the effects of tax evasion and avoidance on the nigerian economy

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This research project is a very crucial study on the effects on tax evasion and avoidance on Nigeria economy.

To solve the research problem, both primary and secondary data were collected.  The research instrument used in collecting the data was questionnaires and oral interview.  Other forms of data collection were also consultation of relevant texts.

In the conclusion of this research work, we can see that the problems of tax administration cannot be over looked that the government should as a matter of necessity provide the necessary facilities needed for administration of tax as well as employ more qualified tax officials.


Chapter one:

1.0       Introduction

1.1       Background of the study

1.2       Statement of the problems

1.3       Objectives of the study

1.4       Research Questions

1.5       Scope of the study

1.6       Limitations of the study

1.7       A Review of Tax Administration in Nigeria

1.9       Problems Associated with Tax Administration Machi

1.10     Reasons for Tax evasion and avoidance

1.11     Definition of Terms


Chapter two:

  1. Data collection, presentation and analysis

2.1       Data Collection

2.2       Data Presentation

2.3       Data Analysis

Chapter three:

3.0       Summary of Findings, Recommendations and Conclusion

3.1       Summary of Findings

3.2       Recommendations

3.3       Conclusion






A well organized society, say a country or a state government owes some fundamental obligations to the people it governs.  These obligations are in the forms of provisions of basic social amenities such good roads, health, security of lives and properties, shelter, good water etc.

The citizens on there own part owe the government by making equitable contribution in the form of levy on tax.  It is against these background that government levy taxes on its citizenry to pursue the above stated objectives it owns to the people.

“Tax according to C. S. Ola is defined as:

“non punitive yet compulsory levy on the income and properties of individuals and organizations by government and which it does not account for, the proceeds from the levy on trade the government uses to pursue the accomplishment of some social, economic and political objective in the interest of it’s citizens

However, another  school of thought maintain that though tax is non-punitive but compulsory an efforts should be made to pay as little possible with the frame work of the law thus engaging in legal tax evasion.  Thus has led us on one of the most universal social malice effecting the proper administration of government at various levels.

This tax evasion and avoidance which is the subject matter of this work.  The acid rest of an efficient government is its ability to generate sufficient revenue to finance its enormous expenditure, and all things being equal tax should be in the forefront in government revenue generation, but on the contrary tax has always contributed miserly to government revenue.  Undoubtedly there has been the after math of excessive tax evasion.

Empirical evidence have shown that the unco-operative and unprogressive attitude of our citizenry towards tax payment result in major financial problems of government.

Obviously it is an agreed fact, that payment of taxes is among the basic things needed for the survival of any society.  In a State such as Enugu the need for an effective tax assessment and collection cannot be over-emphasized.

The government is at a major transitory strategy her quest for industrialization and provision of amenities for her citizens.

The hall mark of technological advancement, economic growth, social satisfaction, the people’s needs and value to the society center exclusively by within the ambit of taxation.  Also the increasing impact government is making in Economic development is such that it requires substantial financial assistance from every individual in the society.

This phenomenon therefore presupposes a qualitative and practical approach to a good system of base administration and collection.  Admittedly, negative attitudes of the populace especially in the payment of tax have resulted in tax evasion and tax avoidance.  Tax evasion is capable of pulling down a well organized government.

Again on this background, it is the considered intention of the researcher to verify and ascertain to what extent tax evasion exist in Enugu State and its impact on the totally generated tax revenue.


“A Tax is a compulsory exaction of money by a public authority for public purposes”.

Taxation is raising money for the purpose of government by means of contribution from individual persons”, a tax signifies an exaction for the support of the government and the Supreme Court said of tax in Nicholas US Anaes that “the one power upon which the whole national fabric is based, it is necessary to the existence and property of a nation and is in the air he breathes for the natural men.

It is not only the power to destroy; it is also the power to keep alive.

