Taxation as an Instrument of Fiscal Policy in Nigeria

TAXATION AS AN INSTRUMENT OF FISCAL POLICY IN NIGERIA

What is tax?: Tax may be defined as a demand made by the government of a country for a compulsory payment of money by the citizen of the country. According to P. Emekwue; “Tax is a major source of government revenue which is compulsorily paid for which government need offer no services or explanation. It is a compulsory charge imposed by a public authority and its essence as distinguished from other charges by government in the absence of a direct quid pro quo relationship between the tax payer and the government”.

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Also the oxford Advanced Learner’s dictionary defined it as the sum of money to be paid by people or business to a government for public purposes. Some reasons for the imposition of tax includes the following:

  1. As a source of revenue for government: In order to pay for public and merit goods and also to meet up with its social economic and political obligation e.g. building schools, hospitals, road etc. Government uses tax instrument to

raise money.

  1. Government also levy taxes to discourage the consumption of goods that are considered undesirable, goods that are inimical to health, social welfare or those goods that create room for ostentation, wrong investment priorities or class distribution in the society.
  2. To re-distribute income in the society: In – equality in the society arising from factor ownership could be controlled through a tax structure that will ensure re-distribute, so that those on high income bracket will pay high tax rates and those in law income bracket to pay taxes enable excess funds to be siphoned out from the rich to the poor by ways of providing subsidies for goods normally consumes by he low income groups by government.
  3. Tax could be used as a means of protecting the infant industries. Some industries in our country are still at infant stage of growth. And if exposed to face stiff competition from the advance economies, they will not service. So government can protect them by raising the prices of imported goods at the expenses of homes base production of goods.
  4. Tax could be levied to control inflation in an economy. When there is inflation in the economy government can tax away the excess income in the hands of the society and thereby reducing the aggregate demand which will eventually bring the price spiral down in the economy.
  5. Export promotion strategies is another reason: reduction in export duties will be an incentive for exporter to export more and import less. Thereby creating a favourable balance of payment for the economy.
  6. Government could also levy taxes in order to stimulate the economy towards growth and development. This could be achieved through tax incentives to investors, tax concessions, tax holidays to new firms or investors that could lead to industrialization and development of the economy.

FORMS OF TAXES

          According to Odoh Nick .N. Public finance for polytechnics; there are broadly two basic forms of taxes as follows:

  1. Direct taxes
  2. Indirect taxes

DIRECT TAXES

          These are taxes that are levied on the income of individuals and business firms and which is actually paid by the person or persons whom its legally imposed. In Nigeria, direct taxes include the following:

  1. Personal Income Tax :­ This is a tax on the income of employees, sole traders, partnership and pensioners. The characteristics of this tax is that, it is progressive.
  2. Company Income Tax : The tax on a company’s profit is called company tax. This tax is also progressive in nature because the higher the income (receipts) or profits from business activities, the higher the tax and vice versa. Also tax avoidance and evasion is lower here when compared with personal income tax, because of the federal governments insistence on the submission of tax certificates with respect to any official issue involving companies.
  • Capital Gains Tax: This is tax on the gain arising from the disposal of items of capital nature. It affect companies, individuals and non-corporate bodies.  
  1. Petroleum Profit Tax (PPT): This is a tax payable by entities that engage in prospecting for, or the extraction and transportation of petroleum oil or natural gas.
  2. Poll Tax: This is a system of tax structure whereby a tax is imposed at a flat rate per head of production or among a group of people. It is regressive tax because no matter what the size of a person’s income, everyone to pay the same amount.

 Also Read: Taxation as a Source to Government Funding

INDIRECT TAX

          An indirect tax is one imposed on the consumption of goods and services by individual as well as corporate persons. It is imposed on one person but paid party or wholly by another owing to “a consequential charge in the terms of some contract or bargain between item. It is a tax levied on the sale or purchases of goods and services levied on one person with the expectation that the incidence will be shifted to another person e.g. the consumer. Examples of indirect taxes are as follows:

  1. Excise Duties: – This is a form of tax levied on selected goods manufactured within the country. They correspond to custom duties on the same type of commodities, which are imported.
  2. Import Duties / Tariffs: – This is a form of tax imposed on goods that are imported from foreign countries. It is levied in order to protect infant industries from those foreign countries that are better established.
  • Custom Duties: – These are taxes paid in connection with international exchange of goods and service. They are in two forms: import duty is levied on goods and services brought into the country from abroad while export duty is imposed on commodities which are exported.
  1. Capital Transfer Tax: This is imposed on property and other capital assets. These taxes are paid either yearly or at particular times, for instance, when a person dies, his assets are subjected to capital tax. In this case, the term death duty or estate duty is used before the assets could be transferred to the relatives who will inherit the assets.
  2. Valued Added Tax (VAT): This form of tax was introduced as a replacement of sales tax which has been in operation under the federal government legislation Decree No 7 of 1986. Vat Decree 102 was promulgated on August 24, 1993.

