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CHAPTER ONE

INTRODUCTION

1.1        BACKGROUND OF THE STUDY

Taxation is a major instrument for the conduct of both developed and developing countries. Taxation is known to accomplish a number of objectives such as revenue generation for government, economic stabilization and income re-distribution. Taxation as an instrument of public policy is essentially concerned with the manipulation of financial operations of both the government and private sectors with a view to furthering certain economic objectives.

In Nigeria, these economic objectives include the attainment of appreciable level of full employment, avoidance of excessive inflation, achievement of satisfactory balance of payment position, appreciable increase in the national income and a reduction of extreme inequality among the citizens, provisions of essential necessities of life like water, school, building of bridges, roads and others.

In every country, there are certain services which the government must provide to the citizens because of their essential nature. The services are so indispensable in life that individuals or corporate bodies are not allowed to provide them or where they are allowed, they are not allowed to monopolize the supplies or the production. Government does this to ensure that the supply of such goods and services are evenly distributed in any given society so that the rich and the poor alike may benefit.

The provision of such essential goods and services involve huge expenditure. One may ask; how does government get such huge amounts to finance the supply of such essential goods and services to her citizens? It is true that government mints money but there are other important economic factors that should be considered so that excessive money is not in circulation in an economy. For an economic balance to be maintained in an economy, government must find ways of financing her activities. One source of such finance is the contribution made by the private sector to government coffers in form of fees, levies or taxes.

Question now arises, how does the funding of these activities come about?

The primary source of government revenue is tax. Taxes which loyal citizens pay account for more than seventy percent of government revenue in Nigeria.

The private sector is not left out in the fund generation because their own fund comes in form of borrowing and private savings etc.

The absence of well-organized and locally controlled money market for borrowing has faced private sectors in most developing countries especially Nigeria to rely primarily on fiscal measures to mobilize domestic monetary resources for revenue generation. For instance, if profit on taxation and the marginal efficiency of investment is not well declined, these will consequently bring a fall on investment and as well affect the economy especially where there is decrease in tax rate. (i.e. number of tax payers)

However, Dukeman (2003) said that for an effective tax system that government should encourage investors or individuals to pay tax to some extent for that will adhere to high rates of income thereby enabling government to carry out its function.

So, as long as this is significantly quantitative and psychologically substantial, the suggestion may not augur well for investment activities especially where retained profit and savings from the bank of capital formation exaggerated. Realizing the importance of tax to finance as the transfix of economic growth the government should initiate financial policies through annual budgets extension services for these business enterprises and also through several government financial enterprises. We are now convinced that with all these sources of revenue by government they should contribute the largest proportion. With the consideration above, attention has been focused on the fiscal policy best suited to the economic development of the country. As part of the search for desirable fiscal policies high consideration is placed on the value of goods and services payable by the final consumers. Nevertheless, the implementation of various governments is measured by the effects at most times, at variance with the objective of government. Some of the revenue collection agencies are either ill equipped to carry out their functions effectively or equipped with person of dubious character who trust laudable objectives of the government. Mostly, some tax payers don’t pay willingly, some take laws into their hands to either evade or avoid tax while others collide with some tax officials as well as employ the services of tax experts to explore the tax loophole. As a result of such ill activities towards taxation there is always a short fall in the government projected revenue.

In view of the importance to taxation as a principal source of government revenue as well as a powerful instrument in the conduct of public policies, all this fraudulent act should be resolved. The mono-product status of the Nigerian economy has received series of criticisms in recent times. According to Okonjo-Iweala (2012), without the diversification of Nigerian revenue from oil, the economy will soon collapse. Recently, Nigeria’s dependence on crude export for revenue based on the projected price and assumed production is 80%. However, oil revenue has accounted for over 76% of government revenue. (Ebosele & Adekoya, 2012). The implication of this overly dependence on oil revenue is the boom-and burst nature of the economy (Akpokodge, 2000). Against the backdrop of the need to diversify the economy of Nigeria, taxation has come extremely handy. Taxation is made up of two broad components and several subcomponents and basically, we have indirect and direct taxation. For purposes of this study, emphasis is on indirect tax considering its effect consumption in Nigeria.

