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CAUSES AND EFFECTS OF TAX EVASION AND AVOIDANCE ON THE ECONOMY

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CAUSES AND EFFECTS OF TAX EVASION AND AVOIDANCE ON THE ECONOMY (A CASE STUDY OF BOARD OF INTERNAL REVENUE IN ABIA STATE)

CHAPTER ONE

INTRODUCTION

BACKGROUND OF THE STUDY

Tax is one o the main source of Government Revenue. It is a strong social and economic tool of the government in regulating the economy and maintaining health social like of the citizens. Tax can be defined as a compulsory payment by individual and companies to the state to enable her attain the National goals objectives. Tax is a non-punitive but compulsory levy by the Government on properties and income of individuals and corporations within the territory. The money raise there of constitutes part of source of finance for general government expenditure in the economy. According to Aguei (1983:276) tax is the transfer of resources from the private to the public sector in order to accomplish some of the Nation’s Economic and Social Goals. It is levy imposed by the government on the income profit or wealth of an individual, partnership and corporate organization. Tax is therefore the system whereby individual are assessed and the final collection of the money for and on behalf of the government. It is a machinery through which Income Earner is obliged to pay a fraction of his income to the government.

There are various type of Taxation which could be classed under two main headings: direct and indirect tax. These two types of tax may be distinguished in terms of the possibility of shifting the tax burden. However, taxes according to Economist is classified whether the tax is proportional, progressive or regressive. The importance of taxation in Nigeria arises out of the important roles, which the government in the light of numerous imperfections and short coming that often beset the economy has to play in order to ensure greater economic development, transformation and growth. Other objective of taxation include influencing economic activities in the country, to bridge the gap between the rich and the poor, to curtail consumption of undesirable and harmful goods and services to combat inflation, to encourage investment to protect infant industries and as well as correct the country’s balance of payment.

However, this phenomenon is not restricted to any part of the world. In New Zealand, the loss of revenue resulting from tax evasion and avoidance is a problem that has been described as “Reaching epidemic proportions”. The unfortunate aspect of this phenomenon is that the rate of this happening in the developing countries is always higher than what is obtained in developed countries.

According to Onoginwa “Personal Income Tax Evasion is generally over 50% in Nigeria compared to about 14% in U.K.” both rich and the poor embrace this chronic problem in the state with literate population and professionals in the state been the big avoiders. Whereas evaders can be found among payer and trader, having carefully examined the above trend of events, the researcher then decides to carry out evasion study to unmask the causes and effect of tax evasion and avoidance on personal income of Board of Internal Revenue in Abia State with a view of finding solution to them.

 

PROFILE OF BOARD OF INTERNAL REVENUE IN ABIA STATE

Taxation in Abia State is not quite different from of Nigeria as a country but there are certain peculiar features in her profile so as to give detail understanding of the state in her Revenue generating effort that we have decided in the state.

Prior to 1st April 1959, the direct tax ordinance Native Authorities assessed and collected income tax from Africans resident within their area of jurisdiction Non-Africans were subjected to the Income Tax ordinance operated by the federal government through its regional office.

With the Nigeria (constitution) order in council 1954 power was given to each region or deriving income there from. Eastern region became effective from 1st April year. This law brought pay-as-you-Earn (PAYE) of tax collection in operation.

The Raisman Fiscal Commission also applied to eastern region. To complete the Act, Eastern Nigeria passed the finance law 1963. This law was to fill the gaps which the federal legislation could legislate on example assessment appears machinery, the machinery for collection and the rates of tax.

With the end of the civil war and the creation of three states has produced new law. The South Eastern (Cross Rivers and Akwa-Ibom) and the Eastern Central States. With the promulgation of South East State edict No. 6 of 1969, the Board of Internal Revenue was established as a statutory body to take charge of tax amended the edict. Since then there has been certain amendments of the state increase.

 

STATEMENT OF THE PROBLEM

Tax has been a powerful instrument of revenue generation in Abia State of which tax evasion and avoidance are the major problem that obstructs the maximum collecting of tax. Highly technical problems besieging the Board of Internal Revenue in the state such as lack of encouragement by the government to tax payer, poor tax administration, unforced penalties on the tax defaulters which make tax law seemed to be useless and most importantly, logistics and zeal to enforce tax payer.

Therefore inefficiency of taxation system in the state deprive the government the ability to produce the citizen with the basic necessities of life.

Since the problem has been identified, the researcher considers it necessary to survey as much as possible to find solution for solving these problems of tax evasion and avoidance in Abia state and Nigeria in general.

OBJECTIVE OF THE STUDY

The broad objective of this study is to find out why people evade and avoid tax and suggest ways of minimizing the practices in Abia State. The broad objective is broken down to the following specific objective:

To establish the existence of tax evasion and avoidance on the revenue generated in Abia State.

To examine relationship between tax rates, tax evasion and tax avoidance.

To proffer solution to the problem of tax evasion and avoidance.

To investigate why people evade and avoid tax.

To determine the effect of tax evasion and avoidance on the revenue generated in Abia State.