Tax Evasion and Avoidance: An
Investigation of the Causes and their Effects on Revenue Generation,
(A Case Study of Lagos State Internal
Revenue Services).
Project
By
Your Name
Matric No. ……….
Presented to the Department of
Accounting, University of ……., in
Partial Fulfillment of the Requirement for the Award of The Degree of Bachelor
of Science (B.Sc.) Accounting of University of …………..
June,
2014
ABSTRACT
This
project focuses on tax evasion and tax evasion and problems they create in
inhibiting the revenue generation of the government. Governments from
generations to generations owe duties to the citizens. It is part of the
governments’ duties to provide social benefits for the citizens; to maintain
law and order and to perform other functions that will ensure functioning of
the state. To carry out their basic functions and provide the necessary social
services like provision of road networks, provision of schools, hospitals, pipe
borne water, electricity and other social benefits to the citizens, and for the
development of the state, governments need money from whatever source the funds
could be generated. Unfortunately over the years in Nigeria and other states of
the federation, including Lagos State, governments’ revenue generation has been
on the decrease while governments’ expenditures have been on the increase. The
provision of public infrastructure and government services is a key factor for
economic development. In many developing countries, a lack of public service
provision slows down economic growth and undermines efforts to improve the
living standard of the population. There are a number of reasons for the
failure of many governments in developing countries to provide sufficient
public services. A lack of tax revenue is one of them. This study therefore examined
how tax evasion and tax avoidance negatively affect the revenue generation of
governments in the developing countries. This study also examined reasons why
individuals and organizations embark on tax evasion and avoidance, approaches
and strategies being adopted by individuals and organizations to carry out tax
avoidance and evasion, and strategies that can be used to overcome the problems
of tax avoidance and evasion. The study also examined the various steps being
currently taken by the Lagos State government to curb the problems of tax
evasion and avoidance and later the research carried an appraisal to assess the
extent that these measures are working to curb these problems. The study made
use of questionnaire as the major tool for data gathering, The sample design
used in this study was experimental research design. The data obtained from the
field were presented using statistical tools like frequency distribution
tables, mean and pie chart. Subsequently the data were analyzed using some
analytical tools chi-square and correlation technique.
CHAPTER ONE
INTRODUCTION
1.1
Background
to the Study
Governments
of all ages, and from generation to generation need money to carry out their
various activities, to function effectively and to fulfill their
responsibilities to their citizenry. Even in the present day economies, taxes
have become a viable source of revenue to the government. Taxes are compulsory
payments levied by the government on the people so as to enable government
support public services. Taxation is as old as the human race, but its role in
the ancient world was highly minimal because of the feudal system of the social
and economic organizations. The feudal lords owned a vast expanse of land which
they let out to the peasants to work on and in return received compensation
from them in form of part of the farm produce at the end of the agreed period.
This practice was prevalent in ancient Egypt and some parts of Europe until in
the middle ages when it gave way and it was modified to become a form of
obligatory service (Odewale, R. W., 2004).
Many
of today’s tax elements were applied in varied forms in various empires and
countries of the ancient world. For instance, in Greece and ancient Rome, taxes
were levied on consumption, and in Greece the tax obligations of the free
citizens and slaves differ substantially, while the Roman tax laws segregated
the residents of the vassal states from the free citizens. Inheritance tax
existed in the Roman world even though close relatives of the deceased were
exempted from such tax. In the ancient world, the middlemen, otherwise called
tax farmers were engaged to collect taxes on behalf of the state in return for
which they received a proportion of the taxes so collected. At the time of our
Lord Jesus Christ, the publicans were responsible for tax collection on behalf
of the Roman Government in Jewish state.
Prior
to taxes becoming a major contributor to the governments’ revenue pool, it has
been a major issue in politics, revolutions and wars throughout history. In the
constitutional reforms of Great Britain and some other countries, taxes have
taken a central place. The Magna Carta of 1215 was particularly about the
feudal obligations the subjects owe to the king and the representatives of the
nation in matters concerning revenue measures. In the 17th Century,
it was issues about taxation that led to the problem that ensued between King
Charles I and Parliament that finally resulted into civil war. It was after
this war that Bill of Rights of 1689 that promised no taxation without grant of
Parliament was passed (Odewale, R. W., 2004). The benefit of this bill was not
passed to the American colonies and it led them to boycott the payment of taxes
imposed by a Parliament in which they had no representation. This led to the
slogan, “No Taxation without representation”, cumulating in the American
Revolution. Taxation again was the major cause of the French Revolution of 1789
because of its harsh, uneven administration and inequitable distribution of the
tax burden.
