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TITLE PAGE
A CRITICAL EXAMINATION OF THE CHALLENGES AND EFFECT OF PERSONAL INCOME TAX ADMINISTRATION INNIGERIA 21ST CENTURY
(A SURVEY OF ENUGUSTATE)
BY
OKONKWO BONAVENTURE SUNDAY
PG/MBA/11/60282
A PROJECT SUBMITTED TO THE
DEPARTMENT OF ACCOUNTANCY,
FACULTY OF BUSINESSADMINISTRATIONUNIVERSITY OF NIGERIA, ENUGU CAMPUS.
IN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE AWARD OF
MASTERS DEGREE IN ACCOUNTANCY (MBA)
AUGUST 2012
DECLARATION
I wish to state in fulfillment of the requirement for the award of Masters Degree in Accountancy (MBA) of the University of Nigeria, Enugu Campus. This research has not been submitted in any Masters Degree in any Department of this institution or any institution of higher learning
………………………………………………………………………..
Mr. R.O. Ugwoke Mr. R.O. Ugwoke
(Supervisor)Head of Department
Date: …………………………Date: ………………………..
………………………………………………
External Examiner
Date: …………………………
APPROVAL PAGE
This is to certify that the project was carried out by Okonkwo Bonaventure Sunday and was approved by the Department of Accountancy University of Nigeria, Enugu Campus under the supervision and guidance of
………………………………………………………………………..
Mr. R.O. Ugwoke Mr. R.O. Ugwoke
(Supervisor)Head of Department
Date: …………………………Date: ………………………..
DEDICATION
This work is dedicated to God almighty that made it possible for me to be alive and carry out this work.
To my family who gave me financial support throughout this programme.
ACKNOWLEDGEMENT
I thank God almighty for his abundant blessing in my life especially in carrying out this work.
I appreciate My supervisor and HOD Mr. R.O. Ugwoke who devoted his time and went through my work. I will never forget to acknowledge his wonderful effort.
My sincere thanks to my sweet mother, Mrs. Agnes Okonkwo for her wonderful advice and support through my stay in this institution.
I will never forget my ally Mr. Johnson Aernan who wanted me to start this programme, helping me financially and other things during this programme.
I will never forget my lovely brothers and their wives, Mr & Mrs. Ezeonyia Oliver, Mr & Mrs. Aloysius Okonkwo and mr & mrs Jude Okonkwo for making all possible efforts, both financially and otherwise.
I equally appreciated my lectures, Prof. (Mrs.) Modum U, Dr. (Mrs.) Regina Okafor, Dr. Eyisi, Dr(Mrs)Onyeanu, Mr. Emengini, Dr (Mrs.) Oforegbu, Mr. Odoh and others.
Finally, my thanks go to everyone who in one way or the other contributed towards fulfillment of this work. I thank all of you and pray that God almighty in his infinite mercy will grant all your desires, bless all of you and reward you a hundred fold.
ABSTRACT
In this project, attempt was made to evaluate the Challenges and the Effect of the Personal Income Tax Administration in Nigeria 21st century with a view to achieve higher revenue yield, economy, equity, convenience and income redistribution. In order to critically do justice to the topic, we critically examined the hindrance as well as the shortcomings of Personal Income Tax Administrations which led to the establishment of the objective of the study.
In order to arrive at conclusive decision on the objectives of this research, primary data were collected through field survey. Extensive literature review was undertaken in libraries within Nigeria. Based on the data, the hypotheses formulated were tested using the chi-square and logical deductions.
After careful analysis, it was discovered that Personal Income Tax Administrations have reordered a very poor performance over the years. The rate of tax evasion is very high among the self-employed. Thus the system has a negative income redistribution effect and is generally inconvenient. The absence of adequate trained experienced tax officials; facilities and motivation incentives as well as loopholes in the tax laws constitute the major hindrances on effective tax administration. Recommendations were made on ways of improving the performance of Personal Income Tax Administration such as measures to combat tax evasion as well as the required legal provision amendment.
