An Assessment Of Tax Payer Perception On The New Finance Act 2020

ABSTRACT

This study examines the Determinants of Personal Income Tax Compliance. The study anchors on the fiscal exchange theory and social & psychological theory to predict the determinants of personal income tax compliance based on the new finance act 2020. The survey research design was adopted and questionnaire was distributed to elicit responses from self-employed persons. The ordered logistic regression was used to analyse the data gathered and was done electronically using the SPSS and Eviews 7 software. The findings show that there is a significant positive relationship between tax rate and personal income tax compliance; the perception of taxpayers’ of the Government of the day has a significant impact on how they comply with personal income taxation; taxpayers’ income has a significant impact on personal income tax compliance; the gender of the taxpayer has no significant positive relationship with his/her level of tax compliance; and the attitude of taxpayers to the tax system has a significant impact on personal income tax compliance based on the new finance act 2020. The study therefore concludes that the psychological aspects of taxpayers such as taxpayers’ perception and attitude have a more fundamental impact on personal income tax compliance than deterrent tax measures. Based on these, the study recommends amongst others that deterrent tax measures such as fines and penalties should incorporate the psychological aspect of taxpayers. That is, tax administrators should know when and how to combine strict deterrent measures with persuasive measures (education).

TABLE OF CONTENT

COVER PAGE

APPROVAL PAGE

DEDICATION

ACKNOWLEDGEMENT

TABLE OF CONTENT

CHAPTER ONE

INTRODUCTION

• BACKGROUND OF THE STUDY
• PROBLEM STATEMENT
• AIM AND OBJECTIVES
• RESEARCH HYPOTHESIS
• SIGNIFICANCE OF THE STUDY
• RESEARCH METHODOLOGY
• LIMITATION OF THE STUDY
• DEFINITION OF TERMS
• PROJECT ORGANISATION

CHAPTER TWO

2.0      LITERATURE REVIEW

2.1      CONCEPTUAL FRAMEWORK

2.2     EMPIRICAL REVIEW

2.3     THEORETICAL REVIEW OF THE STUDY

CHAPTER THREE

3.0       RESEARCH METHODOLOGY

3.1       RESEARCH DESIGN

3.2       POPULATION OF THE STUDY

3.3       SAMPLE AND SAMPLING SIZE

3.4.        RESEARCH INSTRUMENT

3.5         RELIABILITY

CHAPTER FOUR

4.1       DATA PRESENTATION AND ANALYSIS

4.2       TEST OF HYPOTHESES AND DISCUSSIONS

CHAPTER FIVE

5.0       CONCLUSION AND RECOMMENDATION

REFERENCES

CHAPTER ONE

1.0                                                INTRODUCTION

1.1                                  BACKGROUND OF THE STUDY

Government over the world requires funds to finance its policies and objectives. It requires sufficient resources to finance and carry out its functions and duties and one of the ways it can achieve these is through the imposition of taxes on its citizens. Taxes form the major source of revenue to the government in most countries, especially those that are developed (Alabede, 2001). Taxation can be seen as the act by government authorities in imposing a levy on the income, profit, or wealth of individuals, partnerships, and corporate organizations. According to Ola (2001), tax is a compulsory payment made by citizenry upon demand by the government. It serves as a means of pooling resources needed for the ope rationalization of government policies and developmental agendas. Nightingale (2001) opines that taxes are compulsory levies by government for which taxpayers may or may not receive any returns directly proportionate to the amount paid nevertheless; they enjoy the benefits for which the money may be put to use in the society. Eiya (2012) asserts that the imposition of taxes by the government is premised primarily on revenue generation and economic stability. In the words of the researcher, taxes are levies imposed on personal income, business profit, interest, dividend, and discount, or royalties for the purpose of raising revenue.

It is no longer news that global oil price fluctuations, coupled with the multidimensional effect of the COVID-19 pandemic, have negatively affected the economy of Nigeria. This is particularly so, given Nigeria’s status as a mono- product economy which depends significantly on the proceeds of crude oil exports. In addition to this, the country has also been rated among countries that have very low domestic revenue mobilization in the world (Egwaikhide, 2019; Olomola, 2020). According to Maiye and Insidious (2018), Nigeria’s tax to GDP ratio was within the range of approximately 6% in the last few years. That implies that for every N100 of GDP, tax revenue contributed approximately N6. With the country’s budget consistently being on a growing deficit profile in recent years, there seems to be an increasing spree of government borrowing to finance annual budgets and the cost of previous years borrowing. All these observance severely hinder the creation of enabling environment for investment and limits economic growth.

