An Assessment of Tax Evasion Practices in Nigeria’s Formal Sector: A Case Study of Lagos State Government
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Background of the Study
Tax evasion is a critical challenge facing developing economies, including Nigeria. In the formal sector, where businesses and employees are expected to comply with tax regulations, the prevalence of tax evasion undermines revenue generation, leading to insufficient funds for public projects. Lagos State, as Nigeria's economic hub, generates a significant portion of the nation's internal revenue but still grapples with high levels of tax evasion among formal sector participants (Afolabi & Okeke, 2023).
The formal sector includes registered businesses, corporations, and formally employed individuals who are legally obligated to pay taxes. Despite the availability of robust tax laws, loopholes, weak enforcement, and corruption have created an enabling environment for evasion. Studies have shown that many entities in Lagos underreport earnings or avoid taxes entirely, negatively affecting public service delivery (Adeyemi et al., 2024).
This study aims to examine the prevalence and practices of tax evasion in Lagos State’s formal sector, identifying factors contributing to the issue and proposing effective solutions for curbing the practice.
Statement of the Problem
Tax evasion in Lagos State’s formal sector poses significant challenges to achieving fiscal sustainability. Although the state has a relatively structured tax administration system, compliance remains suboptimal. Reports indicate that over 20% of taxable income in Lagos State’s formal sector is either underreported or unaccounted for, causing substantial revenue losses (Olowu & Bello, 2023).
The persistent evasion practices are linked to inadequate tax enforcement mechanisms, public distrust in government accountability, and the complex tax filing processes. If unaddressed, these issues could worsen fiscal deficits and hinder economic development in Lagos State.
Objectives of the Study
- To analyze the prevalence of tax evasion in Lagos State’s formal sector.
- To identify the key factors driving tax evasion practices in the formal sector.
- To recommend strategies for reducing tax evasion and improving compliance.
Research Questions
- What is the prevalence of tax evasion in Lagos State’s formal sector?
- What factors contribute to tax evasion practices in Lagos State’s formal sector?
- What strategies can be employed to reduce tax evasion and enhance compliance?
Research Hypotheses
- Tax evasion is prevalent in Lagos State’s formal sector.
- Weak enforcement mechanisms significantly contribute to tax evasion in Lagos State’s formal sector.
- Improved tax enforcement and simplified processes can enhance compliance in Lagos State.
Scope and Limitations of the Study
The study focuses on tax evasion practices within Lagos State’s formal sector, covering businesses and employees from 2023 to 2025. Limitations include potential reluctance of respondents to disclose sensitive information and challenges in accessing official records.
Definitions of Terms
- Tax Evasion: The illegal practice of deliberately avoiding paying taxes owed by misrepresenting income or other financial information.
- Formal Sector: Economic activities conducted by registered businesses and formally employed individuals.
Tax Compliance: Adherence to tax laws, including accurate reporting and timely payment of taxes.
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