CHAPTER ONE
INTRODUCTION
1.1 Background of the study
According to the Nigerian Tax Policy (2016) “tax is any compulsory payment to government imposed by law without direct benefit or return of value or a service whether it is called a tax or not” (p. 1). Payment of tax is regarded as a civic and patriotic responsibility of citizens which provides a regular major source of fund for government to defray its expenditure on social amenities, provision of infrastructures, security and safety of life and properties within and outside the country [Adeyeye, 2009, 2013; Angahar & Alfred, 2012]. Bello (2001) opines that taxes are compulsory levies by government on the income, consumption, and capital of its citizenry for the purpose of raising revenue.
Literature suggest that the proportion of personal income taxes to the Nigerian government‟s total revenue has been appalling and on the decline (Chartered Institute of Taxation of Nigeria [CITN], 2010; Kiabel & Nwokah, 2009; Nzotta, 2007). One of the reasons for this has been attributed to poor level of tax compliance. Modugu, Eragbhe and Izedonmi (2012) assert that this poor tax compliance
behaviour has been captured in literature as the “compliance puzzle” and is a challenging phenomenon experienced across countries, especially the less developed economies. According to Alabede, Ariffin and Idris (2011a), the problem of poor tax compliance has attracted attention worldwide and this has caused researches both empirical and theoretical to emerge. According to Alabede et al (2011b), low tax compliance has become a thorn in the flesh of tax administration in Nigeria. They assert that this problem has snowballed into a persistent decline in the tax revenue of the government. The non-oil tax revenue accrued to the federal government dropped from about 43.7 % in 1977 to about 13.2 % in 2008 (Central Bank of Nigeria, 2008). Furthermore, CBN (2008) reveals that the ratio of personal income tax to GDP between 1999
and 2008 has not risen above 1.6%. The highest being in year 2003 (1.6%) while the lowest in year 2000 and 2006 (1.0%). This trend shows the under-performance of personal income taxation in Nigeria. Also, the 2012 report by Price Water House Cooper‟s (PwC) “Ease of Paying Taxes Ranking” indicates that Nigeria ranked 138 out of 183 economies that have relative ease in tax payment. This same report recorded that the average tax compliance time in Nigeria is 936 hours as against a 318 hour benchmark for Sub-Saharan Africa and 186 hours for the Organization for Economic Cooperation and Development (OECD) countries. All these portray that compliance by taxpayers in Nigeria is indeed an issue.
In late nineteenth century, a method called “responsive regulation” was proposed to ensure compliance. According to Ayres and Braithwaite (1992), the new proposition has a broader perspective at ensuring compliance as it integrates other measures apart from deterrent tax measures to include education and persuasion. The thrust of responsive regulation is for tax authorities to adjust their monitoring and enforcement efforts in line with the behaviour of taxpayers and know at what point to punish or persuade taxpayers (Braithwaite, Murphy & Reinhart, 2007; Murphy, 2004). It was recommended that the use of a cooperative and persuasive approach alongside deterrent tax measures would ensure optimal compliance to tax and, as a fallout from the proposition, a model was introduced. This model takes into cognizance other measures such as the attributes of taxpayers such as attitude of taxpayers, social and psychological makeup as well as the environment within which non-compliance to tax might occur (Murphy, 2005). A good tax system is made up of the tax policy, tax laws and tax administration. These three elements of tax system are expected to interface to promote the attainment of the economic goal of the nation. The National Tax Policy (2016) provides the fundamental guidelines for the orderly development of the Nigerian tax system. The Policy is expected to achieve the following specific objectives among others: (i) guide the operation and review of the tax system; (ii) provide the basis for future tax legislation and administration; (iii) serve as a point of reference for all stakeholders on taxation; (iv) provide a benchmark on which stakeholders shall be held accountable; and (v) provide clarity on the roles and responsibilities of stakeholders in the tax system.
In an attempt to fulfil the above expectation, the national tax policy is expected to be in compliance with the principles of taxation which are the lubricants to effective tax system.
According to the Guiding Principles of Nigerian Tax System, all the existing and future taxes are expected to align with the following fundamental features: (i) Equity and fairness; (ii) Simplicity, certainty and clarity; (iii) Low compliance cost; (iv) Low cost of administration; (v) Flexibility; and (vi) Sustainability [National Tax Policy, 2016]. This is in consonant with Adam Smith cannons of taxation which emphasised that a good tax system must be based on equity, certainty, convenience, economy, simplicity, productivity and efficiency [Uremadu & Ndulue, 2011].
