HISTORICAL AND LEGAL BACKGROUND OF TAXATION IN NIGERIA

1.0 INTRODUCTION

Most economies of the world are based on one form of taxation or the other. Taxation has always been with man and it will continue to be with him. Countries of the world have different fiscal policies that enable them to explore various types of taxation and impose them on their citizens for the purpose of enhancing revenue and for regulation and governance of the economy. The government of Nigeria, as one of these countries, has legislative powers to impose on its citizens, any form of tax and at whatever rate it deems appropriate. In this unit, therefore, the objectives of taxation and the basic characteristics of taxation, among other things, shall be made known to you.

2.0 OBJECTIVES

At the end of this unit, you should be able to:

1. state clearly, the objectives of taxation in Nigeria 
2. explain the structure of the Nigerian tax system 
3.  discuss the evolution of taxation in Nigeria 
4.  illustrate the sources of Nigerian tax laws 
5. distinguish between a tax and taxation, and between taxes and levies. 

3.0 MAIN CONTENT

3.1 Definition of Tax and Taxation

Tax is a compulsory extraction of money by a public authority for public purposes and taxation is a system of raising money for the purpose of governance by means of contributions from individuals or corporate bodies (Sayode & Kajola, 2006:3).

According to the Oxford Advanced Learner’s Dictionary (1995:224), tax is money that has to be paid to the government. People pay tax according to their incomes and it is often paid on goods and services. Black’s Law Dictionary (1997:1469) defines tax as “monetary charge imposed by the government on persons, entities or property, levied to yield public revenue”.

In Ola (1985:1), taxation is defined as the demand made by the government of a country for a compulsory payment of money by the citizens of the country. For Thomas Cooley in ICAN study pack (2006:3), taxes are “enforced proportional contribution from persons and property, levied by the state, by virtue of its sovereignty, for the support of government and for all public needs”.

Nightingale (1997) describes tax as a compulsory contribution imposed by the government and concludes that even though tax payers may receive nothing identifiable in return for their contributions, they nevertheless have the benefit of living in a relatively educated, healthy and safe society. According to Soyode & Kajola (2006:4), taxation is defined as “the process of levying and collection of tax from taxable persons”.

SELF-ASSESSMENT EXERCISE 1

Define taxation in your own way.

3.2 Objectives of Taxation

In both developed and developing economies, the primary purpose of taxation is mainly to generate revenue for settling government expenditure and for the provision of social amenities and the welfare of the populace. Again, taxation is used as an instrument of economic regulation for the purpose of discouraging or encouraging certain forms of social behaviour.

Hence, you should note the following major objectives for designing a tax policy.

1. To raise money for the provision of services such as defence, health services, education, etc; 
2. To re-distribute income and wealth. That is, the rich pay more tax than the poor. This is achieved by the graduation or “progressiveness” of the rates at which the taxes are levied; (c) To discourage the consumption of harmful goods such as alcohol and cigarettes; 
3.  To harmonise diverse trade or economic objectives of different countries so as to provide for the free movement of goods/services, capital and people between member states;
4. For the management of the economy. Taxation is important in the planning of savings and investments. It can be harmonised with a development strategy. Also, in changing an economic structure, the government can use taxation as a powerful fiscal weapon to plan and develop a country. 

Additionally, taxation can be used to achieve specific economic objectives of nations. In Nigeria, governments- oftentimes, introduce tax incentives and attractive tax exemptions as an instrument to attract and retain local and foreign investors. It is also a device to improve gross domestic product, induce economic development and influence favourable balance of payments with other countries.

SELF-ASSESSMENT EXERCISE 2

1. Why do you think the achievement of tax objectives is necessary? 
2.  What are the other specific economic objectives that can be achieved using taxation? 

3.3 Structure of the Nigerian Tax System

The structure of the tax system in Nigeria can be classified into two forms; under the first form of classification, Nigerian taxes are classified as follows.

(I) Proportional Tax System

This form of tax assesses taxpayers on a fixed percentage. As a result, the amount of tax payable is proportional to every taxpayer’s income. For example, if the tax rate is fixed at 10%, every taxpayer will have to pay income tax at this rate, as his/her income increases or decreases. Illustration 1

Taxpayer’s Income Tax Rate Tax Payable

N % N

15, 000 10 1, 500

30, 000 10 3, 000

45, 000 10 4, 500

A taxpayer, whose income doubles, pays double the amount of tax. That is, when the income was N15, 000, the tax payable was N1,500, but when the income increased to N30, 000, the tax payable went up to N3,000.00

Advantages

1. It is simple to understand; 
2. It is easy to calculate; 
3. It does not affect the pattern of income distribution in the country because every person pays the same rate of tax; 
4.  It is a neutral tax; it has neutralising effects on savings and incentives. 

Disadvantages

1.  It increases inequalities of income and wealth. Both high-income and low-income groups are taxed at the same rate thereby making the low-income earner to sacrifice more than those in the high income group. 
2.  It does not encourage maximisation of government revenue because of the constant tax rate. 
3.  It is against the principle of taxable capacity. This is because the lower income group is required to sacrifice more than the higher income group. 

