Abstract
This study examined the impact of tax structure on inequality in Nigeria. The objectives of this study were to; assess the impact of value-added tax on inequality in Nigeria; find out the impact of company income tax on inequality in Nigeria; investigate the impact of petroleum profit tax on inequality in Nigeria; and to evaluate the impact of customs and excise duties on inequality in Nigeria. In order to achieve the objective of this study, relevant secondary data were collected from the Central Bank of Nigeria (CBN) and the Federal Inland Revenue Service (FIRS) on VAT, CIT, CED, and PPT for a period of 10years (i.e. 2010 to 2020).
This study contribute to knowledge in sense that, it compliments studies in the area of taxation and income redistribution as compared to most studies, which had used cross country data and also specific studies, which had used aggregated and macroeconomics data, while this study made use of micro simulation data.
The Cointegration and Error Correction Models (ECMs), econometric tests of Breusch-Godfrey Serial Correlation LM, Heteroskedasticity, Ramsey RESET, and Variance inflator factor were used to analyze the data. Augmented Dickey Fuller unit root was used to test for stationarity. The result revealed that value added tax, custom excise duty, and petroleum profit tax had positive relationship with GINI when measured at 5% critical level, though value added tax and custom excise duty were not significant. Company income tax had a negative but significant impact on GINI. Based on the findings, it can be concluded that only company income tax was able to reduce income inequality.
Therefore this study recommends that value added tax should be imposed on goods and services consumed by high income earners. In respect of custom excise duty, government should address the level of tariffs; for petroleum profit tax, there is need for adequate diversification of the economy; and for company income tax, tax authority should harness corporate taxes to its fullness.
CHAPTER ONE
1.1. Background of the Study
The value of taxation in promoting economic growth and development as well as the survival of several countries cannot be overemphasized. Tax ensures that government channels its resources towards essential and relevant projects in the society. According to Emmanuel (2010), a lot of developed and developing countries around the world had experimented and proven that no country can truly develop without developing its tax system. Consequently, a lot of countries have embarked on tax restructuring and reforms with a view to developing a tax system that maximizes government revenue without creating disincentiveness for investment.
In Nigeria, the tax system has undergone significant changes in contemporary epochs. The Tax Laws have been reviewed with the aim of fending off obsolete provisions and making simpler the main ones. Under the present Nigerian law, taxation is enforced by the three levels of government, which are; federal, state, and local governments with each level having its sphere clearly spelt out in the Taxes and Levies (approved list for Collection), (Decree, 1998). According to the Decree, not withstanding anything contained in the Constitution of the Federal Republic of Nigeria 1999, as amended, or in any other enactment or law, the federal, state and local governments shall be responsible for collecting the taxes and levies listed in Part I, II and III of the Schedule, respectively.
Part 1 of the schedule contains taxes to be collected by the Federal Government and they include: Companies Income Taxes; Withholding tax on companies, residents of the Federal Capital Territory, Abuja and non-resident individuals; Petroleum profits tax; Value added tax; Education tax; Capital gains tax on residents of the Federal Capital Territory, Abuja, bodies corporate and non-resident individuals; Stamp duties on bodies corporate and residents of the Federal Capital Territory, Abuja; and personal income tax of members of the Armed Forces of the Federation, members of the Nigeria Police Force, residents of the Federal Capital Territory, and staff of the Ministry of Foreign Affairs and non- resident individuals.
Similarly, Part II of the Schedule contains taxes and levies to be collected by the State Government and they include: Personal Income Tax in respect of Pay-As-You-Earn (PAYE) and direct taxation (Self Assessment); Withholding tax (individuals only); Capital gains tax (individuals only); Stamp duties on instruments executed by individuals; Pools betting and lotteries, gaming and casino taxes; Road taxes; Business premises registration fee; Development levy (individuals Only); Right of Occupancy fees on lands owned by the State Government in urban areas of the State; and Market taxes and levies where State finance is involved.
