ABSTRACT
PAYE
is pay as you earn. Therefore PAYE system of taxation is a system of deducting
income tax from the employee’s income by their employer as it falls due. This
method of deducting income applies to all employees resident in Nigeria.
However,
the issue of taxation has increased a miss-conceived idea writes people
believing that the aim of tax is to exploit the citizens for the benefit of the
government. Thus the personal income tax imposes problems to tax
administration. These problems hinder the effectiveness and efficiency of
personal income tax administration and it is traced to be poor gathering of
information from tax-payers which is grouped under three (3) headings;
I.
Assessment: Under and over
assessment occur as a result of poor information assimilation.
II.
Accountability: Inadequate,
improper and incomplete returns on money so far collected as tax to the
authority concerned (government).
III.
Tax policy
implementation:
The inability of the government on its part to implement her tax policies as
regard to rural development is one of the major problems that project against
the smooth operations of personal income tax administration.
Then,
the suggested ways of reducing the problems the problems of personal income
tax:
I.
Government
should employ reasonable and qualified accounting graduates from the
polytechnics and university to manage the affairs of the board of internal
revenue (BIR) department.
II.Government
should educate the tax payers and also establish revenue corps collectors. III.Government
should introduce the use of clearance certificate and cash discount to voluntary
compliance by tax payers.
CHAPTER
ONE
INTRODUCTION
1.1
Background of the study
Late Lord Lugard first introduced income
tax in Nigeria as far back as 1904.The legal history of the Nigeria tax system
can, however be traced to Nigeria customs and traditions. Nigeria income tax in
the modern form however began in 1940, although there was a related type of
tax. Dating 1927 then, when the direct taxation ordinance of 1940 was enacted,
it gave power to administrative officers to levy taxes on income of both
Africans and Europeans in the federal capital territory of Lagos then,
consequently, Europeans in the former region was not subjected to in the
regions on which they were residents in Nigeria. The administrative officers
were therefore unscientific and without any form of uniformity as well as
discrimination in their tax assessment.
Devised by Sir Paul Chambers, PAYE was
introduced into the UK in 1944, following trials in 1940-1941. As with many of
the United Kingdom's institutional arrangements, the way in which the state
collects income tax through PAYE owes much of its form and structure to the
peculiarities of the era in which it was devised. The financial strain that the
Second World War placed upon the country meant that the Treasury needed to
collect more tax from many more people. This posed significant challenges to
the government and to the many workers and employers who had previously never
come into contact with the tax system.
PAYE is an acronym for “Pay as You
Earn”. It is a method of collecting personal income tax from employees'
salaries and wages through deduction at source by an employer as provided by
the relevant sections of the Personal Income Tax Act (PITA). Also pay as you
earn (PAYE) Tax payment method in which an employer is required by law to
deduct income tax (and national insurance, if applicable) from an employee's
taxable wages or salary. This amount (with the employer's contribution, if
applicable) is deposited with the revenue office usually within 14 days after
collection.
A tax could define as the transfer of
resource from the private to the public sector of the economy in order to
accomplish some of a nation’s economic and social goal. The primary economic
goal of developing countries is to increase the rate of economic and social
growth and hence the per capital income which will lead to higher standard of
living.
Provision of additional basic government
services, particularly in education, public health and transport which are
important for the growth of remainders of the economy. A higher rate of capital
formation in production facilities, whether understand in the government or
private sector. The specific goal is of course not the highest rate that will
permit the maximum rate of growth in GNP regarded as feasible under the
circumstance. Broadly, it could be said that there two main method of financing
expenditure open to most developing countries;
I.
Taxes and other current receipts such as
the profit of public enterprises.
II.
Loans and grants.
Of these sources, taxation is perhaps
the most important since that level of government expenditure is to a great
dependent on the ability of the requirement revenue at the disposal of
government.
Thus, Chelliah (1960), taxation might be
used to accomplished the following objectives:
(i)
Increasing the incentive to save and
invest.
(ii)
Transferring from the hand of the public
to the hand of the state to make possible investment.
(iii)
Modifying the pattern of investment.
(iv)
Mitigating of the economic inequality.
(v)
Curtailing consumption and transferring
resources from consumption to investment.
The objectives are relates to the
ultimate goals of increase in national income and of the direction of economic
development. The various forms of tax could be classified under two headings “indirect and direct tax”.
Indirect taxes are those types of tax
that are levied against goods and services e.g. of indirect tax in Nigeria are
custom duties and excise duties.
Direct taxes are those types of tax
levied on factors of production. In Nigeria, direct taxes consist of personal
income tax, company income tax, petroleum profit, capital gain tax and capital
transfer tax. The administration of the income tax laws in each of the
federation is vested in state board of internal revenue service. Prior to 1993,
the composition of the board could vary from state to state-effective fraud
1993, the composition is now uniform throughout the country.