According to Eddy C. Ndekwu, in his book tax structure and administration in Nigeria “Increased tax was first introduced in Nigeria in 1904 by late Lord Lugard when tax became operative in the Northern Nigeria.  At this time, taxes were paid in kind.  The first ordinance on tax was in 1912 and this applied to both the Northern region in 1928.  In 1929, 2 percent flat rate income tax was imposed for both salary and wage earner.  This continued until 1939 when the Companies Income Tax Ordinance (CITO) was enacted.  As a result of the lapses in (CITO) the Nigerian Income Tax Ordinance was enacted in 1940.

In 1961, a major landmark was reached in tax development in Nigeria.  Two tax laws were passed which transformed tax administration in Nigeria, they are:

1)         Income Tax Management Act (ITMA)

2)         Companies Income Tax Act (CITA) a petroleum profit ordinance was passed in 1959 for the purpose of regulating the taxation of companies engaged in petroleum exploration and mining in Nigeria.

From then onwards, research work by various authors and experts have been done on Tax.  It has to be observed here that a great deal of research done had concentrated on tax structure and administration.   Not much effort was devoted to the crucial aspect of tax evasion and its attendant effects government revenue.  Tax evasion involves a deliberate dishonesty on the part of a tax payer by failing to comply with duties of discourse to the Inland Revenue.

Tax evasion is quite different from tax ordinance tax avoidance generally refers to a legitimate exploitation of tax legislation so as to pay less than is equitable.  Some notable Nigerians have in the recent past attempted to address the issue of tax evasion.  Ajibola .O. wrote in the Business Time of 1984 on “Decree to curb tax evaders Soon”.  The write up critically analyses the negative effects of tax evasion and how it can be curbed.

Again, in Business times of February 20th 1984, Oluruleke A.P. cried out that “Firms falsify Records to invade taxes another work, he called for tax returns in Nigeria – “Taxation in Nigeria, prospects for Reforms” and in his paper published daily times of September 21 1985, he listed the causes of tax evasion.

Dr. C. S. Ola in his book “Income tax law for corporate and incorporated bodies in Nigeria, listed a number of cases where issues of tax avoidance were tried in law courts.  It is nevertheless generally accepted by most people that a tax-payer is entitled to be astute to prevent so far as he honestly can, the depletion of his means by tax.

Mezie F. was being practical when he said in debate US commission of Lajeation that “It is perhaps inevitable in an acquisitive society that taxation is regards as a burden from which those who are subject to it will seek to escape by any lawful means available”.

Nevertheless a empirical evidence has shown that tax evaders or tax avoiders are mostly the minor illiterate elites who with all zeal try illegally and legally to circumvent the various tax laws.  The social and economic consequence of this involves a high tax burden on the majority of the illiteracy in the society.  Attempts were made by the IJM 1961 schedule 2 paragraphs to provide penalties for tax avoidance.

In Enugu State, the finance law of Eastern Nigeria is applicable.  These are provisions in No. 5 sections 35, 36 and 38 regarding penalties for offences in connection to tax evasion.

According to Enugu State in Nigeria, Board of Internal Revenue Annual Report 1997 – 2002, the incidence of tax evasion which involves false declaration, impersonation, using frictions address, transfer of ownership of assets of Limited Liability Company are various ways and means people perpetrate tax evasion.  From the investigations carried out, it was a starting revelation.  All the segment of our society engages in tax evasion.

The salary and wage earner continuously every year make false declaration on their assessment forms.  From false basic salary, claiming to have children even when he is not yet married.  Claiming for aged parents who are already dead all aimed at avoiding to pay the correct trade over ninety percent of the business man in his state pays nothing to the covers of the government in form of tax from the profit he made in business registered companies, converse with some assessment officers to declare low profit so as to pay less tax property tax rates entertainment tax pools and belting tax are completely evaded impunity in the State.  The hot is endless.


The problem therefore, is that the various taxes review by the government which may be (income rate, entertainment tax, road tax, pool belting tax, property tax act, value added tax) have not yielded enough revenue from projections made.  This indicates therefore that tax contribute unimpressively to the government revenue.

