PROBLEMS OF TAX COLLECTION IN NIGERIA: A CASE STUDY OF UYO LOCAL GOVERNMENT AREA

2.1     Conceptual Framework 
Adebayo (a004) defined taxation is the legal demand made by the Federal Government or State government for its citizens to pay money on income goods and services. In a less complex society in which the government has few duties and responsibilities, the financial need of the government are minimal. However, as society becomes complex the need of the people becomes greater and the government assures greater responsibility the financial needs of the government becomes great. Consequently, taxes increase and their effect on the economy becomes more important. 
In the past, government has utilized taxation as an instrument of regulating the general economy. Since income tax provide large source of national revenue. Effect on inflation, unemployment and social and economy objective has become the prime consideration in enacting tax law in Nigeria. 
Taxation in an aggregate definition is mandatory contribution from the people to generate revenue for the government; use in financial it’s capital project and recurrent expenditure. A renown tax authority in his book “Principle of Public Finance” Dr. H. Dalton define tax as a compulsory contribution imposed by a public authority, in respect of the exact amount of services rendered to the tax payer in return” according to Professor Seligman, a tax is compulsory contribution from a person to the government to defray the expenses incurred in the common interest of all, without reference to special benefit conferred. 
From the above concept, the following are therefore the global objective of taxation and avoidance. 
i. To persecute the tax law very vigorously thereby deterring tax evasion and avoidance. 
ii. To recognize the tax official’s as important human asset in achievement of the said objective. 
iii. To collect tax according to the law as means as possible and to the actively encouraging voluntary competence. 
2.2     History of Taxation in Nigeria 
Taxation is an age long concept which dates lack to the pre-colonial era in Nigeria. Taxes where paid through different kinds of manual labour for the entire community benefit. Some examples of such services are clearing of bushes, digging of pit toilet, well etc for the benefit of the community as a whole. Failure to render such services usually resulted in seizing of property which will be claimed only on payment of money. For example, the best house at Isenyin, which is inherited by Oyo State Government was said to have been built between 1916 and 1932 after the Isenyin riot of 1916, under the supervision of Captain W. Rose, the resident district officer and Mr. Yerokun, the case taker. 
In 1904, during the colonial rule, late Lord Lugards government introduces income tax to Nigeria and community tax was being paid in Sokoto caliphate, northerner Nigerian. The Ordinance of 1917, 1918 and 1928 were later incorporated into the Direct Taxation Ordinance of No. 4 of 1940 which replace the native revenue Ordinance. During this period, the board of constituted, comprising of the following:- 

1)  The residence Governor. 
2) A representative of elders in each district. 
3) Any native authority recognize by the tax authority. 
4) Any village council appointed by the government.

2.2.1  Characteristic of Taxation 
There are three major characteristic of taxation. There are as follows:

2.2.2  Form of Taxes 
The mode of differentiating tax by asking a question who pay tax? I am assessed and fellow pays, them tax become indirect. 
Direct Tax: This are taxes that are levied on the income, gains or profit of individuals and business firms, and which are actually paid by the person or persons on whom is legally imposed. This view was aptly experienced by John Staurt Mill who define tax as one which is “demanded from the very person who it is intended or desired should pay it. In Nigeria, direct taxes include the following: 
i.  Personal Income Tax: This is a tax on the income of an employees, sole trader, partnership and personals. 
ii.  Company Income Tax: This applies to the profit/income of companies which are usually cooperate economic. 
iii.  Capital gain Tax: This affects companies, individuals and non-cooperate bodies.  It is a tax on the gains arising from the disposal of items of Capital natures. 
iv.  Petroleum Profit Tax: This is a tax payable by entity that engage prospecting for or the extraction and transporting  of petroleum oil on natural gas. 
Indirect Tax: An indirect tax is a tax imposed on employment of goods and services by individuals as well as cooperate persons. It impose on one person, but paid party or wholly by another, owning to “a consequential change in the terms of some contract or bargain between them” in Nigeria, example of indirect tax are as follows: 
i.  Import Duties/Tariff 
ii.  Import Duties  
iii.  Custom Duties  
iv.  Excise Duties 
v.  Value Added Tax (VAT)

