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FISCAL DEFICIT AND THE PRODUCTIVITY OF THE NIGERIAS
TAX SYSTEM (1970 2010)
BY
IBOMA GODWIN E PG/08/09/167291
A dissertation submitted to the Post Graduate School, Department
of Economics, in partial fulfilment of the Requirements for the
Award of the Master of Science (M.Sc) Degree in Economics of the
Delta State University, Abraka, Nigeria
FEBRUARY 2012
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Abstract
This study evaluates the link between fiscal deficit and the
productivity of the Nigeria tax
system between 1970 - 2010 using tax buoyancy and elasticity as
indexes. It also
examines some major tax reforms within the period. Overall, the
analysis shows that for
most of the tax sources, the elasticity indexes were
significantly less than 0.5 while for 3
out of the 10 equations the elasticity fell between 0.5 and 0.9.
This indicates a relatively
weak productive tax system. The study also indicates that unlike
the overall equation the
result for the oil boom period, the elasticity of petroleum
profit tax was unity. The other
results followed the general results. The results for the period
of the Structural
Adjustment Programme (SAP) were not significantly different from
those of the oil
boom and the entire period. The study concludes that
administrative lags may have
affected the remittance of tax revenues to government which may
be responsible for the
low productivity observed. We therefore recommend that
government should broaden the
tax base and improve on administration of tax collection.
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CHAPTER ONE INTRODUCTION
1.1 Background to the Study
Tax structure and regulations in Nigeria have undergone
tremendous changes since the
colonial period. These changes were propelled by the
inconsistencies and visible
confusions in the operation of various tax systems in the
country. These inconsistencies
and confusion led to the establishment of the Raisman Fiscal
Commission of 1958.
According to Aluko (2004), the Commission was mandated to apply
uniform basic
principle for taxing incomes throughout the country. This
recommendation was embodied
in the Nigerian Independence Constitution Order in Council 1960,
which resulted
eventually in the enactment of the 1961 Income Tax Management
Act (ITMA). ITMA
1961 was the forerunner of the Companies Income Tax (CIT) Acts
1961, 1979 and 1990
as well as the Personal Income Act 1993 as amended.
The structure of the Nigerian tax reflects the nature of the
business in the economy.
Depending on the type of business, taxes are levied on
businesses on an annual basis.
This implies that all businesses, organizations and taxable
persons are obligated to make
a tax return to the Inland Revenue (State of Federal). Profits
arising from transactions of
companies constitute taxable income following their assessment
to tax. This also
includes personal income tax, which is duly imposed on
individuals by the relevant tax
authority in the territory where the company has its principal
office, or the place of
business on the first day of the year of assessment or year of
commencement of business.
The state Board of Internal Revenue is responsible for the
administration and collection
of the relevant tax in while the Federal Inland Revenue is
charged with the responsibility
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of the company and other related taxes. These structures are
governed by the Personal
Income Tax Act (PITA, 1993) and Company Income Tax Act (CITA,
1994) respectively
(Anyaduba, 2004).
Therefore, the Nigerian tax system is prudently organized in
order to effectively enhance
the collection of taxes and reduce the incidence of tax evasion
and the subsequent loss of
revenue to the government. The tax laws therefore provides for
the collection of taxes at
source of the taxpayers income. This is achieved through the
withholding tax system,
which allows taxes to be deducted at the source of income. This
is provided in sections
63 of CITA and 72 of PITA; where the laws recommends that income
tax assessable on
any company, whether or not an assessment has been made, shall
if the Board (the
relevant tax authority) so directs, be recoverable from any
payments made by any person
to such company.
Taxation is a dynamic subject, which grows with the constant
changes in the economic
environment in which it operates, hence the need to review the
regulating instruments
from time to time. As a result, there had been amendments to the
various tax laws to
reflect the intention of the government. Usually, tax policies
announced in a budget
speech by government become legally operational on the 1st day
of the next budgetary
year. This creates time lag in implementation and administration
of tax policies. The
main purpose for reviewing the regulating instruments and
changes in tax policies is to
create avenue for increased revenue from taxation. In spite of
these reforms and the
visible increase in revenue from taxation, the federal and state
governments have on a
regular basis engaged in fiscal deficit.
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Fiscal deficit arises because public expenditure rises while
revenue remains unchanged,
or tax revenue falls while public spending remains unchanged, or
tax revenue falls while
public spending rises. A commonly observed phenomenon in most
developing countries
like Nigeria is that, the public sector plays a dominant role in
initiating and financing
economic growth. The resultant growth in public expenditure is
expected to be financed
by public revenues from taxes and non-tax sources but the
revenues always lag behind
the level of public expenditure, leaving large deficits in the
focus.
Onwioduokit (1999) The growth and persistence of fiscal deficits
in both the
industrialized and developing countries in recent times have
brought the issue of fiscal
deficits into sharp focus. The issues surrounding fiscal
deficits are certainly not new, but
the economic development of the past decade has rekindled the
interest in fiscal policy
issues. In the advanced countries, the growth of United State
Federal deficit provided the
impetus for a reassessment of the effect of fiscal deficits on
economic activities (Islam
and Wetzel, 1991). In the less developed countries including
Nigeria, fiscal deficits have
been blamed for much of the economic crisis that beset them in
the 1980s: over
indebtedness and the debt crisis; high inflation and poor
investment performance; and
growth. Attempts to regain stability at the macro-level through
fiscal adjustment achieved
uneven success, raising questions about the macroeconomic
consequences of public
deficits and fiscal deterioration or fiscal stabilization
(Easterly and Schmidt-Hebbel,
1993).
The growth in public revenue through taxation in developing
countries is restricted by
many factors such as low per capita income, limited base on
which direct taxes can be
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imposed, income tax exemptions in the form of tax holidays,
accelerated depreciation
rates and tax credits usually provided to the manufacturing
sector, and deficiencies in tax
administration. On the other hand, public expenditure continues
to grow due mainly to
mismanagement/high rate of corruption; high cost of running
public administration due to
the type of political system, the level of government
participation in production and
control of economic variables; and sheer inability to control
spending by public office
holders (Financial Indiscipline). In addition, increasing
population, insecurity and the
political system are also responsible for increase in public
expenditure.
1.2 Statement of the Problem
Over the years, huge amounts of revenue have accrued to the
federal, state and local
governments from taxation. In a research conducted by Ariyo and
Aaheem (1991), it was
confirmed that budgetary allocation does not necessarily exceed
the expected revenue.
Yet, the government on regular basis embark on extra budgetary
activities indicating the
non-sustainability of the tax revenue.
On the basis of the above, there has been a growing concern over
the use of fiscal deficit
as an option in accelerating economic growth and development
especially in developing
countries like Nigeria. This situation arises from the
ever-increasing magnitude of deficit
by the government of most developing countries. It was on this
ground that Ariyo,
(1993) points out the implications of fiscal deficits on growth
and economic reforms in
these countries. Chibber and Khalizadeh, (1988), have also
suggested that economic
reforms should cover not only the size and financing pattern of
government deficits, but
also the structure of taxation and the level and composition of
public expenditure.
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Studies conducted by different scholars suggest the need for
concerned attention about
the problem of fiscal deficit in Nigeria. A study by Ariyo and
Raheem, (1990) reports
that fiscal deficit has become a recurring feature of Nigerias
fiscal policy and notes the
absence of any identifiable macroeconomic objective to justify
this deficit-prone
behaviour. In same vein, Onwioduokit (2002) opined that
Government expenditure in
Nigeria has consistently exceeded revenue for most of the years
beginning from 1980 and
that the symptoms of such fiscal imbalance are, of course,
budget deficits. While budget
deficits are nothing new in the countrys history, the recent
size of the deficit has been a
cause of concern to many people including academics, policy
makers, and investors. It is,
however, pertinent to note that much of the debates over the
deficits have been more
related to the effects of unacceptably large deficits rather
than with the causes of the
deficits
Furthermore, Ariyo, (1993) reports that the level of fiscal
deficit in Nigeria has become
unsustainable since 1980. When a country experiences
non-sustainable fiscal deficit,
there are three options opened to the government for addressing
the problem. These
options according to Zee, (1988) are determination of the
optimal tax rate for a given
level of expenditure; determination of the optimal level of
expenditure for a given tax
rate; and simultaneous determination of the optimal level of
expenditure and tax rate.