There is a growing realization that conditions within which the most modern equitable and flexible instrument of taxation work, do not yet prevail in the country.  And most of the under developed countries of the world and that substantial modification of the fiscal techniques applicable in under-developed countries are necessary to adopt for the circumstances of the country.  Our tax laws and administrative procedures have been very static and this proves ineffective with the result that government losses revenue that would have been collected as tax.

Procedural approach to income tax administration ought to be dynamic in order to be responsible to changing devices through which tax payers evade and avoid tax.


This research work aimed at achieving the following objectives:

  1. To establish that there exist tax evasion and avoidance in Enugu State.
  2. Exploring the causes of the tax evasion and avoidance.
  3. Assessing the extent of its impact on total generated revenue from taxes.
  4. Suggesting possible ways of abating of eradicating the practice of tax evasion and avoidance.


The following are the research questions:

  1. What is the reason of citizens evading tax?
  2. What is the effect of tax evasion on government projected revenue?
  3. What is the punishment for tax evasion?
  4. How does tax evasion affect the provision of basic amenities for the citizens?
  5. Is there enough government machinery to check tax evasion?


This research work will try to review the effects which tax evasion has directly or indirectly on the revenue generation of Enugu State the circumstances that may have given credence to evasion of tax and the relevant machinery necessary to check it.


Tax analysts have ascribed the problem of tax evasion and avoidance to the inadequacies inherent in our tax system.  However before reviewing the administration in the State and it’s inherent problems, it will be pertinent to understand what Adam Smith enunciated as “Canons of a good tax system” Accordingly “Taxation should be equal” by which he meant proportionally to the tax payers income.  There are three ways of collecting tax from individuals so that it falls equally.  One is the per capital tax, in which everyone pays the same contribution, the proportioned tax in which everyone pays the same proportion of their income as tax.

The progressive tax, in which the amount of tax is adjusted to fall most heavily on the rich, “which of these tax system gives the fairest tax?

It must be judged not from the weight of burden in absolute terms, but relative to the utility to the tax payer of the income surrendered the per-capital income is unfair.  The utility of income given up is very much greater for those in low income bracket.

The proportional tax, which more often than not is applied indirectly tends to be regressive the progressive system is therefore the fairest system for direct taxation and this system has been adopted by most nations.

“Tax should be arranged so that collection is convenient” taxes are invariably a burden at the time of payment even when the tax payer agrees they are just and equitable to collect them of the most convenient point reduces losses by non-payment and simplifies the whole process.  The PAYE (pay as You Earn) system has achieved maximum convenience, tax is extracted from the pay packet before it is received and the employee pays it over to the tax department.  Clearly this is painless extraction for the employee does not miss what he never has some employees have really no idea of what they pay in tax.

“Taxes should be economic, that is productive of revenue”.  Any tax which costs more than, it raises in revenue is clearly a waste of time of course taxation might be introduced for reasons other than causing revenue (for example to discourage and undesirable habit) for purposes of revenue taxes should be abandoned if it is un-economic.

The compliance cost to the tax payer and the administrative cost to the government negatively affect output of tax collected.  Though collection costs may be necessary they should be kept as low as possible as they are unproductive and do not make economic sense.  A tax should be abandoned of the point where the marginal cost of collection becomes greater than the marginal revenue.

“Taxes should be certain” A system of tax collection which is not certain will almost invariably cause discontent.

The system should permit fair and non-arbitrary administration and should be understandable to the payers.

The manner of payment the amount to be paid should all be clear to the payer so as non to be left at the mercy of tax collectors.  Taxes should be impartial, complete impartiality is achieved by direct taxation if it is designed so as to be progressive, two citizens in the same situation as regards income should be equally taxed though impartiality is much more difficult when indirect taxes are imposed.