There
is hardly anywhere in the world where people smile once it is time to pay
taxes. Individuals all over the world love to make some tax savings as much as
they could. If workers are paid their salaries gross and be asked to pay their
tax later on their own volition, hardly will anybody respond. No Nigerian
worker will rejoice on collecting his/her pay slip and find out that ten
percent tax has been deducted from his/her salary. In the same vein, no
Nigerian company will be happy to hear that about additional five percent tax will
be charged on its turnover. It is in attempt to dodge the taxman’s sword that
people devise various means of reducing their tax liabilities. This they do in
the form of tax evasion and tax avoidance.
Tax
evasion is a deliberate action by a taxpayer to defraud the government by
engaging in any of the following acts:- failing to disclose the source of
income; deliberate understating of one’s income; deliberate overstating of
one’s expenses; false claims on allowances; failure to make tax returns, entry
of false and fictitious transactions in the books; and non payment of assessed
tax. All these are done so as not to pay tax or to pay a lesser tax than would
have been normally paid.
On
the other hand, tax avoidance is the act of making use of the loopholes in the
tax laws so as to reduce the amount of tax that should otherwise have been
paid. It can also be described as the making use of the tax shelters in the tax
laws so as to pay less tax. It can be described also as arranging ones tax
affairs, making use of tax allowances and the loopholes so as to reduce ones
tax liability. Any of the following acts could assist a tax payer avoid tax or
reduce his tax liability:- investing in pioneer product line; purchase of
locally made goods instead of imported ones; taking of life assurance policy on
self, or self and wife with high premium payable annually; production of goods
with elements of medical and pharmaceutical products in order to avoid value
added tax; making disposals of chargeable assets and reinvesting the proceeds
so as to qualify for roll over relief and so avoid capital gains tax; setting up of industries in Export Processing
Zone; establishing companies for downstream operations etc.
There is no clear distinction between tax avoidance
and tax evasion. When tax avoidance is carried to the extreme it becomes tax
evasion; while tax evasion is criminal and punishable in law, avoidance is a
legal and allowable though the tax authorities may require prove. Both tax
evasion and avoidance have the impact of reducing the revenue that the
government is able to generate for developmental purposes and for attending to
the needs of the citizens. It is in recognition of the problems that these
concepts – tax avoidance and tax evasion, can have on the revenue generation of
the government that the researcher chose to write on this topic - Tax Evasion and Avoidance: An Investigation
of the Causes and their Effects on Revenue Generation, (A Case Study of Lagos State Internal Revenue
Services).
1.2
Statement of the Problem
As it was stated above, governments need money for
its developmental efforts and to provide social benefits to the citizens. Since Nigeria got her
independence in 1960, Nigerian government has been taking active roles in
running the economic affairs of the country. The state have dominant control in
the management of such important activities like banking, insurance,
agriculture, manufacturing, mining, commerce, construction, provision of health
facilities, supply of energy, communication, transportation and provision of
basic goods and services.
For
instance, prior to the government privatization and commercialization exercise,
there were about 70 non commercial and 110 commercial state-owned enterprises
which depended on public funds and management for their operations. In monetary
terms, the Federal Government invested or held equity shares of over N36
Billion in about 500 enterprises. A good number of them were inefficient and
unprofitable ventures that depended on state funds. The direct consequent of
this and scope of public involvement in the economy was that about 40 percent
of the country’s annual capital expenditures were expended on public
enterprises (Eyiuche A.C., 2005). Apart from government’s involvement in
running the affairs of companies, government also spends huge sums of money on
defense, infrastructural development, education and provision of other social
amenities to the citizens. Unfortunately, in most cases, governments’ revenue does
fall short of its expenditure. According to Adebayo A. (1999), the total
expenditure of the Federal Government of Nigeria has maintained an upward trend
since independence in 1960. This increase has been due to a number of social
and economic factors, as well as long-drawn political programmes. For instance
the total expenditure increased consistently from N60,268.2 million in 1990 to
N77,310.2 million in 1993. While government expenditure has been on the
increase since independence, government abilities to generate revenue has been
on the decrease. The reduction of governments sources of revenue has been
attributed due to unguided poverty that is pervading the country and lack of
capital formation. Poverty is reflected in low per capita income. According to
a World Development Report 1990, 44 percent of the population of the world in
1988 has GNP per capita of $400 or less. On the other hand, 13.2 percent of the
world population living in the industrialized countries has GNP per capita of
about $17,470. According to another Development Report of 1999-2000, 59.6
percent of the world population in 1998 living in low income countries had GNP
per capita of $760 or less, 25.4 percent in middle-income economies had $761 to
$9,360, and 15.0 percent in high-income economies had $9,361 or more. Also
according to a World Bank Report of 2004, the low income countries of the world
include the following: Nepal and Tanzania with GNP per capita income of $210,
Nigeria $300, Uganda $320, Zambia $330, Bangladesh $350, Ghana $390, India
$430, Pakistan $480, Zimbabwe $610, Indonesia $680 and China $750 (Eyiuche A.C.,
2005). So with this poor situation that is faced by Nigeria, over the years,
the country’s capital formation has been very low. As the report shows, Nigeria
is a very poor country, and this has been inhibiting on the ability of the
government to generate the revenue needed for economic development of the
country. This situation is even made worse by the problem of tax evasion and
avoidance. A lot of Nigerians (both individuals and organizations) don’t like
paying their taxes. This problem is not only limited to Nigerian companies
alone. Some multinational companies especially the companies from Asian
countries, because of unbridled corruption in our civil service do connive with
the civil servants especially in the Federal Inland Revenue Services and State
Internal Revenue Services to defraud government and reduce the governments’
abilities to generate tax revenues.
