Investigation Into the Causes of Tax Evasion

1.0 Introduction

1.1 Background Of The Study

The concept of taxation has been a concern of global significance as it affects every economy irrespective of national differences (Oboh etal., 2012). According to Omotoso (2001), in his definition of the modern taxes, defined tax as a compulsory charge imposed by a public authority on the income of individuals and companies as stipulated by the government decrees, acts or cases laws irrespective of the exact amount of services rendered to the payer in return. A more recent and comprehensive definition was given by Dr. Ekenze Oliver of Buitas Consultancy to the effect that tax is: “a compulsory levy imposed by an organization or Government on its member citizens, for the sole purpose of providing common goods and services for the benefit of all members”.

He continued: “tax is designed to raise revenue required for the expenditure authorized in a government budget expectation. It is also a veritable instrument of promoting social and economic justice and equality amongst citizens of a state or members of an organization”. As could be gleaned from the above definitions, a tax is not therefore a voluntary payment; it is a compulsory pecuniary burden placed upon the subjects of a given country to support the people. Thus, taxes constitute the principal source of government revenue and the beauty of any government is for its citizen to voluntarily execute their tax obligations without much coercion and harassment. The greatest puzzle facing the Nigerian tax system is the threat of tax evasion and tax avoidance. It is widely believed that there is a substantial difference between estimated revenue from taxation every year and what is actually collected.

Tax evasion is a major problem plaguing many emerging economies across the globe and Nigeria situation seems unique when viewed against the scale of corrupt practices evident in the country. Under the direct personal taxation as practiced in Nigeria, the major problem lies in the collection of the taxes especially from the self-employed such as the businessmen, contractors, professional practitioners like lawyers, doctors, accountants, architects and traders in shops among others (Kiabel and Nwokah, 2009).

As observed by Ayua (1999) cited in Kiabel and Nwokah (2009) these persons blatantly refuse to pay tax by reporting losses every year. Ayua (1999) further asserts that many of these professionals live a lifestyle inconsistent with reported income, which is usually unrealistically low for the nature of their businesses. The only categories of individuals who fulfill their tax obligation in Nigeria are civil servants and other salaried workers.

1.2 Statement Of The Problem

Investigation revealed that tax evasion in Nigeria has been a cause for a serious concern; this is because it has led to the depletion in the internally generated revenue which has by extension adversely affected our economic growth and development.

1.3 Aim and Objectives Of The Study

The aim of the study is to investigate the Causes of Tax Evasion. In achieving this aim, the following specific objectives were laid out as follows:

1. To examine the relationship between high tax rate and tax evasion in Nigeria;
2. To examine the major causes of tax evasion in Nigeria;
3. To know if many business owners pay tax; and
4. To examine the relationship between tax evasion penalty and tax evasion in Nigeria.

1.4 Research Questions

The study came up with research questions so as to be able to ascertain the above stated objectives. The specific research questions for the study are stated below as follows:

1. What are the major causes of tax evasion in Nigeria?
2. What is the relationship between tax evasion penalty and tax evasion in Nigeria?
3. What is the relationship between high tax rate and tax evasion in Nigeria?
4. Do many Nigerian business owners pay tax?

1.5 Research Hypotheses

In order to pursue the objective of this study, the following generalized statements have been designed to guide and aids in obtaining the result for the experiment to be conducted. For this work, the null hypothesis will be represented with H0 while the alternative hypothesis will be represented with hypothesis H1.

Hypothesis One

• H0: There is no significant relationship between high tax rates and tax evasion in Nigeria
• H1: There is a significant relationship between high tax rates and tax evasion in Nigeria

Hypothesis Two

• H0: There is no significant relationship between weak penalties and tax evasion in Nigeria.
• H1: There is a significant relationship between weak penalties and tax evasion in Nigeria.

1.6 Significance Of The Study

This study would be important to tax authorities in Nigeria as it would unravel the main causes of tax evasion in Nigeria with a view to creating tax policies that would encourage more people to pay tax.

1.7 Scope Of The Study

This study on causes of tax evasion in Nigeria with Ikeja LGA in Lagos state serving as the case study.

1.8 Limitations Of Study

During the course of this study, many things militated against its completion, some of which are:

1. Time Constraint:

   The time frame given to accomplish this project was very short due to school academic calendar and it was carried out under pressure which made the researcher not to implement some necessary features.

2. Financial Constraint:

   Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

3. Lack of Initial Cooperation from Respondents:

   A particular limitation of this work came as a result of the respondent refusal to offer their cooperation at the initial time they were contacted. This contributed in making the success of this research study difficult.

1.8 Definition Of Terms

Tax:

A compulsory contribution to state revenue, levied by the government on workers’ income and business profits, or added to the cost of some goods, services, and transactions.

Evasion:

To escape or avoid (someone or something), especially by guile or trickery.

Revenue:

The income generated from sale of goods or services, or any other use of capital or assets, associated with the main operations of an organization before any costs or expenses are deducted.