The Government, in response to the issues identified have fashioned out a couple of policy and pragmatic measures tailored towards reversing the ugly trend. One of those measures aimed at mitigating the impact of the pandemic on its citizens and businesses, creating support funding for the budget and, resuscitating the economy is the Finance Act 2020. It was signed into law by President Muhammadu Buhari on December 31^st 2020 and it took effect from January 1^st 2021. This Act has introduced changes that revolutionize tax laws and practices that have existed over a number of years. These changes as specified in the Act, affect almost all kinds of taxes imposed in Nigeria (Felix, 2021). The essence of these changes is to facilitate sustained increase in public revenue that will contribute to cushion public expenditure. It is also intended to ease the burden of doing business in Nigeria and ensure that the provisions of the various tax laws are consistent with the national tax policy objectives of the Federal Government (Edet Jr., 2020).

The trans-sectoral dimension of the 2020 Finance Act provisions makes it reasonable to envisage that this new Act would undoubtedly exert some direct and indirect effect on the economy of Nigeria. In fact, some stakeholders believe that the passage of this Finance Act is a significant milestone for Nigeria, as far as the realization of fiscal sustainability, revamping of key sectors and the desired stimulation of the country’s economy is concerned (Obayomi, 2020; Andersen Tax, 2021). However, it has also been opined that tax exemptions and tax cuts, which feature severally in the 2020 Finance Act, have been a major driver of poor tax revenue performance in the past (Eqwaikhide, 2019). Also, Nwaogwugwu (2020) expressed concern that this Act could pave way for the “manipulation of tax laws and tax accounting thereby deepening the problems of tax avoidance”.

According to the Chartered Institute of Taxation of Nigeria (CITN, 2010), Kiabel and Nwokah (2009) and Nzotta (2007) the proportion of personal income taxes to the Nigerian government’s total revenue has been appalling and on the decline and one of the reasons for this has been attributed to poor tax compliance. Modugu, Eragbhe and Izedonmi (2012) assert that this poor tax compliance behaviour has been captured in literature as the “compliance puzzle” and is a challenging phenomenon experienced across countries, especially the less developed economies.

Tax compliance has become a great concern to both developed and developing countries worldwide (Alabede, Ariffin & Idris, 2011b; Igbeng, Tapang & Usang, 2012; Torgler, 2003). This compliance issue may be seen from the time taken by taxpayers to even comply with taxes, or the actual amount collected as taxes when compared to the budgeted. For example, the 2012 report by Price Water House Cooper’s (PwC) “Ease of Paying Taxes Ranking” indicates that Nigeria ranked 138 out of 183 economies that have relative ease in tax payment. This same report recorded that the average tax compliance time in Nigeria is 936 hours as against a 318 hour benchmark for Sub-Saharan Africa and 186 hours for the Organization for Economic Cooperation and Development (OECD) countries. Also, using Edo State as case study, the ratio of internally generated revenue (of which personal income tax is a component) to the total annual budgetary estimates has been experiencing a steady fall from 30.2% in 2009 down to 29% in 2010 and further down to 24% in 2011. All these underscore that compliance in Nigeria is indeed an issue.

Alabede et al (2011b) further claim that the incidence of poor compliance can be deduced from the number of tax cases audited and investigated. According to the Federal Inland Revenue Service [FIRS] (2009), about 680 tax cases relating to both domestic and foreign audited and investigated companies in 2008 resulted into N94.68 billion revenue to the government. This goes a long way in showing the effect of poor compliance on the revenue generation profile of the government. This is further buttressed by Torgler (2003), who argues that there is a limit on the ability of the government to raise revenue for developmental purposes because of the low compliance syndrome.

Early research studies on this phenomenon view the problem from the theoretical perspective of deterrence models (Hartner, Rechberger, Kirchler, & Schabmann, 2008; Riahi-Belkaou, 2004). Allingham and Sandmo (1972) are among the first to empirically investigate the factors that prompt tax compliance. In their opinion, taxpayers can be viewed as rational beings with a high level of self-interest. Hence, they need to be forced to ensure compliance. Their research effort led to the development of the traditional classic theory of tax compliance widely known as the A- S model. According to Sandmo (2005), this theory assumes that the taxpayer maximizes the expected utilities of not complying to tax by balancing the benefits derived from successful tax evasion or avoidance against the risk of been caught and sanctioned. In summation, the theory concludes that tax compliance largely depends on deterrent tax measures such as tax audits, fines, and penalties.

