Taxation: Definition, Benefits and Limits


After the establishment of the American constitution back in 1789, Benjamin Franklin wrote in a letter a quote that has now become world famous. He stated that nothing can be said to be certain in this world except death and taxes.

While for argument sake there may be other certainties in life, it is a no brainer that his statement holds true and this article will focus on one from the original quote (not death). 

Tax Definition

Tax can be defined as a compulsory contribution to state revenue levied by the government on workers income and business profits, or added to the cost of some goods and services and transaction.

It can also be said to be a charge by the government on the income of an individual, corporation or trust as well as the value of an estate or gift.

Primarily, taxes are methods used to raise revenue for government expenditures and may also serve other purposes aimed at improving and developing a nation or a particular region.

History of Tax

Taxation is as old as civilization itself and its history stretches across thousand years into the past, with many ancient civilizations levying taxes on their citizens to pay for military expenses and public services. Taxes were also paid by weaker or disadvantaged nations to stronger ones in order to avoid invasions. Taxation evolved as empires expanded and civilization became more structured. Taxation is seen as a key component in unlocking the resources required for public investment and infrastructural growth.

In a formal sense taxation did not exist in Nigeria until the early 1900’s. Before then, tax administrators were the then traditional chiefs who acted as tax agents and the tax mostly collected was farm produce and other primary goods. Tax was more formalized in the northern part of the country as it was imbed in the teachings of Islam.

Overtime Nigeria as a nation has had various tax laws in its quest to bring about an effective tax system. This has led to the formation of four core principles which are; What to pay, where to pay, when to pay and whom to pay.

Tax Payment in Nigeria

While in the past there were relatively fewer taxes to pay, a rising need of revenue to combat and better the state of the economy has given way for a plethora of taxes which sometimes overwhelms the paying party. It comes as no surprise that tax evasion is rampant especially in a country like Nigeria that doesn’t have sufficient means of checking this practice. However the importance of taxes cannot be understated as it caters to the needs of the people as a whole. A buoyant nation strives to have an effective and efficient tax system which allows for the smooth running and development of social amenities of a nation. Due to this fact, tax payment is not just seen as a legal requirement but also a civic duty which is punishable as a crime if one fails to pay when necessary.

A tax system can be structured under method and incidence. Under methods we have progressive, regressive and proportional tax. The common method practiced in Nigeria is the progressive method where a tax progresses as the income to be taxed increases. That is, the higher the income of the taxable person, the higher the tax would be levied. Under Incidence, we have;

  1. Direct taxation which is assessed directly on the income of the tax payer. In this case, that tax payer is assessed directly on his income, property, rent and so on. Typical types of taxes under the direct form of taxation are the Companies income tax, Capital Gains tax, Education tax, Petroleum Profit tax, Personal Income tax.
  1. Indirect taxation These are the types of taxes that are imposed on commodities at flat rates before they get to the owner of these commodities. In this case, the burden of payment is on the final user of the commodity, because they are merged into the total sales price for that commodity. Typical examples of taxes that fall under this prerogative are Excise and Customs Duties, Value Added tax, Stamp duties.

Tax Authorities in Nigeria

When it comes to the administration of taxes in current Nigeria, the responsibility falls to three tax authorities namely. 

  • Federal Internal Revenue Service. They collect taxes dues to the Federal Government such as Companies income tax, withholding tax, value added tax and capital gain tax etc.
  • State Internal Revenue Service. They collect taxes due to the State such as capital gain tax on individuals, withholding tax on individuals, road taxes and pay as you earn (PAYE) etc.
  • Local Government revenue service. They collect taxes due to the local government such as motor park fees, signage and advertisement fees, illegal parking fees, birth and death registration fee etc.

Benefits of Taxation

  1. Tax is the income for government. The government plan for all sorts of expenditures ranging from general administration to infrastructure and as such need revenue to be able to carry out it plans.
  2. It helps discourage certain activities. There are certain goods the government discourages the populace from consuming. As a form of ensuring the production and consumption of such goods, high taxes are quoted on the specified goods with the aim to stopping or making the product difficult to acquire.
  3. It serves as an instrument of fiscal policy. When consumer spending power is higher than the supply of goods and services, there tends to be a chance of inflation. One way to ensure that the spending of consumers is curbed is to force up the tax. Government normally finds this easy to do than reduce expenditure.
  4. It serves as a major stimulant for growth and development. Favorable tax policies like holidays, concessions help to stimulate growth and development across all sectors of the economy. When there is friendly tax policy, then, there is more investment opportunities which creates more influx of foreign direct investment into the country.

Limitations of Tax

For all the good that taxes represent there are many disadvantages especially in Nigeria one of the main reason been that the laws governing taxes are somewhat draconian. Also the number of taxes one is expected to pay in a system that doesn’t provide much is overwhelming and it feels easier to avoid payment altogether. Doing business in Nigeria is a herculean task made no easier by the ridiculous amount of monies to be paid as taxes. Mostly by the time people are done paying, there will be little left to compensate for the work done. Some other limitations are stated as follows;

  1. Multiplicity of taxes. This means paying similar on the same or substantially similar tax base. 
  2. Tax evasion. Nigeria is one of the few countries in the world where it is fashionable to evade tax. The various structures which are required to work together to make tax evasion difficult are not properly coordinated. For instance, it is possible for a company to register with the Corporate Affairs Commission (CAC) without registering with the FIRS when it could have been one of the conditions in the company registration process. Enforcement of tax compliance should be given adequate attention and various government agencies (land registry, CAC, vehicle registration department, immigration etc) should collaborate and share information to reduce tax evasion. 
  1. Tax clearance certificate. Taxpayers are required to obtain a tax clearance certificate (TCC) annually which is often needed to conduct many business transactions. Tax officials often use this as a tool to harass taxpayers by bringing up issues outside the period covered or contrary to the provisions of the law regarding TCC. For instance, the CITA requires that TCC must be issued within 2 weeks of application otherwise the tax authority must explain. TCC should be issued automatically within 2 weeks of every new calendar year provided a taxpayer has no outstanding undisputed tax liability on the last day of the previous year of assessment
  2. Statute of limitation. The period to reopen tax assessments is limited to 6 years unless there is any form of fraud, willful default or neglect. This provision is to encourage the tax authorities to carry out tax audit promptly and to manage the challenges associated with document retention on the part of the taxpayers. However, in practice, the tax authorities often make allegations of willful default and negligence to reopen past tax assessments without any time limit. The law should be amended to limit the ground of exemption from the statute of limitation only to fraud.

Written by Usha 

Twitter: @Tellion_dm 
Instagram: @A_telliextinctb 

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