Table of content
CHAPTER ONE: INTRODUCTION
CHAPTER TWO: LITERATURE REVIEW
CHAPTER THREE: METHODOLOGY
CHAPTER FOUR: DATA PRESENTATION, ANALYSIS AND DISCUSSION
CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS
CHAPTER ONE: INTRODUCTION
1.1 Background to the Study
Taxation is one of the important elements in managing national income, especially in developed countries and has played an important role in civilized societies since their inception. Tax is defined as ‘a compulsory levy, imposed by government or other tax raising body, on income, expenditure, or capital assets, for which the taxpayer receives nothing specific in return (Lymer and Oats, 2009; Abdullah, Harry, Shazali and Quaiser, 2014). Generally, tax is considered as a civic duty. It is a cost to the tax payer, be it an individual or corporate body (Alabede, Zainol and Kamil, 2011; Abubakari and Christopher, 2013).
Historically, there were various forms of tax in Nigeria before the era of colonial masters. Under the Fulani Emirate system of administration in the Northern part of Nigeria there was a system of tax in place. Nigerians willingly paid tax through offering free services such as clearing the bush paths, digging pit toilets, wells, sweeping the market, and so on, for the good of the generality of the citizens of a village, town or and emirate. Some taxes were also paid in form of farm produce, such as yam harvest. One of the most common ones in the west, Yoruba speaking part of Nigeria, was called “Isakole”. This was usually paid to the Oba (king),just like the President of Nigeria is being paid from Consolidated Revenue Fund, under our federal system of government (Ohene, 2011).
However, income tax was formally introduced in Nigeria in 1904 by the British Colonial Government led by the late Lord Lugard, using an income tax concept termed “community tax”. This was later modified and codified in 1917 and named “National Revenue Ordinance of 1917”. By 1940, the tax ordinance had been amplified, simplified, extended and applied in all the regions in Nigeria, excluding Lagos Township. Prior to 1961 each region in Nigeria legislated on direct and indirect taxes. In 1961 there was a common tax law for the whole federation called “Income Tax Management Act (ITMA, 1961)” which aim was to consolidate the various bits and pieces of tax laws and their amendments existing in the country then, and facilitated tax administrators’ effort to having a common reference point of law that guided their work, and for the taxpayers to understand the provisions of the tax law and comply without much economic programmes for the common good of all the citizens of the State.
Thus the rationale for imposing certain taxes on the public is to generate revenues for the government for public expenditure. Nevertheless, there are other functions of taxes which include reducing inequalities through a policy of redistribution of income and wealth so that income gap between the rich and the poor is not as significant (Singh, 1999; Shanmugam, 2003; Lymer and Oats, 2009; Abdullah, et al., 2014).
Tax payer minimize his cost and maximize his income and profit. However, there is a conflict between government objectives to maximize tax revenue and that of the taxpayer to minimize tax incidence (Olowookere and Fashina, 2013). Nevertheless, not all payments to government are considered as tax payments: for example, charges, license fee, fines and penalties, tolls, and other levies are paid to obtain a specific service and are not strictly tax payments.
Tax payer education program is one of the strategies of improving service delivery to the taxpayers. It is a tool designed to enable taxpayers to understand tax laws and procedures. It involves training of special units within the revenue departments, for providing education, counseling and support to the taxpayers, through different media like newspapers, television, radio programs, websites, seminars, etc. to disseminate key information to the taxpayers.
Improving service delivery is vital to enhance voluntary tax compliance. Lack of voluntary tax compliance prompts revenue authorities to use costly and coercive methods for tax enforcement (Clifford and Jairus, 2013).
Tax compliance is the process of fulfilling the tax payer’s civil obligation for tax payment and filing of tax returns including the provision of necessary documents and explanations required by the tax authority in a timely manner (Oyedele, 2009). It may be voluntary or involuntary. However, one of the greatest problems facing the Nigerian tax system is the problem of ‘non-compliance.’ Taxpayers may be non-compliant as a result of flexible tax morale; low education; rules that are too complicated to follow; taxable activities that are manipulated to avoid tax; a perception that the risk of being caught is low; aversion towards the public sector; and a culture of corruption (Aksnes, 2011).
