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1.1 Background to the study.
Since the existence of human beings on earth after the creation phase, with the resources
man found himself within which was put under his care, it is assumed that the creator put
all things there so that man and his offspring might benefit from his creation. During this
time in the world all human beings were equal, economically speaking and all were living
an average life by exchanging goods and services for a living.
As evolution set in, man needed to be ruled by leaders of their own kind and this brought
about the emergence of kings and queens. The people under each king or queen were
expected to pay periodically, a kind of tax directly, either by giving the products they
cultivated or by providing communal services (Ademola, 1996). The emergence of kings
and queens as rulers, gave birth to social stratification in the society thereby dividing the
society into two classes which are, the rich class and the poor class. These classes will
share a similar lifestyle, which to some degree would distinguish them from members of
other social strata (Haralambos and Holborn, 2004).
Social stratification set in gradually, civilization also paved its way into the society and
soon it became clear that the human society will always be a composition of the have‟s
who are the rich, and the have not‟s who are the poor. The era of kingdoms was slowly
fading away, due to the advent of civilization, and governments began to be established.
When governments began to be established, the political systems was also going through
rapid change at the time and so was the economic system also. The poor were dying off
because of poverty and hunger and also due to their status in the society, they also had no
access to social amenities such as health facilities, security, education e.t.c. These were the
dark days of humanity because there was a very wide gap between the rich and the poor
this gap was ever increasing because the rich were getting richer while the poor were
getting poorer. Something had to be done urgently.
The emerging governments of countries in order to bridge the gap between the rich and the
poor had to put in place a tax system that will enable those who have to provide for those
who do not have through the contributions of those who have. The contributions collected
by the government from those who have was to be used to provide for social amenities
such as security, health, education, employment, e.t.c. which is to be enjoyed by all in the
society whether rich or poor.
The system provided by the emerging governments in countries as earlier mentioned,
today it is referred to as taxation. Taxation is a compulsory levy imposed on a subject or
upon his property by the government to provide security, social amenities and other
amenities for the well being of the society as a whole.
Today, taxation has become an instrument of economic growth and development it is
because over the years, taxation has become a key factor in shaping the fiscal, monetary,
and investment policies in the government. How? this is true because the choices and rates
of taxes chosen by a country, depends on the long-term objectives of the government of
the country.
Economic growth is defined as a process whereby the real per capita income of a country
increases over a long period of time (M.L. Jighan, 2003). Economic growth is measured
by the increase in the amount of goods and services produced in a country. Thus growth
occurs when an economy‟s productive capacity increases to produce more goods and
services. Furthermore, economic growth implies raising the standard of living of the
people, and reducing inequalities of income distribution. Economic development is when
there is increased sustained economic growth for a continuous successive period of time.
In Nigeria, the constitution has vested the sole right to impose tax on the federal
government of Nigeria. The tax system of Nigeria comprises of three components namely
the tax policy, the tax laws and the tax administration. The function of tax administration
is shared between the three tiers of government which are the federal government, the state
government, and the local government. According to the Nigerian constitution, the federal
government is the centre of power of the three tiers of government.
In each tier of government, it is expected that each government uses the tax system
available to it for the primary aim of revenue generation so as to finance the expenditure
of the public sector and provide good infrastructure for the people thereby increasing their
standard of living, which will lead to economic growth of the country and in the long run
economic development.
1.2 Statement of the problem
For any nation in the world to achieve economic growth and development, it needs
revenue to facilitate its economy. In the Nigerian constitution, it is stated that Nigeria
revenue goes unto the federation account before it is distributed among the three tiers of
government these revenues are the oil revenue and the non-oil revenue. Though in reality
the Nigerian economy is divided into the oil sector and the, “other sectors”.
Unfortunately, as at today, Nigeria depends heavily on its oil revenue to the extent
that a fall in oil revenue would affect the Nigerian economy greatly. Due to the fact that
Nigeria depends so much on its oil revenue it pays so much attention to its oil sector and
does not pay any attention or very little attention at most to other sectors of the economy.
