CHAPTER ONE

GENERAL INTRODUCTION

 1.1. Background to the study

From remote antiquity, tax as a fiscal instrument of regulation and control is a ―necessary evil‖ that societies have been compelled to stay with. At the time of Jesus Christ, there was an established tax system that led the people to ask him if he approved the payment of tax to the old Roman Emperor, who was the imperial lord of Jerusalem . In other words, since the inception of statehood, tax has been an instrument for generation of revenue in running the state. Prior to the discovery of other sources of wealth creation like natural resources, science and technology, production and distribution of goods and services,; tax had been that loyal servant of the state.

In recent times, tax has become a viable source of revenue generation to states such that it has shown its capability of being the main revenue stay of some countries all over the world. ―Countries like Canada, the United States of America, the Netherlands and the United Kingdom are some 1examples of a tax based economy with their internal revenue generation being over 50% of their revenue base‖ . States are beginning to accept the reality that taxation is a very good avenue for blocking the shortfall from funds transmitted from the Federation Account.

The Black‘s Law Dictionary defines tax ―as a reliable portion of the property and labour of the individual citizens, taken by the nation in the exercise of its sovereign rights for the support of government, for the administration of the laws and as the means for continuing in operation, the various legitimate functions of the state.‖

The New Shorter Oxford English Dictionary defines tax as ―a compulsory contribution to the support of government levied on persons, property, income, commodity, transactions etc, usually at a fixed rate mostly, proportionate to the amount on which the contribution is levied.‖ Taxation is the process of compulsory exaction of the money by a public authority from individuals and corporate bodies, such monies being for public purposes .

From the above definitions, we can safely say that taxes are compulsory payments levied by the government on the people (i.e. governed) so as to create revenue for the running of the apparatus of government and the provision of social amenities to the citizens of the state. They are the contributions by the people to the general revenue pool of the government.

Tax policy on the other hand is the planned system of a particular country for purposes of the implementation of its tax regime. This policy affects micro and macro-economic behaviours of the citizens of the country. It comprise policies as to who to tax and how much to tax these persons. It is the tax policy that determines whether it targets, the rich, middle class or the low income earners. The decision to target each of these groups for tax purposes also have its own advantages and disadvantages. The ability to provide a policy that balances a country‘s tax regime tells the level of the effectiveness and the efficiency of a tax regime. In other words;

―… tax policies represent key resource allocator between the public and private sectors in a country. It is usually imposed on individuals and entity that make up a country. The funds provided by tax are used by the states to support certain state obligations such as education systems, health care systems, pensions for the elderly, unemployment benefits, and public transportation. A nation‘s tax system is often a reflection of its communal values or the values of those in power. To create a system of taxation, a nation must make choices regarding the distribution of the tax burden-who will pay taxes and how much they will pay-and how the taxes collected will be spent.‖

Before the discovery of crude oil (the black gold) in Nigeria, the Nigerian economy was a tax based economy. Upon discovery of the crude oil, Nigeria shifted its source of revenue to the income accruable from the exploration of crude oil and abandoned taxation or merely paid lip service to its implementation to the extent that the Nigerian budget is based on the projected selling price of crude oil in the international market; and the performance of the budget is fundamentally dependant on how much revenue is generated from the actual sale of the product. Thus, the success or otherwise of the performance of the government is dependent on how much revenue it is able to generates from the sale of crude oil. There had been no obvious problem with this fiscal policy until lately. The problems arising from the over reliance on revenue generated from crude has led to the need to review other revenue options. This work is an attempt to consider the tax options available to the states under the current legal regime in Nigeria.

1.2. Statement of the problem

In recent times, there has been lots of agitation from the federating units where crude oil is explored for ―resource control‖.12 The agitation has taken both economic and environmental dimensions.13 This call has also led to a movement towards the implementation of fiscal federalism and a need for generation of revenue from other sources owing to the consistent instability of oil prices and the challenge of the agitation for resource control.

The problem sought to be addressed in this work is the examination of the operation of fiscal federalism under the current constitutional framework to determine:

a. What is the nature of fiscal federalism under the 1999 Constitution of the Federal Republic of Nigeria (as amended)?

b. What is the extent of the powers of State Houses of Assemblies to legislate on tax matters under 1999 Constitution of the Federal Republic of Nigeria (as amended)?

c. Does the Nigerian law prevent federating States from enacting independent laws on taxation

d. What are the weaknesses of the existing tax laws in addressing socio-economic problems in Nigeria?

1.3. Objective of the research

This research is undertaken so as to explore the alternative to over dependence on revenue generated from the sale of crude oil by all tiers of the Nigerian Government. The aim of this work is as follows;

a. To appraise the nature of fiscal federalism under the 1999 Constitution of the

Federal Republic of Nigeria(as amended)?

12 The term is devised by states in Nigeria wherein crude oil deposits are obtained, calling for the control of the revenues generated from the resources found in their territorial boundaries.

