Review of Public Administration & Management Vo. 1 No.

The Effect of Poor Implementation of Tax Policies on Developing

Economies. A study of Nigerian Economy, (1999-2010).

Echekoba Felix Nwaolisa

[email protected]
[email protected]
Lecturer; Department of Banking and Finance
Nnamdi Azikiwe University, Awka

Ezu Gideon Kasie

[email protected]
08032932828
Lecturer; Department of Banking and Finance
Nnamdi Azikiwe University, Awka

Abstract
This study investigated ‘The Effect of Poor Implementation of Tax Policies on
Developing Economies; A Study of Nigerian Economy, (1999-2010)’. Past
studies have largely focused on challenges and prospects of taxation in
Nigeria. This study found it expedient to explore the rationale behind poor tax
system in Nigeria. To achieve the objective of the study, the following
objectives were set out by the researcher: to examine the causes of double
taxation by different levels of government on Nigerian citizens and non-citizens
alike: to examine the perceived seriousness of tax evasion vis-à-vis various
legal offences. Analytical research method was used since the researcher made
use of secondary data obtained from the office of Federal Inland Revenue
Service. The results show that that the expected revenue mapped out by
Federal Inland Revenue Service could not be met due to poor implementation
of tax policies in Nigeria. It was recommended that the Nigerian Tax system
should be simple (easy to understand by all), certain (its laws and
administration must be consistent) and clear (stakeholders must understand the
basis of its imposition).

Key words: Tax evasion, Double taxation, Tax regime

Introduction
A tax policy represents key resource allocator between the public and
private sectors in a country. It is usually imposed on individuals and

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entity that make up a country. The funds provided by tax are used by
the states to support certain state obligations such as education systems,
health care systems, pensions for the elderly, unemployment benefits,
and public transportation. A nation’s tax system is often a reflection of
its communal values or the values of those in power. To create a system
of taxation, a nation must make choices regarding the distribution of the
tax burden, who will pay taxes, how much they will pay and how the
taxes collected will be spent. In Nigeria, the taxation system dates
back to 1904 when the personal income tax was introduced in Northern
Nigeria before the unification of the country by the colonial masters. It
was later implemented through the Native Revenue Ordinances to the
western and Eastern regions in 1917 and 1928, respectively.

Among other amendments in the 1930s, it was later incorporated into

Direct Taxation Ordinance No. 4 of 1940. Since then different
governments have continued to try to improve on Nigeria’s taxation
system. The general opinion among scholars is that Nigeria’s fiscal
regime is characterized by unnecessary complex, distortions and largely
inequitable taxation laws that have limited application in the formal
sector that dominates the economy. Given the foregoing, it is important
that Nigeria adopt a taxation policy that would enhance national
development. The Nigerian tax system is basically structured as a tool
for revenue collection. This is a legacy from the pre-independence
government. Based on 1948 British tax laws and have been mainly
static since enactment. The need to tax personal incomes throughout the
country prompted the Income Tax Management Act (ITMA) of 1961. In
Nigeria, Personal Income Tax (PIT) for salaried employment is based
on a ‘Pay As You Earn’ (PAYE) system, and several amendments have
been made to the 1961 ITMA Act. For instance, in 1985 PIT was
increased from N600 or 10 per cent of earned income to N2,000 plus
12.5 per cent of income exceeding N6,000. In 1989, a 15 percent
withholding tax was applied to savings deposits valued at N50,000 or
more while tax on rental income was extended to cover chartered
vessels, ships or aircraft. In addition, tax on the fees of directors was
fixed at 15 percent. These policies were geared to achieving effective
protection for local industries, greater use of local raw materials,
generating increased government revenue among others. Since the

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implementation of the Structural Adjustment Programme (SAP),

however, taxes have been used to enhance the productivity and
competitiveness of business enterprises.

Consequently, attention has been focused on promoting exports of

manufactures and reducing the tax burden of individuals and
companies. In line with this change in policy focus, many measures
were undertaken. These involved, among others, reviewing custom and
excise duties, continuing with the reduction of company and income
taxes, expanding the range of tax exemptions and rebates, introducing
capital allowance, expanding the duty drawback scheme and
manufacturing-in-bond scheme, abolishing excise duty, implementing
VAT, monetizing fringe benefits and increasing tax relief to low-
income earners.

