TAX REVENUE AND ECONOMIC GROWTH IN NIGERIA

 

 

Tax is a compulsory contribution imposed by the government upon individuals and corporate bodies within its jurisdiction for the purpose of meeting its expenditure. Such levies vary from one government to government. In Nigeria, there are many  laws enacted for the purpose of generating tax revenue in Nigeria and they include: Personal Income Tax, Companies Income Tax Act, Capital Gains Tax Act, Petroleum Profit Tax Act, and Value Added Tax Act, through these various sources of revenue, government exercises its power of sovereignty by charging those that fall into each bracket, tax on income, gain, profit or purchases, as the case may be.

The purpose of taxation is to generate income for the government to provide social amenities for the people of a nation with focus on improving economic growth and development of a country via proper administrative system and structures. Tax revenue is very essential in promoting economic growth and development. Through taxation, government ensures that funds are used for essential projects in the society. The role of tax revenue in promoting economic activity and growth may not be felt if poorly administered. This calls for a need for proper examination of the relationship between revenue generated from taxes and the economy, to enable proper policy formulation and strategy towards its efficiency. According to Olashore (1999), the Nigerian economy has remained in a deep slumber with macroeconomic indicators showing our economy in crucial need of restoration and recovery from recession and indeed thorough reform.

Tax revenue is a controlling tool of economic reform and play key role in every economy of the world. It is never static but dynamic and should reflect  current realities prevailing in the economy. The tax system is an opportunity for government to collect additional revenue besides other sources of income, which is needed in meeting its pressing obligations. A good system of tax also offers itself as one of the most effective means of mobilizing a nation’s internal resources and it lends itself to creating enabling and conducive environment to the promotion of economic growth and development (Ogbonna G.N, Ebimobowei A 2011)

There is a general lack of consensus among scholars on the role that tax revenue play towards economic growth of nations which show an existence of research gap and  this study is to examine the relationship between tax revenue and the  economic growth and this is an attempt to fill the research gap. For instance,  Ariyo (1998) in  his study on effectiveness of the Nigerian tax system documented a satisfactory level of productivity of the tax system before the oil boom, Festus and Samuel (2007) established that the role of tax revenue in promoting economic activities and growth has not been felt in Nigeria. The two studies reflected that the oil boom has not improved the economic state of the country since before the boom, there was a level satisfactory and after the boom, the growth of economic activities deteriorated. The emergence of oil as a major revenue is one of the means a country’s government devises in solving the economic problems of the country and to enhance government expenditure which is expected to be beneficial to the citizens of such country through the provision of social and economic infrastructures, we as a country have not been able to exploit our capacity to generate tax revenue adequately for the economy.

Globally, there is a paradigm shift to tax revenue as an alternative source of revenue. Nigeria is not an exception. The mechanism for implementing a good tax system in Nigeria are insufficient, and this has resulted in prevalent tax evasion and avoidance of the self- employed individuals and organizations who were not captured as tax payers in the data base of the relevant tax authority’s database system. Additionally, Nigeria has one of the lowest tax to Gross Domestic Product (GDP) ratios at about 6% in the world, this obviously showed that our tax system has not been managed efficiently and we as a country have not been able to exploit our capacity to generate tax revenue adequately for the economy. The need for the government to generate adequate revenue from internal sources has therefore become a matter of extreme urgency and importance. The desire of any government to maximize revenue from taxes collected from tax payers cannot be over- emphasized. This is because, as it is well-known, the importance of tax lies in its ability to generate revenue for the government, influence the consumption trends and grow and regulate economy through its influence on vital aggregate economic variables (Fasoranti,2013).

Nigeria has depended heavily on revenue from Oil as the foremost source of Government revenue while proportion of tax revenue over total revenue  has  been very small. The serious decline in the prices of oil in recent times has led to  a decrease in the funds available for distribution to the federal, state and local governments. Consequently, dependence on oil as the foremost source of revenue in Nigeria has become risky and not beneficial for sustainable economic growth. It is worse for Nigeria where there are fluctuations in prices in the oil market; thereby creating concerns amongst Nigerians and indeed the Nigerian government on  the  need to diversify the economy (Afuberoh & Okoye, 2014).