This tax is a consumption tax and therefore relatively easy to administer and difficult to evade. The yield from VAT is fairly accurate measurement of the growth of an economy since purchasing power (which determines yield) increases with economic growth. VAT is self-assessment taxes that is, the refund or credit mechanism, which eliminates the cascading, affect that is, a feature of the retail sales tax. The inputs – output tax mechanism is VAT also makes it self-policing. In essence, it is the output tax and less input tax that constitutes the VAT payable.

Although VAT is a multi-stage tax, it has a single effect and does not add more than the specified rate to the consumer price no matter the number of stages at which the tax is paid.

 

ILLUSTRATION

If a product moves from raw material producer (A) to manufacturer (B) at N1000 then to wholesaler (C) at N1500, then to retailer (D) at N2000; and finally to the consumer who pays N2500 to the retailer. VAT payable to government at 5% rate of VAT is as follows:

Variable persons Sales price (before VAT)

N

VAT collected (output tax)

N

VAT on inputs (Input tax)

N

VAT paid to government

N

A 1000 50 50
B 1500 75 50 25
C 2000 100 75 25
D 2500 125 100 25
Total 350 225 125

 

Thus, the total VAT paid to government in the four transactions is N125, which is 5% of the final consumer of N2500.

VAT AS REPLACEMENT TO SALES TAX

          This rationale behind replacing sales tax with the value added tax is informed by a number of factors and consideration, notably.

  1. The base of sales tax in Nigeria as operated under decree No.7 of 1986 is narrow. It covers only nine categories of goods plus sales and services in registered hotels, motels and similar establishments. The narrow base of the tax neglects the fundamental principles of consumption tax, which by nature is expected to act across all consumable goods and services. VAT base is broader and includes most professional service and banking transactions, which are high profit generating sectors.
  2. Only locally manufactured goods were traded by the sales tax decree of 1986, although this might have been the intention of the law. VAT is neutral in this regard. Under VAT, a considerable part of the tax to be realized from imported goods. This means that under the new VAT, locally manufactured goods will not be placed at a disadvantage relative to imports.
  • Since VAT is based on the general consumption behavious of the people, the expected high yield from it will boost the fortunes of the state government with minimum resistance from the payers of the tax.

GOODS AND SERVICES COVERED BY VAT

          At the moment, there are seven categories of goods and twenty-four categories of services that are vatable. The goods and service exempted are as follows:

Goods Exempted

  1. Medical and pharmaceutical products
  2. Basic food items
  3. Books and educational materials
  4. Newspaper and magazines
  5. Baby products
  6. Commercial vehicles and their spare parts
  7. Agricultural equipment and products veterinary

 

Services Exemption:

  1. Medical services
  2. Services by community banks, peoples banks and mortgage institution and
  3. Plays and performances conducted by educational institution as part of learning.
    • THE TAX SYSTEM

The Nigerian tax system refers to a set rules and regulations and the aggregation of the tax arrangements, institutions and agents that interact with each other and the rest of the economy to generate revenue for government. It should be noted that government business; whether in the forms of policies, programs, activities or functions is run in accordance with laid down formalities. This will constitute the objectives, the plans of action and the expected and product or result and all these must operate within a specific theoretical and regulatory framework, which will constitute the system.

The constituent of the tax system could be divided into three as follows:

  1. The tax policy
  2. The tax laws: and
  • The tax administration
  1. Tax Policy: – A policy is a particular course of action adopted and in this case the line of action adopted by government in respect of taxation. Taxation is one of the major fiscal policy instruments used in regulating the economy,

boosting investment, encouraging saving capacity, regulating inflation etc.

it is one of the sources of government income used in financing public utilities and performing various social responsibilities. And for any tax system to be legal, it must be a creation of the constant change in the economic environment in which it operates. The need to review the regulating instrument from time to time and amendment made to the original acts.