2.2.3  At State Government Level 
The administration of the income tax law in each of the federation invested in the State Board of Internal Revenue prior to 1993. The composition of the Board could be different from the state to state. However, with 1993 amendment to ITMA the composition is know uniform through out the country. 
2.2.4  Composition  
Sub section 2 gives the composition of the State Board as: 
a)  Three other persons shall be nominated by the Commissioner of Finance of the State on merits. 
b)  The Directors and Head of Department within the state service. 
c)  The Director from the State Ministry of Finance. 
d)  The executive head of the state service as chairman. He shall be a person experienced in taxation, appointment in from within the state service   
e)  A legal adviser who shall be appointed from the state ministry of justice. 
2.2.5  Functions  
The State Board shall be responsible for: 
a)  Ensuring the effectiveness and optimum collection of all taxes and penalties due to the government under the relevant law;  
b) Appointment, promotion, transfer and discipline of employee of the state service. 
c)  General control of the management of the service on matters of policy, subject to the provision of the law setting up the service. 
d) Making recommendation where appropriate to the joint tax Board on tax policy, tax reform, tax legislation, tax treaties and exemption as may be required from time to time.
2.2.6  Technical Committee of the State Board   
As an adjunct to the Board, the law (Section 33C of Decree 3 of 1993) also provided for technical committee of the Board which shall be made up of the following: 
a)  The Chairman of the State Board as Chairman. 
b)  The Director within the state service. 
c)  The Legal adviser to the Board. 
d)  The Secretary. 
Functions 
The technical committee shall have power to do the followings: 
a)  Have powers to co-opt additional staff from within the services in the discharge of its duties. 
b) Advice the State Board on all its power and duties as prescribed. 
c)  Attend to such other matter as may from time to time be referred to it by the Board. 
d)  Consider all matter that require professional and technical expertise and make recommendation to the State Board. 
2.3     Sources of Tax Revenue 
An interesting feature of the Internal Revenue sources of the State is that they are common. The same revenue sources are therefore observed from one state to the other with only little variation. The sources are tax-revenue sources and no-tax revenue sources. The differences between the two sources is that where as the tax revenue are dependent on taxes imposed by the state, the non-tax revenue resource are independent of taxes and hence of the tax administrative machinery available to the state. 

An example of non-tax revenue is income earned from state enterprise like property, development corporation, housing estates, government farms etc. Although a good number of such public enterprises have not really generated substantial revenue to state coffers. There are therefore relatively smaller components of the internal revenue sources of the states. Other examples of non-tax revenue are grants, gift or donations by state indigenes. The large component of internal sources of states’ revenue is the tax-revenue sources. 
There is a long list of these taxes and fee. A typical state list of tax-revenue sources include:- 
i.  Direct Assessment  
ii.  Pay As You Earn (PAYE) 
iii.  Driver Licence Fee 
iv.  Motor Vehicle Licence  
v.  Entertainment tax 
vi.  Stamp duties and Penalties  

2.4     Importance of Taxation   
Taxation as one of the measures that assist the nation economy has the following importance:- 
a)  Taxation is imposed to generate revenue for the government to meet its capital and recurrent expenditure. 
b)  It reduces inequalities of income; the more you earn, the more you pay. 
c)  To increase output and employment. 
d)  To awaken civic responsibilities among citizens. 
e)  Tax is in fiscal policy measure inflation, deflation and depression. 
f)  It encourages and protects new industries. 
g)  It discourage the consumption of harmful product or foods such as beer, tobacco etc  
2.4.1  Tax Exemption  
In Nigeria, there are some types of income that are completely exempted from tax imposition. Their incomes are those from:- 
i.  Social clubs 
ii.  Cooperative society 
iii. Mosque and churches

Contribution to approved institutions e.g. pension and national providence funds.

2.5     Review Of Taxation Problems In Nigeria 
Challenges of the Tax collection and Administration in Nigeria Today
In a symposium by the Chartered Institute of Taxation of Nigeria, as part of Nigeria’s 50th Anniversary Celebration, Naiyeju, J.K. (2010) highlight the various Challenges of the Tax collection and Administration in Nigeria Today as follows: 
(i) Administrative Challenge: Most of the Tax authorities (especially the States and Local Government) lack the desired institutional capacity to administer effectively. The taxes under their purview (capacity in terms of staffing, skills, salary pay, other funding, computer and IT infrastructure etc).