1.3
Aims
and Objectives of the Study
The primary objective of this study is
to find the impact of tax evasion and tax avoidance on the revenue generation
of government with special reference to Lagos State Government. Other
objectives of the study include the following:-
1. To find the reasons why individuals
and corporate organizations resort to tax avoidance and tax evasion.
2. To find the approaches and strategies
that individuals and organizations use to engage in tax avoidance and tax
evasion.
3. To find how a lasting solution can be
find for the problems of tax evasion and tax avoidance/
4. To suggest strategies by which
government can improve their future revenue generation through taxation.
1.4
Research
Questions
1. What are the impact of tax evasion
and tax avoidance on the revenue generation of government?
2.
Why do individuals and corporate organizations resort to tax avoidance and tax evasion?
3.
What approaches and strategies that individuals and organizations use to engage
in tax avoidance and tax evasion?
4.
How can these problems of tax evasion and avoidance be solved?
5.
How can government improve on their future revenue generation?
1.5 Research Hypothesis
1. H0: Tax Evasion and Evasion reduces the revenue generation of
government.
2. H0: Proper accountability and enlightenment of the government
on how tax revenues are being put to use for developmental projects will
increase the pace of tax avoidance and tax evasion.
3. H0: Adopting the canons of effective tax system will not reduce
the rate of tax avoidance and tax evasion
4. H0: Tax avoidance and evasion do not reduce economic development
of Lagos State.
1.6 Significance of the Study
The roles that taxation plays on
economic development of government cannot be overemphasized. Through tax
revenue the governments are able to execute its developmental agendas and
fulfill its responsibility to the citizens. Any impediment on the ability of
government in any form to generate the needed revenue will hinder the
developmental efforts of the government. Tax evasion and avoidance works
against governments’ efforts in generating revenue and therefore should be done
away with. The importance of this study can be seen from the perspective of the
issues that are to be discussed in this study. This study shall examine how tax
evasion and tax avoidance negatively affect the revenue generation of government.
It shall also examine reasons why individuals and organizations resort to tax
evasion and tax avoidance with the objective of finding ways of eliminating the
causes of these tax avoidance and tax evasion among individuals and corporate
organizations. The study shall further examine approaches and strategies that
individuals and organizations use to engage in tax avoidance and tax evasion.
Once these approaches and strategies are exposed, government can then be aware
of them and map out means to check against them when individuals and
organizations resort to them to engage in tax avoidance or tax evasion. This
study shall also offer suggestions to government on strategies that the
government can use to improve their future tax revenue generation. This study
when completed shall be made accessible to both the government and other
interested parties by placing this project in the library and also on the
internet.
1.7
Scope and Limitations of the Study
This study shall examine the impact of
tax evasion and tax avoidance on the revenue generation of government with
special interest in Lagos State. This study shall be limited to Lagos State.
This study shall examine how tax evasion and tax avoidance negatively affect
the revenue generation of government. It shall also examine reasons why
individuals and organizations resort to tax evasion and tax avoidance. The
study shall further examine approaches and strategies that individuals and
organizations use to engage in tax avoidance and tax evasion. The study shall
be focused on the Lagos State Internal Revenue Services.
As with
studies of this nature, time constraint and lack of research
resources in terms of money and personnel, inhibited this study. This study was further limited due to the uncooperative
attitudes of the respondents who were in most instances reluctant in providing
data needed for successful completion of this project.
1.8 Organization of the Study
This project was carried out in five chapters.
Chapter one focused on Introduction under which
the researcher treated topics like background of study,
statement of problems, objectives of
Studies, research questions and research hypothesis,
significance of study, scope limitation of
Study and definition of terms.