(II) Progressive Tax System

This form of tax is graduated as it applies higher rates of tax as income increases. For instance, the progressive tax concept can be explained with the following illustration:

Table 1.1: Personal Income Tax Table

Taxable Income N Tax Rate (%)

First 30, 000 5

Next 30, 000 10

Next 50, 000 15

Next 50, 000 20

Over 160, 000 25

From the illustration above, it shows that progressive tax system has a main objective of redistributing the income of the rich to that of the poor in some ways. For instance, the rich are taxed heavily to finance projects of common interest.

Advantages

1.  It is based on the ability of the tax payer to pay;
    It maximises the revenue for the government; 
2.  It is flexible as government can use it to get more revenue or to grant tax relief to low income earners; 
3. It is equitable – this tax system is equitable because it requires proportional sacrifice on the part of taxpayers. The higher income group bears the heaviest tax burden; 
4.  It promotes economic stability – by reducing the tax rates during recession or depression periods, the government provides relief to the taxpayer so that they may increase their demand for goods and as a result investment is encouraged. On the other hand, tax rates can be raised during economic boom thereby reducing the purchasing power of the taxpayers and as a result, inflation is fought. Thus, this tax system helps in bringing economic stability in the economy; 
5.  It encourages better use of resources – the high income groups mostly indulge in conspicuous consumption and thereby waste their incomes. By taxing luxury goods and incomes of the rich heavily, the government can prevent them from wasteful expenditures and therefore, be in the position to make better use of the country’s resources. 

Disadvantages

1. It has faulty basis – it is based on diminishing marginal utility of income, which is faulty. Utility is subjective and cannot be measured in terms of money, it is not therefore right to base a tax system on subjective utility that is arbitrary; 
2. It is arbitrary – there is no scientific or standard method of fixing the rate of progression. It is usually fixed by the revenue board; but where there are checks and balances, arbitrariness can be curtailed; 
3.  It discourages capital formation – this tax system adversely affects savings, investment and capital formation as taxpayers that have the ability to save and subsequently invest are taxed heavily; 
4.  It is unjustifiable – some people earn high as a result of working hard, while some remain poor because of laziness; it becomes unjustified to tax high-income groups at high rates thus punishing them for their resourcefulness; 
5. It may lead to tax evasion or tax avoidance – people who are taxed heavily try to evade payment of taxes by maintaining false accounts and submitting false statements to tax authorities or avoid taxes by finding and taking advantage of loopholes in the tax laws. 

(III) Regressive Tax

Under this type of tax, the tax payable decreases as the taxpayer’s income increases. A high income person pays less tax than a low income person in a regressive tax system.

Illustration 2

Table 1.2: Regressive Tax Table

Taxpayer Income Tax Rate Tax Payable

N % N

20,000.00 30 6,000.00

40,000.00 20 8,000.00

60,000.00 10 6,000.00

80,000.00 5 4,000.00

This system may not be suitable for developing countries as it yields low revenue and condone political and social reactions. However, it is not commonly applied even in developed economies
The second form of tax classification is by incidence which is given as follows.

(I) Direct Tax

This form of tax is assessable directly on the taxpayer who is required to pay tax on his property, income or profit, etc. He/she is not only advised by notification (called assessment notice), but he/she is duly receipted. The purpose of these formalities is to bring to the taxpayer’s notice the incidence of such tax.

The types of tax that fall under this heading include the following: - Personal income tax
- Companies income tax
- Capital gains tax
- Education tax, etc.

(II) Indirect Taxes

Indirect taxes are borne by persons other than the ones from whom the tax is collected. These are taxes which are imposed on commodities before reaching consumers and are paid by those upon whom they ultimately fall, not as taxes, but as part of the selling price of the commodities.

The types of tax that fall under this heading include the following: - Value Added Tax (VAT)
- Stamp duties
- Excise duties
- Customs duties, etc.

Indirect taxes may affect the cost of living, as they constitute taxation on expenditure.

SELF-ASSESSMENT EXERCISE 3

1.  What structure of tax system will you recommend for a developing country like Nigeria? 
2.  What are the demerits of direct and indirect taxes? 

3.4 Canons of Taxation

A good tax system is easy to administer and shares the burden of taxation justly. Adam Smith puts forward the following canons or principles of taxation which a good tax system should display.

1.  Equity – a good tax system should be equitable. That is, every person should be taxed according to his/her ability. This principle recommends progressive tax system; 
2.  Certainty – the amount of tax to be paid, the time of payment and the manner of payment should be certain and clear to both taxpayers and tax officials; 
3.  Convenience – a good tax system should be convenient in terms of time and mode of payment, to the taxpayer; 
4. Administrative efficiency – the process of levying and collecting taxes must be administratively efficient, transparent and economical without any distortion; 
5.  Productive – a tax system should be such that brings in sufficient revenue to the government. 

SELF-ASSESSMENT EXERCISE 4

Looking at the Nigerian tax system, which canons of taxation is being adhered to?

