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Essay: New tax reforms and their impacts on Tax evasion and tax avoidance

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  • Published: 21 April 2015*
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This study is on ‘An Assessment of New tax reforms and their impacts on Tax evasion and tax avoidance, a case study of federal Inland Revenue Service (FIRS) Maiduguri. The research was conducted to determine the extent to which the tax policy reforms had contributed on the issue of tax evasion and tax avoidance in our economy, and also how tax evasion and avoidance had contributed negatively on revenue generation in Nigeria.
In obtaining research data, questionnaires were administered to staff. In addition, secondary data from textbooks and journals were obtained. The primary data were analyzed using descriptive statistics in from of frequency distribution and percentages while the chi-square test was used in testing the hypothesis. The findings revealed that the new tax reforms have significant effect on the reeducation of tax evasion and tax avoidance in which alternative hypothesis was accepted. The study recommended that government should train and retain tax officials to equip them to display competence and professionalism in the discharge of their duties.
Tax reform is the process of changing the way taxes are collected or administered by the government. Some tax reforms are intended to increase/decrease the level of taxation on all people. Some reforms seek to make the tax system more/less in it effect. Some try to make the tax system more understandable, accountable or more efficient. Therefore, government has been making effort to reform tax system in Nigeria, often with the plan to make value added tax and other taxes more economically liberal.
Nigeria is governed by a federal system; hence its fiscal operations also adhere to the same principle. This has serious implications on how the tax system is managed in the country. Therefore, the government’s fiscal power is based on a three-tiered tax structure divided between the federal, state and local governments, each of which has different tax jurisdictions. Years ago 40 different taxes and levies are shared by all three levels of government (Ayodele Odusola, 2006).
The Nigeria tax system is lopsided and dominated by oil revenue. The most veritable tax earnings are under the control of the federal government while the lower tiers are responsible for the less buoyant ones. The Federal Inland Revenue Service, State Internal Revenue Boards and local Government Committee collect taxes on behalf of government.
Therefore, the federal government on average accounts for 90% of the overall revenue annually but it only account for about 70% of total government expenditure (Ayodele Odusola, 2006).
Over the past four decades, the country’s revenues were largely derived from primary products. Between the year1960 and the early 1970s, revenue from agricultural products dominated, while revenue from other sources was considered as residual. Since the oil boom of the year 1974 to date, oil has dominated Nigeria’s revenue structure, and its share in federally collected revenue rose from 76.3% in 1970 to 81.8%, 76.3% in 1979, 1989 and 1999, respectively. Over the past two decades oil has accounted for at least70% of the revenue, thus indicating that traditional tax revenue has never assumed a strong role in the country’s management of fiscal policy. Instead of transforming or diversifying the existing revenue base, fiscal management has merely transited from one primary product based revenue to another, making the economy susceptible to fluctuations of the international oil market (Ayodele Odusola, 2006).
The need to address this problem led to several taxes policy reforms. The tax policy reviews1991 and 2003, as well as the yearly amendments given in the annual budget, were geared towards addressing the importance of tax policy reforms, one need to appreciate the urgency for such reforms. The need for tax policy reforms in Nigeria are as Follows: There is a compelling need to diversify the revenue portfolio for the country in order to safeguard against the volatility of crude oil prices and to promote fiscal sustainability and economic viability at lower tier of government.
Nigeria operates on a cash budget system, where proposals for expenditure are always anchored to revenue projections. This facilitates determining the optimal tax rate for a given level of expenditure. Thus accuracy in revenue projection is vital for devising an appropriate frame work for sustainable fiscal management, and this can be realized only if reforms are undertaken on existing tax policies in order to achieve some improvement.
Nigerian tax system is concentrated on petroleum and trade taxes while direct and broad-based indirect taxes like the Value Added Tax (VAT) are neglected. This is structural problem for the country’s tax system. Although direct taxes and VAT have the potential for expansion, their impact is limited because of the dominance of the informal sector in the country. Furthermore, the limited formal sector is supported with strong unions that act as pressure groups to deter any appreciable tax increment from gross income.
The widening fiscal deficit that over the years has threatened macroeconomic stability and prospects for economic grow makes the prospects tax reform very appealing. The ratio of deficit to GDP averaged 9.98% and 5.0% for the periods 1990-94 and 1999-2001; in 1993 it was 15.5% (Ayodele Odusola, 2006).
