EFFECT OF TAX EVASION AND TAX AVOIDANCE ON ECONOMIC DEVELOPMENT

CHAPTER ONE

INTRODUCTION

 

1.0 BACKGROUND TO THE STUDY

Tax is of phenomenal importance to the government because it is its main source of revenue. Government expenditure is a major component of the Keynesian model of income determination and it serves as an injection into the economy’s model of income determination.

The subSaharan Africa region faces a number of issues as a result of the global economic slump.With oil and commodity prices plummeting, subSaharan African economies must rethink

their investment and business regulation policies, fearing that the decade of strong growth may be coming to an end. Nigerian finance experts and tax stakeholders have commented that the predicted budget deficits are unsustainable and that the federal government has to address the budget gap through reduced spending and/or increased income as a result of falling earnings from worldwide crude oil sales. One strategy for the Nigerian government to raise tax revenue is to cut down on tax evasion.

As a result, developing policies and measures to combat tax evasion has become a top concern for governments all over the world (Boolaky et al., 2018; Andoh et al., 2019). Attempts to improve tax authorities’ ability to detect tax evasion attempts (Peprah et al., 2020), increasing the severity of penalties for entities caught and convicted of tax evasion (Chiarini & Marzano, 2019), and attempting to improve voluntary tax compliance by citizens by increasing their tax knowledge and convincing them of the societal benefit of paying taxes (Peprah et al., 2020). (Amponsah et al., 2019).

1.1 STATEMENT OF RESEARCH PROBLEM

Tax avoidance and tax evasion are forms of tax non compliance, the distinction lies in the legality of tax avoidance and the illegality of tax evasion. Tax avoidance is the reduction of taxable income or tax owed through legal means. Tax evasion is the unlawful means of concealing income from tax authorities, so as not to remit taxes. According to Webley et al., (1991:128) tax evasion is explained as a behaviour of individuals that affects the economic and social conditions of a state which is congenital in the society today.

Tunde Fowler, the executive chairman of the Federal Inland Revenue Service (FIRS), said in an interview with THE GUARDIAN newspaper in October 2019 that Nigeria loses roughly $15 billion per year to tax evasion.

Tax evasion and avoidance have had a negative influence on government revenue because taxes have a substantial impact on revenue; they diminish the money that was predicted to be collected from a total number of people, which has an impact on the economy.

This is money that could have gone toward things like health care, education, and infrastructure.Many people believe that the loss of revenue caused by widespread tax evasion and tax avoidance in Nigeria is due to poor fiscal policies, the attitude of the government and taxpayers, administrative loopholes and inefficiency, a high rate of taxation, and a lack of civic responsibility among taxpayers.

Omorogiuwa (1981) believes that ineffective tax administration is the primary cause of large-scale tax evasion in Nigeria, and Philips (1973) agrees, stating that evasion is primarily caused by administrative inefficiency.

Tax evasion and avoidance have been a source of consternation for the Nigerian tax system since its inception, and it appears that no solution has been found. The negative attitude persists today with taxpayers perfecting various methods of frustrating tax authorities. This negative attitude towards taxation is unpatriotic, given the well known role that taxation plays in the economy. Today it is undeniable that every government relies heavily on taxation not only for socioeconomic development but also addressing existing wealth disparities in society.

Every year, Nigeria loses billions of naira to illicit financial tax fraud, as individuals and corporate firms engage in fraudulent tax schemes to avoid tax payments to some developing countries, impending development projects, and denying poor people access to critical services.

1.2 RESEARCH OBJECTIVES

The main objective of this study is to asses and examines the effect of tax evasion and tax avoidance on economic growth and development. While, the specific objectives are:

1. To determine the effect of tax revenue on the Nigerian economy.
2. To investigate the relationship between tax rates, tax evasion, and tax avoidance.
3. To determine the extent to which tax evasion and avoidance have harmed revenue generation in Nigeria.
4. To examine why people evade paying tax.
5. Make recommendations and offer solutions to reduce tax evasion and avoidance in Nigeria.

1.3 RESEARCH QUESTIONS

The research question provides a framework and guidelines through which substantial knowledge of the research study can be understood.

