Taxation in Nigeria – Origin and Importance of Taxation in Nigeria

Taxation in Nigeria – Origin and Importance of Taxation in Nigeria

     Taxation in Nigeria –      The earliest trace of any form of direct taxation in Nigeria even before the British Administration was in Northern Nigeria. The North was favored for this because it had a form of organized central administration under the Emirs unlike the south which except in few places in the west was not as organized.Furthermore, the Muslin religion adhered to by the people approved of taxation as being consistent with the demand of Islam. Thus taxes such as Zakka, Gada, Kindin, Kararat and Jangoli which were typical forms of taxes on agricultural products and livestock.

[widget id=”related-posts-by-taxonomy-2″]

With the coming of the British and their consequent colonization of Nigeria they took advantage of tax system that was existing in the Northern part of the country to introduce direct taxation into the area since that was the only alternative available to them to arise fund to administer the region.

Had it been there was any other attempt to impose indirect tax on goods imported into North, it could have been injurious and serious due to the fact that the north was not endowed as the south in terms of sea coast.

In 1904, income tax was first introduced in Nigeria by late Lord Lugard, later made changes which culminated in the native revenue ordinance of 1917. an amending ordinance that extended the provision of the 1917 ordinance to Nigeria was passed in 1918. the first ordinance applied to Abeokuta in Ogun state and Benin city in formal Bendel state (now Edo state) and in 1923 it was extended to Eastern Nigeria. So it should be recalled that Nigeria income taxation in modern from now ever, only in 1940. although, there was a simiplified type of tax dating back to 1927, northern Nigeria was the first of the region to levy direct personal taxation under the Fulani Emirs, prior to the advent of the British. In the system, a kind of minimum tax was levied per head.

Later, in 1906, the native revenue proclamation was introduced and this changed the 1904 direct tax system.

The new system aimed at unifying all existing form of taxation and also reformed the pavers of the Emirs. During this period, there existed some refined principles of taxation even though there were practical problems of interpretation.

In 1914 when Northern and Southern Nigeria were amalgamated the then govern general deemed it necessary to extend the system of direct taxation which had been in existing in the north to the south part of the country.

However, the system was delayed during its extension to the area due to high cost of the operation and also due to the people’s in-subordination. The British government were und anuted by the articles of the southerners and appointed warrant chiefs to help perform the management of tax in the south. This was done with some modification to suit the peculiarities of the southern people.

During 1918, the natives revenue ordinance of 1917 was grudgingly accepted in the western province of southern Nigeria.

Around this time, there was still a lot of problem of acceptance for instances by 1920, direct taxation had almost been introduced in most parts of the west excluding Asaba and warri provinces for fear of disturbance.

The introduction of Native Revenue ordinance was most difficult in the Eastern and Delta areas of the South, due mainly to absence of recognized central authority as in the North. As regard to this, direct taxation was not introduced in Eastern part until 1927

Resistance to this form of direct taxation in this area was such that it led to riot notable in Calabar, Owerri and famous Aba women riot of 1929 which was so severe that it attracted a probe into it.

Beside, the native revenue ordinance, there were also native income tax ordinance for the colony and the non native income tax ordinance for initiated discrimination in direct taxation as between natives and non natives. They were later modified and incorporated into the Direct taxation ordinance No. 29 of 1943 respectively.

The direct taxation ordinance 1940 empowered native authorities to tax  Africans in their area of jurisdiction while the income tax ordinance 1943 was for the taxation non-Africans and companies. These two ordinance were the foundation of our modern taxation.

   IMPORTANCE OF TAXATION IN NIGERIA.

Income tax is very important, because it is one of the major sources of revenue of Nigeria government. It is a sources to think of in both the state and federal governments budgets. The taxes collected come back to the tax payers in the form of social amenities provided by the government.

Also Read: Impact of Taxation as an Aid to Economics Development in Nigeria

Income tax was encouraged or discouraged some activities in the private sector, depending upon whether the policy of the government is towards discouraging or encouraging such companies.  It reduces that net return on investment and also decreases the balance available for private savings.

It is an all pervading subject which affects the live of nearly everybody, and no major accountancy or legal problem can be satisfactorily solved without a consideration of its tax aspect.  Benjamin Franklin, a statement and philosopher, observed that “in this world nothing is certain but death and taxes”.  Taxation is particularly important water supply, electricity and land allocation.

As well, income tax has social effects, personal reliefs, relief in respect of children and tuition, relief on insurance policy premiums and dependent relatives, relief effect the social structure of the whole country.  Its fiscal effect lies on the cost.  The cost of collecting these taxes by the government is considerable.  Professional fees paid by tax payers to accountants and the cost to unpaid employers in deducting tax under the pay-as-you-earn system and handling the taxes so deducted to the government is also vast..