The study group of Nigerian tax system in 1991 and 2003 highlighted the need to increase tax revenue and remove expenditure as the major fiscal issues to be addressed. As such, the primary objective of the committees was to optimize revenue from various sources within the country (Ayodele, 2006).
The necessity to improve the tax notification procedure was underscored in order to facilitate effective evaluation of the performance of the Nigeria tax system and to promote adequate planning and implementation in order to reduce tax evasion and tax avoidance in the country. The quality of management associated with regular and result oriented tax reforms has a significant bearing on the macroeconomic performances and the distribution of resources between public and private sectors.
It has been noted that tax system in Nigeria has come to play a significant role; as a major source of revenue to the Federal Government by way of imposing tax on tax payers and it is for them to pay up the tax. Therefore, the act of evading and avoiding taxes by most registered companies and some individuals has however affected the revenue base of the Government especially in providing essential services in the society. People naturally prefer to reduce their tax liabilities by deliberately overstating their expenses and make false entries and fictions in their books of account. Thus, their act however, causes tremendous reduction in the revenue accruable to the government which eventually shrinks revenue in the treasure of government.
The followings are the research questions:
i. Is the tax evasion and tax avoidance due to high tax rate?
ii. Do the loopholes in the tax laws encourage tax evasion and tax avoidance?
iii. Does corruption affect tax evasion and tax avoidance?
iv. Do new tax reforms have an impact on tax evasion and tax avoidance?
v. Have new tax reforms reduce tax evasion and tax avoidance?
vi. Has tax contributed in the revenue generation to the Federal
The main objective of this research work is to assess the new tax reforms and their impacts on tax evasion and tax avoidance with a specific reference to Federal Inland Revenues Service (FIRS). The specific objectives of this research are:
i. To examine ways in which tax evasion and tax avoidance can be reduced with the new tax reforms.
ii. To identify ways of increasing tax revenue through tax revenue through assessment and collection procedure.
iii. To examine how tax evasion and tax avoidance affect revenue generation in the country.
iv. To ascertain the reasons of tax evasion and tax avoidance and establish techniques by which they can be reduced or avoided.
v. To identify the impacts of tax earnings on income or revenue generation to the Federal Government.
vi. To examine tax reforms in Nigeria.
vii. To examine the effect of tax evasion and tax avoidance on the revenue generation of the government
This research work is proposed to assess the new tax reforms and their impacts on tax evasion and tax avoidance taken as a case study of Federal Inland Revenue Service (FIRS).Due to time factor and material constraint, this research work is restricted/focused only on tax reform with reference to other relevant taxes which the (FIRS) administers so as to make this research work to be more appreciable. Therefore, this research work cover a period of ten (10) year from 2000-2010.The study however, examined the relevant tax laws, revenue scripts, payments and other documents from the Federal Inland Revenue Service (FIRS).
This research work would be relevant to various tax authorities: the Federal Board of Inland Revenue, Local Government revenue committee as well as their tax officials who are responsible to collect tax on individuals or corporate bodies. It gives them insight on how to improve the tax administration.
The research would also help the professional bodies like the chartered institute of taxation of Nigeria and the institute of chartered Accountants of Nigeria as well as their members to see the areas of deficiency in tax collections and call for improvement in tax revenue.
This research would also be relevant to the future researchers and students of Accounting, Economic, Business Administration and other social and management sciences as well as the legislations which will also benefit immensely from this research because it will form basis of tax policy formation, implementation and administration.
The null hypothesis is denoted by ‘Ho’ while the alternative hypothesis is denoted by ‘Hi’
Ho! The new tax reforms have no significant effect on the reduction of tax evasion and tax avoidance.
Hi! The new tax reforms have significant effect on the reduction of tax evasion and tax avoidance.
Ho! Tax evasion and tax avoidance have no significant impact on the revenue generation.
Hi! Tax evasion and tax avoidance have significant impact on the revenue generation.
Ho! Corruption on the part of the tax officers has no significance effect on tax evasion and tax avoidance
Hi! Corruption on the part of the tax officer has significance effect on tax evasion and tax avoidance.

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