This study therefore focuses on the first option to enable us to
determine a sustainable
level of revenue as a basis for evolving sustainable deficit
profile in Nigeria. This choice
is influenced by the following considerations. Firstly, this
research is essentially a
follow-up of related studies by Ariyo and Raheem, (1990) and
Ariyo, (1993), which
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indicate that the level of fiscal deficit in Nigeria is no
longer sustainable and it is not
desirable to continue to incur budget deficit for financing
public expenditure. Rather,
efforts should be made to reduce expenditure or raise additional
revenue by expanding
revenue sources and by exercising some financial discipline.
Second, it is preferable to focus on revenue enhancement tax
policy in view of the current
situation in Nigeria. Most development policies in the country
today are geared toward
rebranding Nigerians, fighting corruption and implementing the
Vision 2020. This as we
know requires large financial outlay on activities that are not
directly productive in the
short, a situation that is expected to continue for some years.
Therefore, a significant
reduction or switching of public expenditure into directly
non-productive real sectors of
the economy is not a viable proposition in the short run in the
phase of high rate of
unemployment, youth restiveness, insecurity and unresolved
political crisis.
Third, Lipumba and Mbelle, (1990) indicate that increasing
revenue and reducing
expenditure are some of the most important fiscal challenges
facing a government
entangled in the budget deficit problem. Ndekwu, (1991) also
noted that more than ever
before, there is now a great demand for the optimization of
revenue from various tax
sources in Nigeria. This probably influenced the decision of the
Federal Government of
Nigeria (FGN), which in 1991 set up a Study Group on the Review
of the Nigerian Tax
System and Administration.
Finally, an accurate estimation of the appropriate level of
optimal rate that will match the
required level of expenditure requires the knowledge of the
productivity of the tax
system. This will assist in identifying a sustainable revenue
profile for the country. It will
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also help in determining appropriate modifications to the
existing tax structure and rates
as well as areas for improving tax administration.
It should be noted that the advent of the oil boom in the 1973
and 1974 fiscal year
encouraged over-reliance on oil revenue to the neglect of the
traditional revenue sources.
As a result, some non-oil revenue sources were either, abandoned
or became of less
concern to the government, and no attention was paid to
assessing the optimal revenue
derivable from these non-oil sources. Further, there were
episodic jumps in the countrys
total annual revenue and hence budget deficits (Ariyo and
Raheem, (1990). This is a
reflection of the vagaries of the oil market whose fortunes
fluctuate widely and
unpredictably.
This research work therefore appraises fiscal deficit and the
productivity of the Nigerian
tax system. This will assist in an objective assessment of the
countrys sustainable level
of revenue as a basis for determining an optimal level of
expenditure. It will also
facilitate the design of fiscal policies to overcome the deficit
problem in the long run.
1.3 Research Questions
Given the magnitude of the fiscal deficit problem in Nigeria and
the length of the period
of time under consideration, fundamental questions are raised
for this dissertation.
Amongst these fundamental questions are:
1. What is the relationship between government total tax revenue
(GTR) and the
Gross Domestic Product (GDP) in Nigeria?
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2. Does an increase in government tax revenue (GTR) lead to the
same proportionate
increase in Gross Domestic Product (GDP) in Nigeria?
3. What are the impacts of the non-oil revenue (NOR) on the
non-oil gross domestic
product (NGDP) in Nigeria?
4. Is there any relationship between the custom and excise
duties (CEXD) and the
gross domestic product (GDP) in Nigeria?
5. Does the petroleum profit tax (PPT) have any significant
impact on the total oil
revenue (TOR)?
6. What is the impact of the petroleum profit tax (PPT) on the
gross domestic product
(GDP) in Nigeria?
7. Does the company income tax (CIT) have any effect on the
gross domestic
product (GDP) in Nigeria?
8. Does the company income tax (CIT) have any effect on the
non-oil gross domestic
product (NGDP) in Nigeria?
1.4 Objectives of the Study
The main objective of this study is to examine the productivity
of the Nigerian tax system
with a view to determining whether it is adequate in meeting
budget proposals without
recourse to budget deficits as an option in budget finance,
knowing well that taxation is
one of the major sources of government revenue. The specific
objectives are as follows.
1. To examine the relationship between government total revenue
and the gross
domestic product in Nigeria.
2. To investigate the impact of increasing government tax
revenue on the Gross
Domestic Product (GDP) in Nigeria.
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3. To examine the index of tax buoyancy in Nigeria from 1970
2010
4. To investigate the relationship between non-oil revenue and
the gross domestic
product in Nigeria.
5. To empirically establish the relationship between petroleum
profit tax and the total
oil revenue as well as the GDP.
6. To investigate the impacts of the total oil revenue on the
gross domestic product of
Nigeria.
7. To investigate the impact of custom and excise duties on the
non-oil gross
domestic product in Nigeria.
8. To examine the relationship between the company income tax
and the GDP and
NGDP.
1.5 Research Hypotheses
The hypothesis formulated for this dissertation is meant to test
relationship between
government tax revenue, tax sources and tax productivity. These
hypotheses are
formulated in null form.
Hypothesis 1
Ho: There is no significant relationship between the federal
government tax (GTR)
revenue and gross domestic product (GDP) in Nigeria.
Hypothesis 2
H1: There is no significant relationship between the non-oil
revenue (NOR) and the
NGDP in Nigeria.
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Hypothesis 3
H1: There is no significant relationship between the petroleum
profit tax (PPT) and
total oil revenue (TOR).
Hypothesis 4
H1: Company Income tax does not significantly affect the GDP and
the NGDP in
Nigeria.
Hypothesis 5
H1: Revenue from total export (TEXP) does not have any
significant effect on the
gross domestic product (GDP).
Hypothesis 6
H1: There is no significant relationship between custom and
excise duties and the non-
oil gross domestic product (NGDP) in Nigeria.
1.6 Scope and Delimitation of the Study
This research work examines fiscal deficit and the productivity
of the Nigerias Tax
System (1970 2010). It covers the structure of the Nigerian tax
system and justifies the
productivity of the system. The researcher obtained data, which
cover a period of 40
years after independence (1970 2010). It examines sources of
revenue, tax elasticity
and buoyancy, fiscal federalism, the impact of the oil boom and
government expenditure
in general.
1.7 Significance of the Study
Successive governments in developing countries have expressed
concern about the level
of fiscal indiscipline and the low level of the productivity of
the tax system especially in
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developing countries and Nigeria in particular. Therefore, this
research work is relevant
to all the three tiers of government as the research is
concerned with the examination of
the link between fiscal deficit and the productivity of the
Nigerias tax system and draw
attention to how this should be curtailed in Nigeria.
The dissertation also assist in identifying a sustainable
revenue profile for the
country thereby helping to determine appropriate modifications
to existing tax structure
and rates as well as improving tax administration. Significantly
also, this work
contributes to knowledge as it improved upon the work of
previous studies such as the
work of Ariyo, (1997), Ariyo, (1993), Ariyo and Raheem (1991,
and 1990) by adding
more variables and extension of the period of study to 40
years.
1.8 Limitations of the Study
The major hindrance to this study is the dearth of adequate
research materials such as the
accurate data on GDP, Custom and Excise Duties, Company Income
Tax, etc necessary
for a smooth research work. However, these problems were
resolved through the use of
published data from the Central Bank of Nigeria (CBN), the
Federal Office of Statistics
(FOS), and The National Bureaux of Statistics (NBS). The problem
encountered in the
use of these secondary data, was that there were slight
variation in the data published by
the different agencies.
1.9 Organization of the Study
The research work is organized in five (5) chapters where
chapter one discusses the
preliminary task of the research. It is sub-divided into nine
sub-units. Chapter two
concentrates on the review of related literature and theoretical
framework. Chapter three
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discusses research methodology while four is concerned with data
presentation and
analysis of results. The last chapter which is chapter five
focuses on summary,
recommendations and conclusion.
1.10 Definition of Terms
To enhance a proper understanding of this dissertation, some of
the terms used in this
work are defined and explained below:
Fiscal Deficit:- According to Alade, (2003) Fiscal deficit is
the amount by which
government spending exceeds government revenue and it is usually
considered
expansionary, while the World Bank (1988) refers to fiscal
deficit as the excess of public
sectors spending over its revenue.
