depending on the product.

Tax Avoidance: This refers to the minimization of tax liability by taxpayers through lawful methods. This is the legal usage of the tax regime to one’s advantage to reduce the amount of tax that is payable by means that are within the law.

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.