CAUSES AND EFFECTS OF TAX EVASION AND AVOIDANCE ON THE ECONOMY

(A CASE STUDY OF BOARD OF INTERNAL REVENUE IN ABIA STATE)

By

AKUNNE AMARACHI LILIAN

Presented To

Department of Accountancy

ABSTRACT

This study was on the causes and effect of Tax Evasion and Avoidance on the economy (Board of Internal Revenue in Abia State). The major objective of the study is to identify the causes and effect of Tax Evasion and Avoidance in the state and how it is done. It also the aim of the study to suggest ways of at least minimizing this ugly incidence in the state, and the study sought the opinions of the staff (Senior and Junior) of the organization. The population size of the research work is 120 which includes the senior official and some staff of inland revenue department of ministry of finance make up the sample frame. The sources of this data was both primary and secondary source which includes interview, questionnaire, textbook, internet search, newspaper etc. The researcher uses simple percentage method in analyzing the data and the major findings is that the imposition of high tax rate will drastically reduce the level of income and profit on the part of the tax payer. From the findings, the researcher, therefore recommends that government should find a way of checking and balancing tax payments so as not to discourage tax payment on the part of the payers. 

TABLE OF CONTENT

Title page i

Approval page ii

Dedication iii

Acknowledgement iv

Table of content v

Abstract viii

CHAPTER ONE

10 Introduction 1

11 Background of the study 1

12 Statement of problems 6

13 Objective of the research 7

14 Research questions 8

15 Significance of the study 9

16 Scope of the study 10

17 Limitation of the study 11

18 Definition of terms 12

CHAPTER TWO

20 Literature Review 16

21 Preamble/Introduction 16

22 Conceptional Framework 19

23 Current literature based on theories/

models and research method 24

24 Summary of the literature review 27

CHAPTER THREE

30 Research Methodology 29

31 Design of the study 29

32 Area of the study 30

33 Population of the study 30

34 Sample/Sampling techniques 30

35 Method of data collection 32

36 Validity/Reliability of instrument 33

37 Distribution and Retrieval of instrument 34

38 Method of analysis 35

CHAPTER FOUR

40 Data presentation and analysis 36

41 Data presentation and interpretation 36

42 Findings 45

43 Discussion of the findings 47

CHAPTER FIVE

50 Summary, Conclusion and Recommendations 50

51 Summary of findings 50

52 Conclusion 52

53 Recommendations 54

54 Implication of the findings 56

55 Suggestion for further studies 56

References 58

Appendix A 59

Appendix B 60

Questionnaire 61

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 1^st 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 1^st 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

RESEARCH QUESTIONS

In the course of this study, the following research questions shall be examined:

Is the existence of loopholes in the Nigerian tax law system an opportunity for tax avoidance?

Is there any effect of tax evasion and tax avoidance on the Nigeria economy?

How can tax evasion and tax avoidance by minimized and eliminate in Abia State?

THE SIGNIFICANCE OF THE STUDY

This work is importance in many respects It is therefore, intended that a successful completion of this project help in reducing and even eliminates the problems associated with taxation Therefore the significance of this study are as follows:

It will help to inform the tax payers of the numbers of benefits gained by paying tax

The project will as well highlight on the importance of high efficiency and effectiveness required of tax officials

The study will also be of immense benefit to the government by alerting them on the war against tax evasion and avoidance and impose the necessary penalty on any offender

The study will help to suggest ways of removing inherent bottleneck in taxation

Finally, the study is useful to individual, tax authority and government in general

SCOPE OF THE STUDY

The scope of this study covered the cause and effects of Tax Evasion and Avoidance on the economy Tax Board of Internal Revenue in Abia State and is of the view that this will bear good result

LIMITATION OF THE STUDY

In a study of this nature, a lot of limitations are bound to come-up, the work is limited by finance The researcher needs to travel to different local government headquarters, the state capital Umuahia for the necessary data This is money consuming hence might have hindered the effectiveness of carrying out the research

LITERATURE : Due to the lack of the relevant books in the school library, the researcher had to travel to many other institutions to gather the necessary textbooks, journals, publications etc for the research work

TIME : The researcher faced the research problem of inadequate time

DATA COLLECTION : I must confess that access to data collection was not an easy task However, the employees of the Board of Internal Revenue were very co-operative The problem I encountered in data collection was as a result of creation of new Local Government Area

Also all data pertaining to revenue of the state since the creation of Abia State from Imo State have disappeared

RESPONDENTS ATTITUDE : The researcher was faced with problems of getting the actual information from the public since they think it is revenue of assessing their liabilities The pretest set back of this research is the most of the interviewed official (Tax Officials) The tax officials were afraid that the result of the research could be used to expose their corrupt practices

DEFINITIONS OF TERMS

Below are the meanings of the following concepts as applicable to the study;

TAX ASSESSMENT : This is the process of ascertaining the amount of tax for which an individual or company is liable to pay

TAX COLLECTION : This is the process of receiving or gathering taxes from tax payer

TAX DELINQUENCY : This refers to the failure to pay a tax obligating on the date it is due

TAX DRIVE : This means raid carried out by tax officials aimed at collecting tax revenue due to government from tax payer

TAX EVASION : This is a willful and deliberate violation by a tax payer to escape a legal tax obligation by failing to report a source of income or seeks to reduce his tax liability by understating a source of income to the Tax Authority

TAX AVOIDANCE : This is a situation by which a tax payer take advantage of the weakness or loopholes in the tax system in order to pay less tax than he ought to have paid

TAX RELIEFS : These are allowance to a tax payer on his circumstance prevailing in the preceding year of assessment such as personal allowance, children allowance, relatives and dependent allowances etc

TAX LIABILITY : This is the total amount of tax an individual or company is supposed to pay

TAX PAYABLE : It is any amount of tax an individual should actually pay It is also tax liability less any tax credit or withholding tax

DIRECT ASSESSMENT : This involves the assessment of self employed, eg trade, business, profession or vocation

RELEVANT TAX AUTHORITY : This is the authority that could impose and collect on the income of a taxable person for a year of assessment

YEAR OF ASSESSMENT : This is a period of twelve months commencing is 1^st January to 31^st December

DIRECT TAX : These are tax levied on factors of production The burden of direct tax falls on the producer

INDIRECT TAX : This is the type of tax that is levied on goods and services The burden of indirect tax fall on the final consumer