The importance of taxation as a fundamental component of government revenue generation and an essential instrument for national development cannot be overemphasized as a sustainable source of income for the government. Although revenue generation is often viewed as the primary and most important role of taxation, it is not only a means of revenue generation for government, it can also be used to stimulate sources of government revenue and develop other areas of the economy from which wealth can be generated.
Unfortunately, tax administration is usually weak and characterized by extensive evasion, corruption and maladministration as a result of defective tax administration system(largely due to under-assessment and inefficient machinery for tax collection) to ensure the maximum possible compliance by taxpayers with their taxation obligations , thereby birthing the mischief that bedevils the tax administration in the form of tax evasion.
Tax evasion is an illegal and outright dishonest act where a taxpayer(people, corporate bodies, trust and other institutions) endeavors to reduce their tax liabilities through the use of illegal means with the motive of evading the payment of tax which constitutes criminal acts punishable under the tax laws. These acts may include: failure to pay tax, failure to submit returns, claiming relief (in personal income tax) for example giving number of children that do not exist, documenting fictitious transactions, understating income, overstating expenditures, ignorance of extant tax laws and high tax rates which would naturally make tax evasion a wise and economical venture.
Tax evasion are problems that face every tax system, where there are leakages in tax collection through evasion, no development can take place and it is usually associated with high unemployment. under direct personal taxation practiced in Nigeria, the major problem lies in the collection of the taxes especially from the self-employed such as businessmen, professional practitioners among others who blatantly refuse to pay tax by reporting losses.
While tax evasion is a crime and is punishable under the Tax Laws, Tax Avoidance is legal or at least not illegal, it arises in a situation where the taxpayer arranges his financial affairs in a way that would make him pay the least possible amount of tax without breaking the law, knowing what the law is and deciding not to be caught by it but rather taking advantage of its provisions to escape tax liability partially or entirely. This could be by way of seeking professional advice; reducing one’s income by submitting claims for expenses in earning the income; purchase of assets exempted from tax or under-valued for tax purposes- investing in arts collection, emigration of capital- increasing the number of one’s children (the maximum allowable in Nigeria is 4) and taking additional life assurance policies.
Recently, the CAC (Corporate Affairs Commission) and FIRS (Federal Inland Revenue Service) partnering to ensure compliance with Tax Laws and to properly inform companies of their tax obligations in a statement signed by CAC on Monday, June 29, 2020 stated that “Certificates of Incorporation of companies under part A of the CAMA will henceforth carry Tax Identification Numbers (TIN) issued by FIRS”. This is to reduce the surge of tax evasion which has cancerously eaten into the fabric of the Nigerian tax system, albeit inadequate, it is a positive drive towards a working tax system.
It is however safe to emphasize that while tax evasion is an offence under the Nigerian tax laws and could earn a defaulter the liability to fines and imprisonment, tax avoidance is using the provision of the law to reduce tax liability and it is legal to so do.
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