The Problem
Efficient tax system is tantamount to economic growth and
development. Any country that treats it with hand glove is heading
towards a precipice. In Nigeria, tax evasion and other related tax
offences are very prevalent. Citizens and non-citizens alike evade tax
with reckless abandon owing to the government attitude towards
taxation in Nigeria. Whereas, tax evaders are dealt with ruthlessly in
advanced countries of Europe, America and Asia, it is regarded as a
simple offence which cannot attract a heavy penalty in Nigeria. In
Nigeria, the only group of people that pay tax as at when due are civil
and public servants because their taxes are deducted from the source.
However, business men and companies that control billions or millions
of naira pay little or no tax.
Moreover, because of lack of efficient tax system in Nigeria, there is a
conflict of interest amongst the Federal, State and Local Government in
tax collection which culminates into double taxation which does not
augur well with the Nigerian Economy. The main reason why different
levels of government feel non-challant about efficient tax system is
because of their belief that there must be a revenue from the oil sector
which will be shared at the end of every month. Therefore this study
seeks to tackle such lackadaisical attitudes.

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Objectives of the Study

The broad objective of this study is to evaluate the effect of poor
implementation of tax policies on developing economies using Nigerian
economy as a case study. The specific objectives of this study are as
follows
1. to examine the causes of double taxation by different levels of
government on Nigerian citizens and non-citizens alike.
2. examine the perceived seriousness of tax evasion vis-à-vis
various legal offences;
3. to assess the effect of corruption on the actualization of efficient
tax policy in Nigeria.
4. to evaluate different methods which tax authorities can employ
in ensuring prompt payment of tax by Nigerians and non-
Nigerians who work in the country.
5. to compare the Nigeria Tax Policy and USA Tax Policy so as to
suggest the best possible means of solving tax evasion in
Nigeria.

Hypotheses
A hypothesis is a tentative answer to a research question that is to be
subjected to further empirical validation. For the purpose of this study,
two hypotheses will be stated in null form
H0: Poor implementation of tax policies in Nigerian do not encourage
tax invasion.
H0: Double taxation discourages investors from investing in Nigeria.

Significance of the Study

A major problem in Nigerian tax regime is the multiplicity of tax-
imposing and tax-collecting entities at federal, state, and local
government levels. Like the Nigerian federation itself, there is little
clarity on jurisdictional competencies and indeed, many observers doubt
whether there is genuine fiscal federalism in Nigeria. This research
work will be significant to the following stakeholders:

Government: Different levels of government in Nigeria should be able

to harmonize and design a better tax regime which will no longer
encourage double taxation inefficiencies.

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Investors: Manufacturers and owners of small and medium scale

industries will find this study useful because it will discuss extensively
the danger inherent in tax evasion.

Scope of the Study

This study covers prominent tax polices initiated by the Government of
Nigeria and its subsequent implementation. It equally compares the tax
regime penalties in USA and Nigeria. Federal Inland Revenue Services
was used as a focal point.

Theoretical Framework
Taxation is basically the process of collecting taxes within a particular
location. In this regard, tax has been defined as “a monetary charge
imposed by the Government on persons, entities, transactions or
properties to yield revenue”. Okodo (2001) defined tax as “the enforced
proportional contributions from persons and property, levied by the
State by virtue of its sovereignty for the support of Government and for
all public needs”.