Tax audits, fines and penalties are measures put in place by the relevant tax authorities to mitigate tax non-compliance. In Nigeria, failure to comply with the provisions of the personal income tax can lead to levying of fines and penalties. Specifically, failure to comply attracts N50000 for every month of default plus interest at commercial rate. However, according to Okoye, Akenbor and Obara (2012:47), “the various penalties specified for non-compliance arenot strictly pursued. Offenders are hardly prosecuted, and this goes on to worsen the situation”. This is to say that the use of tax audits, fines and penalties have not be able to address the issue of tax compliance in Nigeria or better still, tax audits, fines and penalties are seen as “toothless bulldogs” that have not efficiently tamed tax non-compliance. Little wonder other theories have emerged such as the fiscal exchange theory, social influence theory, and comparative treatment theory that have all pointed to the fact that the determinants of tax compliance goes beyond just the use of deterrent tax measures to include analysis of the social and psychological aspect of the taxpayers (Fjeldstad, Schulz-Herzenberg & Sjursen, 2012). All these point that the factors responsible for tax compliance may be viewed from other angles such as economic, psychological, and social makeup of taxpayers and not just deterrence.

1.2                                         PROBLEM STATEMENT

It has been discovered that ever since the introduction of new finance act 2020, the country has been experiencing poor tax compliance. Kiabel and Nwokah (2009) use the adjectives “most disappointing”, “non-performing”, and “unsatisfactory” in describing personal income taxation in Nigeria. Therefore, if the associated problems of poor tax compliance and non-compliance ranging from revenue losses, government inefficiency to carry out its functions and responsibilities, to citizens’ disrespect for the tax laws which may undermine the legitimacy and authority of government, must be addressed, then efforts must be intensified to understand the factors that determine tax compliance. The study seek to address the problem such as psychological aspects of taxpayers such as taxpayers’ perception which have a more fundamental impact on personal income tax compliance than deterrent tax measures.

1.3                           AIM AND OBJECTIVES OF THE STUDY

Therefore, this study seeks to examine the determinants of personal income tax compliance with emphasis on taxpayers’ attributes and not just deterrent tax measures. The specific objectives include to:

1. investigate how taxpayers’ perception of the government affect Personal Income Tax (PIT) compliance;
2. determine the effect that taxpayers’ gender has on Personal Income Tax (PIT) compliance;

• evaluate how taxpayers’ attitude to the tax system affect Personal Income Tax (PIT) compliance;

1. examine the relationship between tax rate and Personal Income Tax (PIT) compliance; and
2. determine the extent to which the income of taxpayers affect Personal Income Tax (PIT)

1.4                                       RESEARCH HYPOTHESIS

To achieve the above objectives, the following hypotheses have been raised:

H01: Taxpayers’ perception of the government is not a significantly determinant of Personal Income Tax (PIT) compliance

H02: Taxpayers’ gender is not a significantly determinant of Personal Income Tax (PIT) compliance

H03: Taxpayers’ attitude is not a significantly determinant of Personal Income Tax (PIT) compliance

H04: Tax rate is not a significantly determinant of Personal Income Tax (PIT) compliance.

H05: The income of taxpayers is not a significantly determinant of Personal Income Tax (PIT) compliance

1.5                                  SIGNIFICANCE OF THE STUDY

This study will help to broaden government tax net and revenue as it would help ensure that all those who draw income from Nigeria do not escape their obligation of paying the applicable taxes as stipulated by the law. Finally, to the government, this study will help them to understand the tax payer perceptions on the new finance act 2020.

1.6                              LIMITATION OF STUDY

As we all know that no human effort to achieve a set of goals goes without difficulties, certain constraints were encountered in the course of carrying out this project and they are as follows:-

1. Difficulty in information collection: I found it too difficult in laying hands of useful information regarding this work and this course me to visit different libraries and internet for solution.
2. Financial Constraint: Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

• Time Constraint: The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

1.7                                      RESEARCH METHODOLOGY

In the course of carrying this study, numerous sources were used which most of them are by visiting libraries, consulting journal and news papers and online research which Google was the major source that was used.

1.8           DEFINITION OF TERMS

In order to aid understanding of this research work by the user/reader, special terms used in this study are:

TAX: This is a compulsory contribution imposed by government on individuals and corporate bodies for the use of government to provide facilities or service to her citizens.

TAX EVASION: This is the attitude adopted by tax payers to deliberately misrepresent the true state of their affairs to the tax authorities or include dishonest tax report such as declaring less income, profit or gains to escape tax liability (wholly or partially) by breaking the law.

TAX AVOIDANCE: This is a legal way by which a tax payer reduces his tax liabilities.

TAX LIABILITY: This is the amount that is borne by the tax payer

PAYE (PAY AS YOU EARN): This type of tax is based on the earnings of the tax payer.

1.9                                     PROJECT ORGANIZATION

The work is organized as follows: chapter one discuses the introductory part of the work,   chapter two presents the literature review of the study,  chapter three describes the methods applied, chapter four discusses the results of the work, chapter five summarizes the research outcomes and the recommendations.