The research questions asked include:

1. What is the effect of tax revenue on Nigerian economy?
2. What is the relationship between tax rates, tax evasion and tax avoidance?
3. To what extent has tax evasion and tax avoidance has affected negatively on generation of revenue in Nigeria?
4. Why do people evade paying tax?
5. What are the possible recommendations and solutions for reducing tax evasion/avoidance in Nigeria?

1.4 SIGNIFICANCE OF THE STUDY

Tax evasion and tax avoidance can be seen as the greatest threat facing the Nigerian tax system. It is widely believed that there is a substantial difference between estimated revenue from taxation every year and what is actually collected.

This study shall set out, a comprehensive analysis on the implication of financial crime (tax evasion/avoidance) and it will also consider the unethical side of professional practice by examining the involvement of professionals in facilitating tax avoidance, tax evasion and corruption in Nigeria.

The study is will be beneficial to traders, tax administrators, and other stakeholders because it informs them about the impact taxes and their schemes have on the development of a nation by the government.

This study shall reviews related literature on the subject matter with tax compliance with particular attention on the dimensions of evasion and avoidance as forms of non-compliance. Research and academia will find the results of the study very interesting as they will seek to test the result of the study replicating it with a view to validating or invalidating the results

Finally this study will be of great importance to student of accounting and finance and allied disciplines because by arousing their interest in the research problem and findings and thus influencing their choice of a research topic for their project, the findings and research will also benefit policymakers in improving strategies and laws for administering taxes.

1.5 STATEMENT OF HYPOTHESIS

Hypothesis One

H0: there’s no significant relationship between tax avoidance, tax evasion and income generation in Nigeria.

H1: there’s a significant relationship between tax avoidance, tax evasion and income generation in Nigeria.

Hypothesis two

H0: there is no significant relationship between the tax rates and tax avoidance and tax evasion.

H1: there is a significant relationship between the tax rates and tax avoidance and tax evasion.

Hypothesis three

H0: total revenue generated does not have effect on Nigerian economy

H1: total revenue generated does not have effect on Nigerian economy.

1.6 SCOPE OF THE STUDY

From the foregoing discussion, the research focuses on the effect of tax evasion and tax avoidance on economic development in Nigeria, using the staff’s federal Inland Revenue service (FIRS) in FCT Abuja. The study covered a period of 10 years from 2012 to 2021 to study the variance between tax evasion and its effect on tax revenue

1.7 LIMITATIONS TO THE STUDY

Financial challenges: this factor serves as a deficiency for the research work, and as a result of Low financial capability, it was not enough to give us desired result.

Inadequate source of data: the researcher was faced with the inability to generate enough required material and relevant data for the research work

Inability to expand sample size: the work focused on only tax experts and official. Not all tax offices were studied making the work limited to the available population within researcher’s capacity.

Time constraint: this pose a great challenge to the research work due to the time frame given.

1.8 DEFINITION OF TERMS

Taxation: is defined by Ogundele (1999) as the process or machinery by which individuals, groups, or communities are made to contribute in some agreed quantum and method for the purposes of the administration and general development of the society they belong.

Tax evasion: refers to any intentional, illegal reduction of tax payments, which usually takes the form of underreporting income, sales or wealth, or overstating deductions (Schneider, Braithwaite & Reinhart 2001), including failure to file appropriate tax returns.

Tax avoidance: refers to the legal reduction in tax burden by means of practices that take full advantage of the tax code or exploiting the loopholes in the tax laws to reduce tax liabilities by arranging ones tax affairs using tax shelters in the tax law, and avoiding the tax traps in the tax laws.

Economic development: Are programs, policies or activities that seek to improve the economic well-being and quality of life for a community. It is the process whereby simple, low-income national economies are transformed into modern industrial economies

Anti-social practices: involve behaviour which confers improper benefits contrary to the legal and moral norms of society and which undermine the capacity of the authorities to secure the welfare of all citizens.

Tax revenue: is the income that is collected by governments through taxation, It includes collections from income tax, corporation tax, customs, wealth tax, tax on land revenue, etc.

Tax compliance: the behaviour of a taxpayer who pays his taxes at a specified time and year of assessment. A tax payer who has no issue regarding his taxing activities is said to be tax compliant.

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