The Impact of Personal Income Tax Compliance on Public Sector Financing: A Case Study of Lagos State Government
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Background of the Study
Personal Income Tax (PIT) compliance plays a pivotal role in public sector financing, as it provides a substantial portion of the revenue required to fund government operations and development projects. In Nigeria, the Personal Income Tax Act (PITA) mandates individuals earning income to remit taxes to relevant authorities. However, the level of compliance among taxpayers often determines the effectiveness of public sector financing. Lagos State, being Nigeria's commercial capital, has one of the highest revenue potentials in the country. Its ability to generate internal revenue from PIT significantly influences its ability to provide essential services such as education, healthcare, and infrastructure development (Adeyemi et al., 2023).
Despite the legal frameworks in place, Lagos State faces challenges in achieving optimal PIT compliance. These challenges include inadequate taxpayer education, inefficient tax administration, and high rates of tax evasion. Recent studies suggest that a lack of trust in government, coupled with perceived mismanagement of public funds, has negatively impacted taxpayers' willingness to comply voluntarily (Olawale & Okoro, 2024). Moreover, complexities in the tax filing process and the lack of robust enforcement mechanisms further exacerbate the issue.
This study examines the impact of PIT compliance on public sector financing in Lagos State, focusing on the extent to which compliance rates affect the state's ability to achieve its fiscal objectives. By analyzing compliance trends and their implications, this research seeks to provide insights into how improved tax compliance can enhance revenue generation and public service delivery.
Statement of the Problem
The Lagos State Government relies heavily on PIT to fund its budgetary requirements and drive socio-economic development. However, the persistent issue of non-compliance undermines the state's revenue potential. The gap between projected and actual PIT revenue highlights significant leakages in the tax system. Challenges such as inadequate enforcement, low taxpayer awareness, and inefficiencies in tax collection mechanisms contribute to this problem (Ajayi et al., 2023). Furthermore, the prevalence of informal economic activities, where income is often unreported, poses a significant obstacle to achieving full compliance.
The consequences of low compliance are far-reaching, affecting the state's ability to finance critical public projects and maintain fiscal sustainability. This study seeks to address the root causes of PIT non-compliance and explore its implications for public sector financing in Lagos State.
Objectives of the Study
- To assess the relationship between PIT compliance and public sector financing in Lagos State.
- To identify factors influencing PIT compliance among taxpayers in Lagos State.
- To evaluate the impact of low PIT compliance on Lagos State's ability to fund public services.
Research Questions
- What is the relationship between PIT compliance and public sector financing in Lagos State?
- What factors influence PIT compliance among taxpayers in Lagos State?
- How does low PIT compliance affect Lagos State's ability to fund public services?
Research Hypotheses
- There is a significant relationship between PIT compliance and public sector financing in Lagos State.
- Factors such as taxpayer education and efficient tax administration significantly influence PIT compliance in Lagos State.
- Low PIT compliance has a significant negative impact on Lagos State's ability to fund public services.
Scope and Limitations of the Study
The study focuses on Lagos State, analyzing PIT compliance trends and their impact on public sector financing for the period 2023 to 2025. The study is limited by challenges such as access to reliable tax data and potential biases in taxpayer self-reports.
Definitions of Terms
- Personal Income Tax (PIT): A tax levied on the income of individuals and sole proprietors.
- Public Sector Financing: The process of funding government operations and projects through various revenue sources.
- Tax Compliance: The act of adhering to tax laws by accurately reporting and remitting taxes owed.
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