Bonu and Pedro (2009) investigated the impact of Income Tax Rates (ITR) on the economic development of Botswana which shows that the impact of income tax revenue over the nations GDP is not impressive in developing nations. This calls for the need to further investigate the current tax performance vis-à-vis the Nigerian economy.

Broadly, the objective of this study was to identify the impact of tax revenue on the Nigerian economic growth from 1987-2016. Other specific objectives include:

From the objectives of this study, the following hypotheses were formulated:

HO1: There is no significant relationship between Petroleum Profit Tax (PPT) and Gross Domestic Product (GDP) in Nigeria.

 

This study examined the Nigerian Economy using its GDP and the Tax revenue generated by the Federal Government of Nigeria were obtained in order to assess the impact of taxation on the economy over the period of 30years from 1987 – 2016. The Trend analysis of Company Income Tax, Petroleum Profit Tax, Customs Duty and Value Added Tax were examined for the period to determine their correlation with  the Gross Domestic Product of Nigeria. The focus was based on the data obtained from CBN and Federal Inland Revenue Services.

Tax revenue is one of the sources of revenue to the government. A sound  and dynamic tax system is a critical factor for economic development including job creation, social welfare, better standard of living. The study is timely given  the current effort of government to review its Tax Policy. This research finding would be of importance to policy makers at national level as they design policies aimed at enhancing economic growth and development through a better tax revenue system. Policy makers, especially the Federal Inland  Revenue Service will use the outcome  of this study to gauge its performance, and determine the level of input it would have to make to impact positively on GDP and by extension the Nigerian economy. Students, academicians and other scholars who wish to undertake further research on taxation will find the literature arising from this study to be of great value, as  it  would be added to the existing literature.

 

These are some of the methodological weaknesses or imperfections of the study. Every research work faces one limitation or the other. In this research work, the researcher encounter some limitations in the course of carrying out this study which include inability to study the entire Nigerian economy as a result of limited time and resources but only using GDP to represent the economy. Also, the researcher experienced some difficulty in obtaining accurate data, the data used for this  study  are the publications of the Central Bank of Nigeria (CBN) and Federal Inland  Revenue which in most cases usually run conflict with data obtained from other sources such as National Bureau of Statistics, Federal Ministry of Finance website  and World Economic Outlook.

Tax: Tax is a compulsory contribution imposed by the government upon individuals and corporate bodies within its jurisdiction for the purpose of meeting its pressing obligations.

VAT: It is a consumption tax on goods and services levied at each stage of the consumption chain, and is borne by the final consumer.

Custom Duties: This represents taxes on imports into Nigeria, charged either as a percentage of the value of imports or as a fixed amount of contingent on quantity.

Petroleum Profit Tax: This is a tax imposed on all companies that engaged in the extraction and transportation and other petroleum operations.

Company Income Tax: This is the tax imposed on profits made by companies operating in Nigeria excluding companies engaged in petroleum  exploration activities.

Tax Compliance: Willingness to pay taxes without threat or coercion.

Tax System: A legal system for assessing and collecting taxes

This work was organized into five chapters. Following this chapter one is chapter two which comprises the overview of the Nigerian tax system and conceptual, theoretical, empirical framework of various literatures reviewed. Chapter three was made up of the methodology adopted, the empirical specifications of the model, estimation techniques and the sources of data. Chapter four was the presentation of results obtained and the analysis and discussions of the findings while the summary of findings, recommendations and conclusion was presented in chapter 5.

In this chapter, we have briefly considered various conditions, circumstances and process that led to the choice of the topic. The basic foundation of this investigation was also explained. We went further to critically examine the problem of this investigation as well as its significances. We bore in mind the various questions arising from the investigation as well as formulating some hypotheses for testing.  This section concludes with the definition of major terms.