Deficit Financing:- This is an economic phenomenon which shows
that government
expenditure surpasses the total revenue in the country.
Convection Fiscal Deficit:- This is the measure of the
difference between total
government outlays and receipt, excluding changes in debts,
which can be measured in
cash or actual basis.
Tax Productivity:- Tax productivity relates to the concept of
efficiency in tax
administration and collection. Therefore, a tax system is said
to be productive if and only
if the revenue generated is able to achieve the purpose for
which the tax is being
collected.
Tax Elasticity:- This is the ratio between the percentage change
in revenue and the
percentage change in the base year.
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Fiscal Indiscipline:- This is a sheer inability of public office
holders and policy makers
to control expenditure. It is the inability to adhere strictly
to the expenditure as stipulated
budget allocation. Off time, they exceed what is allocated for a
particular project or
sector. It is a phenomenon that arises due to the high level of
corruption in an economy.
Tax Buoyancy:- T his is the measure of the total response of tax
revenue to changes in
income. In fact, Ariyo (1997) opines that, tax buoyancy is the
changes in tax revenue due
to changes not only in income but also in other discretionary
changes in tax policy.
Laffer Curve:- According to Newberry and Stern (1987), Laffer
curve is a theoretical
representation of the relationship between government revenue
raised from taxation and
all possible rates of taxation. It is used to illustrate the
concept of taxable income
elasticity. The Laffer curve assumes that at 0% tax rate no
revenue is generated and at
100% tax rate, no revenue is also generated.
Dependency Syndrome:- An attitude and belief that a group
(country) cannot solve its
own problems without seeking external help especially from other
countries.
Dutch Disease Syndrome:- This is a concept that purportedly
explains the apparent
relationship between the increase in exploitation of natural
resources and a decline in the
manufacturing sector. In this research, it is used to refer to
the relationship between the
increase in tax revenue and a decline in private sector benefits
accruing from the tax
revenue.
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Crowding Out of Private Sector:- This is when there is decline
in investment resulting
from the effect of the fiscal policy expansion in private
expenditure or investment.
According to Jhingan, (2005), it is the reduction in private
expenditure or investment
caused by any increase in government expenditure through deficit
budget via a tax cut
increase in money supply or bond issue.
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CHAPTER TWO
LITERATURE REVIEW AND THEORETICAL FRAMEWORK
2.0 Introduction
This Chapter is concerned with a review of literature on fiscal
deficit and the productivity
of the Nigerian tax system from 1970 2010. It is structured into
five sections some of
which are further divided into sub-sections. The first section
examines the overview of
the Nigerian tax system with fiscal deficit in Nigeria while the
second deals with the
sustainability of the Nigeria tax system. The second comprises
of two sub-sections such
as fiscal deficit in Nigeria and monetary impacts of fiscal
deficit. The third section
discusses Nigerian Fiscal Federalism, which is also sub-divided
into two sub-sections
Revenue Profile of the Federal Government of Nigeria and the
Structure of Tax-Based
Revenue in Nigeria. In section four, the Current Legal Framework
is examined. This is
made up of Tax Reforms in Nigeria, taxes collectible by the
federal government,
taxes/levies collectible by state governments and taxes/levies
collectible by local
governments. The last section of this chapter discusses the
Concept of Productivity of a
tax system with sub-sections as, theoretical framework, the tax
buoyancy, tax elasticity
and Tax Stability
2. 1 Overview of the Nigerias Tax System
Taxation is not new to the country. Prior to independence, taxes
existed in the form of
direct taxes which were introduced into the Northern part of the
country by Lord Lugard
in 1904 and later to other parts of the country specifically,
Western Nigeria in 1917 and
Eastern Nigeria in 1928. After the independence, the need to
collect personal income tax
from the entire country led to the promulgation of a uniform tax
law, which gave birth to
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the Income Tax Management Act (ITMA) of 1961, which was
enforceable in the
federation.
Prior to the advent of oil in 1971, revenue from the traditional
sources, such as tax on
export products like cocoa, groundnut and palm kernel provided
adequate revenue for the
needs of the public sector. In addition, most people outside the
tax net used to pay the
poll tax. Following the oil boom, however, little attention was
paid to these non-oil
revenue sources. Consequently, there arose over-dependence on
oil revenue as the anchor
for public expenditure programming thus, a structural change in
the federal tax sources.
According to Ariyo (1997) the relative contribution of oil
revenue increased from 18.9%
in 1970 to 80.7% in 1974, rising further to 82.2% in 1989. This
trend continues in 1990
and rose to 84% in 1993. (See table above).
Given the fragile nature of the oil market, the countrys revenue
profile has been
subjected to wide fluctuations over the years. This, in addition
to overambitious
expenditure programmes resulted in episodic jumps in the
countrys budget deficits.
Ijewere, (1991) and Ndekwu, (1991) noted that successive
governments have expressed
concern about the low level of productivity of the Nigerian tax
system. This has been
attributed largely to the deficiencies in the tax administration
and collection system,
complex legislation, and apathy, especially on the part of those
outside the tax net.
In view of this, the Federal Government of Nigeria (FGN) in 1991
set up a study group
on the review of the Nigerian tax system management and
administration. A behavioural
explanation for this fiscal stance had been elaborated upon by
Olopoenia (1991) in his
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discussion of the impact of a sudden surge in oil revenue in the
context of the Dutch
disease syndrome (Corden and Nealy, 1982; Herberger, 1983). He
explained how the
confidence of wealth effect influences governments expenditures
and non-oil revenue
efforts. With respect to the latter, he indicated that the
government may want to pass on
some of its oil revenues to the private sector indirectly in the
form of lower non-oil tax
rate and levels.
Aghevli and Sassanpour (1982), Veez-Zedeh (1989) and Ezeabasili
and Mojekwu, (2011)
also noted that the level of non-oil revenue is influenced by
the level of economic activity
in the non-oil sector as well as by the oil wealth effect.
Specifically, the extent to which
the government withdraws resources from the non-oil sector may
depend on its
perception of the oil wealth. If oil wealth is perceived to be
permanent, there may be a
desire by government to transfer some of the wealth to the
private non-oil sector through
a reduction in non-oil tax burden. This orientation negatively
affects the productivity of
the non-oil tax sources in particular and the tax system in
general. However, there is
paucity of comprehensive research on the productivity of the
Nigerian tax system. Rather,
most research has focused only on a single aspect of the tax
sources. For example,
Idachaba (1984) assessed the tax-to-base elasticities of import
and export duties in terms
of total imports and exports. Similarly, Diejomaoh (1986)
estimated the income
elasticities of import volume over the period 1954-1964.
The Nigerian tax system is discussed under three interrelated
constituents. The first
constituent is tax policy, which is the particular course of
action adopted, and in this case,
the line of action adopted by government in respect of taxation.
Taxation, we know is one
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of the major fiscal policy instruments used in regulating the
economy, boosting
investments, encouraging savings capacity, regulating inflation
and so on. Ariyo and
Raheem (1991) stated that the policy objective of any government
tax system is aimed at
achieving the following: to create a fair and equitable society;
to create an economic
society free of distortion to investment decisions; to encourage
a fair allocation of savings
amongst investment opportunities; to create incentive to hard
work or for risk taking in
business; to attract foreign investments or at least avoid
capital flight to countries with
lower taxes; to reduce evasion and avoidance and the growth of
underground economy
and encourage voluntary compliance and to reduce the complexity
of the system both for
the tax administrators and the tax payers. The second
constituent is tax laws, which are
the laid statutory acts, that guide the collection and
administration of taxes in Nigeria.
These laid statutory acts where identified by Odusola (2006) as
the major tax laws in
existence as of September 2003 and their various related
amendments. The thirdly
constituent is tax administration in Nigeria, which is the
regulatory framework set up to
guide and monitors the collection of taxes. Taxation has been in
existence even before the
amalgamation of Nigeria as a political entity in 1914. Direct
taxes, which were first
introduced into the northern part of Nigeria, were successfully
administered because the
citizens were already used to one form of tax or another before
the formalization of direct
taxes.
The effectiveness of the administrative arrangement under the
emirate system was the
major factor responsible for successfully administration of tax.
