CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Taxation is not a new word in Nigeria or the world as a whole. In Nigeria, taxation has been in existence even before the coming of the colonial men or the British. Taxation can be defined as the system of imposing a compulsory levy on all income, goods, services and properties of individuals, partnership, trustees, executorships and companies by the government (Samuel and Simon, 2011;Yunusa, 2003). Income tax is one of the major sources of revenue to all government. In Nigeria, it is a factor to be reckoned with in Federal Government’s budget the taxes so collected come back to the taxpayer in form of services. This has over the years encouraged or discouraged some activities in the private sector; though, this depends on whether the policy of the government is towards discouraging or encouraging such companies (Ola, 1999). Taxation is recognized as a very important tool for national development and growth in most societies.  It has viewed as a major vehicle for long term development of infrastructures of the state.  

With the growth and increasing globalisation of businesses (including the increased mobility of capital and rise of e-commerce), the opportunities for taxpayers to violate tax laws are expanding, prompting the need for the tax administration to continually update and broaden the strategies it uses to deal with this problem.

Tax fraud occurs when an individual or business entity willfully and intentionally falsifies information on a tax return in order to limit the amount of tax liability. Tax fraud essentially entails cheating on a tax return in an attempt to avoid paying the entire tax obligation. Examples of tax fraud include claiming false deductions; claiming personal expenses as business expenses; and not reporting income.

Most developed countries are characterized by a broad base for direct and indirect taxes with tax liability covering the vast majority of citizens and firms. Developing countries, in contrast, are confronted with social, political and administrative difficulties in establishing a sound public finance system. As a consequence, developing and emerging countries are particularly vulnerable to tax fraud activities of individual taxpayers and corporations. This can be considered one of the primary reasons for large differences in the ability to mobilize own resources between developed and developing countries.

Detecting and preventing tax fraud and making sure that it cannot be repeated is not solely the responsibility of tax authority and tax officials. Without the cooperation of general public working in high risk areas, it is very difficult to detect illegal tax malpractice and illegitimate personal gain. Therefore, it is up to all levels of hierarchy in public institutions to create an environment of transparency, ethical conduct and accountability in order to ensure proper handling of the very important issues of prevention, detection and handling of tax fraud cases in among the general taxpayer.

The doctrine describes tax fraud as a form of deliberate evasion of tax which is generally punishable by law.  The term ‘tax fraud’ includes situations in which deliberately false statements are submitted, fake documents are produced, etc. Sanctions may include civil or criminal penalties

Finally, the revenue generated by the government from taxation forms a major source of finance to the federal government capital expenditure which is crucial to sustainable economic development. A major challenge to the government in generating this revenue has been the increasing rate of tax fraud offences committed by both tax payers and tax officials.

Therefore tax fraud and other related tax offences are important factors to be considered as they affect both the volume and nature of government finances which is the key to economic development.

1.2 STATEMENT OF THE PROBLEM

Tax Fraud and other tax offences perpetrated by tax payer heavily harm the economy, lower investment levels and reduce government revenue generation. Anti-tax fraud and tax authority strategies are often not effective enough. Damages done to economy and their budgets as a result of tax fraud can be enormous ranging from financial loss to reduction of economy performance, reputation, credibility and public confidence.

Tax systems in many developing countries are characterized by tax structures being not in line with international standards, by lack of tax policy management, low compliance levels and inappropriate capacities in tax administration. The difference in revenue mobilization also stems from economic conditions (size of the informal sector).

In fact, most developing countries show a trend towards the prevalence of indirect taxation. Many of them rely to a great extent on indirect taxes such as value-added taxes (VAT) with indirect taxes amounting for up to two-thirds of total tax revenues, yet it is not new that, the negative menace of tax fraud deprives governments of revenues needed for public spending Forces honest taxpayers to pick up the tab Erodes community confidence in the equity of the revenue system.

Finally, the current method of collecting taxes/levies from tax payers lack proper organization and prone to obvious fraudulent activities, thereby resulting to loss of funds by the State Government. This however, leads to the inability of the Government meeting the basic projects requirements like rehabilitation of roads, building/ renovation of hospitals, schools and so on. The tax administration system does not clearly states the strategy that is being used to apportion taxes or levies or charges to some key business enterprise like electronic shops, saloon, hawkers, petty shops, barbing saloon, recharge card resellers, cosmetics shops, super markets etc. Random amount is being collected as taxes/levies from these business enterprises, which might be below or over charged taxes; and most times the levies/taxes might not be remitted to the state Government or if remitted, a reasonable amount would have been diverted by the officers in charge of the collection. This situation occurs because there is no proper structure on ground to determine the exact monies and the number of petty shops or saloons in a given location, to enable the State Government to ascertain the actual figures, in terms of Naira and Kobo that is generated from most small scale businesses majority of who are individual taxpayers.

1.3. OBJECTIVES OF THE STUDY

The main objective of this research work is to assess the role of tax officials in the prevention and detection of tax frauds in Nigeria.

The research study will highly focus on specific objectives particularly which will be to:

Identify the concept of taxation and tax fraud offences under Nigeria tax system;

Identify legal and administrative measures used to address tax frauds.

Evaluate the techniques/modes adopted by the taxpayers in committing tax fraud. Identify weaknesses in addressing tax fraud by tax authority.

Examine the impact of tax fraud offence on the revenue of the Government in particular and the economy of the country, as a whole.

Recommend mechanisms that should be used to control and curb tax fraud offences.

1.4. RESEARCH QUESTIONS

People talk about tax matters, complain about them and try to dodge them when they can. Some always pay; some always cheat; and some cheat when they think they can get away with it.   Businesses also react to taxes, both in how they organize their activities and, perhaps, in where they carry them out.

This research is intended to find the possible solutions for the following questions:

What is the concept of taxation and tax fraud offences under Nigeria tax system?

What are the legal and administrative measures used to address tax frauds in Nigeria?

What are the various techniques/modes adopted by the taxpayers in committing tax fraud in Nigeria?

Are there any weaknesses in addressing tax fraud by tax authority in Ibadan?

Are there any effect of tax fraud offence on the revenue of the Government in particular and the economy of the country, as a whole?

Recommend mechanisms that should be used to control and curb tax fraud offences.

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