Curbing Tax Evasion, Appraising the Legal Framework

INTRODUCTION

Given the persistent economic challenges in Nigeria exacerbated by substantial borrowing to maintain stability, there is an urgent and pressing demand to embrace and steadfastly secure a sustainable source of revenue for the nation asides oil, hence the increasing attention on tax^[1].

Tax plays a crucial role in revenue generation in Nigeria, supporting government operations, public services, and economic development, making it an important tool for sustaining and growing the country’s economy. In light of the importance of tax, tax evasion poses a worrisome menace capable of crippling economic development in the country.

One common form of tax evasion amongst individual and corporate taxpayers is underreporting of their actual income, which results in lower tax obligations. This is because tax is calculated proportionately to the income of the taxpayer and any alteration to the amount reported invariably affects the tax demands per tax payer^[2].

Individuals and businesses in Nigeria also hide their income or assets in offshore bank accounts to avoid detection and taxation. Businesses can engage in invoicing fraud by inflating expenses or deflating revenues on their financial statements to lower their taxable income.

Other forms of tax evasion include:

• Fraudulently inflating expenses or deductions on tax returns to reduce taxable income, such as exaggerating business expenses or charitable contributions^[3].
• Creating fictitious employees on payrolls or exaggerating the number of employees to claim excessive employment-related tax benefits.
• Overstating or understating the value of invoices in international trade to manipulate customs duties and Value Added Tax^[4].
• Creating a loop of financial transactions to confuse tax authorities and make it difficult to trace the true source of funds.

It is important to note however that there is a clear contradistinction between tax evasion and tax avoidance. The primary distinction between tax evasion and tax avoidance is their legality and ethicality. Tax evasion involves illegal and unethical practices, while tax avoidance, when conducted within the bounds of the law, is a legal and ethically acceptable approach to minimizing one’s tax liability such as tax incentives^[5].

Summarily, the mode of tax evasion is as numerous as taxpayers themselves, with individuals and businesses devising new means of evading tax at every slight opportunity that can be created.

It is therefore important to examine the effect of all these activities on the Nigerian economy.

EFFECT OF TAX EVASION ON THE NIGERIAN ECONOMY

It is hardly news that Nigeria is heavily reliant on its petroleum sector, which accounts for approximately 80% of government revenue. The over-reliance on oil and petroleum exportation has exposed the nation to economic instability due to the fluctuating international oil markets, high levels of unemployment, widespread poverty despite abundant resources, and passive political leadership that has been slow to formulate and implement effective economic policies^[6].

In its pursuit of a sustainable alternative to oil revenue, the Nigerian government has turned its attention to taxation. Taxes have emerged as a reliable source of revenue in nearly all countries worldwide, contributing to approximately 50% of the revenues in most nations. This shift toward taxation signifies a strategic move to diversify revenue sources and reduce the country’s heavy reliance on oil-related income^[7].

Tax evasion therefore has several adverse effects on the Nigerian economy, contributing to a range of economic, social, and institutional challenges as tax has fast become a major source of revenue in Nigeria. These effects in turn hinder economic growth, reduce government revenue, and exacerbate income inequality in the nation^[8].

Chief amongst these effects is a gross reduction in revenue generation and budgetary shortfalls. The direct implication of this is that it would limit the government’s capacity to invest in critical infrastructure, social services, and economic development projects^[9].

The reduction in revenue generation would encourage debt and borrowing by the government to ensure that the nation is run properly, sinking Nigeria further into the slippery slope of debt and the executioner’s noose of debt default.

Similarly, a tax collection system that is characterized by constant evasion can erode investor confidence, as it may be interpreted as a sign of economic instability and governance issues, further deterring foreign and domestic investment.

LEGAL FRAMEWORK AGAINST TAX EVASION IN NIGERIA

To mitigate the negative effects of tax evasion, the Nigerian government has been taking steps to strengthen its tax administration, enhance compliance measures, and improve transparency. This regulatory and legal framework would be examined hereto as follows:

1. The Companies Income Tax Act (CITA) CAP C21 LFN, 2004: This act governs the taxation of companies operating in Nigeria. It prescribes the rules and rates for corporate income tax and provides for penalties for non-compliance and tax evasion.
2. The Personal Income Tax Act (PITA) CAP 8 LFN, 2004 (as amended): PITA outlines the tax obligations of individuals and how personal income tax should be computed and paid. It also stipulates penalties for tax evasion and non-compliance.
3. The Federal Inland Revenue Service (Establishment) Act: This act establishes the Federal Inland Revenue Service (FIRS) as the primary tax collection agency in Nigeria. The FIRS is responsible for enforcing tax laws and regulations, investigating tax evasion, and prosecuting offenders.
4. The Value Added Tax Act (VATA): VATA governs the collection of Value Added Tax (VAT) in Nigeria. It provides for the administration of VAT and penalties for non-compliance and evasion.
5. The Companies and Allied Matters Act (CAMA) 2020: CAMA regulates the operations of companies in Nigeria and includes provisions related to financial reporting, which can be used to detect tax evasion.
6. The Money Laundering Prevention and Prohibition Act 2022: This act includes provisions to combat money laundering and financial crimes, which are often associated with tax evasion.
7. The Nigerian Financial Intelligence Unit (NFIU) Act 2018: The NFIU is responsible for tracking and reporting suspicious financial transactions that may be indicative of tax evasion and other financial crimes.
8. The Economic and Financial Crimes Commission (EFCC) Act 2004: The EFCC is tasked with investigating and prosecuting financial crimes, which may include tax evasion.
9. The Tax Appeal Tribunal (Procedure) Rules, 2021: These rules are applicable to the Tax Appeal Tribunal, a specialized body for resolving tax-related disputes and appeals.
10. The Nigerian Customs Service (NCS) Act 2023: The NCS enforces customs duties and taxes, playing a crucial role in preventing tax evasion related to imports and exports.
11. Federal Inland Revenue Service (FIRS): The FIRS is the primary tax collection agency in Nigeria. It is responsible for assessing and collecting taxes, enforcing tax laws, and prosecuting tax evaders.
12. State Boards of Internal Revenue: Each state in Nigeria has its own Board of Internal Revenue, responsible for collecting taxes at the state level. They work in conjunction with the FIRS to ensure tax compliance.
13. Nigerian Customs Service (NCS): The NCS is responsible for enforcing customs duties and tariffs, which are a significant source of government revenue. It plays a vital role in preventing tax evasion related to imports and exports.
14. Economic and Financial Crimes Commission (EFCC): The EFCC investigates and prosecutes financial crimes, including tax evasion, money laundering, and corruption.
15. Independent Corrupt Practices and Other Related Offenses Commission (ICPC): The ICPC investigates and prosecutes corrupt practices, which can be closely linked to tax evasion and fraud.
16. Nigerian Financial Intelligence Unit (NFIU): The NFIU monitors financial transactions and reports suspicious activities, making it an essential agency in the fight against tax evasion and money laundering.

CONCLUSION

Despite all these measures set in place to curb tax evasion in Nigeria, the problem remains elusive. This can be attributed to the poor implementation of the laws and the corrupt and bureaucratic administration of the regulatory agencies. Therefore, tax evasion still remains a looming problem that continues to cripple the Nigerian economy.

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9. Saidu, Sani, and Umar Dauda. “Tax evasion and governance challenges in the Nigerian informal sector.” Journal of Finance and Economics(2014) 2.5 page 156-161. ↑