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Product Code: 00004487

No of Pages: 113

No of Chapters: 5

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This study examines the determinants of personal income tax compliance in Nigeria. Its justification arose from the dearth of research on personal income tax compliance in Nigeria and the need to investigate what factors really account for personal income tax compliance. Tax administration is one of the components of the tax system which they assert can affect the yield, effectiveness and efficiency of any tax system. The study adopted a survey research design and data used was gathered from primary source while the Ordered Logistics Techniques was used to analyze the model put forward. Findings from this study showed that tax rate, taxpayers’ perception of government, taxpayers’ income and taxpayers’ attitude to tax system have a significant impact on personal income tax compliance. The study concludes that both deterrent tax measures and psychological aspects of taxpayers affect and determine the extent of tax compliance. The study then recommends that government should ensure better compliance by being accountable and providing evidence of proper utilization of taxpayers’ fund.  



Title Page                                                                         i

Certification                                                             ii

Dedication                                                               iii

Acknowledgements                                                  iv

Abstract                                                                   v

Table of Contents                                                     vi

Chapter One: Introduction                           

1.1      Background to the Study                                                 1

1.2      Statement of Problem                                              6

1.3      Research Questions                                                 11

1.4      Objective of the Study                                              12

1.5      Statement of Hypothesis(es)                                     12

1.6      Significance of the Study                                                 14

1.7      Scope of the Study                                                   16

1.8      Limitations of the Study                                          16

1.9      Definition of Terms                                                  17


Chapter Two: Review of Related Literature 

2.1   Introduction                                                             19

2.2   Concept of Personal Income Tax Compliance          20

2.2.1        Factors that may Affect Personal Income Tax Compliance in Nigeria                                             27

2.3   Tax Audit and Personal Income Tax Compliance     35

2.4   Tax Rate and Personal Income Tax Compliance      39

2.5   Taxpayers’ Perception of Government and Personal Income Tax Compliance                                              41

2.6   Taxpayers’ Income and Personal Income Tax Compliance                                                               44

2.7   Taxpayers’ Gender and Personal Income Tax Compliance                                                               45

2.8   Taxpayers’ Attitude to the Tax System and Personal Income Tax Compliance                                              47

2.9   Theoretical Framework                                            49

2.9.1 Economic Deterrence Theory                                  50

2.9.2 Fiscal Exchange Theory                                          51

2.9.3 Social and Psychological Theory                             52

2.10 Further Review of Empirical Studies                                55


Chapter Three: Research Method and Design

3.1      Introduction                                                             75

3.2      Research Design                                                      75

3.3      Description of Population of the Study                    76

3.4      Sample Size                                                             76

3.5      Sampling Techniques                                              77

3.6      Sources of Data Collection                                       78

3.7      Method of Data Presentation                                   79

3.8      Method of Data Analysis                                          79


Chapter Four: Data Presentation, Analysis and Interpretation                                                

4.1   Introduction                                                             83

4.2   Data Presentation                                                    83

4.3   Data Analysis                                                           88

Chapter Five: Summary of Findings, Conclusion and Recommendations                                        

5.1   Introduction                                                             97

5.2   Summary of Findings                                              97

5.3   Conclusion                                                              98

5.4   Recommendations                                                   98

References                                                              100







1.1   Background to the Study

The Federal and State governments just like any other government over the world require funds to finance its operations and policies. It requires ample resources to finance and carry out its expected functions and duties to the populace and one of the ways opened to it to derive the needed funds is via the imposition of taxes. According to Olaofe (2008), the
governments of most countries get the needed funding from the imposition of taxes. Alabede et al. (2011) asserts that taxes form the major source of revenue to the government in most countries, especially those that are developed. Bello (2001) opines that taxes are compulsory levies by government on the income,
consumption, and capital of its citizenry. That is, levies imposed on personal income, business profit, interest, dividend, and discount, or royalties for the purpose of raising revenue. Literature suggest 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 poor tax compliance. Modugu, Eragbhe and Izedonmi (2012) assert that this poor tax compliance behaviour has been captured in literature as the “compliance puzzle” and is a challenging phenomenon experienced across countries, especially the less developed economies. According to Alabede, Ariffin and Idris (2011a), the
problem of poor tax compliance has attracted attention worldwide and this has caused researches both empirical and theoretical to emerge.