In order to increase level of tax compliance, Richardson (2006); Kirchler, Hoelzl and Wahl (2008); Olowookere and Fashina (2013) believed that tax knowledge or education plays the important role. Hence, people should be equipped with the tax education so that everyone has sufficient knowledge toward competent taxpayers. Park and Hyun (2003) suggested that tax education is one of the effective tools to induce taxpayers to comply more. Tax payers will comply voluntarily to pay their taxes if they understandthe basic concept of taxation very well (Marziana, Norkhazimah and Mohmad, 2010).
Findings from Olowookere and Fashina (2013) revealed that tax education activities focused on enlightening taxpayers’ on socio-economic implications of tax evasion opportunities and the transparent and accountable use of tax proceeds have significant influence on taxpayers’ voluntary compliance in Lagos State. For example, the tax education and enlightenment activities conducted by Lagos State Internal Revenue Service (LIRS) team visiting companies within the state to check tax compliance level and enlightening the tax payers have engendered their voluntary compliance (Tunde, 2013).
1.2 Statement of the Problem
Taxation in Nigeria and many other developing countries is a challenging topic and has called for a serious attention in the last two decade. Many problems observed ranging from poor administration, failing to collect sufficient tax revenues, tax structures where tax horizontal and vertical equity considerations are not integrated, lack of government and economic stability, etc.
It is observed that there is low capacity of tax administration to monitor compliance among taxpayers (Tanzi, 2000). Nigeria, like any other developing countries, faces difficulty in raising revenue to the level required for the promotion of economic growth. Hence, the country has been experiencing a consistent surplus of expenditure over revenue for sufficiently long period of time.
To address this problem, the government introduced the imposition of tax (direct and indirect), among others; as major and important sources of public revenue. However, this imposition of tax could not still bring the required result due to a number of reasons such as lack of clear understanding about the tax system by the taxpayers, non-compliance of the taxpayers with their tax obligation, hostility between the taxpayers and tax officials, negative attitude of taxpayers towards the tax system, etc. As a result, the actual amount of tax could not be properly collected (Taddele, 2010).
Despite the fact that people need to pay taxes based on rationales of vertical and horizontal equities, it is not always the case that tax systems are comprehensible and transparent for taxpayers especially for those who are less literate individuals. Tax systems are usually not understood by the society as a result of inadequate or absence of tax education for taxpayers.
The extent of the influence of tax education on taxpayers’ compliance behaviour was not well understood. It is for this reason that this study attempts to examine the influence of tax education in achieving voluntary taxpayers’ compliance.
1.3 Objective of the Study
Generally, this study seeks to explore the influence of tax education on taxpayer’s voluntary compliance behaviour. However, it is set to achieve the following specific objectives:
i. to assess the influence of taxpayer’s education level on tax compliance; and
ii. to investigate the influence of taxpayer’s income level on tax compliance.
1.4 Research Questions
i. What influence does tax education level has on taxpayer’s compliance behaviour?
ii. What influence does taxpayer’s income level has on taxpayer’s compliance behaviour?
1.5 Research Hypotheses
To proffer useful answers to the research questions and realize the study objectives, the following hypotheses stated in their null forms were tested;
Ho1: Education level has no significant influence on taxpayer’s compliance behaviour.
Ho2: Income level has no significant influence on taxpayer’s compliance behaviour.
1.6 Operationalization of Variables
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Fig.1. Operationalization of Variables
Source: Researcher’s Conceptual Model (2015).
1.7 Significance of the Study
This study would be of immense benefit to the academics, tax regulators, students and other stakeholders. It serves as a reference material for further research on topics related to this subject of discourse.
1.8 Scope of the Study
This study focuses on the influence of tax education on tax compliance. It covers only the staff of Lagos State internal Revenue Service. The independent variables proxyused to measure the level of Taxpayers voluntary compliance behaviour are limited to education level and income level of the respondents.