This attitude has an adverse effect on the neglected sectors of the economy because,
resources remain untapped, skills remain undiscovered, local industries are not motivated
and are therefore not innovative, also the proper tax to be paid by these “ other sectors” of
the economy are most times either evaded or avoided by tax payers in these “other
sectors” which are most often overlooked by tax officials probably because to them the
major sector in the economy is the oil sector. Looking at a situation where the Nigerian
government decides to stop overdependence on the oil sector and give equal concentration
to “other sectors” of the economy, more tax revenue would eventually flow in from other
sectors of the economy.
Again, Nigeria lacks a good structure for the development of a good tax system. The
reason for this claim is in reference to the informal sector. The informal sector in Nigeria
are the road side vulcanizes, the road side stall owners, Hair dressers, the road side
mechanics, the land owners, and the list is endless but, all the people classified under the
informal sector are those people who undertake business activities but are not under a
corporate body. Now in Nigeria, the tax structure is not functional because the people
categorized in this sector do not pay tax to anyone because the tax authorities would never
ask the market woman in the market selling her products to pay tax, or the road side
vulcanizes to pay any form of tax, and so many others. Meanwhile in developed countries
of the world that get their revenue from taxation the tax officials ensure that every
individual in a way pays some form of tax to the government nothing and no one is
overlooked no matter how insignificant they may appear. Unfortunately, In Nigeria today
the majority of tax payers are those under corporate organizations who pay company
income tax, and also tax derived from petroleum which is petroleum profit tax. Also most
people pay tax when they are required to provide a tax clearance certificate (TCC).
Furthermore, another reason why tax revenue is very low in Nigeria is owing to
illiteracy and lack of awareness on the part of the tax payer. The petty trader and all other
people in the informal sector have no idea that they are to pay tax and most of them do not
even know who to pay to. Most people in Nigeria do not even know that there is a federal
tax authority that is supposed to charge them on tax. Although, the tax authority is not
entirely to be blamed for the significant level of illiteracy in the country, but the tax
authority being aware of this significant level of illiteracy in Nigeria, should take it upon
itself and carry out a mass tax education on the general public as to bring to light the
purpose, procedures, and benefits of paying tax to the government and also to simplify the
tax laws so as to aid better understanding by the masses.
Another problem is the lack of a functional tax system in Nigeria. It can be noted
from all the points above that all is not well with the tax system in Nigeria. The tax system
does not have a good tax structure to enable all citizens in the country pay tax. Also, the
tax system is not functional because it is not efficient enough to carry out its responsibility
which includes creating a good tax structure for all citizens to pay tax and not only citizens
under corporate bodies or petroleum profit tax. They are to find a means of diversifying
tax to penetrate into all sectors of the economy.
Finally, in conclusion, all the reasons stated above actually cripple the tax system
thereby preventing economic growth, and only sustained economic growth can lead to
economic development. Recently the revenue derived from oil has fallen drastically and
Nigeria depends largely on oil for its revenue implying that there has been a downward
shift in Nigeria‟s revenue. Although Nigeria can still derive revenue from its tax system if
it restructures its tax system in a way that every citizen gets to pay tax, brings to public
awareness the effect of paying tax and the penalties of not paying tax thereby aiding
adherence to tax laws and generating large revenue for the government through the tax
1.3 Objectives of the study.
The primary objective of the study is to determine a way by which the Nigerian tax
system can be used to raise revenue generation in Nigeria so as to foster economic growth
and development in Nigeria.
The secondary objectives of this research are as follows:
1. To find out why the tax system in Nigeria is not functional.
2. To find ways on reducing Nigeria‟s overdependence on oil revenue.
3. To proffer ways of making a good tax structure to aid easy payment of tax in Nigeria
4. To find ways of providing good massive tax education to tax payers to keep them
informed on the importance of tax payment.
1.4 Research questions.
Based on the following research questions the following hypothesis would be formulated
1. Why is the tax system in Nigeria not functional?
2. Can Nigeria stop being over dependent on oil revenue?
3. Can the Nigerian tax structure be restructured to generate more revenue for the
economic growth and development of Nigeria?
