EFFECTIVENESS OF TAXATION AS AN INSTRUMENT FOR CONTROL OF MONEY IN CIRCULATION

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CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

A tax is a mandatory financial charge or some other type of levy imposed upon a taxpayer (an individual or other legal entity) by a governmental organization in order to fund various public expenditures. A failure to pay, along with evasion of or resistance to taxation, is punishable by law. Taxes consist of direct or indirect taxes and may be paid in money or as its labour equivalent (Okonkwo, 1994).

The development of any nation depends on the amount of revenue generated by the government for the provision of infrastructural facilities. Taxation is the key to unlocking the resources required for public investment and infrastructure growth (Anyawuokoro, 1999).

Most countries have a tax system in place to pay for public/common/agreed national needs and government functions: some levy a flat percentage rate of taxation on personal annual income, some on a scale based on annual income amounts, and some countries impose almost no taxation at all, or a very low tax rate for a certain area of taxation. Some countries charge a tax both on corporate income and dividends; this is often referred to as double taxation as the individual shareholder(s) receiving this payment from the company will also be levied some tax on that personal income.

The existence of taxation in Nigeria is linked with the era of the colonial master in the early 20th century. The introduction becomes necessary as a result of the enormous tasks facing the government (Jude, 2003).

In Nigeria, tax system has undergone significant changes in recent times. The tax laws are being reviewed with the aim of repelling of obsolete provision and simplifying the main ones. Under current Nigeria law, taxation is enforced by the tiers of government that is local, state and federal government.

Government, all over the world needs tax to fund and control their economic activities and one of source of revenue is taxation. Taxation can be variously defined. Fundamentally however, it is a compulsory levy on income since the decision to pay tax is not that of the tax payers. According to Okpe (1998), taxation has been defined as a levy which a government imposes on the income of the citizens or corporation in a state for which the government gives no direct benefit to the taxpayer or a non-punitive but yet a compulsory levy by government on the properties and income of individual and corporation. The government cannot build a school or a hospital personally for somebody because he has paid his taxes, but the money realized is used to finance general government expenditures.

The tasks have to do with how government can control its economic activities and how government can achieve the desired level of price inflation and deflation and how to control supply of money.

1.2 STATEMENT OF THE PROBLEM

The Nigeria tax system is beset by a myriad of challenges, some of which are highlighted below (FRN i1997, 2002; Ariyo 1997; Ola 2001; Odusola 2002, 2003; study group on tax reform 2003):

Non availability of Tax Statistics: Taxation has been the oldest governmental activity since the countrys unification is 1914, so one would expect tax statistics to be readily available. This expectation, however, is misplaced. With the exception of the states of Delta, Lagos, Kaduna and Katsina and the Nigeria Customs Services, other agencies of the states and relevant federal tax offices have serious failures in data management. Moreover, there are no efforts to have the limited data that are available collated or analyzed on a routine basis, not to mention, having it stored, or made more easily assessable or retrievable. This situation does not provide much input to policy process.

Inability to Prioritize Tax Effort: The political economy of revenue allocation in Nigeria does not prioritize tax efforts. It is, instead, anchored on such factors as equality of states (40 percent), pollution (30percent) landmass and terrain (10percent), social development needs (10 percent), and internal revenue effort (10percent). The approach, discourages a proactive revenue drive, particularly for internally generated revenue, makes all government tiers heavily reliant on unstable oil revenues which are affected by the volatility of the international oil markets. Aside from the national syndrome of ˜cake sharing, the instability and volatility of oil revenue should have created an opportunity for improved tax efforts within the provisions on taxation ratified in the 1999 constitution. Although some state governments have initiated measured to enhance their tax generation attempts, the outcome has not reflected any level of serious effort.

Poor Tax Administration: Tax administration and individual agencies suffer from limitations in manpower, money, tools and machinery to meet to meet the ever increasing challenges and difficulties. In fact, the negative attitude of most tax collectors toward taxpayers can be linked to poor remuneration and motivation. Okorie (2005)consider the paucity of administrative capacity as a major impediment to the government in its attempts to raise revenue in Nigeria. As of March 2003, the federal inland revenue service (FIRS) had 7,643 staff members throughout the country; of these a mere 12.6 percent, or 645 employees, were tax professionals/officers. The predominance of support staff in a professionally inclined agency like the FIRS does not augur well for the country. The situation at the local government level is more precarious. Anecdotal evidence shows that staffs are not provided with regular training to keep them abreast of developments in taxrelated matters. This makes the administration of taxes in terms of total coverage and accurate assessment very weak.

Multiplicity of Tax: A major problem facing the country is the multiplicity of taxes. Individuals and corporate bodies complain about the ripple effects associated with the duplication of tax, this problem arose from the states complaints about the mismatch between their fiscal responsibilities and fiscal powers or jurisdiction. To compensate, some states took the initiative of levying certain taxes, which has led to arbitrariness, harassment and even closure of businesses. To rectify this embarrassing situation, the taxes and Levies Act of 1998 was enacted. Lagos state is a good example of efforts to offset the inequitable distribution of VAT proceeds: it imposed certain taxes and proposed a re-introduction of the sales tax. To control multiple taxation, the join tax board started to publish a list of approved taxes and levies and to declare an other unspecified taxes illegal. This has created a degree of harmony, and checked the hitherto rampant taxation that had made the business environment in Nigeria so harsh.

Regulatory Challenges: Political risk and exchange controls pose by far one of the greatest business and regulatory challenges for companies during business in Nigeria. Also company law, protection of intellectual property are challenging areas for companies. Protecting your investment and workforce, being able to extract profits and freely move the workface are often taken for granted when investing in first world countries. Not so in Africa and Nigeria in particular, where the possibility of forfeiture of the business, or ability to remit profits could overnight as political regime come and go.

