THE SMALL BUSINESS TAXPAYERS: ISSUES OF DETERRENCE, TAX MORALE, FAIRNESS AND WORK PRACTICE
TABLE OF CONTENTS
CHAPTER ONE: INTRODUCTION
Background to the Study
Objective to the Study
Scope of the Study
Significance of Study
Limitation to the Study
Definition of Terms
CHAPTER TWO: LITERATURE REVIEW
Tax Policy Reforms in Nigeria
Problems of Tax Administration in Nigeria
Strategies to Improve Taxpayer Compliance
Deference Tax Polices and Penalties
Tax Policy and the Growth of SMEs
Policy Measures that will Encourage SMEs Growth
Economic Advantages of Small and Medium Enterprises In Nigeria
Review of Empirical Literature
CHAPTER THREE: RESEARCH METHODOLOGY
The Population of the Study
Data Collection Method
Source of Data
The Research Instrument
Data Analysis Method
CHAPTER FOUR: PRESENTATION OF DATA AND ANALYSIS
Test of Hypothesis
CHAPTER FIVE: SUMMARY OF FINDINGS, RECOMMENDATION AND CONCLUSION
Summary of Findings
BACKGROUND TO THE STUDY
Taxes and tax systems are fundamental components of any attempt to build nations and this is particularly the case in developing nations. Taxes underwrite the capacity of states to carry out their goals; they form one of the central arenas for the conduct of sate-society relations and they shape the balance between accumulations and redistribution that gives state their social character. In short, taxes build capacity (to provide security, meet basic needs or foster economic development) and they build legitimacy and consent (helping to create consensual accountable and representative government).
The key component of any tax system are tax policies and tax administration. No tax is better than its policies, so tax policies matter a lot. And essential objective of tax policy is to ensure the maximum possible compliance by tax payers of all type with their taxation obligations. Unfortunately in many developing countries, tax policies are usually weak and characterized by extensive evasion, corruption and coercion. In many cases over all tax levels are low and large sectors of informal economy escape the tax net entirely.
The puzzle of the economic theory of tax compliance is why do people tax taxes. According to the seminal study by Allingham and Sadono (1972) which in turn is based on Becker’s (1968) economic theory of crime the extent of deterrence as the product of the probability of being detected and size of the fine imposed, determines the amount of income invaded. However in view of the low deterrence applied in most countries, either because of a low intensity of control or small penalties tax payers evasion rate tends to be in the increase.
The Nigerian tax system is basically structured as a tool for revenue collection. This is a legacy from the pre-independence government based on 1948 British tax laws and have been mainly static since enactment. The need to tax personal income throughout the country prompted the Income Tax Management Act (ITMA) of 1961. In Nigeria, Personal Income Tax (PIT) or salaried employment is based on a Pay As You Earn (PAYE) was increased from N600 or 10 percent of earned income to N2000 plus 12.5 percent withholding tax was applied to saving deposits valued at N50,000 or more while tax on rental income was extended to cover chartered vessels, ships or aircraft. In addition, tax on the fees of directors was fixed at 15 percent. These policies were geared to achieving effective protection for local industries, greater use of local raw materials generating increased government revenue among others.
In 2004, a study group (the SG) was inaugurated to review the entire tax system in Nigeria. The terms of reference included;
Review all aspects of the Nigeria tax system are recommend improvements therein.
Review the entire tax administration and recommend improvements in the structure for the whole country.
Consider measures to bring international development in tax administrations to bear in Nigeria.
In 2004, a working group (the WG) was inaugurated to review the report and recommendations for a national tax policy and recommend the creation of an autonomous national customs a revenue authority to assimilate all tax administrative powers of duties while funding from retained tax revenues. The WG also reviewed each SG proposed modifications to existing tax laws and provided comments thereon. They include, strengthening of tax administration, proposed prioritized strategies for implementing the proposed reforms and passage of new tax bills. Subsequent to the report of the following tax legislation to the national assembly.
The Federal Inland Revenue Service Act to establish the agency as an autonomous body and guarantee it’s funding from a percentage of retained tax collections.
Amendments to the Personal Income Tax Act, Companies Income Tax Act and the VAT Act.
For most part, the amendment bills reflect the recommendations of the SG and WG.
It is expected that the new tax legislation will be passed into law by 2006, however today 4 out of the 8 tax bills namely; Bill for an Act to establish the FIRS as an autonomous service, Bill for an Act to amend the National Automotive Council Act, Bill for an Act to amend the Companies Income Tax Act, Bill for an Act to amend the Petroleum Profit Tax have been passed by the National Assembly and signed into lawship President Olusegun Obasanjo on April 16, 2007 while the remaining four tax Bills are still act the fiscal debate stage of the parliament.
Compliance has always been a problem in Nigeria tax system. Even the current draft national tax document did not spell out clearly the compliance strategy. During the military era the tax force unit was used to enforce tax compliance. However, with democratic rule, this is not allowed and the use of the traditional court system is not only too cumbersome but also time consuming. To this effect, a bill for a tax court has been prepared by the state to replace the tax force. The bill has been discussed at the cabinet level and is currently being amended by the Ministry of Justice after which it will be presented to the National Assembly. When this bill becomes operational, it is hoped that compliance will be improved.
The Nigeria tax system is designed in such a way that each act establishing a particular tax spells out various penalties for non-compliance.
