THE IMPACT OF TAX POLICY REFORMS ON
REVENUE GENERATION IN NIGERIA
ABSTRACT
This research study on the impact of tax reforms on revenue
generation in Nigeria was carried out to ascertain the impact of tax reforms on
the volume of revenue generated from various taxes collectible
at the Federal Inland Revenue Service Calabar. Furthermore, the study seeks to
discover the impact of the reforms on individual tax and also determine the
direction of the impact. Accordingly secondary data of tax revenue for six
years and from different tax type were collected. In order to manage the data
size, the data were treated as log. The percentage chi-square and Pearson’s
Product Moment Correlation coefficient analysis technique were used for the
analysis. The result reveals that while the reforms have impact on the volume
of revenue generated in some taxes, it however did not have impact on others.
It was therefore recommended that: in order to ensure sustainable fiscal
policy, the various government tiers should seek the improvement in, the
treatment of taxpayers and tax administrator, adequate investment for the tax
system and judicious spending of tax payer money.
CHAPTER
ONE
INTRODUCTION
1.1
BACKGROUND
OF THE STUDY
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. In Nigeria, the
government’s fiscal power is based on three – tiered tax structure divided
between the federal, state and local governments, each of which has different
taxes jurisdiction. As of 2002, all three levels of government share about 40
different taxes and levies.
The Nigeria tax system is lopsided, and dominated
by oil revenue. The most veritable tax handles are under the control of the
federal government while the lower tiers are responsible for the less buoyant
ones – the federal government taxes corporate bodies while state and local
government tax individuals. While the federal government on average accounts
for 90 per cent of the over all revenue annually, it only accounts for about 70
per cent of total government expenditure. In 1995, the breakdown of total tax
and levy collection of the three tiers was 96.4 per cent for the federal
government and 0.4 per cent for the local government (Phillips, 1997). A major
element contributing to this development was the prolonged military rule that
had ignored constitutional provision.
Over the past four decades, the country’s revenue was
largely derived from primary products. Between 1960 and the early 19970s, revenue
from agricultural products dominated, while revenue from other sources was
considered as residual. Since the oil boom of 1973/4 to date, however, oil has
dominated Nigeria’s revenue structure and its share in federally collected
revenue rose from 26.3 percent in 1970 to 81.8, 72.6 and 76.3 in 1979, 1989 and
1999, respectively. Over the past two decades oil was accounted for at least 70
percent of the revenue, thus indicating that traditional tax revenue, has never
assumed 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 in fluctuation of the international oil market.
The need to address this problem led to several taxes
policy reforms. The tax policy reviews of 1991 and 2003, as well as the yearly
amendments given in the annual budget, were geared towards addressing this
issue. But not much has been achieved. Perhaps to understand the importance of
tax policy reforms, one needs to appreciate the urgency for such reforms. Why
the need for tax policy reforms in Nigeria? First, 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
an economic viability at lower tiers of government. Secondly, Nigeria operates on
cash budget system, where as 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 framework for sustainable fiscal management, and this
can be realized only if reforms are undertaken on existing tax polices in order
to achieve some improvement.
Thirdly, Nigeria tax system is concentrated on
petroleum and trade taxes while direct and broad based indirect taxes like the
value – added (VAT) are neglected. This is a 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. Fourthly, the widening fiscal deficit that over
the years has threatened macro-economic stability and prospects for economic
growth makes the prospect of tax reform very appealing. The ratio of deficit to
GDP averaged 9.98 and 6.0 per cent for the periods of 1990- 2001, in 1993 it
was 15.5 per cent (Ayodele, 2006).
Also, the study groups on the review of the
Nigeria tax system in 1991 and 2003 highlighted the need to increase tax
revenue and reduce expenditure as the major fiscal issues to be addressed. As
such, the primary objective of the study groups was to optimize revenue from
various sources within the country.
Finally, 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. The management associated with regular result – oriented tax
reforms has significant bearing on the overall micro economic performance and
the distribution of resources between public and private sectors as well as
within the public sector.
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