A tax on hair dressing will not affect some people, the non smoker avoids tobacco duty and the hotelier avoids the alcohol tax.  In many cases of on goods the incidence of the tax is on someone other than the person who consumes the goods.  The impartiality achieved by progressive taxation is often called vertical equity.

Horizontal equity by contract seek to ensure that two persons with the same income and the same commitments pay the same tax, but while this is fairly easy to achieve with direct taxation, it cannot be achieved with direct taxation, since two payers have different scale of preferences for goods and services.

The tax structure permits the use of fiscal policy for stabilization and growth objectives.  It should be able to direct and correct economics ills.  The system should be sufficiently elastic so that the revenue from tax may be increased or decreased according to the requirements of the governments.

The qualities of a good tax system mentioned above were not meant to obtain strictly as various objectives are not necessarily in agreement.  For instance, a tax system which is design to achieve equity might end up distorting investment thus having negative effect on the general economy.

In such a situation of conflict of objective, these have to be a trade off.

Nigerian tax analysts have argued that to an unreasonable extensions tax system have to fall short of Adam Smith standard “Tax assessment and tax collection constitute a thorn in the taxing efforts of most developing countries including Nigeria”.

One time director of Federal Board of Inland Revenue mentioned that “the present taxation system is completely faculty and two rapid to be used as an instrument of fiscal policy and it does not encourage industrial development and economic growth”?

In his own contribution, Victor Eromosole a tax analyst opined “our tax laws need to review as a matter of urgency in order to make them relevant to the present day demands and circumstances.  It is very doubtful; in spite of minor subsequent amendments – how relevant the Income Tax Management Act (IMTA) 1961 enacted barely a year after Independence could really be today – Indeed ITMA is so archaic that is fit for the archives.

“Failing to fully incorporate the far reaching socio-economic developments over the past three decades in our tax laws is conspicuous omission, fines and financial figures contained in the act have almost been to make it appear ridiculous with inflation”.

The irresponsible neglect in the tax system of the country makes the burden of taxation fall heavily on the majority of the poorer for instance the head tax may be necessary but not efficient.  As a great number of our populace live in the rural areas to a great extent, they are subsistence farmers or seasonal labourers.  So government encompassing head tax neglects the ability to pay principles.  All subsistence farmers do not make the same income.  Why they be taxed equally?  Also in the cities majority are traders for this group, assessment and collection is not efficient.  The amount to pay is not certain.  Most of them do not pay tax commensurate with their income.  Some do not even pay at all.  Again the tax table does not give allowance for windfall projects, traders who lost money, farmers with negative harvest.  Because level of collectivity is very poor government cannot predict revenue properly, this causes the whole budgetary process to flop.

“The efficiency of any tax system is not just a matter of appropriate tax laws but also a function of the efficiency and integrity of its administration in almost all the States in Nigeria, the low revenue yield of taxation is attributable to the fact that tax provisions are not appropriately enforced either on account of inability to cope for reasons of inadequate manpower, lack of dedication by staff, lack of by-patriotism by tax payers or on account of outright dishonesty or corruption.

Commenting on shortage of manpower and facilities in United Kingdom tax officials are referred to as “Her Majesty’s Inspectors of Taxes” thus demonstrating full backing and recognition of the importance of their work but the poor facilities and restricted prospects makes the job unattractive and therefore by denying tax administrative authority the quality and quantity of staff it needed.

For effectiveness and efficiency, it requires a complement of staff trained in Public Administration, Accountancy, Economics, Social Sciences, Business Management and Computer Technology.

A major problem of our tax our tax administration was pinpointed in a seminar by Ewugor as lack or education on the tax system.  The denounced tax drive and that it should give way for tax education.

According to him “Tax drive without tax education will amount to a double standard and is bound to fail its objectives”.

The tax payers should be informed to imbibe the culture of good record keeping for especially those in business.

Our tax system can only be said to have scored a pass mark with the public sector and organized private sectors.  Pay As You Earn (PAYE).


