Effect Of Tax Evasion And Tax Avoidance On Economic Development

This Research work attempts to look at the effect of Tax evasion and avoidance on economic development of Nigeria and its capacity to reduce tax revenue growth (A case study of Lagos State Internal Revenue Service). Tax is a compulsory levy imposed by government on income individual, firms and household. It was also find out that an individual tax evader or avoider may engage in it simply because he is unable to appreciate any benefit that would accrue to him after payment of such tax. The study made use of secondary data obtained from Lagos internal revenue service on total revenue from taxation and total value of tax evasion. Questionnaires were also used to gathered information on the effect tax administration on tax evasion and avoidance. Mean and standard deviation methods were used to analyze the questionnaire administered to Lagos state internal revenue service staff. Empirical results shown that increasing tax evasion and avoidance reduce government revenue growth in Lagos .It was also found that Tax Administration is responsible for the tax evasion and avoidance in Lagos State. This was due to lack of enforcement machineries which include, adequate manpower, computers and effective postal and communication system. Finally, it is therefore recommended that the government should create awareness in the mind of tax payers about the importance of taxation in development of national economy and the effects of tax evasion and avoidance in government revenue growth.

Introduction

1.1 Background to the Study

Fiscal policy measures in Africa have been largely driven by the need to promote such macroeconomic objectives as raising revenue to finance rapid economic growth of their economies, generating employment, maintaining price level and exchange rates stability and balance of payments equilibrium. To achieve these objectives one of the ways of dealing with taxation problems is to deal with harmful taxes practices. The two harmful practices that readily come to mind is tax evasion and avoidance.

A decline in price of oil in recent years has led to a decrease in the funds available for distribution to the Federal Government and to the State Governments. The need for state and local governments to generate adequate revenue from internal sources has therefore become a matter of extreme urgency and importance. This need underscores the eagerness on the part of state and local governments and even the federal government to look for new sources of revenue or to become aggressive and innovative in the mode of collecting revenue from existing sources (Aimurie, 2012). Aguolu (2004) states that though taxation may not be the most important source of revenue to the government in terms of the magnitude of revenue derivable from taxation, however, taxation is the most important source of revenue to the government, from the point of view of certainty, and consistency of taxation. Aguolu (2004) further mentioned that taxation is hence the most important source of revenue to the government. Owing to the inherent power of the government to impose taxes, the government is assured at all times of its tax revenue no matter the circumstances.

Tax evasion in general refers to illegal practices to escape from taxation. To this end, taxable income, profits liable to tax or other taxable activities are concealed, the amount and/or the source of income are misrepresented, or tax reducing factors such as deductions, exemptions or credits are deliberately overstated (see Alm and Vazquez, 2001 and Chiumya, 2006). Tax evasion can occur as an isolated incident within activities that are - in other aspects - legal. Or tax evasion occurs in the informal economy where the whole activity takes place in an informal manner - this means the business is not only evading tax payments but is also not registered as formal enterprise at all.

Tax avoidance, in contrast, takes place within the legal context of the tax system that is individuals or firms take advantage of the tax code and exploit "loopholes", i.e. engage in activities that are legal but run counter to the purpose of the tax law. Usually, tax avoidance encompasses special activities with the sole purpose to reduce tax liabilities. An example for tax avoidance is strategic tax planning where financial affairs are arranged such in order to minimize tax liabilities by e.g. using tax deductions and taking advantage of tax credits.

Tax evasion and its sister tax avoidance are key fundamental problems of tax administration in a developing country like Nigeria. All forms of taxes in Nigeria are to some extent avoided or evaded because the administrative machinery to ensure effectiveness is weak. As a result of the diversities and complexity in human nature and activities, no tax, law can capture everything hence; loophole will exist and can only be reduced or eliminated through policy reforms.

Thus, besides generating public revenues, strengthening tax systems in developing countries is equally important from a governance or state-building perspective. Thirdly, revenue raising systems typically include the entire population, thereby exhibiting a direct effect on the poor and their household income. Designing a tax system in a pro-poor way can e.g. be achieved by including a redistributive component. All in all, collecting a sufficient amount of revenues is essential for a country to fund pro-poor programs, built effective government institutions and strengthen democratic structures, stimulate sustainable economic growth and reach national and international development goals. To reach these goals it is, however, essential that the tax system is implemented the way it was designed. Thus, counterproductive activities like tax evasion and avoidance practices, that undermine the intentions of the system, need to be reduced.