With the amalgamation of
the northern and the southern protectorates in 1914, direct
taxation was introduced into
the Western territory in 1919, and into the Eastern provinces
around 1928. Therefore, the
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enabling laws and regulations were fashioned after those of
Britain. As a result, Odusola,
(2006) opined that the Nigerian tax administration faces
serious, complex and
multidimensional problems. Similarly, according to Ariyo,
(1997), the problems are; the
deficiency in tax administration and collection system, complex
legislation and apathy of
the Nigerians caused by the lack of value received in return for
their taxation money as
taxes.
However, according to Odusola, some of the major problems are,
the politics of revenue
allocation in Nigeria, which does not prioritize tax efforts.
Instead, it is anchored on such
factors, as equality of states 40%, population 30%, landmass and
terrain 10%, social
development needs 10%, and internal revenue efforts 10%. This
approach, discourages a
proactive revenue drive, particularly for internally generated
revenue, and makes all
government tiers heavily reliant on unstable oil revenues, which
are affected by the
volatility of the international oil markets. Apart from the
national Cake Sharing
Syndrome, the instability and volatility of oil revenue created
an opportunity for
improved tax efforts within the provisions on taxation ratified
in the 1999 Constitution.
Although some states governments such as Lagos, Edo, Delta,
River etc, have initiated
measures to enhance their revenue generation base through
taxation, the outcome has not
reflected any level of serious effort.
Taxation is one of the sources of revenue to the government,
which is used to finance or
run public debts, and for any tax to be legal, it must be a
creation of the law as no citizen
would want to pay any imposition which is not backed by law.
Therefore, the basic laws
or principles applicable to all forms of tax collection are also
applicable to the trading
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income of individuals and companies, on their profits or gains.
There is exception
however for agricultural business where there is no time limit
for set-off of losses. All
income accruing to a company are taxed on preceding year basis
rule and none is taxed
on actual basis except when the commencement or cessation
provisions are being
applied. In case of Personal Income (PIT) however, salary,
pension, commission, and
allowances are taxed on current year basis while rent, dividend,
interest, and business
profits are taxed on preceding year basis.
However, due to high rate of corruption and fiscal indiscipline
coupled with low tax base,
the revenue generated from taxation has not always been
sufficient for the purposes for
which the revenue is generated. This insufficiency creates the
problems of fiscal deficit as
most government often borrow to augment their revenue. When the
government acquires
loans and it is not properly managed for the purposes for which
the loan is acquired, the
vacuum created my result to macroeconomic instability in the
country. Anyanwu,
(1997) opines that the size of public sector fiscal deficit is
one of the most reliable
indicators of the overall macroeconomic instability or
macroeconomic balance and
growth if not properly managed. He further contended that, high
fiscal deficits is an
indication of at least one form of macroeconomic imbalance such
as increase foreign
debts, increased inflation rate, shortage of foreign exchange
and the crowding out of
public sector.
Researchers have found out that the most important statistics
used in measuring the
impact of government fiscal policy in Nigeria is the size of
government surplus or deficit.
In fact, Ariyo (1997), recalled that, the magnitude of
government surplus or deficit is one
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23
of the single most important statistics used in measuring the
impact of government fiscal
policy on an economy. Based on this fact, it is widely accepted
by scholars such as
Okpara (2010), Obi and Nurudeen (2008) as well as Ariyo (1993)
that public sector
finances and related policies constitute the central aspect of
the management of the
economy. Thus, the quality of this management in no small
measure influences overall
macroeconomic performance as well as the distribution of
resources between the public
and private sectors.
The budget structure of most developing countries indicates that
fiscal deficit is a
recurring feature of public sector financing. This phenomenon is
partly influenced by the
desire of these governments to meet up with the ever-increasing
demands of their
populace and to accelerate economic growth and development.
Ariyo, (1997) buttressed
this fact when he opined that the recurring feature of deficit
is a common phenomenon in
developing countries where the populace looks up to the
government for the satisfaction
of their needs.
Attempts have been made to categorise fiscal deficit in various
ways. For example, the
usefulness of fiscal deficit as a tool for enhancing accelerated
growth and development
has been discussed along positive and negative directions. The
work of Thornton (1990)
indicates a net positive effect between fiscal deficit and
economic growth and
development. On the other hand, Baily, (1980) and Landau (1983)
indicate a net negative
effect. Secondly, the mode of financing a fiscal deficit is
another issue. Ariyo, (1997)
identifies the different finance options available to the
government as, (i) running down
government accumulated cash balance (ii) net borrowing from the
banking system or
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24
abroad (iii) issuing of new currency (iv) drawing down the
countrys foreign assets. In
using any of these options however, the government has to be
careful as each has
different impacts on the economy. The sustainability of a fiscal
deficit requires that, if
there is no sustainability of the fiscal deficit, then according
to Wickens and Uctum
(1990), the country will be permanently insolvent.
Taxation was one of the largest sources of government revenue
before the discovering of
petroleum. Nevertheless, the amount of revenue collected from
taxation is a function of
the tax system, which on its own is a major determinant of other
macroeconomic indexes.
It is on this basis that Hinricks (1986) and Musgrave (1984)
observed that economic
development has a very strong impact on a countrys tax system
and policies. This is
because, the countrys tax policies vary with stages of
development as the criteria by
which a tax structure is judged depends on the relative
importance of each of the tax
sources and other sources of revenue generation, which as we
know vary from time to
time. In spite of the huge amount of revenue realized from
taxation, the government
especially in developing countries still engage in deficit
financing. This was the view of
Anyawu, (1997) when he said that despite the fact that the
revenue realized are often
above budgetary estimates, extra-budgetary expenditures have
been rising so fast,
resulting in ever bigger fiscal deficit. He therefore defines
the overall fiscal deficit as
the difference between the sum of both current and capital
revenues plus grants and the
sum of current and capital expenditures plus net lending.
A critical review of the deficit financing option even from the
lay point of view shows
that there is no identifiable macroeconomic objective given
increase revenue from
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25
petroleum, rising inflation rate, increasing in national debts,
and low industrial capacity,
to justify the deficit financing option of the government.
Hence, there is a reason to
believe that fiscal deficit in developing countries and Nigeria
in particular, has generated
the problem of non-productivity of the tax system.
The problem of non-sustainability of fiscal deficit has become a
recurring feature of
public sector financing all over the world. However, the
tendency toward deficit
financing is more pronounced in developing countries where the
populace looks to the
government for the satisfaction of most needs. In view of its
phenomena growth, it is
now widely accepted that public sector finances and related
policies constitute a central
aspect of the management of macroeconomic policies. The quality
of this management in
no small measure influences overall macroeconomic performance as
well as the
distribution of resources between the public and private
sectors.
In other to enhance the quality of tax administration and
management, the Federal
Government of Nigeria in 1991 set up a study group on the Review
of the Nigerian Tax
System and Administration. This is relevant for the fact that an
accurate estimation of the
optimal level of expenditure requires the knowledge of the
productivity of the tax system.
This will assist in identifying a sustainable revenue profile
for the country and will help
in determining appropriate modifications to the existing tax
structure and rates as well as
areas for improving tax administration.
Various scholars have identified three issues that would guide
decisions making on the
fiscal deficit profile for an economy. The first issue relates
to the usefulness of fiscal
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26
deficit as a tool for enhancing accelerated growth and
development. This is an issue on
which, there is yet no consensus among economists, given the
divergent findings of
reported studies. While some studies like that of Thornton,
(1990) indicate a net positive
effect, that of Baily, (1980), Feldstein (1980) and Landau,
(1983) suggest a net negative
effect. Ariyo and Raheem, (1991) also reported mixed results on
the effect of deficit
financing as reported by some other studies.
The second issue relates to the mode of financing the deficit
suggesting that running
down of government accumulated cash balance, net borrowing from
the banking system
or from abroad, issuing of new currency as well as drawing down
of foreign assets (Ariyo
and Raheem, 1990) are mode of financing fiscal deficit. However,
Chibber and
Khalizadeh, (1988), Yellen, (1996) opined that each mode of
financing fiscal deficit have
different impact on the economy. Thirdly, and most importantly,
Buiter, (1988) as well as
Wickens and Uctum, (1990) reiterated that a fiscal deficit
profile must be sustainable,
otherwise, the country will become perpetually insolvent.