However, an indirect tax (such as sales tax, per unit tax, value added tax (VAT), or goods and services tax (GST)) is a tax collected by an intermediary (such as a retail store) from the person who bears the ultimate economic burden of the tax (such as the consumer), this is the major reason why it has great influence on consumption. The intermediary later files a tax return and forwards the tax proceeds to government with the return. In this sense, the term indirect tax is contrasted with a direct tax, which is collected directly by government from the persons (legal or natural) on whom it is imposed (Wikipedia, 2015).

An indirect tax may increase the price of a good to raise the price of the products for the consumers. Examples would be fuel, liquor, and cigarette taxes. An excise duty on motor cars is paid in the first instance by the manufacturer of the cars; ultimately, the manufacturer transfers the burden of this duty to the buyer of the car in the form of a higher price (Lim, 2008). Thus, an indirect tax is one that can be shifted or passed on. This is a function of the relative elasticity of the supply and demand of the goods or services being taxed. Under this definition, even income taxes may be indirect.

Indirect taxation is policy commonly used to generate tax revenue. Indirect tax is so called as it is paid indirectly by the final consumer of goods and services while paying for purchase of goods or for enjoying services. It is broadly based since it is applied to everyone in the society whether rich or poor. Since the cost of the tax does not vary according to income, indirect taxation is a proportional tax. However, indirect taxation can be viewed as having the effect of a regressive tax as it imposes a greater burden (relative to resources) on the poor than on the rich. The taxpayer who pays the tax does not bear the burden of tax; the burden is shifted to the ultimate consumers. Therefore, indirect tax have effect on consumption and the standard of living of the general public.

 

1.2       STATEMENT OF THE PROBLEM

Tax constitutes the greatest percentage of the internally generated revenue in Enugu State and as well the major source of revenue for the government in financing its activities. Tax however has its fundamental problems in the area of administration. There is some problem in planning, control and adequate information flow of tax collection generally. Since the government financial policy and objectives are to ensure adequate revenue and conducive environment for the people’s satisfaction through progressive taxation and other fiscal measures designed to aid the rapid growth and development of the society for the benefit of the citizenry.

It is therefore necessary that these avenues of fund are solidified. But on the other way round the implementation of the government taxation policy and the realization of the taxation goal most a times run at variances with the policy outlined in the annual as well as the tax laws provision.

Many individuals as well as organizations see taxation policy as being harsh and unfavorable. They argue that while few enterprises especially large company continues to benefit from the government support through grants, subsidiaries and other tax incentives, others find the policies unbearable and as a result any little opportunity by such people to evade or avoid tax is highly utilized.  The results of all these tax evasion and avoidance are that less revenue than envisaged is collected through tax by the government and thereby less social amenities than proposed are carried out.

Evidence so far supports the view that indirect tax is already a significant source of revenue in Nigeria. For instance, revenue from indirect tax in the year of its inception (1994) was N8.194 billion, which was 36.5 percent greater than the projected N6 billion for that year (Ajakaiye, 1999). However, the members of the organized private sector have been voicing their reservations in the sense that indirect tax is taking a toll on the prices of their products thereby affecting consumption in Nigeria. From an economic point of view, one expects the price of goods subject to indirect tax to rise, however, beyond this expected rise, businesses are taking advantage of the existence of indirect tax to increase prices of goods and services arbitrarily. According to Aruwa (2008), the resulting price increase has led to higher inflation. This may have prompted Mclure (1989) to state that policy makers should be concerned about the macroeconomic impact of indirect tax, especially on prices, output, income and consumption, before considering its adoption. However, the researcher is evaluating the effects of indirect taxation on consumption in Nigeria

 

1.3   Purpose/objectives of the Study 

The following are the objectives of this study:

1. To evaluate the effects of indirect taxation on consumption in Nigeria.
2. To identify various forms of indirect taxation imposed in Nigeria and their respective effects.
3. To determine other factors that affect prices of goods and consumption in Nigeria.

 

1.4   Research Questions     

1. What are the effects of indirect taxation on consumption in Nigeria?
2. What are the various forms of indirect taxation imposed in Nigeria and their respective effects?
3. What are the other factors that affect prices of goods and consumption in Nigeria?

 

1.5   Research Hypothesis

HO: There is no significant relationship between indirect taxation and consumption in Nigeria