LIST OF TABLES
- Personal Allowances Available to Taxpayers -39
- personal Income Tax Rates in Nigeria ---42
- Offences and Penalties under ITMA Applicable Eastern States ------47
- Questionnaire Distribution ------73
- Sex of Respondents------74
- Qualification of Respondents ----75
- Yearly Comparison of Tax Returns ----76
- Assessment of Self-employed who do not
Produce Accounts ------76
- Investigation of Taxpayer’s Accounts---77
- Falsification of Accounts by Taxpayers --78
- Loopholes in Nigeria’s Personal Income Tax Administration ------78
- Effects of Political Instability on Personal
Income Tax Administration -----79
- Major Constraints against Personal Income
Tax Administration in Nigeria -----80
- Personal Income Tax Administration on
Revenue Maximization ------81
- Personal Income Tax Administration and
Cannons of Taxation ------81
- Updating of Tax Officials Knowledge on Personal Income Tax Administration - - - - -83
- Staff Position of Tax Offices in Nigeria ---84
- Performance of the Personal Income Tax Administration in Nigeria ------85
- Personal Income Tax Revenue Yield----86
- Impact of Personal Income Tax -----89
- Achievements of the Objectives of the Personal Income Tax Administration ------91
TABLE OF CONTENTS
Title page ------i
Certification ------ii
Approval page ------iii
Dedication ------iv
Acknowledgement------v
Abstract ------vi
List of Tables ------vii
Table of Contents ------ix
CHAPTER ONE: INTRODUCTION
1.1Background of the Study ------1
1.2Statement of the Problem-----4
1.3Objectives of the Study------6
1.4Research Questions ------7
1.5Formulation of Hypothesis ------8
1.6Significance of the Study ------8
1.7 Scope and Limitation of Study ----10
1.8Limitations of the study------10
1.9Definition of Terms------11
References ------12
CHAPTER TWO: REVIEW OF RELATED LITERATURE
2.1Development of Personal Income Taxation in Nigeria-13
2.2Personal Income Tax Administration/Laws in Nigeria 17
2.2.1Income Chargeable ------25
2.2.2Income Exempted from Tax ----28
2.2.3Personal income Tax not exempted from Tax under 2011personal income tax (amendment) act - -32
2.2.4Allowance deductions------33
2.2.5Disallowable Deductions -----35
2.2.6Consolidation of personal relief allowances---36
2.2.7Capital Allowances------37
2.2.8Personal Allowance ------39
2.2.9Personal Income Tax Rates-----41
2.2.10Ascertainment of Assessable Income ---43
2.3The personal income Tax (amendment) act 2011-45
2.4Matters arising from implementation ------47
2.5Administration of Personal Income Tax Laws
in Nigeria ------53
2.6Tax Evasion and Avoidance -----54
2.7Offences and Penalties under ITMA 1961
and PITD 1993------55
2.8Offences and penalties under PIT 2011---57
2.9Purpose of Personal Income Taxation ----58
2.10Canons/Principles of Taxation -----60
2.10.1Convenience of Payment ------61
2.10.2Certainty of Tax ------61
2.10.3Economy in Collection ------62
2.10.4Equity in contribution ------63
References ------64
CHAPTER THREE: RESEARCH DESIGN AND METHODOLOGY
3.1Research Design ------66
3.2Sources of Data ------67
3.3Location of Data ------68
3.4Population------69
3.5Sample and Sampling Techniques- ----69
3.6Method of Data Presentation ------70
3.7Method of Data Analysis------70
References ------72
CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS
4.1Questionnaire Administration -----73
4.2Presentation and Analysis of Data ----74
4.3Test of Hypothesis ------85
CHAPTER FIVE: SUMMARY OF FINDINGS, CONCLUSION ANDRECOMMENDATIONS
5.1Summary of Findings------93
5.2Conclusion ------96
5.3Recommendation ------97
5.4Recommendation for Further Studies ----99
Bibliography ------101
Appendix I------104
Appendix II------105
Questionnaires------109
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
The purpose of this work is a modest attempt to evaluate the effect and challenges of the personal income tax administration in Nigeria with a view to ascertaining the extent to which the administration satisfies the optimal criteria of revenue yield, economy, equity, convenience and income redistribution with particular emphasis on EnuguState of Nigeria.
Personal income tax is a compulsory contribution exerted from employees, employers and the self employed persons for the purpose of financing some governmental established function. It also a tax imposed on the incomes of individuals, communities and families. It is also charged on the incomes due to a trustee or an estate.
The personal Income Tax Act, 2004 is now amended by the personal income Tax (Amendment) Act, 2011. This follows many years of agitation for the personal income Tax law in Nigeria to be brought in line with present-day economic realities; and also to assist to increase the compliance levels and the amount of tax voluntarily paid and or collected by the Nigeria government. Some of the highpoints of this new personal income Tax legislation are highlighted in this Tax Alert for your enlightenment and necessary action. The established functions include: The duty of protecting the society from violence and invasion by other independent states; the duty of protecting every member of the society from the injustice or operations of other members of the society, the duty of establishing highly beneficial public utility institutions ands work which are of such nature that the profit they could earn can make repay the expenses to any individual or to a small number of individuals that may provide them; and the duty of meeting expenses necessary for the support for the sovereignty of the state. The personal income tax in Nigeria is being regulated by the income tax management act of 1961 with series of amendments and personal income decree of 1998.