13 Robert S. et al (2009) The case of Ken Saro-Wiwa PEN American Centre New York p. 3. Sagay I.:

“Nigeria: Federalism, the Constitution and Resource Control”. Text of speech delivered by Professor Itse Sagay (SAN), former Head of Law Department of University of Benin at the fourth sensitization programme organized by the Ibori Vanguard at the Lagoon Restaurant, Lagos available online at Urhobo Historical Society website:http:/www.waado.org/NigerDelta/Essays/ResourceControl/Sagay.html Retrieved on 25

November 2009. (2005) Timothy D: (2003) Environmental Movements In Minority And Majority Worlds A

Global Perspective Rutgers University Press London. p. 3

b. To determine the challenges to the implementation of effective tax administration in Nigeria, particularly the problem of tax evasion and tax avoidance.

c. To determine the extent of the powers of State Houses of Assemblies to legislate on tax matters under Nigerian law.

d. To examine the efficacy of tax laws enacted by Lagos State.

And finally proffer solutions to the weaknesses of tax laws and tax administration in Nigeria.

1.4. Scope of the research

This dissertation will attempt to review the relevant statutory enactments and case laws in this regard. Consequently, the Federal Inland Revenue Service (Establishment) Act, Personal Income Tax Act, Personal Income Tax (Amendment) Act, Value Added Tax Act, The National Tax Policy which embodies the policy drive of taxation in Nigeria will also be considered in this research.

The import, effect and limitation of the Taxes and Levies (Approved List for Collection) Act viz a viz the operation of fiscal federalism in Nigeria will also be considered in this work. The Supreme Court‘s decision in Attorney General of Ogun State v. Alhaja Ayinke Aberuagba as it relates to the powers of the states to enact tax laws will also be analysed.

Equally instructive on this subject are the provisions of the 1999 Constitution of the

Federal Republic of Nigeria. The provisions of Second Schedule (Part II) paragraphs 9, 18 and 19 of the Constitution, which empowers a State House of Assembly to make laws for the collection of any tax, fee or rate, or to make laws for the industrial, commercial or agricultural development of a state. The provisions of Section 4 (7) of the Constitution, which also empowers a State House of Assembly to make laws for the peace, order and good government of the state in respect of any matter that is not included in the Exclusive legislative list, or any matter included in the concurrent list or any other matter with respect to which it is empowered to make laws by the provisions of the 1999 Constitution. Some companies carrying on business in Lagos State are presently challenging the decision of the State to impose taxes on them . The Federal Government is also challenging the powers of the Lagos State Government to enact the Hotel Licensing Law21, the Hotel Licensing (Amendment) Law and the Hotel Occupancy and Restaurant Consumption Law It is on this premise that it is considered appropriate to carry out a research on the tax system in Nigeria.

We will shine the torch on the federal tax laws and state tax laws with particular emphasis on Lagos State; tax administration; mode of resolving conflict and attitudinal behaviour; and tax impact in Nigeria. Experience from other jurisdiction may be drawn to explain situations in Nigerian Tax law where necessary.

1.5. Research methodology

The method adopted in this research shall be doctrinal in nature. The research material shall be based on existing legislations and case laws in the area, commentaries and views of experts on the subject as expressed in books, articles of mass media, academic journals, etcetera.

The primary data will be the existing statutes and case law on the subject, while the secondary data are the persuasive writing of academics and tax consultants and practitioners in the area. The research adopts the data and first hand information on tax administration contained in the following materials; Commissioned report of Maarten de

Zeeuw and Abdulrazaq M. T. commissioned by the United Kingdom Department For International Development on the tax performance of Lagos State , the various presentation of Ipaye (Special Adviser to the Governor of Lagos State on Taxation) submitted to the Chattered Institute of Taxation of Nigeria. The first hand information supplied by Ochei a tax practitioner of over 25 years in his book entitled the Nigerian Taxman‘s Book, data sourced from the Central Bank of Nigeria on the Budget performance of State and tax performance of Lagos State. Submission by the Governor of the Central Bank of Nigeria to the House Financial Services Committee of the United States of America Congressional Hearing on the impact of the Global Financial Crisis on the Nigerian Economy28 and the Report presented to the President on the new National Tax Policy29 in preparing this research.

1.6. Literature review

The following books shall be of immense contribution to the writer in the cause of this research: Abdulrazaq a seasoned tax analyst wrote on the topic Principles and Practice of Nigerian Tax Planning and Management30, Adesola titled Tax Laws and Administration in Nigeria.31 Ayua contributed to the area by his very rich book titled The Nigerian Tax Law32. These books mainly delved on the operation of taxation under the existing laws in Nigeria. No mention is made on how states could harness their tax potentials. Consequently they are not resources for the harnessing of tax powers under the Nigerian current legal regime. The Researcher intends to also draw from the fountain of the prolific guru of commercial law in the academia, Ola particularly from his book Income Tax Law and Practice in Nigeria33. This book is very rich in other areas of taxation but seem to only scratch the surface on the potential of state government in exploring tax legislation and how taxation can be an alternative source of revenue for the federating states in Nigeria. The old book of Orewa titled Taxation in Western Nigeria: The Problems of an