The Board of Internal Revenue, Enugu State with it’s headquarters in Enugu is the main tax administration machinery.  It has at least one office in urban area in the State.  Each local government office has a tax collector agent in each town.

The Board equally has an office in Enugu State Liason Offices in Lagos and Abuja which collect taxes from employees under P.A.Y.E in the Laison Office as well as withholding tax on dividends to state residence.

In spite of all these, there is still high rate of tax evasion; which is attributable to the problems of tax administration machinery.


This could be regarded as operational shortcomings.  Since it hinders carrying on efficiently the responsibility charged to them

This comprises of the following:-

  1. Inadequate staffing
  2. Inadequate supply of facilities and
  3. Dishonesty among the tax assessors
  4. a)        Inadequate Staffing:

The headquarters of the Board of Internal Revenue has two divisions and seven units, with four tax offices plus twelve sub-offices.  The staff strength of all these offices and units were one hundred and fifty nine senior officials and six hundred and sixty-five officials giving a total of eight hundred and twenty four officers who are responsible for collection of taxes and other revenue in the whole of Enugu State.  Most of the junior officials are not well educated to the extent that they find it difficult to apply tax laws.  The skeletal numbers of experienced officers are mostly found in urban areas.

These few are loaded with jobs as the available shaft is not sufficient.  We are all aware that our tax laws; especially ITMA 1961 are still carbon copy of British tax laws with insignificant modifications.  They are meant for developed countries which have experienced and have experienced and qualified tax officials that can interpret them and apply accordingly.  The tax interacts and deals with influential; knowledgeable managing directors and business as well as academicians who are looking for any loophole to minimize of avoid tax liability.  The lack of adequate experienced tax officials in Enugu State has created opportunity for tax evasion.

Tax evaders can muddle their accounts up and even direct the ill-equipped half-baked junior tax officials on what he ought to pay.  This results in loss of appropriate revenue that ought to come if properly assessed.

  1. b)        Inadequate Supply of Facilities:

A visit to the headquarters Enugu tax office shows that offices lack facilities.  They have not enough vehicles yet they go on tax drive, the offices are not well equipped either, to the extent that files are scattered everywhere, documents not given adequate security as a result of the nature of their offices, not comfortable visa-vis their counterparts in other government establishments.

In the light of the above, ill-position one would not expect the tax authorities to maintain in terms of their job revenue collection for the state government.

One is inclined to believe that those who should have placed the tax authorities on proper posting did not really know what was required and what they needed and how difficult it is to collect tax.  Despite the huge spending we have gone through in the last decade, many tax authorities have no benefiting office accommodation of their own yet the (Manager to) collect most of the money spent.  For these poor facilities and restricted prospects, the job becomes unattractive and hence it becomes more difficult to attract people to stay in the department.  Every tax authority in this state complains of shortage of experiences staff and yet the job has to be done.  The summary of this ugly situation is that:-

  1. It gives an opportunity for the tax evaders to escape from paying tax.
  2. It makes the security of revenue documents porous therefore creating room for indiscriminate issuance of such documents to the evaders.
  3. c)        Dishonesty among Tax Assessors:

There is the rampant case of dishonesty on the part of some of the assessors.  It cannot be ruled out that they try to cash in on the assumed unwillingness of the self-employed tax payer to keep record of make relevant records available or on their outright ignorance of their right as tax payers and black mall them with higher tax liabilities the inflated tax liability is likely going to lead into a situation of unofficial negotiation between the assessor and the prospective tax payer with a view to escaping payment.


External problems are to be discussed from these perspectives:

  1. Harsh economic conditions
  2. Kick back
  3. Lack of adequate data and environmental planning
  4. Tax payers oriented problems
  5. a)        Harsh Economic Conditions:

This is the prime of all the external problems the harsh economic condition prevalent in the country has led to closing down of many business and the personal income of many self employed also falling as well as the rate of inflation which is devastating as a result of various economic measures (like SAP SEEM FEM etc).  Introduced to revamp the economy as a result, tax payers are left with meager disposable income which cannot meet their needs; hence they are left with the option of avoiding tax thereby reducing the revenue derivable from tax.

