CHAPTER
ONE
INTRODUCTION
1.1 Background of the Study
Personal
income tax is the oldest tax in the country, it was first introduced as a
community tax in northern Nigeria in 1904, before the unification of the
country in 1914 ( Ola, 2001), and was
later implemented through the native Revenue Ordinances to the western and
eastern regions in 1917 and 1928, respectively. Among other amendments in the
1930s, it was later incorporated into direct Taxation Ordinance No 4 of 1940.
The need to tax personal incomes throughout the country prompted the income Tax
Management Act (ITMA) of 1961. In Nigeria, personal income tax for salaried
employment is based on a “pay as you earn” (P.A.Y.E.) system, and several
amendments have been made to the 1961 ITMA Act. For instance, in 1985 PIT was
increased from N600 or 10 percent of earned income to N2, 000 plus 12.5 percent
of income exceeding N6, 000.
In the
Nigerian taxing statutes, no comprehensive definition is given as to the meaning
of the word income. Under the present Personal Income Tax Decree '.
"Income" is simply or evasively defined as including any amount
deemed to be income under the Decree. No doubt this definition has not helped
matters in trying to delimit a clear boundary around the concept of income. The
reluctance to draw a precise boundary in this regard is not a recent
development. In London County Council
v. Attorney Generei', Lord
Mac Naughten famously equipped, in an attempt to define the word income that
"income tax, is a tax on income; it is not meant to be a tax on anything
else". No doubt, the attitude of the courts and legislation in avoiding a
comprehensive definition is to avoid the lurking trap or pitfall that might
result from an imperfect definition which might give more room for tax
avoidance speculators to exploit. Indeed, any definition incapable of
generating revenue for Government ought to sincerely and practically speaking
be avoided. It is also worthwhile to cursorily examine the definition of taxation
itself. Here again, it has been shown that no universal definition of the word
is possible. In the Chambers Encyclopedia, a tax is defined to mean: "a
compulsory levy to finance goods and services provided by a governing body for
the collective satisfaction of wants.
Similarly,
taxation in the words of F.R. Davies denotes "a compulsory levy imposed by
an organ of government for public purposes". This definition is quite
illuminating but a working definition for the purpose of this research work may
be said to be thus: Taxation is the legal demand made by any level of
government of the taxable citizens of that country, to pay a compulsory levy or
money on income, goods or services into the coffers of the government for the
benefits of the citizens of that country.
However, Government needs money, there are various
sources of government revenue, among which are; taxation, borrowing (loans),
profit from government companies and miscellaneous which include aids from
other countries or organizations. Of all these sources, tax is the most
important. This is because it contributes not less than 50 percent of the total
government revenue.
There
are basically two types of tax; they are direct taxes and indirect taxes.
Direct tax includes Personal Income Tax (PIT), poll tax, company tax, Capital
Gain Tax (CGT) etc. while indirect tax include import and export duties, excise
duty, Value Added Tax (VAT) etc. Personal Income Tax as a form of direct tax is
however, the field to which this study relates. Personal income tax Decree Act
of 1993 (PTD, 1993) which repeals the Income Tax Management Act 1961 (ITMA
1961) defined personal income tax as the tax charged on individuals’ chargeable
income. Whereas it explains chargeable income as the total assessable income less
relief in respect of dependent, children, etc.
Personal Income Tax was introduced in Cross River
the same year the State was created. Its historical development in Nigeria
however can be traced in four distinct periods, the period before the British,
the period 1900 – 1918, the period 1918 – 1943 and the modern period 1943 to
date. Since its introduction in Nigeria different laws regulating the
imposition and administration were put in place. The administration of PIT
cannot be gain-said because it tends to ascertain the income. Subject to tax,
persons chargeable, assessment, collection, notices and returns, further
stipulating conditions under which objectives, appeals and recovery of such tax
is made. This is why the federal government through the P.T.D. 1993, vested
states with the power to make laws regulating the administration of PIT as
provided by Paragraph 7 of the 1979 Constitution. Thus, the tax authority
responsible for this, in each States is the State Board of Inland Revenue. All
these are put in place to ensure effective and efficient. PIT revenue
collection using Pay-As-You-Earn (PAYE) and direct assessment on persons on
wage employment and self-employed persons respectively. The PIT revenue thus
collected increase government fund used to finance her expenditure and ensure
stability.
1.2 PROBLEM
STATEMENT
It
has long been evident that personal income tax in Nigeria has remained the most
unsatisfactory, disappointing and problematic of all the taxes in the tax
system today. This is in spite of the fact that tax reform has of recent been a
key element in economic reform which the country had undergone. It is therefore
felt that personal income taxation in Nigeria requires radical handling to
ensure that a large chunk of the taxable population does not escape tax.
Personal income tax is closely related to the pace of development and growth of
the economy. An effective tax system ought to satisfy the twin purpose of
raising maximum revenue and at the same time encourage production. In an
effectively managed tax system, the two purposes are not irreconcilable
provided of course that the beneficial effects of Governmental expenditure and
incentives for
production exceed the unfavourable effects of taxation.
An
effective tax system, aside from maximizing revenue for development, ought to,
if well-structured and managed elicits a feeling of common purpose joint
responsibility or obligation amongst the taxable persons in a country.
This study
is an attempt to examine the hydra-headed problem of tax collection and
administration in our tax system and also proffer suggestions for improvement.
The system is loaded with unduly large number of
overlapping taxes which have more nuisance value than revenue value. The system
is further worsened by the poor policies, inconsistency in legal application,
and low impact on the economy, non-dynamic and so on. The system remains
paralyzed by fundamental lack of tax information, poor data management and
complete absence of information technology. Besides, the system has
increasingly become a nuisance and burden on tax payers in particular. This
study is therefore conducted to find out solutions to the problems which have
been identified in this study, “Assessment of personal income tax as a source
of revenue generation in Cross River State”.
Cross River State government like most other state
governments in Nigeria always runs short of fund relative to their expenditure.
The following research problems are stated to ensure efficient analysis of PIT
as a source of revenue to Cross River State.
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