The Nigerian tax system prior to the discovering of oil was
dominated by revenue from
the traditional sources of revenue, export of primary products.
Okpara (2010), opined that
between 1960 and early 1970s, revenue from agricultural products
dominated the revenue
structure, while revenue from other sources was considered as
residual. However, Ariyo
(1997) posited that, since the discovering of oil, and following
the boom resulting from it,
oil revenue dominated the Nigeria revenue structure and thus,
there is sharp increase in
the share of federally collected revenue. Since then, oil has
accounted for at least over
80% of the federally collected revenue, implying that the
traditional tax revenue sources
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27
are being neglected and does not assume any strong role in the
management of fiscal
policy in the country. The implication was a drastic fall in
revenue from these sources
creating varied problems in the country.
The need to address the problems created through the negligence
of the traditional
sources of revenue led to different tax policy reforms. These
reforms however have
created no much impact on revenue generation in Nigeria since
petroleum still dominates
the revenue profile. Therefore, the efficacy of the effect of
the tax system reforms in
general seems to be questionable.
A countrys tax system is a major determinant of other
macroeconomic indexes. There is
the fact that, for both developed and developing economies,
there exist a relationship
between tax structure and the level of economic growth and
development. In fact,
Hinricks, (1992) and Musgrave and Musgrave, (1994), have argued
that the level of
economic development has a very strong impact on a countrys tax
base, but however, tax
policy objectives vary with the stages of development. For
example, during the colonial
era and immediately after the Nigerian political independence in
1960, the sole objective
of taxation was to raise revenue. Later on, emphasis shifted to
the infant industries
protection and income redistribution objectives.
In addressing this issue of the relationship between
productivity of the tax system and
economic development, Musgrave and Musgrave (1984) divided the
periods of economic
development into two, the early period when an economy is
relatively underdeveloped
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28
and the later period when the economy is developed and that
during the early period,
there is limited scope for the use of direct taxes because the
majority of the populace
reside in the rural areas and are engaged in subsistence
agriculture. Because their
incomes are difficult to estimate, tax assessment at these
stages is based on presumptions
and prone to wide margins of error.
In the early period of economic development, government revenue
is characterized by the
dominance of agricultural taxation, which serves as a proxy for
personal income taxation.
This was not different in Nigeria where the various marketing
boards served as effective
mechanisms for administering agricultural taxation. Ariyo (1997)
opined that
agricultural taxation substituted for personal income tax given
the difficulty in reaching
individual farmers and the inability to measure their tax
liability accurately. Furthermore,
Musgrave and Musgrave (1984) opined that the large percentage of
self-employment to
total employment makes effective personal income tax unworkable
and this was the
situation in Nigeria. This problem thereby necessitates the use
of the ability-to-pay
principle, effectively limiting personal income taxation to the
wage income of civil
servants and employees of large firms both of which account for
an insignificant
proportion of the total working population.
During the early period of economic development, direct taxes in
form of Company
Income Taxes (CIT) were looked down upon because there were few
home-based
industries and so revenue generation from these sources was
insignificant. The same
principle applies to excise tax (an indirect tax) on locally
manufactured goods. However,
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29
both direct and indirect tax increased in relative importance as
economic development
progresses, and due to growth or non-static nature of the bases
of these taxes.
At this early stage also, taxes are difficult to collect because
of the lack of skills and
facilities for tax administration (Hinricks, 1996). 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.
Although taxation was one
of the major sources of revenue to the government, other
important source of government
revenue during the early stages of economic development is the
foreign trade sector
because exports and imports are readily identifiable and they
pass through few ports.
Massel (1996) opined that revenue from export and custom duties
is not stable because of
periodic fluctuations in the prices of primary products and this
tends to complicate plan
implementation in many developing countries.
Economic development brings with it an increase in the share of
direct taxes in total
revenue. This is consistent with the experience of developed
economies in which direct
taxes yield more revenue than indirect taxes. For example,
personal income tax becomes
important as the share of employment in the industrial sector
increases. In developing
countries like Nigeria however, the dominance of the
agricultural sector decreases with
the discovery of oil and sales tax may be broadened because a
great deal of output and
income go through the formal market as the economy becomes more
monetized.
Musgrave and Musgrave, (1984) noted that at this stage, taxes
may be imposed on firms
or individuals, on expenditures or receipts, and on factor
inputs or products, among
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30
others. He further argued that there would be a tendency to
shift from indirect to direct
taxes. His theory relates to a normal development process. This
was not however
relevant to Nigeria as he does not consider a situation where
the sudden emergence of an
oil boom provides an unanticipated source of huge revenue.
Hence, this stereotype may
not be applicable to an oil-based economy like Nigeria.
Nevertheless, the theory still
represents a benchmark against which country specific empirical
evidence may be
compared.
2.2 Sustainability of the Nigeria Tax System
In this dissertation, I will define the term Sustainable Tax
System as means or tax
system that is sufficiently in agreement with or in harmony with
the prevailing economic
and political factors in a country to persist without the need
for repeated major tax
reforms. Experience suggests that any state that wishes to both
grow and to implement
redistributive fiscal policies must first establish an
administrable and efficient tax system.
At the same time, however, to make such a system politically
sustainable, it must be
considered fair by a majority of the politically relevant
population.
One reason why many developing countries like Nigeria do not
appear to have either an
efficient or a fair tax system is essentially because of the
very limited scope of this
segment of the population, so that the politically relevant
domain of the fiscal system is
considerably smaller than the population as a whole.
Specifically, researches has
indicated that any instrument that will help in achieving a
sustainable tax system should
strike the right balance between the equity and efficiency
aspects of taxation in terms of
the equilibrium of political forces.
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31
Ariyo (1990) opines that in general however, any country that is
absolutely relying on
taxation as their major source of revenue and wishing to attain
rapid economic growth
and development must watch the sustainability of their tax
system as it were, because it
cannot be induced by better fiscal institutions. On the
contrary, a more encompassing and
legitimate state is itself the key ingredient needed for a more
balanced and sustainable tax
system. Countries with similar economic characteristics and
similar economic situations
can and have sustained very different tax levels and structures,
reflecting their different
political situation. However, we must not ignore the phrase
currently popular in the
literature of political economics, that when it comes to tax
matters in general politics
rule.
2.2.1 Fiscal Deficit in Nigeria
There is no conceptual controversy over the definition of fiscal
deficit. From every
ramification, the term is synonymous with budget deficit. Alade
(2003) defines fiscal
deficit as the amount by which government spending exceeds
government revenue and it
is usually considered expansionary. While the World Bank (1995)
refers to fiscal deficit
as the excess of public sectors spending over its revenue. As a
result of the fact that
fiscal policies are carried out to manage the entire economy,
Anyanwu, (1997) opined
that the most important aspects of fiscal policies are centred
on the management of the
public sectors fiscal deficit. This is because, it has been
widely recognised that fiscal
deficit is one of the key macroeconomic indicators.
Anyanwu (1997) identifies three different instruments (gauges)
with which we can assess
the fiscal deficit profile of a country. The first is,
determined by the type of deficit to be
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32
measured within the public sector coverage. According to him,
the standard measure of
the fiscal deficit is the convectional deficit, which measures
the difference between total
government outlays and receipts, excluding changes in debts,
which could be measured in
cash or actual basis. As a result, if it is measured on pure
cash basis, the convectional
deficit is the same as the Public Sector Net Borrowing
Requirement (PSBR). Therefore,
the PSBR is a consolidated public sector deficit, which
represents the total excess of
expenditure over revenue at all government levels. The second
instrument, which
depends on the coverage or size of the public sector and its
composition, recognises that
government transactions relevant for measuring the impact of the
fiscal deficit are
sometimes carried out by non-government agencies.
In fact, Anyanwu further affirms that the general government
deficit must in many cases
be expanded to encompass the operations of the non-financial
public enterprise, which of
cause regenerate non-financial public sector deficit. The third
gauge is that which is
relevant to the time horizon. This method of assessing fiscal
deficit came into light due to
the failure of the convectional annual fiscal deficit assessment
to put into consideration
the effects of changes in prices and valuation. Therefore, that
to accurately assess the
sustainability of government fiscal deficit, it requires the
replacement of the annual
deficit with a measure of changes in government net worth over
the years.