This is always done through the annual budget delivered by the president. The policy objective of any government tax system is aimed at achieving the following:-

  1. To create a fair and equitable society.
  2. To encourage a fair allocation of savings amongst investment opportunities.
  3. To create an economic society free of distortion to investment decisions.
  4. To create incentive to hard work or for risk taking in business in case of companies.
  5. To attract foreign investment or at least, avoid capital freight to countries with lower taxes.
  6. To reduce evasion and avoidance and the growth of underground economy and encourage voluntary compliance.
  7. To reduce the complexity of the system both for tax administrators and for tax payers.

The fiscal or assessment years run from 1st January to 31st December of the same fear. [up to 31st march 1980, it is use to be from 1st April to 31st March following]. The basic taxation principles applicable to the trading income of individual are also applicable to companies, that is profits or gains are taxed while losses are allowed to be relieved against profit of the years with the fur years carry forward time limitation. The exceptions for agricultural business where there is no time limit for set-off. Losses are also applicable to companies. All income accruing to a company is taxed on proceeding year basis rule. None is taxed on actual basis except when the commencement or cessation provisions are being applied. However, in the case of personal income tax, salary, pension, commission and allowances are taxed on current year basis while rent, dividend, interest and business profits are taxed on proceeding year basis.

  1. Tax laws: – The legal formalities in the area of government finances include laws; rules and regulations. The laws made during the tenure of a democratic elected government at the federal level are referred to as Acts and this same in the case of state level. However, the laws under military rule at federal level are decree while those at the state levels are called edicts.

Every tax imposed must be backed up by legislation. Below are the various legislation-imposing taxes on individual and corporate bodies in Nigeria.

  1. The personal income tax Decree (decree 104 of 1993) which replaced:
  2. Income tax management Act cap 173 LFN 1990
  3. Income tax (armed forces and other persons) (special provisions) Act cop 174 LFN 1990.
  4. Personal income tax (Lagos) Act.
  5. The companies income tax Act Cao 60 LFN (formally CITA 1979)
  • The petroleum profits Tax (PPT) Act Cap 354 LFN)
  1. The industrial Development (income Tax Relief) Act 1971.
  2. The capital gain Tax Act 1967
  3. The stamp duties  ordinances 1958
  • Value Added Tax Decree No. 102 (1993).
  1. Personal Income Tax: – This legislation regulates personal taxation in Nigeria i.e. it regulates the assessment and collection procedures for the individual or body of individual includes family, sale trustee or executor having any income which is chargeable with tax under the provision of the decree; the provision of the decree is to apply throughout the federation except as there is provided. Note: in reflecting the constitutional provision which places the taxation of income and profits in the exclusive list, income tax management Act Cap 173 LFN 1990 and the income tax (Armed forces and other persons) (special provision) Act (Cap 174 LFN) 1990 have been merged with personal income Tax (Lagos) Act 1961 (PITLA) and redrafted to personal income tax Act (PITA). Thus reference to the three Acts hereafter will be personal income Tax Act (PITA).
  2. companies Income Tax Act Cap LFN 1990 (CITA 1971). This regulates the assessment and collection procedure for the taxation of corporate bodies other than those in production of crude oil or natural gas. This latter class of corporate bodies is taxed under the petroleum profits tax Act – 354 LFN 1990.
  • The petroleum profits tax Act Cap 354 LFN 1990. The petroleum profits tax act regulates the taxation of oil producing companies including the NNPC. These companies are in some cases in joint ventures with NNPC to produce crude oil for sale. The Act regulates the assessment and collection of petroleum profit tax, which accounts for over 80% of the tax collection of the board.
  1. Industrial Development (income tax relief’s) Act 1979. This Act does not impose tax, but provides for industrial incentives by way of exemption from tax for all companies that might be accorded pioneer status by the industrial development co-ordination committee of ministers.
  2. Capital Gains Tax Act 1967: This imposes tax on profits derived from sales of capital items e.g. property, shares in companies etc. the rate of tax is 20 percent (20%) of the net gain after deducting the original cost of assets and expenses of sales up to the 1995 tax year but as from 1996 tax year it was change to 10%.
  3. The Stamp Duties Ordinance 1958: This regulates transactions which are subject to advalorem duties to give them legal backing for purposes of revenue under this ordinance. These matters over which the state had no tax collection, jurisdiction are stamped by the Federal Inland Revenue Services e.g. stamp duties for the registration of capital of new companies are collected by the Federal Inland Revenue Services. Stamp duty on legal transaction involving individuals only, are payable to the state.
  • Value Added Tax Decree No. 102 (1993): This is consumption tax on the supply of goods and services. It is collected on behalf of the government by those who supply goods and services and paid for the buyer and / or the consumer of the goods and services. In practice, VAT is normally included in the invoice, which must be issued for every transaction. The present rate is five percent [5%].
  • TAX ADMINISTRATION: – This has to do with things meant to ensure proper planning e.g. management, the planning of organization structure, staff direction and control are all brought to work under administration.
  1. Tax Authority: This is defined as the “person or body of persons responsible under a law of a territory for imposing tax on the income of individual and companies and for the administrative of that law”.