1.9 Operational Definition of Terms
Tax: a compulsory levy which a government imposes on its citizens to enable it to obtain the required revenue to finance its activities.
Taxation: the practice or process of collecting taxes (money) from citizens based on their earnings and property.
Tax Education: a method of educating the people about the whole process of taxation and why they should pay tax.
Tax Compliance: the process of fulfilling the tax payer’s civil obligation for tax payment and filing of tax returns including the provision of necessary documents and explanations required by the tax authority in a timely manner.
Tax Evasion: a deliberate and willful practice of not disclosing full taxable income in order to pay less tax.
Tax Avoidance: the active means by which the taxpayer seeks to reduce or remove altogether his tax liability to tax without actually breaking the law.
Tax Incentive: deduction, exclusion, or exception from a tax liability, offered as an enticement to engage in a specified activity (such as investment in capital goods) for a certain period.
Tax Incidence: this is the analysis of the effect of a particular tax on the distribution of economic welfare. It is said to "fall" upon the group that ultimately bears the burden of, or ultimately has to pay, the tax.
Consumption Tax: a tax on spending on goods and services. The tax base of such a tax is the money spent on consumption. Consumption taxes are usually indirect, such as a sales tax or a value added tax.
CHAPTER TWO: LITERATURE REVIEW
2.1 Conceptual Frame-work
2.1.1 The Concept and Definition of Tax Compliance
Tax compliance is a major problem for many tax authorities and it is not an easy task to persuade taxpayers to comply with tax requirements even though ‘tax laws are not always precise’ (James and Alley, 2004). It is a wide concept and can be viewed from many perspectives, including public finance, economic, legal and psychological. Compliance through the willingness of citizens to pay tax is very important and cannot be ignored (Akintoye and Tashie, 2013).
Tax compliance has been defined by many researchers in various ways.According to Oyedele (2009) tax compliance is defined as the process of fulfilling the tax payer’s civil obligation for tax payment and filing of tax returns including the provision of necessary documents and explanations required by the tax authority in a timely manner. It is the most neutral term to describe taxpayers’ willingness to pay their taxes (Kirchler, (2007). Allingham and Sandmo (1972) described tax compliance as an issue of ‘reporting an actual income’ and also claimed that tax compliance behaviour was influenced by a situation whereby taxpayers have to make a decision under uncertainty. Similarly, tax compliance is also defined by several tax authorities as the ability and willingness of taxpayers to comply with tax laws, declare the correct income in each year and pays the right amount of taxes on time (Internal Revenue Service Act, 2000 Act592).
Tax compliance is anchored on taxation policies and cut across all industries but studies have already established that regulatory burdens fall disproportionately on specific industries, the worst affected according to Pope and Abdul-Jabbar (2008) are the small and medium enterprises globally. Their size and ability to fulfil tax obligations make it hard for them to comply since most have limited access to resources and inadequate expertise to comply with diverse and complicated regulations (Amon, Daniel and Anthony, 2013).
In reference to tax compliance, majority of enterprises found not to comply have been grouped in one category termed the underground economy (Parliamentary Budget Office, PBO, 2010). According to PBO, underground economy refers to transactions that go unreported and unrecorded for taxation.
Tax compliance has also been divided into two perspectives, namely compliance in terms of administration and compliance in terms of completing (accuracy) the tax returns (Harris, 1989; Chow, 2004; Ohene, 2011).
Compliance in pure administrational terms therefore includes registering or informing tax authorities of status as a taxpayer, submitting a tax return every year (if required) and following the required payment time frames (Ming, Normala and Meera, 2005). On the other, hand, the wider perspective of tax compliance requires a degree of honesty, adequate tax knowledge and capability to use this knowledge, timeliness, accuracy, and adequate records in order to complete the tax returns and associated tax documentation (Singh and Bhupalan, 2001).
McBarnet (2001) suggested that tax compliance should be perceived in three ways, namely;
i. Committed compliance -taxpayers’ willingness to pay taxes without complaint;
ii. Capitulative compliance -reluctantly giving in and paying taxes and
iii. Creative compliance - engagement to reduce taxes by taking advantage of possibilities to redefine income and deduct expenditures within the bracket of tax laws.
