CAUSES AND EFFECTS OF TAX EVASION AND AVOIDANCE ON THE ECONOMY (A CASE STUDY OF BOARD OF INTERNAL REVENUE IN ABIA STATE)
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CAUSES AND
EFFECTS OF TAX EVASION AND AVOIDANCE ON THE ECONOMY (A CASE
STUDY OF
BOARD OF INTERNAL
REVENUE IN
ABIA STATE)
ABSTRACT
This study
was on the causes and effect of Tax Evasion and Avoidance on the economy (Board
of Internal Revenue in Abia State). The major objective of the study is to
identify the causes and effect of Tax Evasion and Avoidance in the state and
how it is done. It also the aim of the study to suggest ways of at least
minimizing this ugly incidence in the state, and the study sought the opinions
of the staff (Senior and Junior) of the organization. The population size of
the research work is 120 which includes the senior official and some staff of
inland revenue department of ministry of finance make up the sample frame. The
sources of this data was both primary and secondary source which includes
interview, questionnaire, textbook, internet search, newspaper etc. The
researcher uses simple percentage method in analyzing the data and the major
findings is that the imposition of high tax rate will drastically reduce the
level of income and profit on the part of the tax payer. From the findings, the
researcher, therefore recommends that government should find a way of checking
and balancing tax payments so as not to discourage tax payment on the part of
the payers.
CHAPTER ONE
INTRODUCTION
BACKGROUND
OF THE STUDY
Tax is one o
the main source of Government Revenue. It is a strong social and economic tool
of the government in regulating the economy and maintaining health social like
of the citizens. Tax can be defined as a compulsory payment by individual and
companies to the state to enable her attain the National goals objectives. Tax
is a non-punitive but compulsory levy by the Government on properties and
income of individuals and corporations within the territory. The money raise
there of constitutes part of source of finance for general government expenditure
in the economy. According to Aguei (1983:276) tax is the transfer of resources
from the private to the public sector in order to accomplish some of the
Nation’s Economic and Social Goals. It is levy imposed by the government on the
income profit or wealth of an individual, partnership and corporate
organization. Tax is therefore the system whereby individual are assessed and
the final collection of the money for and on behalf of the government. It is a
machinery through which Income Earner is obliged to pay a fraction of his
income to the government.
There are
various type of Taxation which could be classed under two main headings: direct
and indirect tax. These two types of tax may be distinguished in terms of the
possibility of shifting the tax burden. However, taxes according to Economist
is classified whether the tax is proportional, progressive or regressive. The
importance of taxation in Nigeria arises out of the important roles, which the
government in the light of numerous imperfections and short coming that often
beset the economy has to play in order to ensure greater economic development,
transformation and growth. Other objective of taxation include influencing
economic activities in the country, to bridge the gap between the rich and the
poor, to curtail consumption of undesirable and harmful goods and services to
combat inflation, to encourage investment to protect infant industries and as
well as correct the country’s balance of payment.
However,
this phenomenon is not restricted to any part of the world. In New Zealand, the
loss of revenue resulting from tax evasion and avoidance is a problem that has
been described as “Reaching epidemic proportions”. The unfortunate aspect of
this phenomenon is that the rate of this happening in the developing countries
is always higher than what is obtained in developed countries.
According to
Onoginwa “Personal Income Tax Evasion is generally over 50% in Nigeria compared
to about 14% in U.K.” both rich and the poor embrace this chronic problem in
the state with literate population and professionals in the state been the big
avoiders. Whereas evaders can be found among payer and trader, having carefully
examined the above trend of events, the researcher then decides to carry out
evasion study to unmask the causes and effect of tax evasion and avoidance on
personal income of Board of Internal Revenue in Abia State with a view of
finding solution to them.
PROFILE OF
BOARD OF INTERNAL REVENUE IN ABIA STATE
Taxation in
Abia State is not quite different from of Nigeria as a country but there are
certain peculiar features in her profile so as to give detail understanding of
the state in her Revenue generating effort that we have decided in the state.
Prior to 1st
April 1959, the direct tax ordinance Native Authorities assessed and collected
income tax from Africans resident within their area of jurisdiction
Non-Africans were subjected to the Income Tax ordinance operated by the federal
government through its regional office.
With the
Nigeria (constitution) order in council 1954 power was given to each region or
deriving income there from. Eastern region became effective from 1st April
year. This law brought pay-as-you-Earn (PAYE) of tax collection in operation.
The Raisman
Fiscal Commission also applied to eastern region. To complete the Act, Eastern
Nigeria passed the finance law 1963. This law was to fill the gaps which the
federal legislation could legislate on example assessment appears machinery,
the machinery for collection and the rates of tax.
With the end
of the civil war and the creation of three states has produced new law. The
South Eastern (Cross Rivers and Akwa-Ibom) and the Eastern Central States. With
the promulgation of South East State edict No. 6 of 1969, the Board of Internal
Revenue was established as a statutory body to take charge of tax amended the
edict. Since then there has been certain amendments of the state increase.