In Nigeria, the taxation of corporate bodies is exclusive administered by the Federal Board Of Inland Revenue (FBIR) through its operative arm, the Federal Inland Revenue Service (FIRS).

On the other hand, the personal Income Tax is administered by the state governments except the PIT coming within the income tax armed forces and other persons (special provision) Decree 1972.

Various tax legislation specifies the powers and duties of a tax authority. These comprises in most cases:

  1. Power to raise assessment
  2. Power to collect and account for the tax; and
  3. To receive representation from the taxpayer and their agents through this interaction, a relationship is created between the tax authority and the taxpayer.

The socio-political and economic organization of a country and its way of life affect the development of the tax structure and its administration. And Nigerian, being a federation with a 3-tier system of government has a government level. It should be noted that the federal government has in recent times been embarking on the overhaul of the Nigeria tax system, creating a deliberate low tax regime, and to re-organize the entire tax administration to make it more efficient and constantly reviewing the tax laws.

 

  • PRINCIPLES / CHARACTERISTICS FOR A GOOD TAX SYSTEM

According to Adam Smith 1937 and Nick Odoh N. 1998. Taxes are levied as a means of achieving many objectives. But how effectively and efficiently they achieve these objectives often depends on the characteristics of the taxes. The essentials of a good tax also known as cannons of taxation was first enunciated by Adams Smith in his book “Wealth of Nations” they are as follows.

  1. The principles of certainty: – This principle states that the tax law must be such that a tax payer can ascertain without much difficulty so as to know what is due from him / her to the state. The law must be impel and clear as much as possible. Tax payers should know how much to pay and when to pay it. Neither the amount nor the time of payment should be subjected to arbitrary decision of tax officials.
  2. The principles of Equity: – This takes into account the “fairness” of a tax. The tax must not be arbitrary nor should the amount payable be influenced by prejudice or personal feelings.
  3. The principles of Convenience: – The taxpayer must not experience great cost or inconveniences simple because he / she wants to simply with tax obligations. Infact, the compliance cost must be zero. The tax should be collected when best suitable for the taxpayer like the harvesting period, in the case of farmers and at the end of the month in the case of salary earners. Therefore, tax collection must coincide with income.
  4. The principles of Economy: – A good tax system must take adequate precaution to ensure that it does not make the economic situation worse off. It must take cognizance of the citizen as an investor, consumer and saver and must not affect adversely the economic contribution of the person taxed. Neither should it lead to disincentive to efforts nor undesirable features like inflation.
  • DEVELOPMENT OF THE NIGERIA TAX SYSTEM

The development of taxation in Nigeria dates back to the days of our great-grand fathers when commodities taxed themselves through communal labour to prosecute community projects to help wade off aggression or attack or some kind of evil from outside the community. The earliest trace of any form of direct taxation was in the northern region of the country. Here, people contributed towards charity because of the organized from of administration if Emirs and commitment to Islam. According to Olaniyan, due to the enforcement of direct rule in the Northern part of the country at about the period, 1990 local authority had direct responsibility for the collection of direct taxes. These were of two types namely; general tax levied on settled farmers and traders and cattle tax. “Jangali” levied on nomad pastorities. The two taxes were retained by local authorities for the discharge of their responsibilities such as maintenance of law and other and provision of local services. The remaining part, however, was paid to the central governed. Some other forms of levies that were existing are “Gado, “Gaisua”, etc.