  1. b)        Kick – Back:

The indiscriminant issuance of police check slip by police in Enugu State to commercial motorist for instance constitute a great financial set back in road tax, road tax payers prefer giving little amount of money as kick-back to the police men than paying more as tax; thereby evading tax.


  1. c)        Tax Payers Oriented Problem:

No tax payer, no matter how wealthy pays tax with a smile on the face, on this background, they look for a way to avoid tax.  To tax payers (both) those employed by government, tax sounds like wasteful spending and they seek all available avenue to avoid tax.  They take pleasure in tax evasion.  Those they pay tax never declared their actual profit or total assessable in some cases bound where any invitation by tax office is enough to change address or even disclose wrong address.  Some employees never surrendered such to tax office.  All these problems are constituted by tax payer themselves which have made it impossible to generate adequate revenue from tax.

Problem of tax administration machinery are our raid but for the scope of this study, they cannot be exhausted here.

  1. d)        Lack of Data and Environmental Planning:

There is no available statistical data that produced the number of taxable people in Enugu State.  The one tax officials have no adequate record of tax income thereby subjecting the tax officials to impose tax based on guess work.   Again, non-availability of data is escalated by lack of environmental planning, citizens build houses without any government approved plans.  This gives rise to inability to have access to every home since some of them are not motorable.  This has created problem of reaching every part of the state thereby giving room for tax avoidance and evasion, often times a tax officials mission may be misunderstand and some tax officials host their lives while on duty, people tend to see government as one enterprise with colossal resources.


Based on responses from respondents, the reasons for avoiding tax are diverse and varied.  They are:

  1. a)         Low income as their income are generally low.
  2. b)         The idea of government giving to individuals and not individuals giving to government still fill the minds of the tax payers; and this lead to non-acceptance of tax by the society.
  3. c)         Contribution to community projects like building of secondary schools, electrification, good roads, communication system and pipe borne water.  Complaints were made that if government should embark in developing each rural area relieving the indigenes the burden; such is enough for every citizen to pay tax with great enthusiasm and joy.
  4. d)         The present economic condition where majority of the unemployed depends only on income earner.  The individual will try to avoid tax, as much as possible so as to have to cater for the dependents.
  5. e)         What the tax paid and collected is used for is not clear to the tax payers.  Some complained of the pot holes in almost all the roads and said that it wouldn’t be rational of them to declare there income for tax since it is due to the stack neglect of the government to maintain the roads that their tyres wear out easily and have to be replaced and roads water logged and motorable.
  6. f)         The bourgeoisies and urban comrades said that since they are not under the government employment, there is no reason why they should pay base to the government.
  7. g)         The role of the tax officials was equally included among the reasons for avoiding tax, such roles are that if you submit yourself for assessment, it becomes an opportunity for them to either receive bribe from you on over-tax you.  Above all they see going to tax office as missing a whole day’s activities on which you may or may not succeed on that day.

Tax evaders in the village overcome tax officials by going to market at late evenings as those on tax drive usually visit the market within morning hours and not traveling outside the town.

Yet another popular system of evading tax is by colluding with and obtaining from the tax officials coverage papers, hence it was disclosed by one of the respondents that have legal receipts which perform the same function with legal one costs nothing vis-à-vis the tax he would have paid as tax.


The terms that follow have been defined in relation to the context in which they are in this work.

  1. Tax Administration:  Refers to all managerial arrangements to collect state revenue from citizens on which one law or the other has been given to the laws but this is only incidental to the work.
  2. Chargeable income is the net total income from all sources after deducting all allowances and reliefs.
  3. Infrastructure:  Refers to all the underlying (Intra) facilities used by the Board in tax revenue generation.  They include staff equipment, materials and money that the Board must have first before it can collect tax.
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