For example a recurring problems with PIT is the non-compliance of employees to register their employees and to remit such taxes to relevant authorities. To address this, in 2002 the government amended the 1993 PIT Act to make non-compliant employers liable to penalties up to N25,000 as well as liable for the payment of all tax arrears. Employers failure to keep proper records would also face a penalty of N5,000. A fine this small tends to encourage tax evasion since the penalty for being caught is lower than the cost for non-compliance the issues of remitted funds from the PAYE system and withholding taxes particularly among government ministries and agencies as well as tax adherence by all three levels of government to the approved list for (tax) collection, as stipulated by the 1998 Taxes and Levies Act 21, have over the past five years attracted the attention of JTB.
A detail examination of various tax policies and their deferent measures against non-compliance will be discussed in the literature review of the study.
This study seeks to examine among other things, the small business taxpayers: issues of deterrence, tax morale, fairness and work practice.
The whole essence of governance is to advocate the welfare of an increasing number of people. The 1999 Constitution of the Federal Republic of Nigeria, in many of its provision affirms this position. Suffice it to state here equivocally that, the largest proportion of resources with which the welfare of the citizens are advocated, are raised through taxation. Hence the relevance of the tax cannot be overemphasized. However what is worrisome has been the tax payers pay voluntary and on time and what they should pay under the law has been a long standing problem inspite of may effort to reduce it.
When most tax payers fail to comply, the burden of funding the nation’s commitments falls heavily on the few compliant tax payers.
Globally a colossal amount of money is list to non compliance of tax payer. This trend makes it practically impossible for successive government to deliver the electoral promises to the electorates. In reaction to this anomaly, governments (both in developed and developing economics) adopt deterrence policies to combat this ugly trend in order to boost their revenue base to enable them fulfill their electoral promises.
This research work will be devoted to examine these problems, their possible solutions to reduce the tax gap and make recommendation to forestall this anomaly.
The following research questions are raised:
Is there significant relationship between deterrence policies and tax compliance among small business taxpayers?
Is there significant relationship between enhancing tax payers morale and tax compliance?
Is there significant relationship between perceived fairness and tax compliance among small business taxpayers?
Is there significant relationship between work practice and tax compliance among small business taxpayers?
OBJECTIVE TO THE STUDY
For decade, tax researchers have investigated why some people pay taxes and others do not. Through experiments, random surveys and available tax data bases, researchers have identified characteristics of non compliant and factors that motivate tax compliance.
This study, in contribution to the existing studies moves further to fulfill the following objectives.
To examine if there is significant relationship between deterrence policies and tax compliance among small business taxpayers;
To determine if there is significant relationship between enhancing tax payers morale and tax compliance
To find out whether there is significant relationship between perceived fairness and tax compliance among small business taxpayers.
To ascertain whether there is significant relationship between work practice and tax compliance among small business taxpayers.
The following hypotheses have been formulated to serve as a base for this research;
Ho: There is no significant relationship between deterrence policies and tax compliance among small business taxpayers.
H1: There is a significant relationship between deterrence policies and tax compliance among small business taxpayers.
Ho: There is no significant relationship between enhancing tax payers morale and tax compliance.
H1: There is a significant relationship between enhancing tax payers morale and tax compliance.
Ho: There is no significant relationship between perceived fairness and tax compliance among small business taxpayers
H1: There is a significant relationship between perceived fairness and tax compliance among small business taxpayers
Ho: There is no significant relationship between work practice and tax compliance among small business taxpayers
H1: There is a significant relationship between work practice and tax compliance among small business taxpayers.
SCOPE OF THE STUDY
The research study focuses on the small business taxpayers: issues of deterrence, tax morale, fairness and work practice.
The population of the study is the entire small business taxpayers in Nigeria, while the sample size will be restricted to some selected small business taxpayers in Nigeria comprising businessmen, self-employed and traders in shop among others.
Geographically, the study will be conducted in Benin City, Edo State.
SIGNIFICANCE OF STUDY
Tax plays a pivoted role within the concept of generating revenue for the government while enabling it (government) to provide the citizens with such welfare good and services. It is important to examine the country’s revenue drive and particularly its tax laws and policies in order to assess their adequacy for the constitutional responsibilities of enhancement of general welfare.
Besides the above, this study is relevant in several other ways.
It affords the government through the relevant tax authorities to fully recover all tax revenue due to the government thereby reducing the tax gap.
The various deterrence tax policies when properly enforced, would help in checking liabilities on tax returns; underpayments of taxes due from filed returns and non filling which refers to the failure to file a required tax return.
The study will also acquaint all potential investors with the existing tax policies in the country. This will form a focal point in this investment decisions.
LIMITATION TO THE STUDY
The record keeping culture of Nigeria is a sharp deviation from the global standard. This makes it a nightmare in an attempt to obtain the true statistics of tax payers.
In addition, efforts to obtain the relevant deterrence policies of tax were met with a brick wall, as Nigeria does not only lack in relevant deterrence policies of tax but also the few existing ones have become archaic and the penalties have become insignificant that they no longer deter tax payers from non compliance.
DEFINITION OF TERMS
Tax: Charge imposed by a government body on personal income, corporate income, estates, gifts or other source to obtain revenue for the public good.
Tax System: It encompasses tax levies tax policies and tax administration.
Deterrence: To prevent the occurrence of something through fear of the consequences.
Tax Policy: The framework with which tax is administered by the tax authority.
Tax Return: From used to file taxes payable to the government.
Tax Liability: Amount of tax fallen due for payment.
Allingham, M. G. and A. Sandono (1972), Income Tax Evasion. A Theoretical Analysis, Journal of Public Economics, 1: 17 – 30.
Becker, G. S. (1968), Crime and Punishment: An Economic Approach, Journal of Political Economy, 76.
Margaret, M. and Christ, E. (2009), Sustaining Growth in Developing Economies through improved Tax Payers Compliance, Challenges for Policy Makers and Revenue Authorities, University of Canterbury.
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