In western Nigeria, there were also some forms of taxes in the form of tribute, levies and fees, to mention but a few. Tax payment was virtually not existing in the eastern part of the country rather each community contributes equally at will when the community embark on one form of project or the other. This could be due to the fact that they have no leader to account to as in the case of the other two regions. When the British came, they enacted various taxing ordinances aimed towards regulating the imposition and collection of taxes from natives. This problem existed as far back as the 1880’s. lord Lugard administration as the British high commission for Nigeria tried to combine the different tax levies and taxes into a simple understandable and collectable. “Direct tax”, do as to maintain some acceptable common equity, certainly, convenience and economy. Income tax first introduced in 1904 by the late Lord Lugard when community tax becomes operative in Northern Nigeria.

During the administration of Lord Lugard, the first law enacted was land revenue proclamation in 1904 in which the process of taxes were collected by the natural rulers of that time and shared between them and the government. The Emirates according to Emirs direction used the natural ruler’s portions while others were used in running the government of the country. The native revenue proclamation law was later or introduced in 1996, which aimed at unifying all existing forms of taxation as of then. This replaced the 1904 Land Revenue Ordinances. Its purpose was to regulate the imposition and collection of taxes from natives. It was extended to the north and south although Delta area in the south resided it. The eastern part such as Owerri, Calabar and Aba also refused the payment. It was eventually extended to them in 1928 after the amendment of 1917, Native Revenue Ordinance. The Native Direct Taxation Ordinance and the Non-Native Income tax was tax in 1928 after the amendment of 1917 native revenue ordinance. The native directs taxation ordinance and the Non-native income tax protectorate of indirect taxation between the natives and non-natives. These were later replaced by direct taxation ordinance of 1940.

Under the direct taxation ordinance, rates of taxes and basis of computing income varied between local administrative units due to lack of proper administration. According to C.S. Ola, the legal history of personal income tax in Nigeria may be traced back to enactment of the direct taxation ordinance which was unscientific and without any form of uniformity by levying tax on incomes of Africans and Europeans in the former regions in which they were resident.

In early 1950’s, there evolved a federal system of government where the income tax ordinance of 1943 was retained as a federal matter, which governed the taxation of non-Africans and companies while the 1940 Direct taxation ordinance became a regional affairs and governed the taxation of Africans in different regions. Each of the three regions – north, west and east were empowered to pass laws for the taxation of Africans resident in their regions.

Direct taxation was introduced at a recent date in late 1920’s in eastern Nigeria primarily at local levels. In 1956, the eastern Nigeria government took over most of the direct taxation powers of the local government and established the present income tax largely to finance universal education. The first indigenous laws were enacted by:

  1. Eastern region in 1956 – taxation ordinance with finance law No. 1 of         1956.
  2. Western region introduced the income tax law No. 16 of 1957.
  1. Northern region retained the 1940 taxation ordinance.

It is curious that the eastern region which was the last to accept any form of tax system in Nigeria was the first to introduced a comprehensive region finance law that served as a model for other regions. It was this finance law that introduced PAYE method of taxation in Nigeria. Another note worth fact was the highest rate of tax per head was paid in the eastern region.

In 1957, the Rainman fiscal commission recommended the introduction of uniform basic principles for taxing income of persons other than limited liability companies throughout in the Nigeria (constitution) order of council 1960 (ITMA) and the personal income tax (Lagos) Act 1961. This recommendation was also the basis for providing in section (70) of the Nigeria (constitution) order in council of 1960 section (1) of which conferred an exclusive power upon parliament to make laws for Nigeria or any part thereof with respect to taxes on income while section (ii) and (iii) conferred concurrent power upon parliament to make laws for Nigeria or any part thereof with respect to certain inform principles of personal income tax. Base on this, the federal government enacted the income tax management Act (I.T.M.A) of 1961. When it came into operation in April 1961. All other regional laws on taxation had to be amended to bring into conformity with the federal law.

The nations modern direct taxation dates bank to 1940 and 1943, the major legislative land mark was made shortly after Nigeria independence with the Acts mentioned above. Other necessary laws were introduced such as the companies income tax Act 1961 superseded by 1979 Act as amended, the petroleum profit tax act 1959; the capital gain tax decree 1967; the stamp duties ordinance 1958; capital transfer Act 1979; income tax armed forces and other persons special provision decree 1972; other pre-operation levy on companies in corporate for more than six months and has not commenced business popularly called decree No. 4 of 1985 (finance miscellaneous taxation provision decree 1985). Most of these acts have undergone amendment act still the tax laws in the country have a lot of bearings to those introduced by the colonial masters. the Nigerian taxation system are basically British and while perhaps not always best swited to African conditions, they do reflect centuries of attention in England to the question of most acceptable forms of taxation.

