1.1 Background of the Study
The government of any country has significant duties that are heavily influenced by the government's income from various sources, including taxes (Adefolake and Omodero, 2022). Ogbonna and Appah (2012) argue that a well-structured tax system is the primary means of generating revenue to provide essential infrastructure. The most significant source of revenue for the government, according to Aguolu (2004), is taxation. Because of the government's intrinsic ability to impose taxes, the government is always guaranteed to receive tax money regardless of the situation. Azubike (2009) also shares the same opinion, stating that taxation is a crucial element in all societies across the world. By implementing a tax system, the government can raise the funds required to fulfill its pressing duties.
To carry out their responsibilities, the Nigerian government heavily relies on taxes as they serve as a significant and compulsory source of revenue and income (Ilallah, 2023). The government typically imposes taxes on individuals and companies as a means of generating revenue. Unlike other sources of government income, taxes are mandatory charges, making them a significant source of revenue for the government (Adefolake and Omodero, 2022).
The withholding tax (WHT) system is a critical tax collection method for the Nigerian government. It involves deducting a specific percentage of the payment made to a payee and remitting it to the relevant tax authority on the payee's behalf. This tax is deducted at the source of income and paid directly to the government. In Nigeria, businesses and individuals must contend with withholding tax, which is considered one of the most significant taxes (Onojodofia, 2023). This tax is only deducted from qualifying transactions, which reduces the possibility of tax evasion and enhances tax compliance. The withholding tax (WHT) is applicable to specific qualifying transactions, and the appropriate tax rates for individual and corporate beneficiaries are used. Rent, dividends, interest, commissions, technical and management consulting, constructions, contracts and agency agreements, directors' fees, and royalties are some examples of these qualifying transactions (Nexia, 2021). WHT may also indicate the total tax due on some franked investment incomes. A tax-free income transfer from one company to another is known as franked investment income (FII), and it usually takes the form of a dividend. In order to avoid double taxing corporate income, FII was introduced. The FII is referred to as a franked payment from the standpoint of the business making the payout (Kagan, 2020).
According to the regulations of the Federal Inland Revenue Service (FIRS) in Nigeria, WHT must be remitted by the 21st day of the subsequent month after the deductions have been done. For WHT deducted from individuals and non-limited liability companies, the deadline for remitting to the relevant State Internal Revenue Service (SIRS) is 30 days after the obligation to deduct arose.
WHT use has grown in popularity as a means of enforcing tax compliance, and it has important implications for how much revenue the government may generate. It enhances the efficiency of tax collection by enabling the government to collect taxes from a broad range of taxpayers without the need to approach them directly. Additionally, it reduces the cost of tax administration since the government does not have to expend significant resources on tax collection and enforcement. Furthermore, it aids in reducing the occurrence of tax evasion and avoidance since taxpayers are obligated to pay a portion of their taxes upfront (Kagan, 2023).
However, there exist paucity of empirical data on the impact of withholding tax (WHT) on government revenue generation in Nigeria. Hence the purpose of this study.
1.2 Statement of the Problem
Governments around the world consider tax revenue as a significant source of income. The collection of taxes and fees is a fundamental approach adopted by countries to generate public revenues, enabling them to finance investments in essential areas such as human capital, infrastructure, and the provision of services for their citizens and businesses(World Bank, 2023). More specifically,the withholding tax (WHT) system has played a crucial role in generating revenue for the Nigerian government.
Several empirical studies have explored the impact of taxation on revenue generation in Nigeria. According to the findings of Adegbite and Fasina (2019) and Eneojo and Gabriel (2014), taxation plays a crucial role in generating revenue, with significant contributions to the overall revenue generated in the country. However, despite the the importance of the WHT system, there exists paucity of data on its impact on government revenue generation in Nigeria. This study aims to fill this research gap by providing insights into the economic impact of the WHT system in generating revenue for the government.
1.3 Aim of the Study
The study aims to assess the impact of withholding tax (WHT) on government revenue generation in Nigeria.
1.4 Objectives of the Study
The study had the following specific objectives:
- To determine impact of withholding tax on government revenue by comparing tax revenue before and after implementation of policy.
- To assess compliance level with withholding tax policy and its impact on government revenue generation.
- To evaluate impact of withholding tax policy on economic activity in affected sectors and its effect on revenue generation for government.
- To investigate impact of withholding tax policy on foreign investment and determine its effect on government revenue generation.
1.5 Research Questions
- What is the impact of withholding tax on government revenue by comparing tax revenue before and after implementation of policy?
- What is the compliance level with withholding tax policy and its impact on government revenue generation?
- What is the impact of withholding tax policy on economic activity in affected sectors and its effect on revenue generation for government?
- What is the impact of withholding tax policy on foreign investment and its effect on government revenue generation?
1.6 Research Hypothesis
H1: Tax revenue collected before and after the implementation of the withholding tax policy has no significant impact on government revenue
H2: The compliance level with withholding tax policy has no significant impact on government revenue generation.
H3: Economic activity in sectors affected by withholding tax policy has no significant impact on revenue generation for government.
H4: The withholding tax policy has no impact on foreign investment and has no significant effect on government revenue generation.
1.7 Justification of the Study
In order to evaluate the efficacy of the policy and pinpoint areas for improvement, it is essential to comprehend the impact of withholding tax policy on how much revenue the government generates. By investigating the proxies mentioned earlier, such as tax revenue collected before and after the implementation of the withholding tax policy, compliance rate, economic activity, and impact on foreign investment, policymakers can gain a better understanding of the impact of the policy on revenue generation.
The results of the study can provide evidence-based recommendations on how to optimize withholding tax policies to maximize government revenue while minimizing any negative impact on the economy. In addition, the study can also benefit taxpayers, businesses, and investors by providing insight into how withholding tax policies affect their economic activities.
Overall, the study is important for policymakers, taxpayers, businesses, investors, and the economy as a whole, as it can help promote efficient and effective tax policies that generate revenue for the government and support sustainable economic growth.
1.8 Scope of the Study
This study will focus on the economic impact of withholding tax on government revenue generation in Nigeria. The study will examine the impact of withholding tax policies on government revenue generation through various proxies, including tax revenue collected before and after the policy's implementation, compliance rate, economic activity, and foreign investment.
The study will cover the period from 2010 to 2020 and will be limited to the analysis of data both primary and secondary data sources.