Personal income tax revenue constitutes one of the major sources of internal revenue to state governments in Nigeria while the statutory allocations from the federal government occupy the premier position. Revenue from the premier sources have remained stagnant due to the oil glut in the international oil market in 1978 followed by the protracted collapse in the crude oil prices in 1982. Signaling to the state governments to meet the financing of its established function through the improvement of the personal income tax yield. The inability of the state government to meet the drop in statutory allocation through personal income tax administration and other internal revenue sources compelled them to depend more on foreign assistance.
Taxation is an aspect of public finance in revenue improvement. The sale objective of public finance is to satisfy both merit and social wants. This establishes the rational for progressive taxation. Government subsidization in the form of relief to low-income earners is necessary under progressive personal income tax. The emphasis is one satisfying merit want or necessaries where the actual income is greater than the expected expenses, this forms the basis of tax cut by government to those savings. People falling into the category where marginal propensity to save is dissevers.
The creation of 36 states and full granting of autonomy to local governments in Nigeria has helped to bring administration nearer to the governed. Consequently, the demand for the government services and the need for rapid economic development have increased the need for revenue generation. As government attempts to meet the growing demand for its services it’s recurrent expenditure rises steeply every year. Apart from meeting the rising recurrent, revenue, it has to generate savings (or budget surplus) on the recurrent account for financing the capital expenditure. The state government seems to recognize, that it is by overhauling the tax administration and laws that their meager revenue from personal income tax would greatly increased. Personal income tax administration can be said to have performed creditably, where it achieved adequate revenue and meet the established criteria of equity, economy, certainty, convenience, and income re-distribution.
1.2STATEMENT OF PROBLEM
Total tax revenue from sources absolutely controlled by the government and the administration of tax laws in the economy has been facing a lot of challenges over the years.
The persistent decline in the revenue were mainly due to less emphasis on the importance of personal income tax as a source of internal revenue generation while the measures introduced under various administrations have not helped in achieving the desired objective.
Despite the uniqueness of personal income tax as revenue generating instrument, it does to appear to yield sufficient revenue. Though it is mainly a state affair, the statement governments do not place much reliance on it because it does not contribute enough to financing both internal and capital expenditure.
There is also a general dis-satisfaction among members of the public on the personal income tax administration. The employed workers (employee) contend that the burden of taxation falls disproportionately or heavily on them while the self employed pay little or no tax.
Again, economic booms of oil era have come and gone leading to the experiencing of economic recession over the years but not use has been made of personal income tax as a fiscal instrument of economic control, recovery and growth. It is in line with these problems that the researcher deemed it fit to ascertain the real affects and challenges of the personal income tax administration in Nigeria, with particular emphasis on Enugu state and to make recommendations on ways of curtailing these short comings.
1.3OBJECTIVES OF THE STUDY
Theobjective of the study includes:
i.To evaluate the policy of maximizing the revenue from personal income tax.
ii.To evaluate the personal income tax administration in the economy.
iii.To equity, economy, convenience, certainty, and income re-distribution.
iv.To identify the objectives of personal income tax administration.
v.To identify the challenges as well as factors which enhance the achievement of the objectives of the personal income tax administration in Nigeria.
vi.To identify the affects of personal income tax administration on the economy and payee in general.
1.4RESEARCH QUESTIONS
The broad objectives of this research work were attained through dependable solutions to the following questions:
(i)Does the Nigeria personal income tax system achieve revenue maximization?
(ii)What are the objectives of personal income tax administration/laws on the economy?
(iii)What is the effect of these tax administrations on the Nigeria tax system?
(iv)To what extent has the objectives of the personal income tax administration achieved?
(v)What factors constitute challenges to the achievement of the objectives of effective tax administration?
(vi)What are the factors that have positive on the attainment of the objectives of these tax laws?
(vii)What socio-cultural factors adversely affect the administration of the Nigeria tax laws?
1.5FORMULATION OF HYPOTHESIS
The solutions to the questions arising from the objectives of this research can be validated using the following set of hypothesis:
1.Ho:The personal income tax revenue yield is not adequate
Hi:The personal income tax revenue yield is adequate
2.Ho:personal income tax administrations have not significant impact on the Nigeria tax system
Hi:Personal income tax administrations have not significant impact on the Nigeria tax system.