Spicer and Lundstedt (1976) perceived degrees of tax compliance as ‘a special form of gambling’ (which, may involve likelihood of detection and penalties) which requires the tax authority to understand the factorsunderlying taxpayers’ decision to comply with tax laws.
In contrast with tax compliance, tax non-compliance is defined as taxpayer’s failure to remit a proper amount of tax, perhaps on account of the complexity or even contradictions in the tax legislation or tax administration procedure (Jackson and Milliron, 1986; Kesselman, 1994; Kasipillai and Jabbar, 2003).Singh, Bhupalan and Somasundram (2003 and 2005) claimed that the wider perspective of compliance becomes a major issue in a self-assessment system since the total amount of tax payable is highly dependent on the levels of tax compliance this perspective reveals, although it is inevitable that tax authorities will seek to ‘influence’ the areas taxpayers have influence over determining to reduce the risks of non-compliant behaviour they face otherwise e.g. through continuously conducting tax audits of different sorts and other means such as various compliance influencing activities including tax education.
Some studies also segmented income tax non-compliance into unintentional and intentional behaviour e.g. Allingham and Sandmo(1972), Kesselman (1994), Mohani (2001), andLoo, (2006).
2.1.2 Tax Education and Tax Compliance
This concept discusses the importance and the role of tax education particularly in determining taxpayers’ attitudes towards taxation.
Knowledge about taxation, the benefits of taxation and the dangers of non-compliance remain a key issue to tax compliance in Nigeria and many countries. Countries such as the US, Canada, Japan, New Zealand, Australia, the UK and Malaysia have all been implementing a continuous tax education for taxpayers and children as future taxpayers (Palil, 2010; Amon, Daniel and Antony, 2013).
The influence of knowledge on compliance behaviour has been proven in various researches (Mohamad, Mustafa and Asri, 2007).Tax education enables too well understand the tax system. Eriksen and Fallan (1996) believed that with reasonable understanding of the tax laws, people are willing to respect the tax system; consequently they are more compliant to pay tax instead of evading it. Furthermore, individuals become educated, which is knowledgeable in the aspect of tax planning, tax law and the likes. At the same time, tax knowledge improved individual’s awareness and ethics toward reduce their tendencies of tax non-compliance (Mohd and Mohd, 2013).
It is expected that tax education will enable the taxpayer to understand tax laws and procedures as well as creating positive tax compliance attitude (Roak and Stephen, 1994; Normala, 2007; Clifford and Jairus, 2013).
Findings from Olowookere and Fashina (2013) revealed that tax education activities focused on enlightening taxpayers’ on socio-economic implications of tax evasion opportunities and the transparent and accountable use of tax proceeds have significant influence on taxpayers’ voluntary compliance in Lagos State. For example, the tax education and enlightenment activities conducted by Lagos State Internal Revenue Service (LIRS) team visiting companies and businesses establishment within the state to check tax compliance and enlightening the taxpayers have resulted in increased tax payers’ compliance (Tunde, 2013).
Recent studies, including by the OECD, indicate a link between tax morale– citizens’ perceptions of tax issues and perceptions of the quality of social expenditures. In other words, people who receive good quality public services are more willing to pay their taxes (OECD/CEPAL, 2011).
Low tax morale not only weakens citizens’ commitment to the common social project, it also reinforces a vicious cycle: people justify not paying their taxes on the grounds that the state is not keeping its side of the social bargain; this leads to insufficient revenue for improving services, services decline and so the cycle is perpetuated (OECD,2013).
Tax Education to the SMEs becomes necessary when the objective of rising tax revenue, at the changing environment; particularly from the official tax assessment is considered (Normala, 2007). The department of taxpayer education in Mwanza, since the financial year 2005/2006 has conducted taxpayer sensitization programs through radio, newspapers, television, bulletin boards, roadside banners, street announcements using mobile car with speakers, leaflets with tax information, participations in the community activities and the organization of taxpayer day. These have contributed positively to the Revenue Performance Report, of Mwanza City in 2007/2008 (Clifford and Jairus, 2013).