 

  • THE ROLE OF TAXATION IN THE NATIONS DEVELOPMENT

According to Olaniyan I.F. “Taxation with macroeconomics framework of nation decree. The purpose for taxation is to accomplish some of the nation’s economic and social objectives in the process of economic growth and development. Some of these areas that the effect of taxation cuts across are as follows: –

  1. Protection of infant industries: – Taxation has been a vital fiscal policy tool for the protection of industries in Nigeria, most especially “infant industries”, from those of the well established ones in European countries. Normally import duties are meant to discriminate against goods and services that are competitive with the local ones in the pipeline.

In achieving this, the government created domestic conditions that were geared towards neutralizing  the adverse effect of external competition in the 1991 fiscal year. One of these was the duty draw back scheme, which is an integral part of export promotion scheme. This was increased to N50 million as against the N10 million in 1990. The second domestic condition created was the introducing of manufacturing in bond scheme” where manufacturer could import, free of duty, the raw materials for production of exportable goods. The government also made effort in effecting the tariff duties existing. Consequently, the custom (dumped and subsidized goods) Act of 1958 and import duty monitoring scheme Act were reviewed to allow effective implementation of the current tariff regime.

Furthermore, amendments were made on the existing custom and excise tariffs in 1993. For example 10% levy on C.I.F value of imported sugar was imposed for the development of local sugar production. The custom and excise No.1 of 1988 was extended to end on December 31st 1994 in other to ensure on one hand that the industrial and agricultural sector of the economy are adequately protected. Also in that 1994 fiscal year. Tariff for the production of local bacteria was retained and local factories were encouraged to resuscitate their operation to take advantage of  the large local market, while the existing heavy duty was given added force.

However, it has been often argued that protection cannot contiue forever, it is therefore essential that young industries will be well organized and managed so that in a short period of time, they would be able to stand on their own by producing goods and services that can compete effectively with imported ones.

  1. Inflationary Control: – Inflation has been a notable problem in Nigeria for the past 10 years or there about. This problem has been due to the fact that the quality of money in circulation is greater than the available goods and services which money can buy. An another causative factor is that of demand pull inflation where prices are increased due to excessive demand for commodities and services. Also, cost of production results in cost pushes inflation.

In tackling this situation, government in its 1993 fiscal year shifted tax burden from production to consumption by the introduction of VAT (Value Added Tax) effects on the moderate the rate of cost pull inflationary effects on the cost of production. The fiscal provision in 1994 was designed to compliment the objective of monetary policy to maintain price stability and therefore reducing the rate of inflation. To this end, inflationary pressures moderated during the first half of the year at 53.5% in June, which compared favourable with 57.5% at the end of December 1993. The government also found the reduction of the inflation a necessary objective in the 1995 fiscal year.

Another measure necessary in controlling the inflation problem is ensuring that enough goods and services are produced to measure up with the quality of money in circulation. In respect of this, government has made it a point of duty to giving the productivity sector enough incentives that will boost greater production activities. A notable example of this is when manufacturer was given free duty in respect to importation of raw material for production purposes in 1991 budget.

  1. Income Distribution or Re-distribution: – Taxation has also used in checking inequality of income. Direct taxes especially personal income tax rate made in a progressive form I other to redistribute income. In effecting steeply, progressive tax system, income that fall over and above a certain level should be pruned down to that level which for conveniences we regard as the mean. While those income that fall below should be shield from tax. An example of this was in 1993 fiscal year when all workers whose incomes are not more than N5000 were exempted from payment of income tax. Meanwhile, the income tax rate for that year was 35% with the government commitment to redistribute income, the level of income to be shield from tax was further reviewed. In the budget of 1995 low-income earners not earning more than N7500 were exempted from tax. This was further reviewed to a current amount of N10,000. Inequality of income is further reduced by the provision of social services which is designed to benefit the poor. The fiscal policy tool of 1993 was meant toward directing funds to poverty – alleviation project.
  2. Effects of production: – A tax system is good enough when it has a minimal disruptive effect on the economic life on the citizens. effect of taxes on production is clearly made manifest on the ability to work; desire to work; save and invest.