4. To what extent does the lack of a good tax education affect the tax revenue generated
in Nigeria?
1.5 Research hypotheses.
In order to provide solutions to the research questions above, which is the purpose of the
study, the following research hypothesis has been formulated;
Ho: Null hypothesis
Hi: Alternative hypothesis.
Hypothesis one;
Ho: The Nigerian tax system cannot be used to promote economic growth and
development in Nigeria.
Hi: The Nigerian tax system can be used to promote economic growth and development in
Hypothesis two;
Ho: Nigeria‟s overdependence on oil revenue does not affect the economic growth and
development of Nigeria.
Hi: Nigeria‟s overdependence on oil revenue affects the economic growth and
development of Nigeria.
Hypothesis three;
Ho: Good tax education has no impact on the economic growth and development of
Hi: Good tax education has impact on the economic growth and development of Nigeria.
Hypothesis four;
Ho: If the Nigerian tax system is restructured, it will have no impact on the economic
growth and development of Nigeria.
Hi: If the Nigerian tax system is restructured, it will have an impact on the economic
growth and development of Nigeria.
1.6 Significance of the study.
This study would provide researchers on an extensive knowledge on ways by which the
Nigerian tax system can be used as a tool in promoting economic growth and development
in Nigeria through, the use of internally generated revenue from all forms of taxation in
Nigeria. This study would also examine the challenges that would occur for Nigeria to use
taxation as a tool for promoting economic growth and development in Nigeria.
1.7 Scope of the study.
This research work would cover the Nigerian economy although it will be a case study of
the Nigerian tax system from 2001-2010. The study would cover the whole country after
the tax system from 2001-2010 has been reviewed in order to determine ways of using the
Nigerian tax system as a tool for promoting economic growth and development in Nigeria
through the use of revenue generated from tax.
1.8 Limitations of the study.
The constraints of this study include the inability to retrieve all 100 questionnaires that
were administered to respondents. Also another limitation was in data collection of the
secondary data from organisations involved because most organisations did not allow
frequent access or total access into their premises.
1.9 Organisation of the study.
This study is structured into five chapters. Chapter one discussed the introduction which
encompasses in it, the background information, statement of the problem, objective of the
study, research questions and hypothesis, significance of the study, scope of the study,
organisation of the study, and definition of terms. Chapter two is devoted to the literature
review, with concept clarification, analytical review, and theoretical framework. The
methodology of the research was discussed in chapter three, Chapter four covers the
analysis and presentation of data. Chapter five is embedded with the summary, conclusion,
and recommendation for further studies.
1.10 Definition of terms.
The terms below have been defined as used in the work
1. Taxation; Taxation is a compulsory levy imposed on a subject or his property
by the government to provide security, social amenities and other amenities for the
well being of the society.
2. Tax evasion; tax evasion is an illegal way of not paying tax. It is a criminal
offence and involves criminal activities by reducing the tax liability by making false
returns of income.
3. Tax avoidance; Tax avoidance is a legitimate and legal way of paying less tax
or not paying at all. It occurs when a tax payer takes a perfectly legal course to keep
down the amount of tax he has to pay as taxes. Tax avoidance can also be referred to
as tax mitigation.
4. The informal sector; The informal sector is that sector of the Nigerian
economy which consists of the petty traders, the roadside vendors, the landowners,
the road side hawkers and stall owners e.t.c.
5. Other sectors; Other sectors of the economy here refers to all other sectors in
the economy apart from the oil sector which are considered as minor sectors in the
economy due to Nigeria‟s overdependence on the oil sector of the economy.
6. Tax clearance certificate (TCC) ; Tax clearance certificate is a certificate
issued by the state board of internal revenue for individuals and federal inland
revenue service for limited liability companies to certify that taxes assessed on
income or
7. profit, of a person or company has been fully paid or that no tax is due on such
profit or income.


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