(ii) Compliance Challenges: For PIT, Non-compliance of employers to register their employees and remit such taxes to relevant tax authorities. For VAT, a lot of VAT collected are not remitted while many evade the tax in the cities and rural areas.
For CIT, many of SMEs, informal sectors and even big companies carry out evasive practices.
(iii)Lack of Equality: The bulk of PIT today are paid by only the employees. Politicians, the rich, professionals and the privileged, few are not equitably taxed.
(iv)Challenge of Multiple taxes: It is still a major problem besetting our tax collection and administration.
(v) Poor Taxation Drive by tiers of Government: The political economy of revenue allocation discourages a proactive revenue drive, especially by the states and LGs. They heavily rely on their share of the oil revenue.
(vi)  Challenge of Bad Governance: Taxpayer are not encouraged to pay more taxes because there is no visible evidence of good governance.
(vii) Challenge of Corruption: The tax collection and administration is often prone to corruption. The corruption risk erodes the tax yield and confidence in the system.
(viii) Challenges of Human Capacity Building and Training: At the States and Local Governments, there is dearth of capable hands to administer the relevant taxes efficiently.

2.5.1  Tax Refund
A Tax refund or tax rebate is a refund of taxes when the tax liability is less than the tax paid. When a tax is over paid, the law requires it be refunded. Section 23 of FIRS (Establishment Act) 2007 makes provision for tax Refund to eligible taxpayers. The Act gives FIRS the power to make tax refund after proper auditing. A dedicated account is to be set up by the AGF and funded from the Federation Account based on approved budget. The Tax refund is to be made from this account. Payment should be made from this account within 90 days. 
Issues
The prescribed 90 days commences from the time a claim is made. What if the claim is frivolous? It is presumed the claim will be registered to avoid controversies. The service is to decide on who is eligible for refund. This may be unfair to a legitimate taxpayer if there is undue delay. There is no time-frame stipulated for the tax audit instigated by a claim for tax refund. 
2.6     Prospects of Tax Collection and Administration
In a symposium by the Chartered Institute of Taxation of Nigeria, as part of Nigeria’s 50th Anniversary Celebration, Naiyeju, (2010) highlight the prospects ahead in regards to the Tax collection and Administration in Nigeria. These are in line with the recommendations of the symposium as follows:

- Efficient service delivery
- Code of Conduct for staff,
- Internal Control,
- Sanctions and incentives
- Whistleblower protection; and
- regulation against corrupt practices.
- Corruption auditing
etc.
In conclusion, as we go into post 50 years of our independence, all economic citizens must be committed to meeting their tax obligation while the government must be serious in the discharge of its responsibilities to the governed. Tax evasion and corruption must be seen as social and economic leprosy on perpetrators. Entrance to our public offices and good things of life must be shut to tax evaders and corrupt citizens. Good taxpayers and honest citizens must be adequately reward (Naiyeju, J.K. 2010).