 

THE EFFECTS OF TAXATION ON ABILITY TO WORK SAVE AND INVESTMENT

          In recent times, the government of Nigeria has placed emphasis on efficiency through its tax policy thereby serving an incentive to work. Thus it has become pertinent to shield the poor members of the society from tax. In response to this, the government in its 1993 budget decided to shield the poor members of the society with income less than (N500.00) five hundred naira a month from tax. In 1995, it was N7500 and presently, N10,000. It is even argued that when public funds are expanded in the provision of social services, this might prove more beneficial to this segment of the society than harm that the payment of taxes will do them. Consequently, the government still in its 1993 budget placed emphasis on directing funds to poverty – alleviation projects, the ability to work, save and invests result from a chain effect. In other words, when the tax is heavy, there will be low saving leading to low capital formation and finally how investment ventures vice – versa. In cognizance to this fact, the government has continuously reviewed downwards of the tax rate on individual and likewise provide adequate tax relief. The tax rate in 1991 was 40%. This was reviewed to 35% in 1992, and remained so until 1995. In 1996, it was reduced to 30% its present rate is 30%. It further encourages worker personal allowance was increased from N2000 to N3000 plus 15% of earned income in 1992. Children allowance was increased from N400 to N500 etc. all these are meant to increase the desire and ability to work.

Furthermore, it was provided that government in its 1991 budget moved towards lower taxes and higher incentives for the productive sector of the economy . in boosting the productive sector, government reduced the rates of company taxes to 35% and small companies at 20%. Presently, the company tax rate is 30%. In 1993, due to the introduction of vat, states were made to abolish all forms of taxes and levies that have similar tax effect on business enterprise.

  1. Stimulation of Economic Recovery / Development: – Taxation has also been an instrument in stimulating recovery from trade depression when unemployment is usually high. In respect of this, the 1994 fiscal policy measures were designed to chart a rational course of trade policy. Therefore, the government decided that the anomalies identified in the 1994 custom and excise regime to connected so that affected industries can increase their capacity utilization and provide more employment opportunities for Nigerians.

Here, industrial machines, equipment and spare parts were meant to be imported duty free in order to encourage investment in capital industrial projects. Furthermore, in fighting unemployment and stimulating recovery from depression, government has increased its expenditure with corresponding decrease in spendable income in the hand of the people and consequently, increases consumption expenditure, which in turn, creates opportunities for generating employment.

In improving the standard of living of existing employees government in the 1991 fiscal year decides to continue to recognize fringe benefits payable in the private sector in line with or up to the units paid in public sector. The invention is to harmonize the treatment of fringe benefits, particularly the provision of housing accommodation by employers. Another area of development worth nothing is that of education tax, which was introduced by decree No. 7 of 1993, was implemented in the 1995 financial year.

  1. Resources Allocation: – Virtually any tax will have some effect upon resource allocation, even a uniform income tax will reduce consumption and thus production of some goods more than others. For example, heavy tax is placed on production of goods such as tobacco, alcohol etc. that are harmful to human health with lesser tax is imposed on essential in the allocation of resources. excise and VAT for example, and used in reducing of resource. Excise and VAT for example, are used in reducing production of goods not regarded as essential for production of higher priority goods. An example of this was the introduction of VAT in the 1993 fiscal year. Here, books, newspaper and magazines were exempted.
  2. Revenue Generation for Government for Public Sector Investments: – Taxes are to the government of Nigeria what income is to the businesses and individuals. Government realize huge amount of revenues from taxes yearly for the nation’s growth and development e.g. in 1991 company income was anticipated at N8,928 billion this increase to N10,745 billion in 1992, N14,526 billion in 1993, N429 billion in 1994, and N21 billion in 1995. Also from custom and excise, 1991 had a generated estimate of N7.817 billion, N11.299 billion in 1992; N16.003 billion in 1993, N17.626 in 1994 and N45 billion in 1995. Some other areas from which revenue accrues to the nation are petroleum profit tax. VAT (Value Added Tax) etc.

All these revenue are meant to provide basic economic social infrastructural facilities necessary for the citizen of the nation. Examples of these are roads, water supply, electricity, housing, parks etc.

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