ABSTRACT
Taxation in Nigeria is an ever-changing topic that is impacted by the evolving economic environment. It is important to regularly assess and update the regulatory instruments concerning taxation. Nigeria operates under a federal system, meaning its fiscal operations are governed by the same principles. This has major implications for managing the tax system. Currently, Nigeria heavily depends on oil revenue for its tax system, leading to an uneven structure. The taxation laws are overly complex, resulting in distortions and inequality. Additionally, these laws have limited application in the country’s dominant informal sector.
This paper aims to provide a case study on tax administration in Nigeria, including an investigation into key tax reforms, an outline of the profile and composition of tax revenue, an assessment of potential impacts on the poor, a discussion of significant obstacles to effective tax implementation, and proposed necessary reforms.
HISTORY OF TAX IN NIGERIA
During the Stone Age in Nigeria, tax collection occurred prior to the arrival of Europeans. Local Chiefs were responsible for collecting taxes, which served the purpose of administration and defense.
Every person was expected to contribute a portion of their earnings from land cultivation to the state. Cultivators were obligated to provide labor for public projects, such as clearing vegetation, digging latrines, and wells, for the community’s benefit. Failure to fulfill these duties often led to property loss, which could be recovered after paying a fine. When Europeans arrived, taxes were collected from individuals by local chiefs. In 1946, a legislative council was established for the entire country, empowering regional councils with significant financial responsibilities.
After gaining independence, state governments had to find new ways to generate revenue. In 1904, Lord Lugard implemented the initial tax called community tax in the northern region. As per the tax regulations, the board has the power to review assessments as needed and can legally take action against individuals who do not pay taxes, regardless of their social standing. However, due to political factors and inadequate administration of tax laws, these legal powers have unfortunately been abused.
OVERVIEW OF THE STUDY
Tax policy has a significant impact on the distribution of resources between the public and private sectors in a country. This policy applies to individuals and entities, generating revenue that states use for various obligations like supporting education systems, healthcare systems, pensions for the elderly, unemployment benefits, and public transportation. The tax system often reflects the communal values or those in power. To establish a taxation system, a nation must decide how to fairly distribute the tax burden, determine who pays taxes and how much they pay, and outline how collected taxes are allocated.
Concerning Nigeria, the primary sources of revenue comprise the ensuing:
- Oil sector such as petroleum resources.
- Non-oil sector such as custom duties, taxes and other services.
- Internal borrowing from organisations and financial intermediaries such as commercial banks, bonds, treasury certificates and call money.
- The need for revenue from taxes cannot be over emphasized as this contributes significantly to government revenue.
- The concept of taxation is as old as exchange process (whether barter or monetary) that gradually developed with civilisation.
Throughout Nigeria’s history, there have been several laws and acts in place to regulate tax administration. The Companies Income Tax Act of 1961, modified by the Companies Income Tax Act (CITA 1979), is an important law that establishes the Federal Board of Internal Revenue. Additionally, the Income Tax Management Act of 1961 governs personal income tax imposition in Nigeria with the objective of preventing double taxation.
The Tax Management Act of April 1, 1961 was implemented to harmonize regional tax laws with federal legislation.
Following this, the Finance/Miscellaneous Taxation Provisions/Decree of 1987, modified by the Decree of 1993, established the Federal Inland Revenue Service (FIRS) as a functional division within the Federal Board of Internal Revenue (FBIR).
These modifications aligned with suggestions from the study group on tax reforms and administration in Nigeria, which was formed on January 9, 1991.
THE FEDERAL INLAND REVENUE SERVICE
Established in 1943, the Federal Inland Revenue Service (FIRS) of Nigeria is an independent entity separate from the Inland Revenue Department that encompassed Anglo-Phone West Africa during colonial times. Taxation plays a crucial role in various aspects such as revenue generation, resource redistribution, regulation of specific goods and services consumption, inflation control, and job creation. With constitutional authority for tax collection, the FIRS was created under the Income Tax Ordinance of 1958 which established the Board of Inland Revenue. Subsequently, in 1961 under Section 4 of the Companies and Income Tax Act (CITA) No. 22 of 1961, it was renamed as the Federal Board of Inland Revenue (FBIR).
In the past, FBIR was a department in the Federal Ministry of Finance. However, in 1993, there was a transformation that led to the establishment of the Federal Inland Revenue Service (FIRS) as the operational arm of FBIR through the Finance (Miscellaneous Taxation Provisions) Act No 3 of 1993. This act also created the office of the Executive Chairman of the Board.
Later on, in 2007, autonomy was granted to FIRS with the enactment of the Federal Inland Revenue Service Establishment Act (2007). Currently, FIRS is one of the Federal Ministries, Departments and Agencies (MDAs) undergoing significant changes.
The introduction of Integrated Tax Offices (ITOs) in 2005 replaced the previous tax offices categorized by specific tax types, such as the Value Added Tax Office, Personal Income Tax Office, Petroleum/International Tax Office, Withholding Tax Office, and Area Tax Office. The implementation of ITOs simplified the process for taxpayers by providing a single location to conduct all their tax-related transactions. Additionally, Large Tax Offices (LTOs) were established to cater specifically to oil and gas companies, marketing and service companies, airlines, shipping agencies, and any business with a turnover of N1 billion.
The issue can be summarized as:
Our research aims to bring understanding and awareness to the common issue of the lack of knowledge surrounding the FIRS in Nigeria. We will shed light on the significance of this organization and its role in tax administration. In addition, we will analyze how the FIRS achieves its goals through elements such as human resources development, staff motivation, professionalism, dedication, loyalty, accountability, transparency, excellent human relations, information dissemination, and effective communication. The tax system in Nigeria includes 39 different taxes, levies, and fees consisting of 8 Federal taxes, 11 State taxes, and 20 Local Government taxes and levies as specified in the Taxes and Levies (Approved List for Collection) Decree No. 21 of 1998.
OBJECTIVE OF THE STUDY
The purpose of this research was to evaluate tax administration in Nigeria, including the challenges encountered, accomplishments achieved, and their influence on both individuals and government tax revenue. The investigator aimed to identify the causes of low tax revenue, propose solutions for these issues, and evaluate how effectively the government implemented new policies and strategies resulting in enhanced tax generation.