Taxes may be direct or indirect and may be imposed on individual

basis, on entities, on assets and on transactional basis. In Nigeria, taxes
are imposed on the individuals such Personal Income Tax and
Development Levy. On companies such as, Companies Income Tax,
Petroleum Profit Tax, Education Tax and Technology Levy. On
Transactions such as, Value Added Tax, Capital Gains Tax, Stamp
Duty, Excise Duty, Import Duty and Export Duty. On Assets such as
Property Tax.
Objectives of the Nigerian Tax System
Oshinowo (2001) stated that the Nigerian tax system is expected to
contribute to the well-being of all Nigerians and taxes, which are
collected by Government should directly impact on the lives of the
citizens. This can be accomplished through proper and judicious
utilisation of the revenues collected by government. In line with the
above, there are certain objectives, which the Tax System is expected to
achieve. These objectives include:

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To Promote Fiscal Responsibility and Accountability

Okorie (1999) asserts that one of the primary objectives of the National
Tax Policy is to create a tax system, which ensures that Government
transparently and judiciously accounts for the revenue it generates
through taxation by investing in the provision of infrastructure and
public goods and services. Where this is in place, Nigerians would have
a tax system that they can fully relate to and which is a tool for National
Development.

To facilitate economic growth and development.

Agbade (2003) stated that the overriding objective of the Nigerian tax
system should be to achieve economic growth and development. As
such, the system should allow for stimulation of the economy and not
stifle growth, as it is only through sustained economic growth that the
potential ability to offer improvements in the well-being of Nigerians
will arise. The tax system should therefore not discourage investment
and the propensity to save. Taxes should not be a burden, but should be
applied proactively with other policy measures to stimulate economic
growth and development.

To provide the government with stable resources for the provision

of public goods and services
For Nigeria to pursue an active development agenda and carry out the
basic functions of government, its tax system should generate sufficient
resources for government to provide basic public goods and services
(e.g. education, healthcare, infrastructure, security etc., (Bulus, 2010). It
is therefore a primary objective of taxation to provide the government
with resources that it shall invest in judicious expenditure that will
ultimately improve the well-being of all Nigerians.

To Address Inequalities in Income Distribution

Nigeria’s tax system should take cognisance of our peculiar economic
circumstances and seek to narrow the gap between the highest and
lowest income groups. Those with the highest incomes should pay the
highest percentage of tax and tax revenue should be utilised to provide
Nigerians with affordable social amenities, basic infrastructure and
other utilities.

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To Provide Economic Stabilisation

Nigeria should use its tax system to minimise the negative impacts of
volatile booms and recessions in the economy and also to help
complement the efforts of monetary policy in order to achieve economic
stability.

Impediments to Efficient Tax System in Nigeria

Evasion of customs duty
Customs duties are an important source of revenue in the developing
countries. The importers purport to evade customs duty by (a) under-
invoicing and (b) mis-declaration of quantity and product-description.
When there is ad valorem import duty, the tax base is reduced through
under-invoicing. Mis-declaration of quantity is more relevant for
products with specific duty.

Smuggling
Egwu (2002) defined smuggling as importation or exportation of
foreign products through unauthorized route. Smuggling is resorted to
for total evasion of leviable customs duties as well as for importation of
contraband items. A smuggler does not have to pay any customs duty
since the products are not routed through an authorized or notified
Customs port and therefore, not subjected to declaration and payment of
duties and taxes.

Anya, (2007) stressed that Nigeria has one of the worst porous borders
in the world stretching from Borno, Zamfara, Kogi and Cross-River
states thus making it possible for smugglers to have a field day.

Government response
Tax evasion also depends on the efficiency of the tax administration.
Corruption by the tax officials often renders control of evasion difficult.
Tax administrations resort to various means for plugging in scope of
evasion and increasing the level of enforcement. When the president
and governors receives huge amount of money from federal allocation,
it makes them lackadaisical about engaging in internally generated
revenue which involves taxation thereby encouraging tax evasion.

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Corruption by tax officials

Corrupt tax officials cooperate with the tax payers who intend to evade
taxes. When they detect an instance of evasion, they refrain from
reporting in return for illegal gratification or bribe. Corruption by tax
officials is a serious problem for the tax administration in a huge
number of developing and southern European countries.