Despite the emphasis on the importance of taxation and the efforts made at improving its efficiency, citizens" aversion to taxes have remained a problem that most tax authorities have to grapple with. This is because individuals will always look for a means -legal or otherwise-to reduce or even completely avoid paying taxes. This result in heavy revenue losses to governments and ultimately affects their ability to meet their obligations.

1.2. Statement of Problems

Over the years, revenue derived from taxes has been very low and no physical development actually took place, hence the impact on the poor is not being felt. It is the view of many people that the loss of revenue caused by widespread tax evasion and tax avoidance in Nigeria is due to inefficient and inept tax administration. Omorogiuwa (1981) has opined that ineffective tax administration is the main factor responsible for large scale tax evasion in Nigeria. Philips (1973) corroborates this view when he states that tax evasion is due principally to administrative ineffectiveness

Nigeria is losing billions of Naira every year to illicit financial tax fraud as individuals and corporate firms engage in fraudulent tax schemes aimed at avoiding tax payments to some of the developing countries, impeding development projects and denying poor people access to crucial services.

The primary way which money flows out of these countries is through tax offset. In its simplest form this entails three steps. Firstly, a corporation working in a developing country sets up a subsidiary in a tax haven. Secondly, they sell their product at an artificially low price to this subsidiary - enabling them to declare minimal profits and consequently pay very little tax to the government of the developing country. Thirdly, their subsidiary in the tax haven sells the product at the market price - for comparatively huge profits coupled with a low tax rate (or none at all). In other words, corporations are manipulating prices to pay minimal taxes.

Tax evasion and tax avoidance are major facilitator of poverty, crime, and corruption in a developing countries like Nigeria. Tax haven secrecy drains nearly $1 trillion from each year from the country. This is money that could have been spent on health care, education, and infrastructure, while banks play a critical role in the global economy and many countries" tax systems; many have also played a significant part in facilitating tax evasion and avoidance schemes, thereby reducing revenue generated by government both at the federal, state and local government level.

1.3. Objectives of the Study

The main objective of this research work is to assess the economic effect of tax evasion and avoidance on economic growth and development of the country.

The specific objectives of this study are as follow

To analyze the various causes of tax evasion and avoidance

To identify the factors or problems militating against the tax assessment and collection in Nigeria.

To identify possible effects of the tax evasion and avoidance on the economic development of the country and Lagos state Inland Revenue service in particular.

To analyze the effectiveness and flaws of various tax in the country

To examine ways in which tax evasion and avoidance can be reduce with the new reforms.

To examine tax reforms in Nigeria

1.4 Research Question

For this research work to be effective, the researcher has being able to draft out the following questions:

What are the causes of tax evasion and avoidance?

What are the factors or problems militating against the tax assessment and collection in Nigeria?

What are the possible effects of tax evasion and avoidance on economic development development of the country and Lagos state Inland Revenue particular?

Are tax laws in the country effective?

Has new tax reform reduce tax evasion and tax avoidance in Nigeria ?

Do the loopholes in the tax laws encourage tax evasion and tax avoidance in Nigeria?

1.5 Statement of Hypotheses

To aid the research work the following hypotheses have been postulated. The null hypothesis is denoted by "Ho" while the alternative hypotheses is denoted by "H1"

H0: There is no significant difference between the expected tax revenue and the amount actually paid by those who evade and avoid tax
H1: There is a significant difference between expected tax revenue and the amount actually paid by those who evade and avoid tax

H0: There is no significant difference between the number of people who are due to pay personal income tax and those that actually pay tax
H1: There is a significant difference between number of people who are due to pay personal income tax and those that actually pay tax.

H0: There is no significant difference between numbers of registered enterprises that pay tax in the country
H1: There is a significance difference between numbers of registered enterprises that pay tax in the country or state

1.6 Justification / Significance of Study

The greatest puzzle facing the Nigerian tax system is the threat of tax evasion and tax avoidance. It is widely believed that there is a substantial difference between estimated revenue from taxation every year and what is actually collected. This research study shall seeks to identify the role of professionals in facilitating tax evasion and avoidances, and which has been a damaging effect on the growth and sustainability of development of Nigeria. It shall also assess the significant detrimental effect of tax evasion/avoidance on the provision of infrastructures, public services and public utilities.

The relevance of this study can first be appraised in the light of its usefulness to the Nigerian nation as a whole.
This study, among other things, will expose the effect of tax evasion and avoidance on government revenue and economic growth. Concern over the economy wide effect of Tax is important because of the possibility that the tax evasion and avoidance may cause government to cut some expenditure of certain essential services, hence affecting government effectiveness and efficiency.

