TAX RATES AND REVENUE GENERATION IN SUB-SAHARAN AFRICA

ABSTRACT

The study examined the impact of tax revenue on economic growth in Nigeria. The study broadly classified tax revenue into oil and non-oil tax receipts and assessed their impact on economic growth in Nigeria between 1981 and 2018, which makes it unique from previous studies. Oil tax revenue was captured by petroleum profit income tax while non-oil tax revenue was measured by the sum of company income tax, value-added tax and custom & excise duty. The study used secondary data.

The results showed that; tax revenue accounted an average 4 percent of gross domestic product in Nigeria within the 38-year period under coverage; oil and non-oil taxes had positive but minimal impact on economic growth of Nigeria; government expenditure also had positive but insignificant impact on economic growth in Nigeria; the combined effect of tax receipts and government revenue, which indicates fiscal policy, has negligible impact on economic growth in Nigeria.

The study concluded that creating a more friendly tax policies for businesses and investors, fixing collapsing infrastructures and incentivizing players in the informal sector to become part of the formal sector will help bolster tax receipts in Nigeria. The study further recommended that; Government at all levels needs to double efforts towards increasing collection of tax revenue; Strict penalties should be meted to people who avoid and evade taxes in order to reduce the incidence of tax evasion and avoidance to the barest minimum; Fiscal authorities should use tax payers’ monies to provide infrastructural facilities to ease living conditions and improve business activities; Tax laws should be periodically reviewed just as it is obtained in United States and other developed countries in order to ensure the act reflects economic reality; The Buhari-led administration needs to intensify efforts to diversify the major revenue source of Nigeria from oil to other sectors of the economy such as agriculture and industry in order to make tax receipts a major revenue pillar of the country.

 

CHAPTER ONE

 

INTRODUCTION

 

1.1  BACKGROUND TO THE STUDY

 

The growth of sub Saharan African countries has been a major problem as its growth slowed 2.3 per cent in 2018, down from an average 3.3 per cent in the past 5 years (Chelsea bruce lockhart 2019). Also according to (Chelsea bruce lockhart 2019), both Nigeria and Angola saw their oil production fall in 2018. As a result a little set back in the major source of income would affect the revenue generation of the country. With an improved or a standard income of revenue, the sub Saharan countries in Africa would be able to improve their economy amongst other benefits that an improved revenue will bring. There are different ways of generating additional revenue apart from agriculture and oil which are the major source of revenue generation in sub-Saharan Africa countries, one of which is through taxation.

 

Tax can be defined as the levy charged on income of individuals and corporate bodies by the government. It is a compulsory payment imposed by the government through its agents on income of individuals and corporate bodies as well as on good and services. Tax in developing countries like Nigeria and other sub Saharan African countries is a strategic tool of great importance. It can serve as a genuine back up to the major source of revenue generation in sub Saharan African countries. Beyond that, tax and its rates affects work and training decision, individual savings, production, investment, job creation, and business innovation; as well as choice of saving instrument and asset by investors (OCED, 2009).

 

In sub Saharan Africa taxation affects the revenue generation of a country and, the different types of rates has a big role to play. There are several ways in which different tax rate affects the revenue as sometimes an increase in tax rate will lead to an increase in revenue e.g. an increase in the vat rate will lead to an increase in the revenue generation, while an increase in another tax rate can lead to decrease in revenue e.g. an increase in withholding tax may lead decrease in investment which could lead to a decrease in revenue generated. As mention earlier on, sub-Saharan African countries are dependent on non-tax revenue, to be more specific countries like Nigeria and Angola bank on oil, Kenya on foreign aid and Zambia on bauxite, making their economies unpredictable. Ugwunta and Ugwuanyi (2015) and dasalegn (2014), indicated the positive relationship between tax and revenue

 

There are different types of chargeable tax such as the Withholding tax, Value added tax, Personal income tax, and Capital gain tax, Petroleum profit tax, education tax etc. and these different chargeable taxes have different tax rate in different countries. The nagging question is the effect of this different tax rate on the revenue generation. The question becomes critical when you put the fluctuation in price of major sources of revenue generation of sub-Saharan countries.