In Anyanwu (1997), the extent to which any given public sector
fiscal deficit can be
reconciled with broader macroeconomic goals also depends largely
on the way it is being
financed. Thus, the success and failure of public sector fiscal
deficit management
depends on how it is being paid for or financed. Iyoha (2004)
opined that on account of
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33
the structural and systematic problems in the Less Developed
Countries (LDCs), budget
deficit invariably appears in the normal course of governance.
He therefore, identifies
three sources of financing a public sector deficit as, deficit
financing (borrowing from
central Bank), domestic borrowing (from non-bank public) and
external borrowing i.e,
borrowing from other countries or international organisations
such as International
Monetary Fund (IMF), Paris Club, World Bank etc.
Each of these approaches of financing public sector fiscal
deficit has its advantages and
disadvantages depending on whether the money borrowed is being
used to finance the
purchase of consumption goods for the economy or it is used to
finance white elephant
projects, which is always the case with most Less Developed
Countries (LDCs). In an
economy like that of Nigeria, which is prone to high rate of
corruption, spending
government revenue on elephant projects is a common phenomenon.
Hence, Gordon,
(2006) stated that fiscal deficit causes foreign borrowing in a
small open economy; but it
causes both foreign borrowing and crowding out of the economy in
a large open
economy.
2.2.2 Monetary Impacts of Fiscal Deficit
Alade, (2003) and Fjeldstad,(2003) pointed out that the impact
of fiscal policy on
aggregate demand can also be estimated by looking at the fiscal
deficit or surplus and
examining its impact on the liquidity of the economy. According
to them, if an economy
is in a recession and operating at less than full capacity,
higher government spending may
assist in increasing real output and promoting additional
employment. He therefore
opines that monetary effects of government fiscal deficit are
complex and show the inter-
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34
relationship between fiscal and monetary policy. He identified
two broad monetary
impact of fiscal deficit on the economy. Firstly, money supply
will tend to rise,
influencing private sector wealth and asset portfolio decisions
with respect to financial
and real assets. Interest rate will be affected and so will
governments deficit financing
arrangement. Thus, financial crowding out may arise if
governments demand for credit
reduces the availability of finance to the private sector.
Secondly, as a result of the rise in
money supply arising from a fiscal deficit, the reserve base of
the financial institutions
will tend to increase and this will affect their ability to
create credit. In addition, if
accretion to financial institutions reserves is not curbed by
monetary policy the supply of
credit may grow and contributes to further increase in monetary
aggregate.
2.3 Nigerian Fiscal Federalism (Assignment of Tax Powers)
According to Ariyo (1997) fiscal federalism refers to the
existence in a country of more
than one level of government, each with different taxing powers
and responsibilities for
certain categories of expenditure. Nigeria is a good example of
a country operating a
federal system of government through three tiers of government:
the federal, the state and
the local. The present state of Nigerias fiscal federalism has
evolved over time, starting
with the Phillipson Commission of 1946. As Ekpo and Ndebbio
(1992) noted, this
evolution has been influenced by economic, political, social and
cultural considerations.
The present arrangement has also undergone several revisions
since the initial report of
the Phillipson Commission of 1946. Since then, there have been
eight Commissions each
revising the reports of their respective predecessors. One of
the most recent revision
exercise was undertaken by The National Revenue Mobilization,
Allocation and Fiscal
Commission in 1988.
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35
One major characteristic of federalism is the constitutional
separation of powers among
the various levels of government. Drawing upon the reports of
the various commissions
and revisions to previous constitutions, Section 4 (second
schedule) of the 1989
Constitution of the Federal Republic of Nigeria (FGN, 1989b),
reviewed in 1999,
specified three categories of legislative functions. The first
is the exclusive legislative list
on which only the federal government can act. The second is the
concurrent legislative
list on which both the federal and the state governments can
act, and the third comprise
residual functions consisting of any matter not included in the
above first two lists.
Ariyo (1997) further reiterated that In Nigeria, two major
factors influence the
assignment of tax powers or jurisdiction among the three tiers
of government. These are
administrative efficiency and fiscal independence. The
efficiency criterion requires that a
tax be assigned to the level of government that is most capable
of administering it as
efficiently as possible. Fiscal independence on the other hand
requires that each level of
government should, as far as possible, be able to raise adequate
funds from the revenue
sources assigned in order to meet its needs and
responsibilities. Very often the efficiency
criterion tends to conflict with the principle of fiscal
independence. The former entails a
great deal of centralization or concentration of tax powers at
the higher level of
government, due to the limited administrative capacity of lower
levels of government.
Conversely, the latter requires the devolution of more tax
powers to the lower levels of
government to match the functions constitutionally assigned to
them. In the Nigerian
context, the scale has always been tilted in favour of the
efficiency criterion.
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36
The Phillipson Fiscal Commission of 1946, set very stringent
conditions for declaring
any revenue source as regional. It required revenue or taxes to
be easily assessable by
local authority for easy assessment and collection, to be
regionally identifiable, and in
general to have no implication for national policy. Given such
conditions, very few
revenue heads (taxes) could be considered as regional and
assignable to either the state or
the local government levels. There is also a distinction between
the ability to legislate on
a particular tax and the ability to collect a particular tax.
The two powers can reside with
the same level of government or be separated.
Available evidence from the current jurisdictional arrangement
summarized in Table 4.9
suggests that both types exist in Nigeria. Researches by Ariyo
(1997) shows that all the
major sources of revenue are left solely to the federal
government in legislation and
administration (See Fig 4.9). These are import duties, excise
duties, export duties, mining
rents and royalties, petroleum profit tax, and company income
tax. This may be
attributable to the bias for the efficiency criterion noted
earlier. The principal tax with
shared jurisdiction is the personal income tax on which the
Federal Government Nigeria
(FGN) legislates. In terms of its administration, the FGN
collects the personal income tax
of armed forces personnel and the judiciary. Olopoenia, R.A.
(1991 recalled that, each
state government administers and collects personal income tax
from other categories of
residents in its territory. Capital gains tax is also under
shared jurisdiction in which the
FGN legislates while state governments collect the tax. Given
the bias for the efficiency
criterion, the state and local governments have jurisdiction
over minor, low-yielding
revenue sources. For example, state governments have
jurisdiction over football pools
and other betting taxes, motor vehicle and drivers license fees,
personal income tax
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37
(excluding the judiciary and the military), and sales tax. Local
governments administer
entertainment tax, radio and TV licensing, motor part fees and
the potentially buoyant
property tax.
2.3.1 Revenue Profile of the Federal Government of Nigeria
Public revenue has been defined to mean cash flow from all
available sources of income
to the government of a country in a given period of time,
usually a fiscal year. Public
revenue is also used to refer to all funds required by the
government or public authority
for the execution of its functions. Public revenue has been
defined as the mobilization of
funds from available sources of finance the government, the
collection, proper handling
and recording of the receipts by delegated agents of public
authorities for the purpose of
discharging the national functions and responsibilities. In
general, government sources of
revenue varied from country to country depending on the
political and economic system
of that country.
The pre-independent and the period before 1970 were
characterized by the dominance of
agricultural taxation (non-oil revenue source) which serves as a
proxy for personal
income tax. There was the problem of collecting personal income
tax in this period due to
the difficulty in reaching individual farmers and their
inability to measure tax liability
accurately, yet non-oil revenue was the largest source of
government revenue. In other to
enhance this, the government adopted the use of the various
marketing boards as effective
mechanism for the administration of agricultural tax. During
this period also, a large
percentage of the people were self-employed and so the
effectiveness of personal income
tax was not workable. This was the same view by Musgrave and
Musgrave, (1984) and
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38
Hinricks, (1986) both of whom agreed that taxes are difficult to
collect because of lack of
skills and facilities for tax administration. It was therefore
not out of place when the
government shift base to the oil revenue sources and thus the
revenue from the non-oil
sector gradually gave way.