Early research studies on this phenomenon view the problem from the theoretical perspective of deterrence models (Hartner, Rechberger, Kirchler, & Schabmann, 2008; RiahiBelkaou, 2004). Allingham and Sandmo (1972) are among the first to empirically investigate the factors that prompt tax compliance. In their opinion, taxpayers can be viewed as rational beings with a high level of self-interest. Hence, they need to be forced to ensure compliance. Their research effort led to the development of the traditional classic theory of tax compliance widely known as the A-S model. According to Sandmo (2005), this theory assumes that the taxpayer maximizes the expected utilities of not complying to tax by balancing the benefits derived from successful tax evasion or avoidance against the risk of been caught and sanctioned. In summation, the theory concludes that tax compliance largely depends on deterrent tax measures such as tax audits, fines, and penalties.

Tax audits, fines and penalties are measures put in place by the relevant tax authorities to mitigate tax non-compliance. In Nigeria, failure to comply with the provisions of the personal income tax can lead to levying of fines and penalties. Specifically, failure to comply attracts N50,000 for every month of default plus interest at commercial rate. However, in the words of Okoye, Akenbor and Obara (2012), the use of tax audits, fines and penalties have not be able to address the issue of tax compliance in Nigeria “the various penalties specified for non-compliance are not strictly pursued. Offenders are hardly prosecuted, and this goes on to worsen the situation”. In other words, tax audits, fines and penalties are seen as “toothless bulldogs” that have not efficiently tamed tax non-compliance.

With the passage of time, evidences have also emerged based on the researches of seasoned scholars that deterrent tax measures such as tax audits, fines and penalties alone cannot fully encourage tax compliance (Alabede et al, 2011a; Slemrod, 2009; Torgler & Schaffner, 2007). Furthermore, it has been argued that the A-S model focused on the economic aspect leaving out the area of taxpayers’ psychology (Aim, 1999; Torgler, 2007).

Consequently, in late nineteenth century, a new method called “responsive regulation” was then proposed to ensure compliance. According to Ayres and Braithwaite (1992), the new proposition has a broader perspective at ensuring compliance. Thus, 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 behaviour 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 optimal compliance to tax. Therefore, as fallout from the proposition, another model was introduced. This model takes into cognizance other measures such as the attitude of taxpayers, social and psychological makeup as well as the environment within which noncompliance to tax might occur (Murphy, 2005).

This new approach considered tax payers attitude and perception to be important because taxpayers are seen as social beings, as such, they can be influenced either positively or negatively. The attitude of tax payers connotes how he or she would react while the perception deals with how he or she thinks, reason or makes opinions and beliefs. According to Okoye, et al (2012), Nigerians shy from taxes because they see the government of the day as been corrupt and unfair in the utilization of tax payers’ monies and in the provision of basic amenities and other social projects. This is the kind of perception that can breed tax non-compliance amongst tax payers and thus become a problem which even fines and penalties may find difficult to ameliorate.

From the foregoing, studies have indeed been carried out on the issue of tax compliance with indications that the factors responsible for tax compliance may be viewed from other angles such as economic, psychological, and social makeup of taxpayers and not just deterrence.

1.2   Statement of Problem

The discourse on tax compliance based on extant literatures is sufficient to enable the deduction that the associated problem of taxpayers not complying with taxes is far from settled. Tax compliance has become a great concern to both developed and developing countries worldwide (Alabede, Ariffin & Idris, 2011b; Igbeng, Tapang & Usang, 2012; Torgler, 2003a). 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 GDP between 1999 and 2008 has not risen above 1.6%. The highest being in year 2003
(1.6%) while the lowest in year 2000 and 2006 (1.0%). This trend shows the underperformance of personal income taxation in Nigeria. In the same vein, the budget of Edo State shows that the ratio of internally generated revenue (of which personal income tax is a component) to the total annual budgetary estimates has been experiencing a steady fall from 30.2% in 2009 down to 29% in 2010 and further down to 24% in 2011. 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.

