By Ogbole A. Frank
For the development and growth of any society, the provision of basic infrastructure is necessary. This explains why government shows great concern on how funds can be made available to achieve their set goals for the society. Government needs funds to be able to execute its social obligations to the public. These social obligations include but are not limited to the provision of infrastructure and social services. Meeting the needs of the society calls for huge funds which an individual or community could not contribute alone. One of the main methods through which funds are acquired for the government is through taxation. Citizens are expected to discharge their civic responsibility by paying their taxes to contribute to the development and administration of the society at large.
Tax evasion and avoidance remains the greatest problems plaguing tax administration in Nigeria. Apart from salaried employees, most citizens in Nigeria pay inadequate taxes or no taxes at all and this has led to a substantial loss of government revenue. The reasons for such behaviour could be attributed to several factors; the insufficiencies and complexities of tax legislation coupled with taxpayers taking advantage of loopholes in the tax law, high rates of taxation and a lack of sense of civic responsibility amongst the taxpayers.
Tax evasion and avoidance have been a menace which seem to have defied solution had bedevilled the Nigerian tax system right from colonial times. While some have blamed the situation on the tax authorities for not living up to expectation with regards to tax administration, others attribute it to the unpatriotic attitude of the taxpayers.
This disturbing aversion to taxation has some historical antecedents. Traditionally, there has always been a hostile response to the payment of tax by the people who viewed tax collectors as a nuisance to the society. And the few that paid tax, did so with the greatest reluctance. Even in the Bible, instances abound where the Jews treated the tax collectors with disdain and contempt.
This negative attitude continues in modern times and with taxpayers perfecting various methods of frustrating the tax authorities. To say the least, this negative attitude to taxation is unpatriotic in view of the well recognised role which taxation plays in the economy. In fact, it is undeniable today that every government depends to a large extent on taxation not only for its socio-economic development but also as a means of ameliorating the existing inequalities of wealth in the society.
Definition of Tax Evasion and Avoidance
Tax Evasion as defined by the Canadian Department of National Revenue is “the omission or commission of an act knowingly with intent to deceive so that the tax reported by the taxpayer is less than the tax payable under the law, or a conspiracy to commit such an offence. This may be accomplished by the deliberate omission of revenue, fraudulent claiming of expenses or allowances, and the deliberate misrepresentation, concealment or withholding of material facts.”
Tax practitioners have described tax avoidance as a situation where the taxpayer arranges his financial affairs in a way that would make him pay the least possible amount of tax without infringing the legal rules. It is a term used to denote those various devices which have been adopted with the aim of saving tax and thus sheltering the taxpayers’ income from greater liability which would have been otherwise incurred.
Tax evasion is the wilful and deliberate violation of the law in order to escape payment of tax which is imposed by law of the tax jurisdiction, while tax avoidance is the active means by which the taxpayer seeks to reduce or remove altogether his liability to tax without actually breaking the law.
While the law regards tax avoidance as a legitimate game, tax evasion is seen as immoral and illegal.
These ‘twin devils’ have created a great gulf between actual and potential revenue. The government has perennially complained of the widespread incidence of tax avoidance and evasion in the country as companies and other taxable persons employ various tax avoidance devices to escape or minimize their taxes or deliberately employ fraudulent ways and means of evading tax altogether, sometimes with the active connivance of tax officials.
Tax Evasion Schemes
The problem of evasion is much more glaring under the direct assessment method under which the self-employed are taxed than with the indirect assessment method under which employees are taxed. It is generally believed that the self-employed pay less than 10 percent of their personal income tax to the government yearly, while employees pay the remaining 90 percent.
Even civil servants and the other salaried workers are equally guilty of this nefarious practice in the manner in which they abuse the personal allowances and relief statutorily provided by the law. Thus, almost every potential Nigerian civil servant, in their claim for personal allowances and reliefs, would claim falsely that he is married with four children.
Tax evasion has continued to remain an endemic problem in this country. Tax evasion” … has become so widespread that there now exists a cash economy of widespread proportion which the tax man has no control”.
Tax evasion may be perpetrated in several ways, some of which comprise the following:
i. False claims in respect of children, wife, capital allowances, dependent relatives, life assurance premiums etc;
ii. Understating or false declaration of income receipt from trade, business, professional, vocation or employment;
iii. Omission to state gross amount of dividends, rents etc. received in Nigeria from outside sources.
iv. False claims of contribution to a pension scheme.
v. Reduction of tax liabilities through fraudulent tax returns.
vi. Giving incorrect information in relation to any matter or thing suffering the liability to tax of any taxable person.
Types Of Tax Evasion
A typical area of tax evasion in Nigeria is the attempt to evade customs duties. Typically importers try to evade customs duties by either under–invoicing or changing the product description to attract lower rates of duty. A lot of goods are brought into the country through unauthorised routes. This is intended to evade the payment of customs duties.
Personal Income Tax:
Unscrupulous employers may try to evade paying employment taxes. Most often this is done by intentionally failing to remit to the tax authorities the employment taxes it collected from its employees. After a certain amount of time, the employer will then dissolve the company or claim bankruptcy, leaving the employment taxes unpaid. Other methods are paying the employees in cash; filing false payroll tax returns, or failing to file payroll tax returns.
One of the simplest ways to evade VAT in Nigeria is to inflate the claims to deduct VAT paid at earlier stages or outright fabrication of fake invoices for purchases never made.