Lastly, Part III of the Schedule contains taxes and levies to be collected by the local government, which includes: Shops and kiosks rates; Tenement rates; On and Off Liquor License fees; Slaughter slab fees; Marriage, birth and death registration fees; Naming of street registration fee, excluding any street in the State Capital; Right of Occupancy fees on lands in rural areas, excluding those collectable by the Federal and State Governments; Market taxes and levies excluding any market where State finance is involved; Motor park levies; Domestic animal license fees; Bicycle, truck, canoe, wheelbarrow and cart fees, other than a mechanically propelled truck; Cattle tax payable by cattle farmers only; Merriment and road closure levy; Radio and television license fees (other than radio and television transmitter); Vehicle radio license fees (to be imposed by the Local Government of the State in which the car is registered); Wrong parking charges; Public convenience, sewage and refuse disposal fees; Customary burial ground permit fees; Religious places establishment permit fees; and Signboard and Advertisement permit fees (See Taxes and Levies (Approved list for collection) Decree No 21 of 1998 Laws of the Federation of Nigeria)
Modern advocacies on policy reforms in most developing countries have often focused on improving social service delivery; designing market-friendly worldly institutions; establishing effective poverty-reduction programmes; trade and market liberalization, (Ilaboya & Ohonba, 2013). There is no gainsaying that this reform agenda holds a number of social and economical benefits. However, other fundamental areas that need reformations are revenue generation and income distribution. It is a fact that social and economic development would be laden by the lack of revenue resources and inefficient income distribution, (Sameti & Rafie, 2017). Suffice it to say that the tax sub-sector is a veritable means of complementing total revenue generation and a tool to enhance income distribution. Action Aid (2013) found that a well-structured tax system could generate sufficient revenue to fund needed infrastructural development and to promote policy reforms. Organization for Economic Cooperation and Development (OECD) (2015) holds a similar view that, the tax system has the potential to reduce income inequality. Emerging evidence revealed that, addressing inequality of income can bring about improved sustainable economic growth over a longer period of time, (Sameti & Rafie, 2017; Ostry, Berg & Tsangarides, 2014).
Inequitable distribution of income and its impact on poverty and human development is one of the most discussed economic issues in sub-Saharan Africa, especially in Nigeria, (Awe & Rufus, 2016; Action Aid, 2013; Tax Justice Network Africa (TJNA) and Christian Aid Report, 2014; Ogbeide & Agu, 2015). Widening inequality in Nigeria has brought on an argument based on the level to which taxes are to be used as a means of curbing inequality. Generally, taxes can cause inequality as well as reduce inequality, (Office of National Statistics (ONS), 2011). Taxes in the least-developed countries have been found to be inefficient in addressing redistribution of income, politically demanding to execute, and potentially harmful to growth, (Office of National Statistics (UK), 2011; Martinez-Vaquez, Volovi & Liu, 2011; Ardanaz & Scartascini, 2013; Bird & Zolt, 2014; International Monetary Fund, 2014).
In Nigeria, inequality is all-around and has manifested in the form of lack of adequate shelter, lack of access to other essential needs of life, such as quality water, health and hygiene food. Jibrin, Blessing, and Ifurueze (2012) affirmed that, oil accounts for about 90-95percent of the export revenue, 80percent of the government’s revenue in Nigeria and about 90percent of foreign exchange earnings. Due to Nigeria’s reliance on crude oil as posited by Martin and Crookes (2013), there are a number of indications of inequality rising further with higher levels of oil production. In a bid to reduce inequality, the Nigerian government has introduced a number of policies such as Poverty Alleviation Programme (PAP), National Economic Empowerment and Development Programs (NEEDs), etc. In addition, taxation policies like pay as you earn (PAYE) and all forms of a progressive system of taxation such as income tax, have not yet achieved its main objective. The major contribution of tax policy as a redistributable instrument as stated by Chu, Davoodi, and Gupta (2017), should be to raise revenue needed to fund effective pro-poor and other vital government expenditure, and to avoid generating horizontal inequities, which referred to people who have the same ability to pay tax are charged differently.
The National Tax Policy of Nigeria (2012) stated that, in order to correct the imbalance in the direct tax system due to the over-dependence on revenue derived from the oil sector which is no longer seen as a sustainable source of revenue for the nation, there is a need to shift from direct taxation to indirect taxation. This is because indirect taxes are more efficiently realized providing a higher rate of returns and as well as stimulating economic growth in the sectors, whilst still meeting the revenue requirements. In the report of the Office of the National Statistics in the United Kingdom (UK) (ONS, 2011), the effects of taxes and benefits in United Kingdom on inequality over 30years has shown that taxes overall made little difference to income inequality based on the fact that, though direct taxes reduce inequality but indirect taxes increase inequality by roughly the same amount.