The dominance of non-oil revenue gradually gave way to oil and
gas revenue sales of
crude oil, introduction of petroleum profit tax (PPT),
royalties, as there was increase in
oil export. However, the major fiscal policy instruments in
Nigeria have been categorized
in four major headings namely:
(a) Non-Oil Revenue
- Company income tax (CIT)
- Import and export duties
- Education levy
- Personal income tax (PIT)
- Capital gain tax
- Value added tax
- Mineral rent and leases
- Fines, fees, licenses
- Stamp duties
- Investment and interest income
- Property rent/leases
- Withholding taxes
(b) Oil and Gas Revenue - Crude oil sales
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39
- Sales proceeds of liquified natural gas
- Oil exploration license
- Oil mining lease
- Royalties
- Rents
- Petroleum profit tax
(c) Capital Receipts
- Government borrowing
- Grants and international aids
- Sales of government investments
- Sales of government properties
- Donations
- Issuance of bonds and other securities
(d) New Sources of Public Revenue
- Premium from sales of foreign exchange
- GSM operating licenses
- Internally generated revenue from virtually all government
agencies
- Saving from debt cancellation
- Recovery of looted public funds from some corrupt government
officials.
The examination of the revenue profile above, showed that
Nigeria has passed through
structural changes over time. Egwakhide, (1988) opined that 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. Thus, there was
a fall in revenue from
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40
the non-oil sector; especially as agricultural was being
neglected in favour of white-collar
jobs. This was however complemented with increase in excise
duties except in 1975 and
1976 (see table below). This appreciable increase in revenue
from excise duties was due
to enhance performance of the industrial sector in that
period.
Different researches conducted have shown that the revenue
profile of Nigeria indicates
that import and excise duties constitute the bulk of the
government revenue since
independence. Hence, Ariyo (1997) observed that import and
excise duties accounted for
41.9% and 21.9% respectively while Petroleum Profit Tax (PPT)
and Company Income
Tax (CIT) stood at 19% and 8.9% respectively. He further opines
that this trend starts
declining with respect to import and excise duties while PPT was
increasing
progressively. The reason for this increase in revenue form PPT
was due to the
negligence of agriculture as petroleum export replaces the
traditional agricultural export.
And as at 1979, revenue from PPT rose to 74.9% while import
duties and excise duties
fall to 12.8% and 3.7% respectively.
The 1979 constitution, section 149 (S.1) establishes the
Federation account into which all
the revenue collected by the federal government shall be paid
into except PIT. The
federal government has exclusive right to collect and remit into
the federation account
revenue from crude oil and gas, oil lease rent, oil mining
license, PPT, non-oil revenue
such as CIT, import and export duties, excise duties, mineral
mining rents etc. Thus,
Ariyo (1997) puts it that before the advent of the oil on 1971,
revenue from the
traditional sources such as tax on export products like cocoa,
groundnut and palm kernel
provided adequate revenue for the needs of the public sector.
Following the oil boom,
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41
however, little attention was paid on non-oil revenue sources.
Consequently, there arose
an over dependence on oil revenue as the anchor for public
expenditure. Hence, given the
fragile nature of the oil market, the countrys revenue profile
has been subjected to wide
fluctuations over the years.
2.3.2 Structure of Tax-Based Revenue in Nigeria
A brief review of the Nigerias tax-based revenue profile since
1960 shows a progressive
decline in income from the traditional sources of revenue. The
revelation throw light on
the shifts in the relative importance of each revenue source
over time and the extent to
which the Nigerian tax-revenue profile conforms with Musgraves
theory. In the 1960s,
emphasis was on accelerated economic growth and development, and
the main goal of
tax policy was maximum revenue generation to finance public
sector programmes.
Similarly, policy makers emphasized import substitution to
underlie the industrial
development strategy (Ekuarhare, 1980). Attention was directed
toward increasing the
existing tax rates (especially import duties) in the form of
high protective tariffs, and as a
consequence import duties provided the bulk of federal
government revenue in the early
1960s (Phillips, 1991).
Another major macroeconomic objective underlying the increase in
tariffs was the desire
to discourage imports and thereby curtail consumer demand.
Excise duties were also
introduced on several goods to broaden the revenue base. Given
the low industrial base,
the contribution of the latter was insignificant. Therefore, in
overall, revenue from these
sources accounted for about 73% of total revenue. This makes the
foreign trade sector the
major source of revenue in the 1960s. Some structural changes
emerged in the revenue
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42
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
duties in the 1970s due to the enhanced performance of the
industrial sector. 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 with Musgraves theory to the
effect that as an
economy develops, more reliance may be placed on direct tax
revenue. However some
caution is advisable in confirming the relevance of Musgraves
theory to the Nigerian
environment. We should note that the mere classification of
petroleum profits tax and
royalties as direct taxes immediately distorts an objective
assessment of the relative
importance of indirect taxes over time. In fact, a focus on
non-oil revenue sources shows
that the indirect tax still dominates the old and traditional
revenue sources.
In effect, Ariyo, and Raheem (1991) concluded that in reality
Musgraves theory is not
applicable to the Nigerian environment for several reasons. For
example, the behavioural
explanation in the context of Dutch disease noted earlier might
have accounted for low
efforts on direct non-oil taxes. Similarly, the proceeds of the
oil boom were spent largely
on massive importation of consumer goods, thus enhancing the
income from import
duties, a policy which would have hindered rather than enhanced
the pace and level of
industrial development in the economy. Nevertheless,
documentation of objective
evidence relating to this issue awaits in-depth research.
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2.4 Current Legal Framework
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, taxation is enforced
by the three tiers of
Governments, i.e. Federal, State, and Local Government with each
having its sphere
clearly spelt out in the Taxes and Levies (approved list for
Collection) Decree, 1998. Of
importance at this juncture however are tax regulations
pertaining to investors both
foreign and local. The importance of tax regulations cannot be
overemphasized, as most
transactions with any Ministry, department, or government agency
cannot be concluded
without evidence of tax clearance, i.e. a Tax Clearance
Certificate certifying that all taxes
due for the three immediately preceding years of assessment have
been settled in full.
2.4.1 Tax Reforms in Nigeria
As a means of meeting their expenditure requirements, many
developing countries
undertook tax reforms in the 1980s. Osoro (1991) however pointed
out that most of these
reforms focused on tax structure rather than on tax
administration geared towards
generating more revenue from existing tax sources. The situation
was even of a wider
dimension in Nigeria. Osoro (1993) further opines that tax
reform which is a change in
the status quo has been one of the major preoccupations of most
developing countries in
the 1980s. He confirms that over 100 attempts at tax reforms in
developing countries
have been recorded since 1945. In fact, Gills, (1989) reechoed
that tax reform has turned
from a desired or preferred task to being a necessary one.
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One of the victims of numerous economic crises that have plagued
developing countries
like Nigeria since the first oil shock in 1973 has been the tax
system. Consequently, tax
collections have been hit hard resulting in large fiscal
deficits. Unfortunately, in the
1980s external finances with which to finance fiscal deficits
were not forthcoming.
Developing countries were left with no option but to print more
money to finance
deficits, with consequent double-digit inflation.
Most developing countries therefore suffer from over-dependence
on a small number of
sources of tax revenue, which are vulnerable to external events,
which remains a crucial
problem in their tax system. These sources include import and
export taxes on mineral
products, the prices of which are determined on world markets,
and tend to be volatile.
These taxes constitute a major source of revenue in many
developing countries.
It was based on the above problems that led many developing
countries to undertake tax
reforms during the 1980s. However, most of these reforms,
however, have been on tax
structure, with the general objectives of revenue adequacy,
economic efficiency, equity
and fairness, and simplicity. It is therefore pertinent to point
out the fact that even if the
reform is compatible with the macroeconomic objectives of the
government, there is little
chance of success because it either cannot be administered, or
administrative reforms
cannot be undertaken. Many tax reforms carried out in developing
countries have been on
tax structure rather than on tax administration.
In Nigeria, Odusola (2003) discussed the review of the existing
tax policies and reforms
and opined that Nigerias fiscal policy measures have been
largely driven by the need to
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promote such macroeconomic objectives as promoting rapid growth
of the economy,
generating employment, maintaining price levels and improving
the balance-of-payment
conditions of the country. Although policy measures change
frequently, these objectives
have remained relatively constant. Until the mid 1980s, tax
policies, for instance, were
geared to achieving such specific objectives as:
(i) Ensuring effective protection for local industries;
(ii) Encouraging greater use of local raw materials;
(iii) Enhancing the value added of locally manufactured and
primary products;
(iv) Promoting greater geographical dispersion of domestic
manufacturing
activities;
(v) Generating increased government revenue
In accordance with Odusola (2003), the recent developments in
the Nigerian tax system
and components of the countrys tax system, especially those
included in the exclusive
and concurrent legislative lists, are briefly examined
below:
(a) Personal Income Tax (PIT):- It was the oldest tax in the
country and was first
introduced as a community tax in northern Nigeria in 1904. It
was introduced the
western and eastern regions in 1917 and 1928, respectively and
latter amendments
in the 1930s, and incorporated into Direct Taxation Ordinance
No. 4 of 1940. The
need to tax personal incomes throughout the country prompted the
Income Tax
Management Act (ITMA) of 1961. In Nigeria, personal income tax
for salaried
employment is based on a pay as you earn (PAYE) system, and
several
amendments have been made to the 1961 ITMA Act. In 1990, further
amendments
were made to PIT.