Thus, higher knowledge concerning taxes leads to higher compliance and poor knowledge concerning taxes leads to higher non-compliance.Knowledge about taxation practices can also contribute to the perceived power of authorities; for example, knowing that tax officers have conducted a large number of tax audits and detected several cases of fraud can make them appear effective and powerful. Perception of ineffectiveness, on the other hand, can reduce perceived power, pointing to the importance of information policy on part of tax authorities (Erich, Erik and Ingrid, 2008).
2.1.3 Concepts of Income Tax
In developing countries the income tax compliance has been constrained by the significant number of changes to the tax laws, that are now so complex and only a handful of tax experts can understand them. This creates additional problems for compliance by taxpayers who do not have access to sophisticated tax specialists (Oberholzer, 2008; Festo and Isaac, 2013).
Income tax is based on a system of rules and regulation that determine the treatment of various items of income and expenses.
It is pertinent to note that income taxation is based on a system and shares the characteristics of any form of system. Income tax system has been developed around general concepts that guide in its application to various types of transactions. However, there are exceptions that do not go in line with the application of the general concepts. These exceptions generally stem from the desire to use the tax system to promote some social, economic or political goals.
A concept is a broad principle that provides guidanceon the income tax treatment of transaction. A construct is a mechanism that has been developed to implement a concept. A doctrine is a construct that has been developed by the courts. Therefore, construct and doctrines are the interpretive devices necessary to apply a concept.
Income tax concepts can be categorized into major functions within the income tax system. These include;
i. general concepts
ii. accounting concepts
iii. entity concepts and;
iv. realization concepts
18.104.22.168 General Concepts:
This provides guidance on the overall operation and implementation of the income tax system. A fundamental concept underlying the income tax structure is the ability-to-pay concept which states that the tax levied on a taxpayer should be based on the amount that the taxpayer can afford to pay. The first result of this concept is that the income tax base is a net income number (i.e. income minus deductions and losses) rather than a gross figure such as total income received. Therefore, the tax base recognizes different deduction levels incurred by taxpayers as well as different levels of income.
22.214.171.124 Accounting concepts:
This guides the proper accounting for and recording of transaction that affect the tax liability of taxpayers. Without these concepts, taxpayers could manipulate their affairs so as to avoid paying taxes for many years.
126.96.36.199 Entity Concepts:
This provides that each tax unit must keep separate records and report the results of its operations separate and apart from other tax units. This tax law requires that all tax units be classified as one of two basic entity types: taxable or conduit.
Taxable entities are those that are liable for payment of tax. That is taxable entities must pay a tax based on their taxable income. The four entities responsible for the payment of income tax are individuals; regular or corporation.
Conduit entities are non-taxable reporting entities. A conduit entity is one in which the tax attributes (income, deduction, losses, credit) of the entity flow through the entity to the owner(s) of the entity for tax purposes. The entities record transaction undertaken by the entity and report the result to the government.
188.8.131.52 Realization concepts:
This concepts states that no income is recognized for tax purposes until it has been realized by the taxpayer. A crucial question regarding income items under these concepts is when to recognize the income. In this regard, the taxpayer’s accounting method resolves many of the problems.
2.1.4 Comparison of Tax Evasion and Tax Avoidance
Tax evasion has been defined by Soyode and Kajola (2006) as deliberate and willful practice of not disclosing full taxable income in order to pay less tax. It is described by Olayinka, Temitope and Jumoke (2010) as an intentional illegal behavior involving a direct violation of tax laws to avoid payment of taxes.Tax evasion usually entails taxpayers deliberately misrepresenting or concealing the true state of their affairs to the tax authorities to reduce their tax liability. It also includes, in particular, dishonest tax reporting such as declaring less income/profits or gains than actually earned or overstating deductions.It is a violation of tax laws and a general term for efforts by individuals, companies, trusts and other entities to evade taxes by illegal means (Nwachukwu, 2006).