Alabede et al (201lb) further claim that the incidence of poor compliance can be deduced from the number of tax cases audited and investigated. According to the Federal Inland Revenue Service (FIRS) (2009), about 680 tax cases relating to both domestic and foreign audited and investigated companies in 2008 resulted into N94.68 billion revenue to the government. This goes a long way in showing the effect of poor compliance on the revenue generation profile of the government. This is further buttressed by Torgler (2003a), who argues that there is a limit on the ability of the government to raise revenue for developmental purposes because of the low compliance syndrome. Early researchers advocated that deterrent tax measures are the best chance at curbing this menace (Ola, 2001; Slernrod, 2000). However, despite the use of deterrent tax measures, other theories have emerged such as the fiscal exchange theory, social influence theory, and comparative treatment theory that have all pointed to the fact that the determinants of tax compliance goes beyond just the use of deterrent tax measures to include analysis of the social and psychological aspect of the taxpayers (Fjeldstad, Schulz-Herzenberg & Sjursen, 2012). Furthermore, Nzotta (2007) points out that although the tax audit and investigations departments in Nigeria have tried to make adequate provisions for sanctions against noncompliance, the problem still persists and the worst hit is the personal income tax. Similarly, Kiabel and Nwokah (2009) use the adjectives “most disappointing”, “non-performing”, and unsatisfactory” in describing personal income taxation in Nigeria. Hence, if the associated problems of poor tax compliance and non-compliance ranging from revenue losses, government inefficiency to carry out its functions and responsibilities, to citizens’ disrespect for the tax laws which may undermine the legitimacy and authority of government, must be addressed, then efforts must be intensified to understand the factors that determine tax compliance.

According to Igbeng et al (2012:183) “most researchers on tax compliance have focused their attention on the Western World and Some Asian countries” with little emphasis on the domestic peculiarity of developing countries such as Nigeria. Most of the recent investigations were studies done in other countries like Mughal and Akram (2012) (Pakistan), Palil and Mustapha (2011) (Asia and Europe), Ahangar, Bandpey and Rokny (2011) (Iran), Barbuta-Misu (2011) (Romania), Torgier (2003b) (Costa Rica) while some of the few indigenous ones include Ebimobowei and Peter (2013), Igbeng, Tapang and Usang (2012), Modugu et al. (2012), and Micah, Ebere and Umobong (2012). However, most of them focused on either tax compliance generally or company income tax compliance. Thus, the motivation for this study is to investigate personal income tax compliance by exploring the Nigerian tax jurisdiction. This in particular is what prompted the researcher to focus attention on Nigeria and raise the following research questions tailored to the Nigerian environment and taxpayers.  

1.3   Research Questions

1.     To what extent does tax audit affect Personal Income Tax (PIT) compliance?

2.     What is the relationship between tax rate and Personal Income Tax (PIT) compliance?

3.     How does the taxpayers’ perception of the government affect Personal Income Tax (PIT) compliance?

4.     To what extent does the income of taxpayers affect Personal Income Tax (PIT) compliance?

5.     What is the relationship between taxpayers’ gender and Personal Income Tax (PIT) compliance?

6.     How does taxpayers’ attitude to the tax system affect Personal Income Tax (PIT) compliance?





1.4   Objective of the Study

The broad objective of this study is to examine the determinants of personal income tax compliance in Nigeria while the specific objectives are to:

1.     Determine the extent to which tax audit affect personal Income Tax (PIT) compliance.

2.     Examine the relationship between tax rate and Personal Income Tax (PIT) compliance.

3.     Investigate how taxpayers’ perception of the government affects Personal Income Tax (PIT) compliance.

4.     Determine the extent to which the income of taxpayers affects Personal Income Tax (PIT) compliance.

5.     Investigate the relationship between taxpayers’ gender and Personal Income Tax (PIT) compliance.

6.     Evaluate how taxpayers’ attitude to the tax system affects Personal Income Tax (PIT) compliance.

1.5   Research Hypotheses

The following hypotheses stated in their null form have been put forward for the purpose of this study;



Hypothesis One

HO:   Tax audit does not significantly affect Personal Income Tax (PIT) compliance

HI:    Tax audit significantly affect Personal Income Tax (PIT) compliance.