 

 

1.2  STATEMENT OF RESEARCH PROBLEM

The tax system of sub- Saharan countries is not perfect. Sub-Saharan Africa countries still being developing has left much to desire.  Taxation was introduced despite the existence of various means in which revenue is generated, the main head ache has been finding the appropriate tax rate that works for both the citizens and the government i.e. affordable to the citizens and improve the income generation of government. The unawareness of the government of the importance of income taxes on income generation as also mention by (Gate, 2016) there are many ways to increase the revenue collected from high income earners one of which is higher income tax rate.

The problem to be examined is how a change in tax rate can lead to increase in tax revenue as one of the most important debates developed is whether the lower tax rate increase economic growth, resulting to higher wages, more jobs and bigger profit, it is reasonable to argue that a tax-cut will be least partially self-financing.

(Samwick, 2016) Mentioned that tax rate slices will eventually prompt a bigger economy over the long haul and also rate cuts would raise the after-tax return to working, sparing, and contributing, they would likewise raise the after-tax income individuals get from their present degree of exercises. People generally favor tax-cut and certainly detest any approval of offsetting savings from the spending side of the budget. However, an increase in tax rate might not have a significant effect like in the income tax increase in 1990 and 1993 and the capital gain tax increase in 1986.The change in tax rate can lead to inflation or deflation

 

 

 

1.3  RESEARCH QUESTIONS

As the research goes on, the following research question will guide the focus of this study:

  1. 1.      What is the effect of the Withholding Tax rate on the revenue generated in sub-Saharan African countries?
  2. 2.      To what extent does Company Income Tax rate affect revenue generated sub-Saharan African countries?
  3. 3.      What is the effect of the Personal Income Tax rate on the revenue generated in sub-Saharan African countries?
  4. 4.      How does Value Added Tax rate affect revenue generated in sub-Saharan African countries?

 

1.4  RESEARCH OBJECTIVE

The research objective of this study includes:

  1. To ascertain the effect of Withholding Tax rate on the revenue generated in sub-Saharan African countries.
  2. To examine the effect of Company Income Tax rate on the revenue generated in sub-Saharan African countries.
  3. To determine the effect of Personal Income Tax rate on the revenue generated in sub-Saharan African countries.
  4. To examine the effect of Value Added Tax rate on the revenue generated in sub-Saharan African countries.

 

 

1.5  RESEARCH HYPOTHESIS

The proposed hypotheses for this study are;

  1. H1: The Withholding tax rate affects the revenue generated in sub-Saharan African countries.

H0: The Withholding tax rate does not affect the revenue generation in sub-Saharan African countries.

  1. H1: The Company Income tax rate affects the revenue generated in sub-Saharan African countries.

H0: The Company Income tax rate does not affect the revenue generation in sub-Saharan African countries.

  1. H1: The Personal Income tax rate affects the revenue generated in sub-Saharan African countries.

H0: The Personal Income tax rate does not affect the revenue generation in sub-Saharan African countries

  1. H1: The Value Added tax rate affects the revenue generated in sub-Saharan African countries.

H0: The Value Added tax rate does not affect the revenue generation in sub-Saharan African countries

 

 

1.6   SIGNIFICANCE OF THE STUDY

This study expands the knowledge on taxation and revenue generation existing literature. It also contributes additional knowledge to the different types of tax and their rates in sub-Saharan African countries. When completed, it would be useful to the following people:

  1. To the government of sub-Saharan countries to help provide lasting solution to the poor economy of sub-Saharan African countries.
  2.  To enlighten the government that more income can be generated from taxation when the proper tax rates are implemented.
  3. To show that an increase in tax rate will not always lead to an increase in the revenue generated in developing countries like most sub-Saharan countries.
  4. To show that income tax and its rate is very key to increasing income generated from taxation