Chapter two focused on literature review in which
various literatures were reviewed which were
works carried out by different authors and
researchers relevant to the researcher’s area of study.
This was presented under two headings: Theoretical
Framework of the study and Conceptual
Framework of the study.
Chapter three focused on Research Methodology in
which the researcher highlighted the nature
of the research method, research design used in this
study, population, sample and sample
design, research instrument used, the reliability
and validity of the research instrument,
procedure for research instrument administration and
method of data presentation and analysis.
Chapter four focused on presentation and analysis of
data. The various data that were gathered
from the field were presented and later analyzed
using various statistical tables, pie charts,
frequency tables, chi square analytical tools. Subsequently
the hypothesis earlier stated in chapter
one were tested also in this chapter.
In chapter five, the researcher focused on summary,
conclusions and recommendations during
which he presented detailed summary of the works carried
out in this project. Subsequently, the
Researcher presented some conclusions he drew from this
project and made recommendations to
Management and suggestions for further studies.
1.9 Definition of Terms
Canon
of Tax: These
are the basic characteristics that a good tax system should possess. They include
the following: Canons of Equality, Certainty, Convenience, Economy, Buoyancy,
Productivity, Flexibility, Simplicity, Diversity and Neutrality.
Custom
Duty: These are taxes paid on goods
imported into the country.
Excise
Duty: These are taxes paid
on goods exported out of the country
Income
Tax: These are taxes paid
on income received by individuals and corporate organizations
Inland
Revenue Services: This
is the body charged with collection and administration all revenues accruable
and payable to the Federal government.
Internal
Revenue Services: These
are organizations charged with the collection and management of all taxes and
revenues payable to each state of the federation.
Progressive
Tax This is a tax system in
which the percentage of income paid in tax varies directly with the level of
income.
Proportional
Taxes: These
are taxes in which all the tax payers pay the same percentage of their incomes
for tax.
PAYE: Pay As You
Earn. This is a tax that is charged on all income that accrue to people in
their course of employment in organizations/
Regressive
Tax:
In this tax system,
the percentage of income paid in tax varies inversely with the level of income.
That is, the higher the level of income, the lower the percentage of income
paid in tax.
Tax: Taxes
are compulsory payments levied by the government on the people so as to enable
government support public services
Tax
Administration: This
is the process of managing and administering the various tax systems in any
country. The administration process include the determination of what taxes to
be paid, the forms and process the taxes are to be paid, the periodicity of tax
review, where and when are how the taxes are to be paid, and the body
responsible for tax collection.
Tax
Avoidance: tax
avoidance is the act of making use of the loopholes in the tax laws so as to
reduce the amount of tax that should otherwise have been paid. It can also be
described as the making use of the tax shelters in the tax laws so as to pay
less tax. It can be described also as arranging ones tax affairs, making use of
tax allowances and the loopholes so as to reduce ones tax liability.
Tax
Burden This
is the brunt borne by the tax payer as a result of he/her paying a particular
amount of tax.
Tax
Certificate This
is a certificate that is issued to a tax payer as an evidence that the tax
payer has paid a particular amount of tax.
Tax
Collectors: These
are people who are responsible for collecting taxes on behalf of the
government.
Tax
Evasion: Tax
evasion is a deliberate action by a taxpayer to defraud the government by
engaging in any of the following acts:- failing to disclose the source of
income; deliberate understating of one’s income; deliberate overstating of
one’s expenses; false claims on allowances; failure to make tax returns, entry
of false and fictitious transactions in the books; and non payment of assessed
tax. All these are done so as not to pay tax or to pay a lesser tax than would
have been normally paid.
Tax
Incidence: Tax
incidence denotes of the person who bears the tax burden. The tax incidence is
usually bo.ne by the tax payer.
Tax
Merchants: These
are people who are responsible for collecting taxes on behalf of the
government.
Tax
Mitigation: This
is the steps being take to reduce the problems associated with tax payment
Taxation:- Taxation is the
process of determining the taxes to be collected, how these taxes are to be
collected and the management of the entire collection process.
VAT: Value
Added Tax is a consumption tax in levied on businesses at every stage of
production and distribution on the value they add to their purchases of new
materials and other inputs. VAT System
was introduced into Nigeria in January 1994.
Withholding
Tax: This is a tax charged on
shareholders and owners of businesses deducted at source on the dividend paid
to them or any money they receive as a result their investments into an
organization.
REFERENCES
Adebayo,
A. (1999), Economics, A Simplified
Approach, Lagos: African International Publishing Ltd, page 112.