Hypothesis Two

HO:   There is no significant relationship between tax rate and Personal Income Tax (PIT) compliance.

HI:    There is significant relationship between tax rate and Personal Income Tax (PIT) compliance.

Hypothesis Three

HO:   Taxpayers’ perception of the government does not significantly affect Personal Income Tax (PIT) compliance

HI:    Taxpayers’ perception of the government significantly affect Personal Income Tax (PIT).

Hypothesis Four

HO:   The income of taxpayers does not significantly affect Personal Income Tax (PIT) compliance.

HI:    The income of taxpayers significantly affect Personal Income Tax (PIT) compliance.

Hypothesis Five

HO:   There is no significant relationship between taxpayers’ gender and Personal Income Tax (PIT) compliance.

HI:   There is significant relationship between taxpayers’ gender and Personal Income Tax (PIT) compliance.

Hypothesis Six

HO:   Taxpayers’ attitude to the tax system does not significantly affect Personal Income Tax (PIT) compliance.

HI:    Taxpayers’ attitude to the tax system significantly affect Personal Income Tax (PIT) compliance. 

1.6   Significance of the Study

The importance of a study of this nature cannot be over emphasized.  

Theoretical Significance: This study is significant as its findings provided evidence to show a combination of theories describe the true nature of personal income tax compliance in Nigeria and not otherwise.

Methodological Significance: Prior indigenous researches in this area to the best of the researcher’s knowledge used primary data to capture tax compliance with most of them using the ordinary least square technique for analysis. However, this study sought an improvement, as it made use of the ordered logistic regression

Finally, this study expanded the frontiers of knowledge on the issue of tax compliance. Specifically, the following groups stand to benefit from this work in terms of knowledge

1.     Tax Authorities: The relevant tax bodies in Nigeria will find this study significant as the findings of this work will present avenues wherein tax compliance can be improved upon and hence, help in boosting government revenue.

2.     Tax – Payers: Individual taxpayers also stand to benefit from this study, as this study will help to encourage and educate them on the concept of compliance.



1.7   Scope of the Study

This study examines the determinants of personal income tax compliance in Nigeria with emphasis on the south-south region. The study is restricted to the taxes imposed on self-employed persons. Respondents are drawn from Edo and Delta states as these states can conveniently be reached for the purpose of data gathering. Using time frame of 5 years (2010 – 2015).

1.8   Limitations of the Study

The most challenging limitation to this work is the issue of tax audit. Tax audit as it relates to personal income tax presupposes self- assessment. However, the reality is that most of the self-employed taxpayers never actually use the self-assessment form. Rather the government assessment form is what is obtainable. Hence, tax audit is hardly ever conducted which made it difficult in determining its impact. Furthermore, the non-accessibility to secondary data constrained us to make use of primary data to the variables.  

The smallness of the sample size, reluctance of respondents to filling the questionnaires and the difficulty in determining who actually filled the questionnaires in situations where it was not filled immediately were also issues encountered.

1.9   Definition of Terms

Income: Any salary, wage, fee, allowance or other gain or profit from employment including compensations, bonuses, premiums, benefits or other prerequisites allowed, given or granted by any person to a temporary or permanent employee other than so much of any sums as or expenses incurred by him in the performance of his duties, and from which it is not intended that the employee should make any profit or gain.

Personal Income Tax: Tax levied on the income of “persons”. That is, an individual who is either in paid employment or self-employed.

Personal Income Tax Compliance: Obedience both wilful and forced, to personal income tax laws and regulations by both taxpayers and tax authorities. It has also been defined as the ability of a taxpayer to submit correct, complete, and acceptable returns in agreement with tax laws and regulations requiring such to the relevant tax authority for the purpose of being assessed to tax (Kircher, 2008). Organization for Economic Cooperation and Development (OECD) (2001) defines compliance as a combination of two forms viz administrative compliance and technical compliance. Administrative compliance involves conformity with the administrative rules of tax filing and payment while technical compliance deals with complying with the technicalities involved in the tax system.

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