The Raisman Fiscal Commission of 1958
recommended the introduction of basic principles for taxing income of
individuals in Nigeria. This recommendation was embodied in section 70 of the
1960 Nigeria constitution and formed the basis of the income tax Act (ITMA) of 1961.
This income tax Act is one of the major tax laws that are being applied in
Nigeria today. However, it has being amended in subsequent years.
The main provision of this Act, which
deals with the fundamental income tax principles applicable to the whole country,
is related as:
I.
The basis for computing incomes of
individuals.
II.
The treatment of provident/prison fund.
III.
The determination of resident.
IV.
Treatment of incurred in a trade,
business, profession or vocation.
V.
Capital allowances for asset used in
production.
VI.
Allowable and disallowable expenses for
income purpose.
VII.
Incomes exempted from tax.
When the income tax management Act came
into operation, the respective regional government in line with the provision
amended all the regional laws in existence. The western region principal tax law, income tax law,
chapter 48 of 1959, as for the purpose of bringing it in line with the income
tax management Act (ITMA) amended in 1961 by the income tax law, 1961 and
Nigerian modern form of income taxation, however only began in 1940.
1.2
Statement of the Problem
Over the years, revenue derived from
taxes has been very low and no physical development actually took place, hence
the impact on the poor is not being felt.
Inadequate tax personnel, fraudulent
activities of tax collectors and lack of understanding of the importance to Pay
by tax payers are some of the problems of this study. The issues mentioned
above will therefore constitute the problems to be addressed by this research
work.
Non-compliance strategy: mamud (2008:2)
observed that the recurring with personal income tax (PIT) is the
non-compliance of the employers to register their employees that has to remit
such taxes to relevant tax authorities. According to him, government in 2002
amended the 1973 PIT Act to make non-compliance employers liable to penalty up
to #2500.00 as well as liable for the payment of all the arrears. Employers
that failed to keep proper records also face penalty of #5000.00 the
implication of the above is that those employers may fell reluctant to remit
their employees names to the relevant authorities hence they may always bribe
their way through.
The problems of personal income tax
assessment in Onicha Local Government Area of Ebonyi State include the
following:
i.
Lack of regular payment of tax
ii.
Lack of understanding of what pay as you
earn is all about.
iii.
Problems of assessment.
iv.
Problems of not returning the form at
the stipulated time limit.
1.3
Objectives of the Study
It is the researcher belief that though
the basis of the research shall in the main purpose be the problems of pay as
you earn (PAYE) assessment in Onicha Local Government Area, Ebonyi State. The
fact-finding and recommendation shall also be applicable to other organization
and the tax administration.
Since the survey on personal income tax
assessment had revealed some lapses, the objectives intended to be achieved
through this study may be summarized as follows:
i.
To enlighten the tax payers of
usefulness of the revenue derived from the system.
ii.
To find out if the tax payers has
received any benefit from paying the tax.
iii.
To examine the entire machinery of
pay-as-you-earn collected in Onicha Local Government Area, Ebonyi State
iv.
To find out whether the problems of
personal income tax are due to its administration.
v.
To identify the problem associated with
personal income tax administration with reference to Onicha local government
board of internal revenue.
vi.
To suggest ways of improving the
administration of pay as you earn.
1.4
Research Questions
In this juncture, some certain questions
were prepared to the management and staff and other employees of the local
government council office. There are:
(i)
Is there any relationship between
government policies and pay-as-you-earn?
(ii)
Has taxation contributed to revenue
generated in Nigeria?
(iii)
Has taxation contributed to the steady
economic growth in gross domestic product?
1.5 Statement Hypotheses
The
followings hypotheses were designed for the study:
Ho.1:
There is no significant relationship between government policies and pay-as-you-earn.
Hi.1:
There is significant relationship between government policies and
pay-as-you-earn.
Ho.2:
Taxation has not contributed significantly to revenue generation in Nigeria.
Hi.2:
Taxation has contributed significantly to revenue generation in Nigeria.
Ho.3:
Taxation has not contributed significantly to the steady growth in gross
domestic product in Nigeria.
Hi.3:
Taxation has contributed significantly to the steady growth in gross domestic
product in Nigeria.
1.6
Significance of the Study
The significance of this study would
therefore be looked at in different occasions.
I.
Firstly, as it will enlighten the
government and the entire people of Onicha Local Government Area, Ebonyi State
on the importance of personal income tax assessment and the need to have a
correct and complete view.
II.
It will also serve as a reference
material to both student and economic planner alike.