2.7     THEORETICAL FRAMEWORK  
Local government system in Nigeria needs a moderate amount of financial autonomy to be able to discharge its responsibilities effectively.  Public revenue in a federal system assumes that there are benefits to be derived from decentralization. Public revenue decentralization occurs when lower tiers of government have statutory power to raise taxes and carry out spending activities within specified legal criteria. This is referred to as the Overlapping Authority Model propounded by Deil.S.Wright (1978) on Intergovernmental relationships.  Public revenue decentralization occurs when much of the money is raised centrally but part of it is allocated  to lower levels of government through some revenue-sharing formula otherwise known as administrative decentralization.  
The main reason for decentralization is anchored on allocation sharing or efficiency grounds so it is possible to advance argument for decentralization in Nigeria where there are many ethnic groups.  
Oates (2003:240) contends that “there are surely reasons, in principle to believe that policies formulated for the provision  of infrastructure and even human capital that are sensitive to regional of local conditions are likely to be more effective in encouraging economic development than centrally determined policies that ignore these geographical differences” There is a great relationship between decentralization and economic growth and behaviour for economic fundamentals within the decentralized jurisdiction is a matter that remains an empirical issue and discussions must be country specific.  
Kim (1995) quoted in Oates (2006) has shown that in his mode of explaining rates of economic growth, revenue decentralization that there are positive and statistical significant change,  using a sample of countries. His results also shows that, other things being equal, more public revenue decentralization was associated with more rapid growth in GDP per capita during 1974-1989 period.  
Prud’ homme (1995) on the other hand, argues that decentralization can increase disparities jeopardize stability, undermine efficiency and encourage corruption. He maintains that local authorities, for example, have few incentives to undertake economic stabilization policies. The instrument of monetary and public revenue policies are better handled by the central government.  
Oates (2003) opines a contrary view that the principles of centralization is costly because it leads the government to provide public goods that diverge from the preferences of the citizens in particular areas (regions, provinces, states, local governments). He also argues that “when these preferences vary among geographical area, a uniform package  chosen by a nation’ s government is likely to force some localities to consume more of less than they would like to consume.  
According to Tanzi (1995) the interpretation of both Oates and Prud’ homme assumes that subnational government levels already exist, hence the crucial problem becomes which of the existing government levels ought to be responsible for particular forms of spending.  
The function of government can be divided into three-allocation, distribution and stabilization function (Musgrave 1959). Using this stratification, stabilization and distribution functions are expected to be under the peripheri of the central government while lower government undertakes allocative functions. Hence, any spending and taxing decisions that will affect the rate of inflation, level of unemployment, etc. are better handled at the centre, while other activities that will affect social welfare are more efficient if undertaken by subnational governments.  
Theoretically, the scope of benefit is the basis for allocating responsibilities governments. Public goods and services which are national in nature (foreign affairs, environment, immigration and defense) should be provided by the central government while those whose benefits are mainly localized should be assigned to the lower levels of government. Quasi-private goods or intermediate goods and services such as administration, health and welfare services should on account of efficiency delivery, be assigned to lower levels of government (Vincent. O. 2001). 

Studies on tax and public revenue mobilization in Nigeria have shown a high degree of centralization. According to Emenuga (2003), the allocation of revenue to the tiers of government has not adhere strictly to the expenditure requirements of each tier, thus the federal government has become a surplus-spending unit while other functions, he proposes the determination of a tier’ s  share through the aggregation of its basic expenditure needs.  
To reduce the gap between tax power ad responsibilities, two types of revenue sources are allocated to each tier. These are independent revenue sources and direct allocation from the federation to which centrally collectable revenues are paid. Local government also receives allocations from state Internal Revenues. An agreed formula for vertical revenue sharing is used in sharing funds from the federation account.  
Another key issue in the practice of public revenue mobilization in Nigeria is how to distribute the bloc share from the federation account among the constituent units of each tier i.e. among the 36 states and the 774 local governments.  This is called horizontal revenue sharing.  
In Nigeria, there are four categories in the vertical allocation list – federal, state, local governments, and the special fund.  The allocation to the Federal Capital Territory (FCT) is accounted for under the special fund which is administered by the federal government. 
 2.8    Local Government Finances and Revenue Utilization 
Public revenue mobilisation is one of the most keenly contested issues in Nigeria.  A comprehensive review of the reports of the various commissions and government policies from the 1946 Philipsons commission to the activities of the National Revenue Mobilisation, allocation and fiscal commission established in 1989 could be found in Kayode (1993), Emenuga (2003) and Ekpo (2004). 
Local governments in Nigeria receive statutory allocations from the two higher tiers of government (federal and states).  At the present, revenue sharing formula, local governments receive 20 per cent from the federation account.  They are also statutorily entitled to 10 per cent of states’ internally generated revenue.  As regards to Value Added Tax, local governments receive 30 percent in 1998.  This was shared to local governments, on the following basis:  equality (50 per cent):  population (30 per cent) and derivation (20 per cent).    
In 1999, local governments received 35 per cent of the VAT proceeds. The federal government controls all the major sources of revenue like import and excise duties, mining rents and royalties, petroleum sales tax, petroleum profit tax and companies income tax among other revenues sources (see table 1).  Local Government taxes are minimal hence this limits their ability to raise independent revenue and so they depend solely on allocation from the federation account. 
Much of the revenue collected by the federal government and distributed among the different tiers of government using the vertical revenue allocation formula is from the federation account.  But the federal government seems to exercise too much control over its distribution.  So many deductions are made from the  total revenue collected before the rest is distributed according to the sharing formula.