Curbing Tax Evasion
The federal and various states governments have commendably deployed several measures aimed at curtailing or minimising tax evasion in Nigeria. Most of these measures are contained in various legislation empowering the government department, ministries, agencies or any commercial bank with whom any company has any dealing with respect to any kind of transaction or business to demand from such a person a tax clearance certificate of three years immediately preceding the current year of assessment. In a similar manner, the government introduction of provisional tax within 30 days by corporate entities or the declaration of interim dividends constitute a commendable anti-evasion endeavour. In some states, similar anti-evasion measures have been adopted.
In other instances, tax evasion measures take the form of legislation which compels performing musicians to pay tax to the government before being allowed to play. Stiff penalties were imposed for failure to comply with such directives.
Our tax laws are replete with punitive momentary measures as well as criminal sanctions aimed at solving this problem. One of such many provisions is section 66 of the Companies Income Tax Act which conferred on the Federal Inland Revenue Service (FIRS) the power to seize and sell defaulting taxpayers’ goods, chattels as well as their premises in extreme cases in order to recover the amount of tax owned by such taxpayers. Others are found in the FIRS ACT of 2007 which stipulates the following offences and penalties as follows:
i. Section 40 – FAILURE TO DEDUCT OR REMIT TAX
The penalty on conviction is pay tax withheld or not remitted. In addition to a penalty of 10% of the tax withheld or not remitted per annum plus interest at the prevailing CBN rate and imprisonment for a period not exceeding three years.
ii. SECTION 41 – OBSTRUCTION, HINDERING, MOLESTING OR ASSAULTING AUTHORISED PERSON
Penalty – N200,000 or three years imprisonment or both.
iii. FALSE DECLARATION
Penalty as in section 41.
iv. SECTION 43 – COUNTERFEITING DOCUMENTS, FALSIFICATION, ALTERATION.
Penalty as in section 41.
The FIRS, the foremost government agency empowered to collect taxes on behalf of the government, has risen up to the challenge by introducing several measures to help minimise tax evasion. Prominent among these are:-
The Introduction of TIN
The Tax Identification Number (TIN) is a unique sequential fourteen digit number generated electronically as part of the registration process and assigned to a taxpayer, company, enterprise or individual for identification. This number eases tracking of taxpayers and access to their tax history and records. This is done in collaboration with the State Boards of Internal Revenue to enhance exchange of information. This has led to the discovery of fake tax clearance certificates and other ploys to evade tax by taxpayers.
The Personal Income Tax Act (PITA) Amended 2011
The thrust of the amendment is aimed at reducing the tax burden of taxpayers in order to increase their disposable income, especially low income earners. It is also aimed at shifting the tax focus from direct to indirect tax and ensuring equitable income redistribution. This amendment simplifies tax computation in order to encourage voluntary compliance thereby widening the tax base of revenue authorities. Consequently this will result in more revenue for government to provide critical infrastructure and basic amenities to its citizens.
The Integrated Tax Administration System This is geared towards simplification of processes and systems for ease of use by the taxpayers. It will engender the adoption of best practices in FIRS in the areas of business process, taxpayer identification and the automation of core tax processes with a comprehensive taxpayer database as an enabler. It will enhance and simplify the administration of taxation, provide requisite support to critical tax administration functions such as returns and payment processing, revenue and taxpayer accounting, audit and investigation, tax policy and research forecasting etc, in a manner that would otherwise be difficult or tedious in a manual system.
Presumptive taxation is a form of tax regime fashioned out to bring taxpayers operating in the informal sector into the tax net. It is predicated on a taxpayer’s presumed, not actual income, which may not be easy to determine because records are not. This method of taxation is thought to be effective in reducing tax avoidance as well as equalizing the distribution of the tax burden.
FIRS believes that the implementation of a workable presumptive tax regime will engender easy access to the large pool of taxpayers in the informal sector and bring them into the tax system. This will enable the government not only to grow the tax base across the three tiers of government, but more importantly, improve tax collection from non-oil tax revenue. If this is done successfully, it will be contribute to the overall development of the Nigerian tax system and the Nigerian economy.
The government has also tightened the laws on tax evasion and severe punishment for tax officials that collude with individuals and organizations to fleece the treasury. Greater efforts should be made by the various governments to spread the tax burden beyond the few captured by the Pay-As-You-Earn system and ensure that all taxable adults are captured in the Personal Income Tax regime. The waivers on Company Income Tax should be streamlined to plug the leakages and their rampant abuse.
Furthermore, it is recommended that tax officials should be constantly trained and re-trained on the job, a deliberate and a more aggressive public enlightenment campaign embarked upon by government, t FIRS and other state revenue boards.
• Government should ensure that taxation is a fiscal policy instrument and not just as an instrument of revenue generation. Besides, tax rates reflect economic realities.
• Government should strive to boost the economy and reduce the level of poverty among its citizens because where the majority of the people are poor, tax evasion becomes inevitable. Government should systematically develop the social and infrastructural sectors to enable the people, especially the self-employed, increase their capacity in the area of production. Also, a welfare programme should be instituted particularly for the vulnerable (such as young school leavers and the aged) so as to mitigate the burden of those working.
• Members of religious bodies should encourage their members to pay tax to enable the government to bring about developments to the people.
It has become self-evident that the problem of tax avoidance and evasion is hydra-headed. And that though the problem is not peculiar to the Nigerian tax system, its impact here appears more drastic. Thus, there is an urgent need to improve our tax administration and maximise tax revenue necessary for developments. This is where a crop of honest and capable tax administration officials is of utmost relevance. Though it is quite appreciated that there are penalties and sanctioning provisions, they are far from being adequate and effective.
Furthermore, tax is indispensable in the running of any government, military or civilian, democracy or autocracy. Admittedly, government is the biggest employer of labour in developing economies. Unarguably, it is the highest spender, therefore it needs money to provide essential services for its citizens.