Allingham, Michael G. and Agnar Sandmo (1972), Income tax evasion: A theoretical analysis,
Journal of Public Economics 1, pp. 323-338.
Alm, James, Betty Jackson and Michal McKee (1992), Institutional Uncertainty and Taxpayer
Compliance, American Economic Review, 82 (4), 1018-1026.
Alm, James and Jorge Luis Martinez-Vazquez (2007), Tax morale and tax evasion in Latin America,
Andrew Young School of Policy Studies.
Asika
N. (2004) Research Methodology – A
Process Approach, Lagos: Mukugamu and Brothers Enterprises, Pages 129-134
(Baker,
2005). (Hines and Rice,1994;Clausing 2003; Buettner and Wamser, 2007)
Brautigam, Deborah, Odd-Helge Fjeldstad and Mick Moore (eds.)
(2008), Taxation and state-building in
developing countries. Capacity and consent, Cambridge University Press.
Clemens Fuest and Nadine Riedel (2009) Tax evasion, tax avoidance and tax
expenditures in
developing
countries: A review of the literature Oxford: Oxford University Centre for Business Taxation, UK Department for International Development
(DFID)
Chipeta, Chinyamata (2002), The Second Economy and Tax Yield in Malawi, Nairobi:. African
Research Consortium, Research Paper No. 113,
Cobham, Alex (2005), Tax evasion, tax
avoidance, and development finance, Queen Elisabeth House Working Paper No.
129.
Eyiuche, A.C.(2005), Economic Problems and Development Programmes
and Politics of
Nigeria,
Enugu: Diamond Publications, pages 346-377.
Everest-Phillips, Max (2008), Business tax as
state-building in developing countries: applying governance principles in
private sector development, International Journal of Regulation and Governance
8(2), pp. 123–154.
Fagbohungbe O. (2002), Research Methods For Nigerian Tertiary Institutions. Lagos: Kotleb Publishers.
Friedman, Eric, Simon Johnson, Daniel Kaufman and Pablo Zoido (2000), Dodging
the grabbing hand: the determinants of unofficial activity in 69 countries, Journal
of Public Economics 76(3), pp. 459-493.
Fuest, Clemens and Nadine Riedel (2009), Tax evasion, tax avoidance and tax expenditures
in developing countries: A review of the
literature, Report prepared for the UK Department
for International Development (DFID),
Oxford.
Global Financial Integrity (2008), Illicit financial flows from developing countries: 2002- 2006, Executive
Report, GFI (Global Financial Integrity), Washington D.C.
GTZ – German Technical Cooperation (2006a), Good Financial Governance – Good Governance in Public Finance,
Fiscal Studies No. 3, Division State and Democracy, Eschborn.
GTZ – German Technical Cooperation (2010) Benefits of a Computerized Integrated system
for Taxation: iTax Case
Study – A Handbook for Practitioner Based on GTZ Tax Sector Experience in
Tanzania and the Philippines.
Lieberman, Evan (2002), Taxation Data as Indicators of State-Society Relations: Possibilities
and Pitfalls in Cross-National Research, Studies of Comparative
International Development 36(1), pp. 89-115.
Kirchler, Erich, Stephan Muehlbacher, Barbara Kastlunger and Ingrid Wahl
(2007), Why
Pay Taxes? A Review of Tax Compliance Decisions, International Studies Program,
Working Paper 07/30, Andrew Young School of Policy Studies Georgia State
University.
Pashev, K. (2005). Tax Compliance of Small
Business in Transition Economies: Lessons from
Bulgaria. Atlanta Georgia: Working paper
05-10. Andrew Young School of Policy Studies.
Schneider, Friedrich (2005), Shadow
Economies of 145 countries all over the world: What do we really know? Mimeo,
University of Linz.
Schneider,
Friedrich (2007), Shadow Economies and Corruption all over the World: new
estimates for 145 countries, Economics, The Open Access, Open Assessment
e-Journal, No. 2007-9, July 24, 2007.
Odewale
R. W. (2004) Principles of Nigerian
Taxation, Ibadan: DBM Publishers
The complete part of this project is available for sale
PROJECT PROPERTIES
|
Project Status
|
Available
|
|
Number of Chapters
|
5
|
|
Number of Pages
|
112
|
|
Number of Words
|
17,558
|
|
Number of
References
|
24
|
|
Project Level
|
B.Sc.
|
|
Price
|
N10,000
(Non-Negotiable)
or USD50 in US Dollar
|
|
Abstract, Sample of
Questionnaire are included
|
|
We can also assist you in writing your own project starting from sourcing for project topic to project defending. So contact us on this number for more discussion of how we can help you. 234-08028177177
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