STATEMENT OF
THE PROBLEM
Tax has been
a powerful instrument of revenue generation in Abia State of which tax evasion
and avoidance are the major problem that obstructs the maximum collecting of
tax. Highly technical problems besieging the Board of Internal Revenue in the
state such as lack of encouragement by the government to tax payer, poor tax
administration, unforced penalties on the tax defaulters which make tax law
seemed to be useless and most importantly, logistics and zeal to enforce tax
payer.
Therefore
inefficiency of taxation system in the state deprive the government the ability
to produce the citizen with the basic necessities of life.
Since the
problem has been identified, the researcher considers it necessary to survey as
much as possible to find solution for solving these problems of tax evasion and
avoidance in Abia state and Nigeria in general.
OBJECTIVE OF
THE STUDY
The broad
objective of this study is to find out why people evade and avoid tax and
suggest ways of minimizing the practices in Abia State. The broad objective is
broken down to the following specific objective:
To establish
the existence of tax evasion and avoidance on the revenue generated in Abia
State.
To examine
relationship between tax rates, tax evasion and tax avoidance.
To proffer
solution to the problem of tax evasion and avoidance.
To
investigate why people evade and avoid tax.
To determine
the effect of tax evasion and avoidance on the revenue generated in Abia
State.
RESEARCH
QUESTIONS
In the
course of this study, the following research questions shall be examined:
Is the
existence of loopholes in the Nigerian tax law system an opportunity for tax
avoidance?
Is there any
effect of tax evasion and tax avoidance on the Nigeria economy?
How can tax
evasion and tax avoidance by minimized and eliminate in Abia State?
THE
SIGNIFICANCE OF THE STUDY
This work is
importance in many respects. It is therefore, intended that a successful
completion of this project help in reducing and even eliminates the problems
associated with taxation. Therefore the significance of this study are as
follows:
It will help
to inform the tax payers of the numbers of benefits gained by paying tax.
The project
will as well highlight on the importance of high efficiency and effectiveness
required of tax officials.
The study
will also be of immense benefit to the government by alerting them on the war
against tax evasion and avoidance and impose the necessary penalty on any
offender.
The study
will help to suggest ways of removing inherent bottleneck in taxation.
Finally, the
study is useful to individual, tax authority and government in general.
SCOPE OF THE
STUDY
The scope of
this study covered the cause and effects of Tax Evasion and Avoidance on the
economy Tax Board of Internal Revenue in Abia State and is of the view that
this will bear good result.
LIMITATION
OF THE STUDY
In a study
of this nature, a lot of limitations are bound to come-up, the work is limited
by finance. The researcher needs to travel to different local government
headquarters, the state capital Umuahia for the necessary data. This is money
consuming hence might have hindered the effectiveness of carrying out the
research.
LITERATURE:
Due to the lack of the relevant books in the school library, the researcher had
to travel to many other institutions to gather the necessary textbooks,
journals, publications etc for the research work.
TIME: The
researcher faced the research problem of inadequate time.
DATA
COLLECTION: I must confess that access to data collection was not an easy task.
However, the employees of the Board of Internal Revenue were very co-operative.
The problem I encountered in data collection was as a result of creation of new
Local Government Area.
Also all data pertaining to revenue of
the state since the creation of Abia State from Imo State have disappeared.
RESPONDENTS
ATTITUDE: The researcher was faced with problems of getting the actual
information from the public since they think it is revenue of assessing their
liabilities. The pretest set back of this research is the most of the
interviewed official (Tax Officials). The tax officials were afraid that the
result of the research could be used to expose their corrupt practices.
DEFINITIONS
OF TERMS
Below are
the meanings of the following concepts as applicable to the study;
TAX
ASSESSMENT: This is the process of ascertaining the amount of tax for which an
individual or company is liable to pay.
TAX
COLLECTION: This is the process of receiving or gathering taxes from tax payer.
TAX
DELINQUENCY: This refers to the failure to pay a tax obligating on the date it
is due.
TAX DRIVE:
This means raid carried out by tax officials aimed at collecting tax revenue
due to government from tax payer.
TAX EVASION:
This is a willful and deliberate violation by a tax payer to escape a legal tax
obligation by failing to report a source of income or seeks to reduce his tax
liability by understating a source of income to the Tax Authority.
TAX
AVOIDANCE: This is a situation by which a tax payer take advantage of the
weakness or loopholes in the tax system in order to pay less tax than he ought
to have paid.
TAX RELIEFS:
These are allowance to a tax payer on his circumstance prevailing in the
preceding year of assessment such as personal allowance, children allowance,
relatives and dependent allowances etc.
TAX
LIABILITY: This is the total amount of tax an individual or company is supposed
to pay.
TAX PAYABLE:
It is any amount of tax an individual should actually pay. It is also tax
liability less any tax credit or withholding tax.
DIRECT
ASSESSMENT: This involves the assessment of self employed, e.g. trade,
business, profession or vocation.
RELEVANT TAX
AUTHORITY: This is the authority that could impose and collect on the income of
a taxable person for a year of assessment.
YEAR OF
ASSESSMENT: This is a period of twelve months commencing is 1st January to 31st
December.
DIRECT TAX:
These are tax levied on factors of production. The burden of direct tax falls
on the producer.
INDIRECT
TAX: This is the type of tax that is levied on goods and services. The burden
of indirect tax fall on the final consumer.
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