Income tax also has some effect on population movements and the extent of business carried on.  A state with low income tax rate will find that more people are moving into that state.  While traders will leave states with high income tax rates or engage in various schemes of tax avoidance and evasion.

The significance of tax is also shown by the fact that one of the problems inherent in any federal system of government is the allocation of taxing powers between the federal and state governments.

In May and June 1957, the Nigeria leaders were planning the form of federalism they wanted, a two-member fiscal commission knows as the Raisman Commission was appointed to study and to make recommendations as to the allocation of taxing power between the Regional Government and the federal government.

In June, 1958, the commission tendered its principal report, section 4(1) of the Nigeria constitution enacts that the provision relating to fiscal arrangements can only be amended by a two thirds vote in each house of the parliament, consented to be each legislative chamber of at least three of the former regions.

 QUALITIES OF A GOOD TAX SYSTEM

The attribute of a good tax system must possess as we know  were propounded by Adam Smiths, cannons of taxation.  These qualities include the following:

A:      Fairness: A good tax system should be one that allows citizens to pay according to their ability.

Taxes paid by the rich and the poor must have a clear difference.  The rich should pay more than the poor.

A tax that can per any reason be dodged by a section of people thereby shifting the burden to others if deemed to be unfair.

Considering the three main ways of collecting taxes we can infer their applications to principle of fairness. Some of these ways are:

1. the per capital tax: In this type, every one pays the same contribution.
2. The proportional tax: Everyone pays the same proportion of his/her income say 10% on the while income as tax.
3. The progressive tax: The amount of tax is adjusted to fall most heavily on the rich.  Where it falls heavily on the poor, it is regressive applying these methods to two different people who earn different incomes, the outcome will be.

From the table, the proportional taxation shows the two parties paying the same proportion of the income as tax but here, the tax is regressive due to the facts that the loss of 20% of income by Mr. B is not as painful as to Mr. A.  it is therefore unfair to tax proportionately.  This imposes a heavy tax on the poor and a comparatively small tax burden on the rich.

The progressive is the system amongst them for direct taxation.  Here, the utility of each naira given up is very much greater to Mr. A earning #1200 than the utility of the same naira to Mr. B who earns #5,000.  that is why the pay-As_you –Earns (PAYE0 system of direct taxation adopted by the government is a welcomed development to the nation.

b. NEUTRALITY: A tax system that is god must be minimal in its effect on the optimum allocation of resources.

It should not alter the market mechanism that is its effect n forces of demand and supply. It should not as well lead to loss in total output by adversely affecting.

1. Enterprises, through high profit taxes
2. Work which could occur with high marginal rate of imcome.
3. Export of cash crops which could occur with high taxes.
4. Saving which could be discourage by high wealth taxes.

There should exist a tax system that encourages industry and enterprise. It must as a matter of fact be motivational and full of  incentives because with other problems like brain drain and capital flight will be the resultant effect of this system.

c. CONVENIENCE: The tax payment is a burden at the point of payment although the payer may accept the fairness of the tax he is paying. To  collect tax at the most convenient point and time reduces losses that may be encountered as a result of evasion and makes the whole system simple. This situation arises where the tax payer pays tax annually. Although this way creates avenue for default because the amount to be paid may be too much for the tax payer to bear at the end of the year, this is why the pay as you earn is recommended because tax is deducted as sources before the employees are paid their salaries.

In brief, a good tax system must ensure that time, place and manners should be related to how people receive and spend their money or income and thus must be convenient to tax payers.

d.  CERTAINTY:         Tax payer as a statement of fact should know their tax liability clearly. Any tax system that doesn’t ensure certainty is regarded as a bat system.

Any tax system that doesn’t ensure the exact amount to be paid as tax possess the danger of corrupt tax to be paid a collector collecting whatever taxes they wishes and could show favoritism or discrimination in the process of tax collection from tax payers.

e.       ECONOMICAL:          A good tax system must have a least cost of collection.  Any tax which costs more to collect than it raises in revenue is clearly a waste of time and resources.  Moreover, wastages like abandoned government property heaped road construction materials on road sides do not only negate principle of economy but also kills tax payers spirit.

f.       FEXIBILITY:     A good tax system should be in hormony with government policies and programmas.  The system has to be adjustable at all time in case of any clashes with other government programmes or change in economy.

The Nigerian tax system is noted to be eratic because of review of tax policy in almost every budget. The 1990 budget is evidence as it relates to tax.

g.       PRODUCTIVITY:       In fact, a good tax system should be able to generate enough revenue for meeting government developmental programmes. A system that ensures increase in revenue as the economy develops without imposition of now tax is not only commendable but recommended is well. This can only be achieved through an income elastic tax structure, progressive tax system etc.

EFFECTS OF TAXATION

Taxation is the major revenue source of any government.  As well, it is a fiscal instruments through which government generates income to execute its programmes and policies.