Corruption: Many countries have also had committees of enquiry, which have dealt with tax reform issues, include corrupt tax practices. The outcome of these efforts have also, at best, been mixed. It has become increasingly understood that without the imposition of fundamental complementary changes, tax reforms in and of themselves do not have a long lasting impact. Has noted. In many cases political corruption is at least as serious as corruption of the tax bureaucracy. Low salaries for tax officials, political protection of prominent tax evaders, poor monitoring of junior officials, high tax rates, high levels of discretion for the tax official, and poor information, generally are some of the Africa, Asia and Latin America At what point are the policymakers, bureaucracies, and taxpayers ready to make fundamental changes towards reducing corrupt practices is a question to which there is no prior or easy answer. As noted earlier, globalization has increased the urgency for such fundamental changes, but it is the internal dynamics of each society that will determine whether the needed changes will be made. Measures to reduce corrupt practices are needed on a variety of fronts, and they need to be applied on an ongoing basis over a long period of time. (the world bank, 1997, p. 105). It is essential that as with reform, addressing corrupt tax practices come to be regarded as an on-going process and not as one-off event. Basic institutional reforms are needed. However, the knowledge about how to bring appropriate institutions is still at an early stage (Rodrik,, 1999). All parties, including the multilateral agencies need to develop a sense of humility in this area.

Corruption is prevalent in the administration of taxes and duties. Until very recently, it was commonplace to collect tax payments partly on behalf of ones self and partly for the government. Evaders prefer to bribe officials rather than pay taxes. Tax assessors collude with taxpayers, particularly with regard to the PIT, or in some cases, in connection with the assessment. The multiple processes of clearing imports is not only a source of administrative delay, but also an avenue for entrenching corruption. This is further compounded by the pilferage of goods at Port As CITN notes, ˜governments in Nigeria are perceived as a corrupt and selfish lot, to whom money should not ever be voluntarily given, taxes paid are expect to end in private pocket, not in public utilities. This attitude has eroded tax consciousness on the part of Nigerians. Although some progress has been made by the present administration, there is still room for improvement.

It is obvious that Nigeria being one of the developing nations of the world is seriously faced with series of problems which includes;

1. The extent in which the tax system has been inactive or ineffective in preventing or combating inflation.
2. The probable effects of a rapid rise in prices on revenues and expenditure.
3. The vicious circles of poverty (i.e. the gap between the rich and poor in too wide).

3 1.3 OBJECTIVE OF THE STUDY

To critically examine the reasons for taxation as an instrument of money control and its effects on government and its citizens, and its general effects on the Nigeria economy with regards to political, social and economic development of our country.

In this case government has to meet the desired standard of living and cost of living of the citizens and adopt a suitable level of economy to boast investors and improve natural output.

For the purpose of this study, the following objectives are expected to be attained:

1.      To determine how tax system can be effective in preventing and combating inflation.
2.    To ascertain the extent on which revenue and expenditure are probable effects of a rapid rise in prices.
3. To determine and to use tax system to breach the vicious circles of poverty on our country.

1.4 RESEARCH QUESTIONS

In order to achieve the objective highlighted above, the following research questions were formulated as follows:

1. In what ways can tax be used to effectively prevent or/and combat inflation?
2. The effectiveness of rapid rises in prices on revenues and expenditure
3. The effect of vicious circles of poverty in Nigeria economy.

1.5 RESEARCH HYPOTHESES

HI: The extent to which tax system is inactive and ineffective in preventing and combating inflation.

HO: The extent to which tax system is not inactive and ineffective in preventing and combating inflation.

HI: There is significant effect of a rapid rises in prices on revenues and expenditure.

HO: There is no significant effect of a rapid rises in prices on revenue and expenditure.

HI: There is significant effect on tax system and supply of money with the vicious circles of poverty.

HO: There is no significant effect on tax system and the supply of money with the vicious circles of poverty.

1.6 SIGNIFICANCE OF THE STUDY

The study is important in such that:

1.  The outcome of this study would enhance the ability of the students offering course in taxation to understand the subject properly and help the researcher to obtain the award of Master Decree in Accountancy.
2.    The study would serve as an information bank for future research in the area of taxation.
3. The findings of this research would help government officials to utilize taxation in achieving desired goals
4. . It shall also serve as an eye opener to government of the present time that taxation can be used as economic tool for the control of money in circulation in order to avoid inflation, control high cost of living and low standard of living.

1.7 SCOPE AND LIMITATION OF THE STUDY

This topic, the effectiveness of taxation as an instrument for control of money in circulation should been expected to cover Nigeria (i.e. Thirty six (36) states and the FCT) but decided to limit it to some states of the federation, since the economy of every state of the federation is the same and the same tax Act is applied throughout the Federal Republic of Nigeria.

Due to financial handicap, distance (Landmass) and the constraints and the attitude of the respondents, most of them were either not available or incorrectly completed the questionnaire given to them. The irrational behaviour of human beings who react differently as same were willing to give the needed information, other were reluctant or refused to co-operate even under several persuasion.

1.8 DEFINITION OF TERMS

Some technical term, which features in this work are defined to enhance letter understanding of the research work?

Taxation: Taxation refers to compulsory levy imposed on private, individual, institutions or groups by the government.

Tax: Tax is the money paid by the citizens, according to their income, value of goods purchased etc to the government for public purposes.

Financial Handicap: This means shortage of money for an activity.

Tax Payer: People, group of people or companies that pays tax.

Vicious Circle: It is a situation in which one problem leads to another, which then makes the first one worse.

Inflation: This is when there is too much money in circulation.

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