The United States Tax System

Taxes in the United States are administered by literally hundreds of tax
authorities. At the Federal level there are three tax administrations.
Alcohol, tobacco, and firearms taxes are administered by the Alcohol
and Tobacco Tax and Trade Bureau (TTB). All other taxes on domestic
activities are administered by the Internal Revenue Service (IRS). Taxes
on imports (customs duties) are administered by U.S. Customs and
Border Patrol. TTB is part of the Department of Justice and CBP
belongs to the Department of Homeland Security. The IRS is a division
within the U.S. Department of Treasury. Organization of state and local
tax administrations varies widely. Every state maintains a tax
administration. A few states administer some local taxes in whole or
part. Most localities also maintain a tax administration or share one with
neighbouring localities, Steve (2002). The United States Government
has fortified their borders especially the border between the United
States and Mexico where drug barons and other economic saboteurs ply
their trade.

Celebrated cases of tax evaders in the United States of America

 1932-1939: Al Capone served seven years of an 11-year
sentence in federal prison on Alcatraz Island for tax evasion. He
was let out of jail early while suffering with the advanced
stages of Syphilis.
 1963: Joe Conforte, a brothel owner, serves two and a half
years in prison, convicted for the crime of income tax evasion.
 Cornelius Gallagher (D-NJ) pleaded guilty to tax evasion, and
served two years in prison.
 1974: Otto Kerner, Jr. (D) Resigned as a judge of the Federal
Seventh Circuit Court District after conviction for bribery, mail

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fraud and tax evasion while Governor of Illinois. He was

sentenced to 3 years in prison and fined $50,000.
 1982: Frederick W. Richmond (D-NY) was convicted of tax
evasion and possession of marijuana. He served 9 months.
 1987: Robert Bernard Anderson (R) former United States
Secretary of Treasury (1957–1961) pled guilty to tax evasion
while operating an offshore bank and sentenced for 2 years.
 Harry Claiborne, Federal District court Judge from Nevada, was
impeached by the House and convicted by the Senate on two
counts of tax evasion. He served over one year in prison.
 1991: Harry Mohney, founder of the Déjà Vu strip club chain,
served three years in prison for tax evasion.
 1992: Catalina Vasquez Villalpando (R), Treasurer of the
United States, pled guilty to obstruction of justice and tax
evasion and was sentenced for 2 years in prison.
 Nicolas Castronuovo is the owner of the Florida pizza parlor
where Senator Robert Torricelli was caught on an FBI wiretap
soliciting contributions in 1996. Nicolas Castronuovo and his
grandson Nicholas Melone later pleaded guilty to evading the
government of $100,000 and was sentenced for 3 years in
prison.
 1995: Webster Hubbell, (D) Associate Attorney General, pled
guilty to mail fraud and tax evasion. He is sentenced to 21
months in prison.
 1996: Heidi Fleiss was convicted of federal charges of tax
evasion and sentenced to 7 years in prison. After two months
she was released to a halfway house, with 370 hours of
community service.
 2002: James Traficant (D-OH) was convicted of ten felony
counts including bribery, racketeering and tax evasion and
sentenced to 8 years in prison.
 2002: The Christian Patriot Association, an "ultra-right-wing
group", was shut down after convictions for tax fraud and tax
evasion.
 2005: Duke Cunningham (R-CA) pleads guilty to charges of
conspiracy to commit bribery, mail fraud, wire fraud and tax

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evasion in what came to be called the Cunningham scandal. He

was sentenced to over eight years.
 2008: Actor Wesley Snipes was sentenced to 3 years in jail for
tax evasion.
 2008: Charles Rangel (D-NY) failed to report $75,000 income
from the rental of his villa in Punta Cana, Dominican Republic
and was forced to pay $11,000 in back taxes.
 Jack Abramoff , lobbyist, was found guilty of conspiracy, tax
evasion and corruption of public officials in three different
courts in a wide ranging investigation. Currently serving 70
months and fined $24.7 million
 Jared Carpenter , Counsel of Republicans for Environmental
Advocacy, pled guilty to income tax evasion, and received 45
days, plus 4 years probation.

Source: Federal Inland Revenue Services Archive, Washington DC

(2010)
Unfortunately, in Nigeria due to lax in efficient tax system and over
reliance in the down stream sectors of the economy, there is no
celebrated cases of prominent Nigerian’s that was jailed for tax evasion
nor any company was fully penalized for evading tax.