3.5 Legal History of Personal Income Tax

Taxation in Nigeria started with personal income tax in 1904, when Lord Lugard introduced income tax in the northern part of Nigeria. Community tax became operative through the Revenue Ordinance of 1904. In 1917, after the amalgamation of the northern and southern protectorates, the 1904 Revenue Ordinance was replaced by the Native Revenue Ordinance of 1917. Furthermore, the provisions of the 1917 ordinance were amended in 1918 and extended to southern Nigeria particularly, the west and the Midwest and subsequently, to eastern Nigeria, in 1928.

However, the Native Revenue Ordinance was later incorporated into the Direct Taxation Ordinance No. 4 of 1940, cap 54. Still in the pre- independence era, personal income tax was administered and collected by the native administrations or local government in the name of direct taxation. Under the Direct Taxation Ordinance of 1940, the assessment and collection of taxes were the primary responsibilities of the native administrations/authorities throughout the country, and taxes so collected were their main sources of revenue.  In 1943, another ordinance known as the “Income Tax Ordinance of 1943” was promulgated to take care of Lagos residents, who had opposed the 1940 ordinance. Unlike the 1940 ordinance, the 1943 ordinance was an admixture of both poll tax and income tax which were received from the native residents in the township of Lagos and non- native residents in Nigeria by the central government for the general revenue of the country.

The Nigerian Income Tax Ordinance of 1943 remained in force in the federal territory of Lagos until 1961 when the Personal Income Tax (Lagos) act of 1961 was enacted by the federal government. The root of the present laws on Personal Income Tax in Nigeria can be traced to the Fiscal Commission set up in 1957, which consisted of Sir Jeremy Rainsman as the chairman and professor R.C. Tress as a member among others. The purpose of establishing the commission was to examine the jurisdiction and fiscal powers of the various tiers of government in Nigeria.

At present, the laws that regulate Personal Income Tax in Nigeria are as follows.

1. The Income Tax Management Act (ITMA) 1961; 
2.  Personal Income Tax Act (PITA) 1979 as amended in 1993; 3. Tax reforms; 
3. Annual pronouncements that have been gazetted. 

3.5.1 Legal History of Companies Income Tax

Companies’ Income Tax was introduced in 1939 as a source of revenue for the Federal Government of Nigeria. First, tax on companies was imposed under the Companies’ Income Tax of 1939. This was to cover the aspect of income tax that was not covered by the Native Revenue Ordinance of 1917 with all its subsequent amendments.

In 1940, the Income Tax Ordinance of 1940 was promulgated to consolidate the Companies’ income tax ordinance of 1939. Tax under the 1940 ordinance was imposed upon any “person” and this expression was defined to include a company. By 1943, the income tax ordinance was enacted for Lagos residents and foreigners, including corporate organisations. This took care of some major changes such as the introduction of penalties on falsification of returns, failure to file in a return, or failure to keep the required accounting records; which are offences punishable with fine or imprisonment or both.

Chick Fiscal Commission preceded the 1954 constitution, which was the first federal constitution in Nigeria, recommended that the two taxes imposed under the Income tax ordinance of 1943 be within the exclusive jurisdiction of the federal government. The present tax system in Nigeria has its roots in the Rainsman Fiscal Commission recommendation that jurisdiction over companies income tax be exclusive to the federal government and that the States, except for certain uniform principles, should have jurisdiction over personal income tax.

It was in the light of this that the 1960 constitution conferred an exclusive fiscal power upon the federal government to impose taxes on the incomes and profits of companies. Consequently, the Companies Income Tax Act (CITA) 1961, was enacted to repeal the Income Tax Ordinance, Cap 85 which itself repealed the Income Tax Ordinance of 1943. CITA, 1961 has undergone several amendments.

 3.7 Distinction between Taxes and Levies

Tax has been defined as a compulsory levy imposed by government on persons and entities to yield revenue. The term “tax” is unique and specific in the sense that it is imposed by the government of a country or state. Examples of taxes are Companies’ Income Tax, Personal Income Tax, Valued Added Tax, etc. On the other hand, the term ‘levy’ is generic as it could describe the imposition by a legal authority of tax, penalties and fines.

It follows, therefore, that while all forms of taxes can be described as levies as they constitute imposition, not all levies can be properly described as taxes. A tax can be imposed once and the payers continue to pay, as and when due and on regular basis. Levy on the other hand and in most cases, is a one off permanent that may not occur again. Tax, like levy, is involuntary in the sense that its compliance is compulsory, but is usually not intended to be punitive as a levy. A tax must be charged and exacted, pursuant to a legislative authority that is supported by a particular written legal instrument. If it is backed by a particular valid tax law, it is a tax irrespective of whether it is described as levy or tax.

4.0 CONCLUSION

The foregoing discussion is essential to imparting the background knowledge of taxation and its principles in you. This background information has justified the necessity for the imposition of taxes by governments the world over.

5.0 SUMMARY

The unit has highlighted the historical & legal background of taxation in Nigeria. Specifically the following areas have been covered.

1.  Definition of a tax and a levy; 
2. The primary purposes of taxation; 
3. The structure of the Nigerian Tax System;