It is a compulsory fee all eligible adults in the country have the obligation to pay.  This reason make it influenced both the nation’s economy and individual as a whole.  Some of these taxation effects include:

i.        DISINCENTIVE TO WORK:        A very high tax induced on the people will discourage work as a result of low moral to work.  The resultant effect is fall in national income which also affects labour supply.  Since the highest rate of tax is paid on marginal earning, there is the  temptation to work less hard, do less over time and retire quicker”.

For example, a skilled worker or a professional who pays income tax at 45k net of tax, if he did not meet up with his obligation, he ahs to work even have but the likely thing that he does is to sacrifice this particular time for some leisure.

ii.       DETERRANT TO SAVE:    Taxation which is in fact a reduction of current income, reduces ability to save. This is more evident when one considers the amount left after tax payment, this amount may not even be enough to meet immediate needs not to talk of savings.

iii.      DETERRANT TO ENTERPRISES:       The reward for enterprise just like in any other business is profit and when this profit is taxed, it checks the spirit of enterprises.  This profit motivate makes entrepreneurs to engage in high risk ventures only to be taxed after all their efforts, moreover, where the enterprise runs into a los no incentives are given to them most of the time for the losses sustained.  Although the government policy of giving three years allowance to industries to operate tax free 20% concession to ago based and mining industries.

iv.      ECONOMICS SABOTAGE:          Export taxes on primary commodities used as a stabilization instrument has its dra.  Badas even when its objective is realized. In that they will stimulate the diversification of primary production sector and the growth of untaxed types of output. The government revenue derived from then will fluctuate considerably and it may be gathered at the expense of the savings of private sector rather than its consumption.

v.       TAX AVOIDANCE/EVASION:     High rate of taxes may bring about wide spread incidences of tax wvasion and avoidance which may eventually lead to government revenue reduction. This is mostly evident when we consider the fact that people dodged their tax liability ordinarily not to talk of when the rates increase.

This has been identified as one of the causes of  tax evasion in Nigeria were tax payers consider the rate to be high especially now that unemployment is high in the country.

One of the reason for tax evasion is when tax payers assumed that money realized from tax is not well utilized.

PERSON INCOME TAX GENERATION (GENERAL CRITERIA).

Personal income tax is dividend into two sub-classes via small tax and other taxes.

i.        Small tax:   This tax is normally levied on all taxable adults residing in the local government area irrespective of their incomes.  The could be regarded as poll tax or flat rate tax.  This has a fixed flat rate.  some  members of the community are exempted entirely from tax liability due to insanity, infirmity or old age ie other tax:  This is a progressive type of tax levied on income of tax payers if the taxable income is high, the tax due in this normally graduated in percentage in order of magnitude chargeable income.  Both small and other taxes forms are examples of direct taxes which are paid directly to the government.  The payment could be on installmental bases on the day to day receipt of income.  The installmental payment is the pay-as-you-earn (paye) system, whereby the taxpayer pays his tax to government through his employer who deducts his or her taxliability before payment is made to him or her.  It is called deduction at source.

Enblock payment of tax is paid once in tax year.  The payment could be in respect of current tax, arrears of tax assessed and collected by a relevant tax authority within the same year of assessment.

Arrears of tax is the tax assessed but not collected in the year for which the assessment was made.  It would be collected in the future.

Later tax arises when a tax payer was not assessed or taxed for the previous year(s) due to omission.

ADMINISTRATION SIGNIFICANCE OF A GOOD TAX SYSTEM

          There is no way our tax laws and policies will operate themselves.  Tax assessment, collection and accounting must be carried out by human machinery.  No matter how efficient the tax lows and policies efficient and effective the entire system may collapse.

The administrators to do better, faster and more thoroughly, the same thing done by other methods. It will make the system worthwhile because the volume of paper work had long out stripped out capacity to do the quantity and quality of work which we conscientiously believed needed doing.

The electronic data processing will enable us to do more operations that were virtually impossible by manual methods.

Some major ways we hope to facilitate processing strength effort and improve the revenue producing operations of the services are by:

1. Providing a systematic nation wide check or failure of individuals or business entities to file returns.
2. Verifying the mathematical accuracy of return filed.
3. Determining prior to refund whether a tax paper is indebted for diligent taxes for a prior year for the same or a different tax or whether perhaps he has already claimed and received a refund for the same tax period.
4. Providing a consolidated tax account for each tax payer that will reflect his current tax status at any point in time.
5. classifying returns for audit purposes.
6. finally, as we have relready indicated extensive matiting of data reported on tax payer returns.  Some other effective tax administration criteria are:
7. Right orientation of staff
8. Right working environment
9. Need  for information procurement
10. staff development programme
11. use of budgetary system for tax collection
12. use of relevant cost analysis and contribution approach to decision making.
13. enforcement of penalties
14. fast disposition of tax cases.

[simple-links category=”3200″]

 Taxation in Nigeria – Origin and Importance of Taxation in Nigeria