Research Method and Results

Analytical research method was used since the researcher made use of
secondary data obtained from the office of Federal Inland Revenue
Service.

Table 1: Total Tax Collection for March, 2011(in billion), oil and
non-oil.
Category 2011 FIRST Actual % OF Contribution To
Monthly Collection Total Collection
Target (N’b) (N’b)
Oil tax 140.9167 165.8922 60.11
Non-oil tax 150.1250 110.0688 39.89
Total 291.0417 275.9610 100.00
Source: FIRS, Reporting and Statistics Department

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The table above shows that the expected revenue mapped out by
Federal Inland Revenue Service could not be met due to poor
implementation of tax system in Nigeria. If different levels of
government engage in strict implementation of tax regime, there will be
efficient tax system in the country.

Table 4.2 : Tax Revenue Collection by Tax Types.

Tax Annual Tax Actual % Contribution
Types Target (Nb) Collection (Nb) to the Total
Collection
PPT 140.9167 165.8922 60.11
CIT 63.2500 38.4155 13.92
GI 7.4167 0.7456 0.27
CGT 0.2917 0.0089 0.01
SD 1.2500 0.5973 0.22
VAT 64.1666 61.6073 22.32
EDT 8.0833 3.3752 1.22
PIT 4.5000 5.1623 1.87
POL 0.4167 0.0474 0.02
NITDEF 0.7500 0.1093 0.04
TOTAL 291.0417 275.9610 100.00
Source: FIRS, Planning, Reporting and Statistics Department

The table above equally shows that the target revenue which the Federal
Inland Revenue Service projected could not be met because of
governments non-challant attitude towards taxation.

The result of the above analysis shows that poor implementation of tax
system in Nigeria has led loss of huge revenue to the government.

Recommendations
1. Taxpayers should understand and trust the tax system, and this can
only be achieved if Nigerian tax policy keeps all taxes simple,
creates certainty through considerable restrictions on the need for
discretionary judgements, and produces clarity by educating the
public on the application of relevant tax laws. It is therefore

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imperative that the Nigerian Tax system should be simple (easy to

understand by all), certain (its laws and administration must be
consistent) and clear (stakeholders must understand the basis of its
imposition).

2. To enable a high level of compliance, the economic costs of time

required, and the expense which a taxpayer may incur during the
procedures for compliance, shall be kept to the absolute minimum
at all times. Furthermore, taxpayers should be regarded as clients
with the right to be treated respectfully. The convenience of the
taxpayer and minimal compliance cost should guide the design and
implementation of every tax in Nigeria.

3. A key feature of a good tax system is that the cost of administration

must be relatively low when compared to the benefits derived from
its imposition. There must therefore be a proper cost - benefit
analysis before the imposition of any taxes and the entire machinery
of Tax Administration in Nigeria should be efficient and cost
effective.

References
Agbade, J.N. (2003). Technological innovation and Taxation in Nigeria:
An evaluation of Citizens’ perceptions, American Academy of
Financial Management.

Anya, B. H. (2007). Leadership and Tax Management – A case study

based on SAS Cargo, Master’s Thesis, Stockholm School of
Economics, p.7.

Bulus, H.I (2010). Survey of Nigerian Tax systems: Citizens option.

ABI/INFORM Global, p. 4A-13A.

Egwu, T.U. (1993). Doing Your Research Project – A guide for first-
time researchers in education and social science, 3rd Ed, Open
University Press, Buckingham.

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FIRS WDC, (2010). Celebrated Cases of Tax offenders in the United

State of America. Washington Press.

Okodo, J. W. (2001). Research methods in the social sciences, Harper

Collins, New York.

Okorie, S.U (1999). Nigerian Tax Regime: Problems and Prospects.

Journal of Accountancy. 21, p. 1573-1624.
Oshinowo, D. B., (2001). Realizing the gains from Efficient Taxation:
Cost, Pricing, and Payment Choice. Journal of Money, Credit, and
Banking, vol. 33, No. 2, pp. 216-234.

Steve, J. M. (2002). Cannons of Taxation. Johnjacobs Publishers.

Enugu

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