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(b) Company Income Tax (CIT):- Company income tax (CIT) was
introduced in
1961. The original law (Company Income Tax) has been amended
many times
and is currently codified as the Company Income Tax Act 1990
(CITA). The
Federal Board of Inland Revenue, whose operational arm is the
Federal Inland
Revenue Services (FIRS), is empowered to administer the tax. The
Company
income tax Act (CITA) policy regimes can be divided into two
phases, namely, pre-
1992 and post-1992. The CIT policies in the pre-1992 era were
narrowly based and
characterized with increasing tax rates and overburdening of the
taxpayers, which
induced negative effects on savings and investment. Since 1992,
however, measures
have been taken to address these structural problems.
(c) Education Tax:- This was introduced in 1993 under the
Education Tax Act No.
7. The essence of this tax is to prevent the educational system
from total collapse
due to the financial crisis that had affected the sector for
years. Thus, an education
tax of 2% of assessable profits is imposed on all companies
incorporated in
Nigeria. This tax is viewed as a social obligation placed on all
companies in
ensuring that they contribute their own quota in developing
educational
facilities in the country. The tax is applied to company net
profits, and is deducted
from net profits before tax, thus it is not subject to company
income tax. Odusola
(2006) argued that the introduction of this tax has added to the
list of multiple taxes
that eats away the profit margins of companies. It is therefore
a double tax on
company profits, and is argued to be a major disincentive to
foreign investment in
Nigeria.
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(d) Capital Gains Tax:- This accrues on an actual year basis and
it pertains to all gains
accruing to a taxpayer from the sale or lease or other transfer
of proprietary rights in
a chargeable interest which are subject to a capital gains tax
of 10%, such
chargeable assets may be corporeal or incorporeal and it does
not matter that such
asset is not situated in Nigeria. Where however the taxpayer is
a non-resident
company or individual the tax will only be levied on the amount
received or brought
into Nigeria. Computation of capital gains tax is done by
deducting from the sum
received or receivable from the cost of acquisition to the
person realizing the
chargeable gain plus expenditure incurred on the improvement or
expenses
incidental to the realization of the asset.
(e) Value Added Tax (VAT):- This was introduced by the VAT Act
No. 102 of 1993
to replace the old sales tax but its implementation actually
began in January 1994.
Ajakaiye and Odusola (1996) opined that VAT 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 (FBIR) to
charge and collect VAT at a flat rate of 5% of all invoiced
amounts of taxable goods
and services. VAT paid by a business on purchases is known as
input tax, which is
recovered from VAT charged on companys sales, known as output
tax. If output
exceeds input in any particular month the excess is remitted to
the Federal Board of
Inland Revenue (FBIR) but where input exceeds output the
taxpayer is entitled to
a refund of the excess from FBIR though in practice this is not
always possible. A
Taxpayer however has the option of recovering excess input from
excess output
of a subsequent period. It should be stated at this point that
recoverable input is
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limited to VAT on goods imported directly for resale and goods
that form the
stock-in-trade used for the direct production of any new product
on which the
output VAT is charged.
(f) Petroleum Profits Tax (PPT):- Nigerian law by virtue of the
Petroleum Profits
Tax Act requires all companies engaged in the extraction and
transportation of
petroleum to pay tax. 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 operations. 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. Where oil companies operate under production sharing
contracts they will
be liable to tax at a rate of 50%. There are however some
concessions granted
petroleum companies known as, Capital Allowance and Petroleum
Investment
Allowance; the former is deducted in arriving at the taxable
income and entails
expenditure on equipment, pipelines, and storage facilities,
buildings and drilling
costs, these are referred to as qualifying assets.
The applicable rate of Capital Allowance for any year is of 20%
of the cost of the
qualifying assets applied on a straight-line basis for the first
4 years and 19% for the
5th year. Anyanwu (197) opines that the latter is regarded as an
addition to capital
allowance and covers allowance in respect of new investments in
assets for
petroleum exploration; it is available in the accounting period
in which the assets are
first used. It must be stated that the deduction of Capital
Allowance is restricted, so
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that for any accounting period, the tax on the company should
not be less than 15%
of the tax which would have been assessable had no capital
allowances been granted
the company. Currently, the legal provisions of the various
types of taxes have been
codified, although they have been subjected to several
revisions. Interested readers
are referred to Federal Government of Nigeria (1989a) and
Federal Inland Revenue
Service (1990) for the latest set of amendments to the tax
sources covered in this
study.
Adesola (1995) further recalled that the frequency of amendments
to the various
acts or decrees makes it very difficult to keep track of the
various legislative
reforms. The worrisome frequency led interested observers to
advise the FGN to
ensure the stability of each tax regulation for at least five
years. This is meant to
encourage purposeful planning and investment decisions
especially by corporate
agencies and foreign investors. For the purpose of this study,
however, we are
interested in the net effect of the legion of reforms on tax
yield. All efforts to secure
similar information on customs and excise duties proved
abortive. The quality of
information currently available on tax reforms is constrained in
at least two respects.
Firstly, it is not possible to assess objectively the net effect
of tax burden over time.
We do note, however, government has stated intention to move
towards a lower tax
regime especially on company income tax. Nevertheless, an
objective determination
of the net effect of these tax-rule changes and reforms still
awaits in-depth research.
Second, it is not possible to separate discretionary from
non-discretionary tax
changes. The information shown in Table 6 merely covers some
specific periods
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without any information about the underlying reasons for the
changes. Also, the
observed stability in tax rates is more apparent than real given
the frequent changes
experienced in practice.
2.4.2 Approved Taxes and Levies for the Three Tiers of
Government
In recent time, a list of taxes and levies for collection by the
three tiers of government has
been approved by government and published by the Joint Tax Board
(J.T.B.). These were
identified by Adesola (1995), Adekanola (1997), and Abiola
(2002) as follows:
2.4.3 Taxes Collectible by the Federal Government
(1) Companies income tax
(2) Withholding tax on companies
(3) Petroleum Profit Tax
(4) Value-added tax (VAT)
(5) Education tax
(6) Capital gains tax - Abuja residents and corporate bodies
(7) Stamp duties involving a corporate entity
(8) Personal income tax in respect of:
- Armed forces personnel
- Police personnel
- Residents of Abuja FCT
- External Affairs officers; and
- Non-residents.
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2.4.4 Taxes/Levies Collectible by State Governments
(1) Personal income tax:
- Pay-As-You-Earn (PAYE);
- Direct (self and government) assessment;
- Withholding tax (individuals only);
(2) Capital gains tax;
(3) Stamp duties (instruments executed by individuals);
(4) Pools betting, lotteries, gaming and casino taxes;
(5) Road taxes;
(6) Business premises registration and renewal levy;
- Urban areas (as defined by each state): Maximum of N 10,000
for registration
and N5,000 for the renewal per annum
- Rural areas: Registration N2,000 per annum
- Renewal N 1,000 per annum
(7) Development levy (individuals only) not more than N100 per
annum on all taxable
individuals;
(8) Naming of street registration fee in state capitals
(9) Right of occupancy fees in state capitals;
(10) Rates in markets where state finances are involved.
2.4.5 Taxes/Levies Collectible by Local Governments
(1) Shops and kiosks rates;
(2) Tenement rates
(3) On and off liquor licence;
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(4) Slaughter slab fees;
(5) Marriage, birth and death registration fees
(6) Naming of street registration fee (excluding state
capitals)
(7) Right of occupancy fees (excluding state capitals)
(8) Market/motor park fees (excluding market where state finance
are involved)
(9)