Therefore, it is against this backdrop that this study is being undertaken to investigate the impact of tax structure on inequality in Nigeria.
1.2. Statement of Research Problems
In this 21st century, a critical challenge confronting tax administration especially in Nigeria is on how to advance the frontiers of professionalism, accountability and awareness of the general public on the imperatives and benefits of taxation in our personal and business lives which include: promoting economic activity; facilitating savings and investment; and generating strategic competitive advantage, (Kiabel & Nwokah, 2017). If tax administration does not for any reason meet the above challenges, then there is a desperate need for restructuring.
The following are some of the problems identified for the study
- What is the impact of value added tax on inequality in Nigeria?
- How does company income tax impact inequality in Nigeria?
- Is there any significant impact of petroleum profit tax on inequality in Nigeria?
- Will customs and excise duties have an impact on inequality in Nigeria?
- How can the issue of inequality be addressed in the Nigeria tax structure?
In addition, the gap identified in the literature with respect to this study, is that, previous studies that examined the tax structure did not rely exclusively on the features and characteristics of the tax composition, and furthermore, many of the recent studies were conducted in developed countries. Therefore, this is a gap the study will fill by examining the impact of tax structure on inequality in Nigeria.
1.3. Research Objectives
The main objective of the study is to examine the impact of tax structure on inequality in Nigeria. The specific objectives are to;
- assess the impact of value-added tax on inequality in Nigeria
- find out the impact of company income tax on inequality in Nigeria
- investigate the impact of petroleum profit tax on inequality in Nigeria
- evaluate the impact of customs and excise duties on inequality in Nigeria
1.4. Research Questions
The following research questions were posed for the study.
- What is the impact of value added tax on inequality in Nigeria?
- How does company income tax impact inequality in Nigeria?
- Is there any significant impact of petroleum profit tax on inequality in Nigeria?
- Will customs and excise duties have an impact on inequality in Nigeria?
1.5. Research Hypotheses
Based on the above research objectives, the following research hypotheses will be formulated in their null form.
Ho1: Value added tax has no significant impact on inequality in Nigeria
Ho2: Company income tax has no significant impact on inequality in Nigeria
Ho3: Petroleum profit tax has no significant impact on inequality in Nigeria
Ho4: Customs and excise duties have no significant impact on inequality in Nigeria.
1.6. Significance of the Study
This study examined the impact of tax structure on inequality in Nigeria. It is hoped that the findings of this study will enhance knowledge and appreciates the growing importance of direct and indirect taxes as an effective and efficient tool for revenue generation as well as being used to achieve redistribution.
The study is beneficial to the Federal Inland Revenue Service to acknowledge the fact that direct tax especially Company Income Tax should be strengthened to ensure more redistribution in Nigeria.
The result of this paper may as well aid the relevant policy makers in their effort towards the international policy on tax that will aid economic growth and development.
Lastly, it is hoped that the findings of this study will also provide a good reference source for researchers interested in the area of study especially to the academic community on similar issues.
1.7. Scope of the Study
The scope of this study is confined to tax structure and inequality in Nigeria. The year for the study is for a period of 10years which ranges from 2010 to 2020. Data for the study will be gathered using online publications from the Nigeria Tax Authority and Central Bank of Nigeria.
1.8. Methodology of the Study
The research methodology used in this work, is qualitative. It involves heavy dependence on secondary data and sources like published journals, articles, and books by commendable authors in the field as well as works and writings of other scholars which are tangential to this research. It also includes news reports, publications and bulletin of the Federal Inland Revenue Service (FIRS) and Central Bank of Nigeria (CBN).
1.9. Definition of Operational Terms
Tax: as an enforceable contribution of money enacted pursuant to legislative authority
Value Added Tax: is a consumption Tax paid when goods are purchased, and services rendered; it is a form of indirect tax borne by the final consumer as part of price paid for the goods or services.
Company Income Tax: is an annual tax, and for each year of assessment the tax shall be payable at the rate contained under Section 40 of the Act upon the profits of company accruing in, derived from, brought into, or received in, Nigeria.
Petroleum Profit Tax: governs the taxation of companies engaged in the core activities of exploration and production of oil and gas under the ground or sea bed (i.e. upstream operations) in Nigeria.
Custom and Excise Duties: governs the imposition of Customs and Excise or duties charged at the Nigeria’s ports (of entry or exit)
