CHAPTER ONE

BACKGROUND TO THE STUDY

1.0 INTRODUCTION      

Despite her strong fundamentals, oil rich Nigeria has been hobbled by inadequate power supply, poor education, lack of infrastructure delay in the passage of legislative reforms, an inefficient property regulation system, poor electoral processes, restrictive trade policies, militancy, insecurity, an inconsistent regulatory environment, a slow and ineffective judicial system, pervasive corruption, the poor becoming poorer as the economic diversification and strong growth have not translated into a significant decline in poverty levels of the country. (CBN Statistical Bulletin, 2014). The constant reliance on the oil revenue for political, economic, and social development for the provision of infrastructure in the country has become worrisome as the price of crude oil continues to decline below the budget benchmark. This concern prompted this study to investigate the impact of taxation another source of revenue for the economic development of Nigeria. According to Ogbonna and Ebimobowei (2012) “the political, economic and social development of any country depends on the amount of revenue generated for the provision of infrastructure in that given country”. They further stated that a well-structured tax system would boost the generation of the income for a meaningful development of such country. This Ogbonna and Ebimobowei view are the same as the Biblical account, where Jesus paid tax to the government of Caesar the Roman Emperor. There were many taxes needed from the provinces to administrate the Roman Empire these taxes paid for a good system of good roads, law and order, security, religious freedom, a certain amount of self-government and other benefits. The provisions of these basic amenities depend on the amount of revenue being generated. Kiabel and Nwokah (2009) stated that rise in the cost of running government coupled with the incessant dwindling revenue had left all tiers of government in Nigeria with formulating strategies to improve the base of income. One of such strategies is taxation. According to PricewaterhouseCoopers, Nigeria has made some improvement to the tax system. What then is taxation? Oxford Dictionary of Accounting (1995) defined taxation as a levy on an individual or corporate body by the central or local government to finance the expenditure of that government and also as a means of implementing its fiscal policy. Thus the government can transfer resources through taxation from private consumption to public investment.

The major objective of taxation is to Finance government expenditure and to redistribute wealth which will have a positive causation effect on development of the country (Jhingan 2004, Ogbonna and Ebimobowei, 2012; Musgrave and Musgrave, 2004; Ola 2007; Burges and Sterm, 1993; Bhantia 2009; Lewis 1984)

In Nigeria, this important role of taxation lacks in our system. Odusila (2006) noted that the system is lopsided and dominated by oil revenue, that over the past two decades, oil revenue has accounted for at least 70% of the revenue, by implication traditional tax revenue has never assume a strong role in the country’s management fiscal policy. The view of Jhingan (2002) that taxation effectively curtails conspicuous consumption and other wasteful expenditure of the richer classes does not hold water in Nigeria. The richer are acquiring and accumulating properties and paying less or no tax while the poor are getting poorer and paying tax. The redistribution of income through taxation in Nigeria has not been achieved. On the other hand, there is no tangible improvement in our infrastructural facilities. Nigerian roads are bad and have become a death trap to the citizens.

Presently, according to Okonjo-Iweala, the Minister of Finance and Coordinator of Nigerian Economy, said that Nigeria faces a massive infrastructural deficit, citing infrastructure deficit as a hindrance that is holding back economic development by at least 2 percent per annum according to a recent world bank study. The minister further stated “that about US$14.2  billion per year is required to bridge the infrastructural gap, with about $10.5 billion needed for national infrastructure alone, adding that amount spending is only $5.9 Billion (The Financial Times: 2014). Some countries have influenced their economic development through revenue from the tax. For example, Canada, United States, Netherland, United Kingdom. They desire substantial income from Company Income Tax, Value Added Tax, Import Duties and had used same to create prosperity (Oluba: 2008) cited (Worlu and Nkoro, 2012).

According to IMF “Developing countries must be able to raise the revenue required to finance the services demanded by their citizens and the infrastructure (physical and social) that will enable them to move out of poverty. Taxation will play the key role in this revenue mobilization”.

However, Nigerian economy as a number one economy in Africa and emerging economy in the world has many problems militating tax revenue mobilization as a source of financing developmental activities. Federal Inland Revenue Services (FIRS) faces the challenges of widespread tax evasion, which is motivated by a complaint about corruption and poor quality of services. Omoigin (2011) stated, in Nigeria and other African countries, the level of tax evasion are quite high. No wonder, Okonjo-Iweala (2014) noted that a recent study conducted by the government revealed that about 75 percent of registered companies in the country are not registered with the stepping up its efforts to encourage voluntary compliance with a tax obligation. PricewaterhouseCoopers(www.rcn.com) in their publication titled Nigeria @ 50 Top 50 Tax Issues ranging from tax legislation to administration and tax policy matters. According to the world bank doing business 2011 report, Nigeria ranked 137 out of 183 countries surveyed on the ease of doing business and 134 on the ease of paying taxes. The report, further noted that in the 2010 report, Nigerian ranked 134 and 131 on the ease of doing business and paying taxes respectively. The report documented that Nigeria has been sloping back consistently on the ease of paying taxes index is a function of three broad indicators – some tax payments, time require complying with tax obligations and total tax rate. Confirming World Bank Report, Okonjo-Iweala said for every N100 that business has to pay in taxes they pay about N30 in compliance costs. She further said that this is a waste of capital that could be invested in this business to grow them and create more jobs for our economy. Another challenge identified according to Oyedele (2011) that the mark-to-market (MTM) or Fair Value Accounting (FVA) of the financial instrument upon adoption of International Financial Reporting Standards (IFRS) would create significant swings in earnings and capital. By extension, it will affect taxable profit been reported by some management of organizations that use discretion in managing profit and tax,  companies shelter their taxes at the detriment of tax authority duty of collecting taxes, due to the government. In the United States, it is reported that a “two-book” method of presentation of financial report exist, one for taxable income that companies report to government and the other to investors. This buttress the point that there exist “book tax gap and evident of earnings manipulation and tax sheltering” (Daniel, 2009). As noted in a circular published in March 2013 by Federal Inland Revenue Services (FIRS). “Section 55(1) of the Companies Income Tax Act, CAPC 21, LFN 2004 requires a company filing a return to submit its audited account to the FIRS while sections 8, 52 and 53 of the Financial Reporting Council (FRC) of Nigeria Act, 2011 gave effect to the adoption of International Financial Reporting Standards” The implication is that companies will be taxed based on audited accounts prepared in line with IFRS recommendations. Tax is a compulsory levy designed to generate revenue for public expenditure including infrastructures. (Appah 2004; Azubike, 2009; Appah and Oyadoughan 2011; Ogbonna and Ebimobowei, 2012).“Tax paying culture is poor in Nigeria due in large part to the lack of transparency and accountability on the part of the government as tax payers money is rarely seen at the mark.” Therefore, based on this background, the objective of this study is to examine the impact of taxation on the economic development of Nigeria (2000 – 2013). In addition to the stated purpose is to investigate the impact of International Financial Reporting Standards (IFRS) on taxation and economic development of Nigeria, judging its impact on the magnitude of revenue generated in the post- IFRS adoption in Nigeria.