3.Ho: The objectives of personal income tax administration have not been achieved due to loopholes in the tax laws.
Hi:The objectives of personal income tax administration have not been achieved due to loopholes in the tax laws.
1.6SIGNIFICANCE OF THE STUDY
In the light of a depressed economy, the need for a research of this nature cannot be over emphasized. The attention is drawn by the need for increase in internal revenue if the government in Nigeria in the face of world economic recession and the present economic situation calls for self-reliance and self-sufficiency. This research work attempted to reveal to the governments at all levels, the loopholes in the tax administration as well as proffer useful suggestions towards the challenges facing the income tax assessment and collection.
Besides, the members of the society that constitute the tax payers will benefit from this. The information in the work will expose them to the need to pay tax as well as the consequences of tax invasion.
Various state governments, joint tax board and federal board of Inland Revenue as well as other economy planners, the study will be found useful. This will reveal lapses and challenges/hindrance on personal income tax revenue maximization which I hoped that if appropriate corrective measures are put in place, will go a long way in improving or enhancing revenue yield which in turn will improve the provision of necessary social and economic activities of the citizens.
Finally, it will be of immense help to academicians and future researchers on taxation in particular and public finance in general.
1.7SCOPE OF THE STUDY
This project is desired to cover certain period, which is to enable the researcher to evaluate recent developments in personal income tax administration in Nigeria, with particular emphasis in EnuguState the income tax management Act (IMA) 1961 as amended to data by (PITA) 1993 are used for the study.
1.8LIMITATIONS OF THE STUDY
The research is aware that a number of limitations abound. The study would have been extended to other states of the federation and other forms of taxation in Nigeria to have a fair representation but time and resources cannot permit such. The short period available for this academic work and the meager resources of the researcher made it particularly impossible to go beyond the bound. Nevertheless, it is assumed that generalization on other forms of taxation in every other states of the federation could be possibly made from the conclusion arrived here, since all the states are in the same geo-political zone.
1.9DEFINITION OF TERMS
This section aimed at definition some technical terms used in the courage of this project writing.
(i)Personal Income Tax: This is a compulsory payment exerted from employees, employers and self employed personal for the purpose of financing some governmental; established function.
(ii)Public finance: This is that branch of finance that studies the finance function of government. In other word, it can be defined as that branch of economic studies the income and expenditure of government.
REFERENCES
Adebayo, A. (1969), “Nigerian Public Finance its Development Problems and Prospects”New York:Africa Publishers Corporation.
CBN (1990). Annual Report and Statement of Account; various Editions Douglas Uche Okonkwo, need for Positive Income Tax Policy; Nigeria. Business Times. Feb., 12th
Ewojoh, S. (1998). An Appraisal to Better Taxation Revenue, Nigeria: Business Times, July 21st.
Swany, M.R.K. (1996). A FINANCIAL Management Analysis of the Nigerian Economy Situation, Problems and Solutions.Nigeria Journal OF Financial Management Vol. 1 No 2
CHAPTER TWO
REVIEW OF RELATED LITERATURE
This chapter reviews the existing literature on personal income tax with special emphasis on the development of personal income tax in Nigeria, income tax management Act of 1961, personal income tax in Nigeria.
The purpose of personal income taxation and the qualities of a good personal tax system will be reviewed. This chapter will be concluded with the review of the effects of personal income tax administration on the work force.
2.1DEVELOPMENT OF PERSONAL INCOME TAXATION IN NIGERIA
The history of personal income taxation in Nigeria can be said to dated back to the age of man prior to the period of the European colonization, there was a type of personal income taxation in Nigeria dating back to the days of our great-grand fathers, whereby communities tax themselves through communal labour to execute community projects to help them made of aggression of inter-tribal or other kinds of evil outside the community. Investigation revealed that the inter-tribal wars, which existed in the olden days, were attributed to search by stronger towns or communities to get more towns or communities under their control. The weaker towns/communities conquered become the subject of the stronger one, paying taxes to them while security will be provided in turn. During the era, people cheerfully paid taxes in kind by rendering services such as clearing the bush paths, digging of toilet pits, wells and go on for the benefit of the community as a whole. Failure to render such services usually resulted in seizure property reclaimable on payment of money or which represent money and may even lad to ostracizing. This is still being practiced in various parts (towns or villages) of this country today especially in the Igbo speaking areas. And this is the reason behind fund launching in every festive period for executing the community developments projects common among the Igbo today.