 

 

1.7  SCOPE OF THE STUDY

In order to accomplish the target of this fact-finding, this enquiry embraces the use of taxation as a way of generating revenue for West African countries. Nigeria, South Africa, Cameroon, Senegal and Togo has been chosen by judgmental sampling technique to make a generalization as a result of the limited time and the large amount of sub-Saharan African Countries

 

1.8  THE RESEARCH METHODOLOGY

This study embraces the use of secondary data as there won’t be need for primary data. To attain the objective of this study, an in-depth fact-finding is done on sub-Saharan African countries. The main focus would be on how tax rates affect the revenue generation of West African countries.

 

 

1.9  SOURCES OF DATA

This project utilizes secondary data source. The secondary data is gathered from previous work contained in various journals, web search, newspaper, magazines, textbooks, lecture notes, internet, articles in the area of specialization, scholars report and previous research work.

 

1.10          THE DEFINATION OF TERMS

  1. A.    TAXATION

Taxation is simply the imposition of compulsory levies on individuals and entities by government. Tax is charges in almost everywhere in the world and the primary objective is to raise revenue although they serve other purpose too.

 

  1. B.     TAX RATE

Tax rate is the percentage in which an individual or a corporation is taxed. There are different tax systems used to charge tax.

 

  1. C.    REVENUE

Revenue is seen as the income generated from normal business activities. It is also defined as the yield of source of income (such as taxes) that a political unit (such as a nation or state) collects and receives into the treasury for public use.

 

  1. D.    INCOME TAX

Income Tax is a tax government imposes on income generated by business and individuals within     their jurisdiction. By law, tax payer must file for income tax return annually.

 

  1. E.     ECONOMY

An economy is the large set of inter-related production and consumption activities that aid in determining how scarce resources are allocated. The production and consumption of goods and services are used to fulfill the needs of those living and operating within the economy, which is also referred to as an economic system.

 

  1. F.     WITHHOLDING TAX

Withholding tax is an amount that an employer withholds from employees' wages and pays directly to the government. The amount withheld is a credit against the income taxes the employee must pay during the year. It also is a tax levied on income (interest and dividends) from securities owned by a nonresident as well as other income paid to nonresidents of a country.

 

  1. G.    VALUE ADDED TAX

Value-added tax (VAT) is a consumption tax placed on a product whenever value is added at each stage of the supply chain, from production to the point of sale. The amount of VAT that the user pays is on the cost of the product, less any of the costs of materials used in the product that have already been taxed.

 

  1. H.    CAPITAL GAIN TAX

Capital gain is a rise in the value of a capital asset (investment or real estate) that gives it a higher worth than the purchase price. The gain is not realized until the asset is sold. A capital gain may be short-term (one year or less) or long-term (more than one year) and must be claimed on income taxes.

 

  1. I.       PETROLEUM PROFIT TAX

Petroleum profit tax is a tax on income of companies engaged in petroleum operations. Mintz (2010) explains that industries tax for oil and gas concerns is imposed on the incomes made from the sale of oil and gas net of the production costs which comprise current mining costs; capital cost allowances, as well as exploration and development costs. Exploration costs are expensed while development costs are capitalized and written off at the declining balance rate.

 

  1. J.      EDUCATION TAX

Education tax is levied on all companies. It requires companies to pay a percentage their assessable profits.

 

  1. K.    INVESTORS

Investors are people or a body that put in money or other valuables in a financial venture with hopes of getting return in the nearest future.

 

  1. L.     INCOME EFFECT

 Income effect is the change in demand for a good or service caused by a change in a consumer's purchasing power resulting from a change in real income. This change can be the result of a rise in wages etc. or because existing income is freed up by a decrease or increase in the price of a good that money is being spent on.

 

  1. M.   TAX CUT

Tax cut is seen as the immediate reduction in the tax rate of a particular type of tax. Tax cut are one of the many to stimulate the economy.