III.
It will serve as a reference material
for other researchers who may be interested in similar studies.
1.7 Scope of the Study
This
research is reduced in scope of Onicha Local Government Area, Ebonyi State that
is one of the 13 local government areas, in Ebonyi State Nigeria.
The scope of study is therefore limited
to the revenue generation activities of the board of internal revenue, Onicha
local government area Ebonyi state.
1.8
Limitation of the Study
This
research is limited most especially by time constraint. A rear accurate
research work demands a long term of study to generate enough data and make
enough analysis and verification of data and the analysis.
Unfortunately, the period within which
this work should be completed is short and shaved many other things to do. In
addition, there is a shortage of relevant texts and documents either a shortage
of relevant texts and documents either by their non-availability, unaffordable
cost of procurement or confidentiality. These are vital data sources that their
absence will hamper the claimed validity of any work.
Finally, the uncooperative attitude of
some staff of the board has its own negative effect on this work because their
attitude has been discouragements, which reduce the zeal to research more.
1.9 Definition of terms
i.
TAX:
Tax is a compulsory charge imposed by the public authority (federal, state and
local government) for the general purpose of government. It is also a levy
regularly imposed and regarded as contribution to the general pool from which
most government expenditure are financed.
ii.
TAXATION:
Taxation can define as a compulsory contribution/payment to the public
authority to meet the expenses of government and the provision of general
benefit.
iii.
PAYE:
The term pay as you earn (PAYE) is used to describe the system whereby employee
pay tax on whatever income he /she earns from his employment in any particular
month at the end of the month. In order words it is a tax payment method in
which an employee is required by law to deduct income tax (and national
insurance, if applicable) from an employee’s taxable wages or salary. This
amount (with the employer contribution, if applicable) is deposited with the
revenue office usually within 14 days after collection. It is simply a
withholding tax on income payments of employees.
iv.
PERSONAL
INCOME TAX: Personal income tax can be defined as a
tool, which is often used by government as a fiscal policy to affect the level
of potential output. In other words, personal income tax is a techniques,
machine or act by which the government obtains its revenue from her taxable
citizens and organizations for the economic development of the state.
v.
INDIRECT
TAX:
This is a type of tax where the impacts fall on one person and the incident on
another person.
vi.
DIRECT
TAX:
This is a type of tax where the incidence and the impact of taxation fall on
the same entity. A direct tax is borne entirely by the entity that pays it, and
cannot be passed on to another entity.
vii.
CURRENT
YEAR BASIS: Current year basis means that income
assessment for tax purposes comprises income earned between January 1st
and December 31st of the year under consideration.
viii.
PRECEDING
YEAR BASIS: Preceding year basis means the
assessment based on the income from January 1st to December 31st
of the proceeding tax year.
ix.
TAX
RETURN: Every taxable person is required for each years of
assessment or income tax year to fill an income tax return from declaring a
trust, correct statement of his income from every source, and fill in other
particulars of his circumstances. The return must be submitted to the tax
authority around or return must be submitted to the tax authority around or
before April of tax year.
x.
EARNED
INCOME: This is in relation to an individual income derived
by him from a trade, business, profession, vocation, or employment carried on
or exercised by him and a pension earned by him in respect of any previous
employment. It is also known as REWARD FOR EFFECT.
xi.
ASSESSMENT
NOTICE: The conveying of the computation of the tax
liability to the taxpayer.
xii.
SELF-ASSESSMENT:
The assessment by the taxpayer himself in which he carried out the computation
of the liability, usually on a prescribed tax form and accompanies with payment
of the due to tax authority. Latest by the due payment permitted on the tax
law.
xiii.
TAX
AUTHORITY: The person or body of person responsible under
income tax decree No104 of 1993 to impose, compute, collect and administer tax
legislation is called tax authority.
xiv.
RETURN
FORM: Is form use to declared employees income and claim
the allowance entitlement to.
xv.
FREE
PAY ALLOWANCE: Employees entitlement under the
personal income tax such as: children, dependent allowance.
xvi.
TAX
REFUND: Is the amount refunded to an employee if he is over
assessed after claiming free pay allowance.
xvii. TOTAL PAY:
This is the sum of all payable to employees during any remuneration period
including all allowance bonuses, acting allowance and commission.
xviii. MONTHLY REMITTANCE:
Is the total tax collected during the month from pay of employees which is
payable to the board of internal revenue service after deducting tax refund if
any.
xix.
DIRECT
EMPLOYER: The person/organization directed by tax authority
on prescribed form to operate PAYE on emolument of his employee.
xx.
GDP:
Gross Domestic product.
xxi.
GNP:
Gross National Product.