Assessment of Personal Income Tax Administration in Nigeria (A Study of Akwa Ibom State Board of Internal Revenue)
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 funds for the 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 the government on the income, consumption, and capital of its citizenry to raise revenue.
Literature suggests 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 a poor level of tax compliance. Modugu, Eragbhe, and Izedonmi (2012) assert that this poor tax compliance
behavior has been captured in literature as the “compliance puzzle” and is a challenging phenomenon experienced across countries, especially the less developed economies. According to Alameda, Ariffin, and Idris (2011a), the problem of poor tax compliance has attracted attention worldwide and this has caused research 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 the year 2003 (1.6%) while the lowest in years 2000 and 2006 (1.0%). This trend shows the underperformance 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 the 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 behavior 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 the 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 tax policy, tax laws, and tax administration. These three elements of the 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 fulfill the above expectation, the national tax policy is expected to comply with the principles of taxation which are the lubricants to an 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 inconsonant with Adam Smith’s canons of taxation which emphasized that a good tax system must be based on equity, certainty, convenience, economy, simplicity, productivity, and efficiency [Uremadu & Ndulue, 2011].
1.2 Statement of the problem
Personal income tax administration has been in existence for as long as taxation has been. It contributes majorly to the revenue generated through taxation processes. It has never been easy to persuade all taxpayers to comply with the requirements of a tax system. Tax compliance is likely to become a more significant aspect of tax policy as most of the old problems remain and new considerations are raised by developments such as self-assessment, the emergence of the global economy, and electronic commerce. These factors have policy implications about the way the tax system should be administered. Tax policy, especially in developing countries, is affected by several factors such as technology, globalization, major environmental challenges, and the world’s population. It means that the ‘‘one size fits all’’ policy could no longer be valid. To create a good tax system, taxes should be collected regularly, consistently, conveniently, and affordably. This is to say, a good tax system has two main components which are related to principles of taxation and tax administration. Principles of taxation were promoted by Neumark and Heller. Heller developed principles of taxation such as cost-effectiveness, tax compliance, economic efficiency, harmonization with other policies, income redistribution, and ability to pay as technical administrative principles (Turhan, 1998, p.208). The efficiency of tax administration depends on many social, economic, and political factors. Tax administration is widely expected to provide tax gap measurements, random audits, and robust monitoring of risk (OECD, 2017, p.62). The globalizing world doesn’t let tax authorities control everything at the same time. Therefore, tax authorities can make a trade-off between tax rates and tax bases. However, tax administrations employ Information and Communication Technology (ICT) to raise tax receipts. Tax administration must be effective and efficient. The most common definitions of these concepts are that the tax administration is effective when it achieves a high level of voluntary tax compliance and efficient when the tax administration’s costs are low about the collected revenue (the core focus of this study). OECD’s notes on principles of good tax administration indicate that effective tax administrations must know and follow the goals and challenges of revenue authorities. To do so, the main role of revenue authorities is to ensure compliance with tax laws. therefore, this study was undertaken to assess the situation of personal income tax in Akwa Ibom state.
1.3 Objectives of the study
This study aims to assess the administration of personal income tax in Akwa Ibom state. Specifically, this study seeks to:
1. Determine the method of assessing personal income tax which encourages voluntary payment by residents of Akwa Ibom state.
2. Determine the effectiveness of the PIT collection method for optimum tax revenue generation.
3. The extent of tax laws application by tax authorities in achieving optimum personal income tax.
1.4 Significance of the study
The study would enable tax policymakers to re-evaluate their strategy in the collection of personal income taxes. It will enable tax authorities in the state to develop better ways of applying the effective method of tax collection and remittance. The findings of the study will educate the users of this study on personal income tax administration in the state.
1.5 Research questions
1. What are the method(s) of PIT that encourages voluntary compliance by residents of Akwa Ibom state?
2. How effective is the personal income tax collection method in Akwa Ibom state?
3. How effective is the application of Personal tax laws for the achievement of optimum personal income tax revenue?
1.6 Research hypotheses
H0: The tax authorities in the state are not effective in the application of tax laws in Akwa Ibom state.
Ha: The tax authorities in the state are effective in the application of tax laws in Akwa Ibom state.
1.7 Scope and delimitation of the study
This study is undertaken to examine the concept, application, and administration of Personal income tax in Akwa Ibom state. There are other types of taxation such as company income tax, petroleum tax, value-added tax, and so on. But this study will concentrate on personal income tax. Furthermore, the findings of this study are limited to the case study selected for this research. The Akwa Ibom state board of internal revenue was selected for this study. The implication of this choice could mean that the findings from this study may not apply to other states in Nigeria. However, it leaves a research gap that other researchers can seek to fill.
1.8 Organization of the study
This study is organized into five distinct but related chapters. The first chapter describes the research problem and the objectives. It highlighted the research questions and defined the scope and delimitation. The second chapter reviewed studies on Personal Income tax, its background, and purposes. In the third chapter, we described the methodology applied in collecting and analyzing data. In the fourth chapter, the data collected were presented and analyzed using percentage tools and granuer tests. In the fifth chapter, we summarized the study and drew conclusions based on the findings reported in the previous chapter.