Essentially, this research work is intended to expose the role of Taxation in the economic development of Nigeria, the knowledge of which therefore makes the research important to policy makers, the Lagos State Internal Revenue Service (LIRS), Tax administrator, students as well as the general public who may require information about Taxation and its performance.

1.7 Scope of the Study

This research work covered the effect Tax evasion and avoidance on the Nigerian economy, its role in expanding the revenue base of the government and the overall economic development of the country using Lagos internal Revenue Service as A case study.

1.8 Limitation of the Study

Among the factors limiting and constraining the scope of this study are:­

The inadequacy of data and relevant literature on the subject;

Insufficient financial resources;

The poor response to questionnaires by respondents and sometimes-outright refusal;

There is also the issue of lack of time to carry out a more in-depth study.

However, since these factors were foreseen, proper care was taken in constructing the questionnaires so that the questions asked were not so exact or direct is warrant reluctance in their response.

Also, all efforts were made to ensure that correct information was gathered and adequate provisions were made for errors so that the authenticity and credibility of the research finding are not several affected.

Summary of Findings, Conclusion and Recommendation

In this chapter, an attempt is made to discuss the findings of this study, conclusion drawn and recommendation made are hoped to help to reduce, eliminate the problem at tax evasion and avoidance in the state and nation.

5.1 Summary of Findings

Some findings were obtained from the questionnaire and the hypotheses are they the answers to our research question and problem.

They are as follows:

High tax rate, ignorance on part of tax payers and loopholes in tax are the causes of tax evasion and tax avoidance.

Tax evasion and tax avoidance has a negative effect on the state government revenue.

There has been a difference between expected tax revenue and the amount actually paid by those who evade and avoid tax.

There has been much difference the tax office and the registration of business unit.

All the registered companies and enterprises do pay their tax.

Punishments are not given to those companies and individuals that refer to pay their tax.

That poor revenue gotten for development is due to the major effect tax avoidance and tax evasion.

All business in this country are actually registered.

Everybody pays their personal income tax monthly

Shortage of road and electricity, built from taxation are due to low revenue following tax evasion and tax avoidance.

Social security required, like employment etc are not provided by the government due to tax evasion and tax avoidance.

There has been effect of tax avoidance and tax evasion on capital formation.

A new reform will reduce tax evasion and tax avoidance in Lagos state.

There is a significance difference between the member of register enterprises and the member of registered enterprises that pays tax to the country or state.

5.2 Conclusion

Tax evasion and tax avoidance in this country, especially Lagos state has been a serious problem to the revenue profit of the government to be very low and hence it earn be easily execute. It is not known how much tax lost by "artificial" as opposed or "legitimate" tax avoidance scheme or tax evasion there is little direct evidence that avoidance lead to evasion although the resentment that comes from watching others same tax may cause a decline in tax payer morality.

A proposition which leads to an examination of the tax base and of those item of income tax altogether just as much as those who escape tax through artificial devices causes more increase in the burden on other tax payer. It would be unities to leave this problem without nothing, the commit of the royal commission that the existence of widespread of tax avoid once and tax evasion an evidence that the system has the tax payers and is in need of radical reform.

5.3 Recommendation

In the light of the finding the following recommendation are made although these recommendation are not conclusion but are supplement to the already suggested measures by the federal and state government of Lagos state and other tax expect in the state.

Tax laws should be properly implemented by pushing the offenders

The tax law should be moderate because it is not high tax rates that generate income but a moderate rate with full enforcement.

The internal revenue service should require some class of self employed to submit to them statement of fixed period containing details of accuracy of the tax payers returns.

The tax authorities should organize educative program to enlighten the tax payers above the different law guiding the Nigeria tax system why he/she should pay tax and the effect of non-payment of tax.

In order to ensure that he incidence of tax evasion and avoidance is minimum and members of registered enterprises is brought into the tax bracket there should be better co-ordination between the own of government which is responsible for the registration of business unit and internal revenue services.

Government should provide infrastructure facilities like water, good, roads and electricity for those in the rural areas.

The direct bank lodgment system should be put in place for all taxes collection by all ties of government in order to prevent fraud.

A special monitoring unit should be created daily monitoring and collecting examine bank lodgment and bank statement, in order to prevent delays by tax officials in paying gains collected from government revenues, also a tax artificial must be present in the bank to issue receipts on the spot to persons who pay in taxes.

The prospect for a better tax administration in Nigeria will be bright, when the recommendation made are implemented. The setting up of the study group on the review of Nigeria tax system is a step in the right direction which will enable government to establish the designed reflective and efficient tax administration which Nigeria needs.

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