TAXATION AND IT'S EFFECT ON NIGERIA ECONOMY

TAXATION AND IT'S EFFECT ON NIGERIA ECONOMY

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Background of the Study

Taxation is an essential mechanism by which governments earn income to finance public services and infrastructure. The efficacy of a tax system can have a substantial impact on a country's economic growth and stability. The taxation system in Nigeria has been a topic of significant discussion due to its intricate and frequently ineffective nature. In the past, the tax system in Nigeria has been marked by the presence of many levies, complicated regulations, and a high level of non-compliance. These factors have hindered the efficient collection and use of tax revenues (Ariyo, 2014; Akhor & Ekundayo, 2016).

The Nigerian economy, which primarily depends on oil earnings, has encountered various difficulties, including economic instability caused by the unpredictable fluctuations in global oil prices. The economy's reliance on oil has made it vulnerable to substantial dangers, underscoring the necessity for diversification and a stronger tax structure to guarantee sustained economic expansion. The International Monetary Fund (IMF) (2018) suggests that Nigeria should lessen its susceptibility to oil price shocks and achieve economic stability by diversifying its revenue streams through efficient taxes.

Taxation in Nigeria encompasses a range of forms, such as personal income tax, corporation tax, value-added tax (VAT), and customs charges. Nevertheless, there have been doubts over the efficiency and usefulness of these taxes. The tax-to-GDP ratio of Nigeria is comparatively low in relation to other emerging countries, suggesting a substantial capacity for augmenting tax collections (World Bank, 2019). The uncontrolled nature of the informal sector, which makes up a significant portion of the Nigerian economy, presents a challenge for tax authorities (Olayinka, 2020).

The Nigerian government has implemented various measures to improve the tax system. Significant developments include the implementation of the Tax Identification Number (TIN) system, the creation of the Federal Inland Revenue Service (FIRS) as an independent entity, and the implementation of the Integrated Tax Administration System (ITAS) (FIRS, 2017). Notwithstanding these endeavours, the tax system continues to confront challenges such as tax evasion, corruption, and insufficient enforcement measures.

An effective and efficient tax system is crucial for economic development as it furnishes the government with the requisite resources to allocate towards infrastructure, education, healthcare, and other vital areas. Furthermore, a well-functioning tax system can enhance fairness and diminish economic disparity by guaranteeing that affluent individuals and companies contribute proportionately to their tax obligations (Bird & Zolt, 2015).

Multiple studies have investigated the influence of taxation on the economic growth of Nigeria. For example, Saibu (2015) discovered that although taxes can generate crucial government revenue, excessive taxing might hinder economic activities by diminishing disposable income and business earnings. In contrast, Adegbite and Adesina (2020) contended that an efficiently organised tax system has the potential to stimulate economic growth by equipping the government with the necessary funds to spend in public goods and services.

The relationship between taxation and economic growth in Nigeria is intricate and has multiple aspects. A delicate equilibrium must be struck to prevent taxes from impeding economic activities while still providing ample income for public spending. Comprehending this equilibrium is essential for policymakers who wish to create a tax structure that promotes long-lasting economic development.

This study seeks to conduct a thorough analysis of the effects of taxation on the Nigerian economy, with a specific focus on how different tax regimes influence economic growth and development. The study aims to analyse the correlation between taxes and economic performance in order to offer insights on how Nigeria might enhance its tax system to attain sustainable economic development.

 

1.2 Statement of the Problem

Despite multiple attempts at reform, Nigeria's tax system continues to be inefficient and plagued by problems such as low rates of compliance, tax evasion, and corruption. The tax-to-GDP ratio is much below the average for rising economies, suggesting unexplored opportunities for generating money. The lack of effectiveness in tax collecting obstructs the government's capacity to allocate funds towards crucial public services and infrastructure, thereby hindering economic progress. Furthermore, the significant dependence on oil revenues exposes the economy to the risks associated with variations in global oil prices, emphasising the necessity for a diversified and resilient tax structure. Tackling these obstacles is essential for attaining sustainable economic progress in Nigeria.

1.3 Research Questions

1. What is the impact of taxation on Nigeria's economic growth and development?

2. How do different types of taxes (e.g., personal income tax, corporate tax, VAT) affect various sectors of the Nigerian economy?

3. What are the major challenges facing the Nigerian tax system, and how can they be addressed to improve tax compliance and revenue generation?

 

1.4 Objectives of the Study

1. To analyze the impact of taxation on economic growth in Nigeria.

2. To examine the effects of different types of taxes on various sectors of the Nigerian economy.

3. To identify the major challenges facing the Nigerian tax system and propose solutions to enhance tax compliance and revenue generation.

 

1.5 Significance of the Study

This study is significant as it provides a comprehensive analysis of the relationship between taxation and economic growth in Nigeria. The findings will be valuable to policymakers, tax authorities, and researchers in understanding how to optimize the tax system for better economic performance. By identifying the challenges and proposing solutions, the study aims to contribute to the development of a more efficient and effective tax system in Nigeria. Additionally, the study's insights into the impact of different types of taxes on various sectors can inform targeted tax policies that promote sectoral growth and overall economic development.

1.6 Scope and Limitations

The scope of this study includes an analysis of the Nigerian tax system and its impact on economic growth from 2014 to 2024. The study will focus on various types of taxes, including personal income tax, corporate tax, and VAT, and their effects on different sectors of the economy. The limitations of the study include potential data constraints, the dynamic nature of tax policies, and the challenge of isolating the impact of taxation from other economic factors. Despite these limitations, the study aims to provide a robust analysis based on available data and relevant literature.

 

1.7 Organization of the Study

The study is organized into five chapters. Chapter 1 provides an introduction, including the background of the study, statement of the problem, research questions, objectives, significance, scope, and limitations. Chapter 2 reviews relevant literature on taxation and economic growth. Chapter 3 outlines the research methodology, including the research design, data collection methods, and data analysis techniques. Chapter 4 presents and analyzes the data collected, discussing the findings in detail. Chapter 5 summarizes the findings, concludes the study, and provides policy recommendations and suggestions for further research.

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