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
TABLE OF CONTENTS
of Contents vi
Background to the Study 1
Statement of Problem 6
Research Questions 11
Objective of the Study 12
Statement of Hypothesis(es) 12
Significance of the Study 14
Scope of the Study 16
Limitations of the Study 16
Definition of Terms 17
Two: Review of Related
2.1 Introduction 19
of Personal Income Tax Compliance
2.2.1 Factors that may Affect Personal Income
Tax Compliance in Nigeria 27
Audit and Personal Income Tax
2.4 Tax Rate
and Personal Income Tax Compliance 39
Perception of Government and Personal Income Tax Compliance 41
Income and Personal Income Tax Compliance 44
Gender and Personal Income Tax
Attitude to the Tax System and Personal Income Tax Compliance 47
Economic Deterrence Theory 50
2.9.2 Fiscal Exchange Theory 51
Social and Psychological Theory 52
2.10 Further Review
of Empirical Studies 55
Three: Research Method and Design
Research Design 75
Description of Population of the Study 76
Sample Size 76
Sampling Techniques 77
Sources of Data Collection 78
Method of Data Presentation 79
Method of Data Analysis 79
Four: Data Presentation, Analysis and Interpretation
4.1 Introduction 83
4.2 Data Presentation 83
4.3 Data Analysis 88
Five: Summary of Findings, Conclusion and Recommendations
5.2 Summary of Findings 97
Background to the Study
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.
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.
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.
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).
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).
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.
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.
Statement of Problem
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.
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
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
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
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. 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?
is the relationship between taxpayers’ gender and Personal Income Tax (PIT)
6. How does taxpayers’ attitude to the tax
system affect Personal Income Tax (PIT) compliance?
Objective of the Study
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.
the relationship between taxpayers’ gender and Personal Income Tax (PIT)
6. Evaluate how taxpayers’ attitude to the tax
system affects Personal Income Tax (PIT) compliance.
following hypotheses stated in their null form have been put forward for the
purpose of this study;
Tax audit does not significantly affect
Personal Income Tax (PIT) compliance
HI: Tax audit significantly affect Personal
Income Tax (PIT) compliance.
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.
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).
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.
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.
HO: Taxpayers’ attitude to
the tax system does not significantly affect Personal Income Tax (PIT)
HI: Taxpayers’ attitude to the tax system
significantly affect Personal Income Tax (PIT) compliance.
Significance of the Study
importance of a study of this nature cannot be over emphasized.
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.
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
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
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
– 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
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
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.
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.
Definition of Terms
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.
Income Tax: Tax levied on the income of “persons”.
That is, an individual who is either in paid employment or self-employed.
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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