CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

The government of any country performs crucial duties that rely heavily on income from various sources, including taxes (Adefolake & Omodero, 2022). Ogbonna and Appah (2012) argue that a well-structured tax system serves as the primary means of generating revenue to provide essential infrastructure. According to Aguolu (2004), taxation is the most significant source of government revenue. Since governments have the authority to impose taxes, they can reliably collect funds to support public services. Azubike (2009) similarly notes that taxation is a critical component of all societies worldwide, enabling governments to raise funds to fulfill essential duties.

In Nigeria, the government depends heavily on taxes as a compulsory and significant source of revenue (Ilallah, 2023). Taxes are imposed on individuals and companies to generate funds, distinguishing them from other voluntary sources of income (Adefolake & Omodero, 2022).

The withholding tax (WHT) system plays a central role in Nigeria’s tax collection framework. WHT requires payers to deduct a percentage of payments to recipients and remit it directly to tax authorities. By deducting taxes at the source, WHT reduces tax evasion and promotes compliance (Onojodofia, 2023). WHT applies only to qualifying transactions, including rent, dividends, interest, commissions, consulting fees, construction contracts, directors’ fees, and royalties (Nexia, 2021).

Additionally, WHT relates to franked investment income (FII), which transfers tax-free income from one company to another, usually as dividends, to avoid double taxation on corporate earnings (Kagan, 2020). The Federal Inland Revenue Service (FIRS) mandates that WHT deductions must be remitted by the 21st day of the following month. For individuals and non-limited liability companies, remittance to the relevant State Internal Revenue Service (SIRS) must occur within 30 days of the deduction.

WHT enhances tax compliance, broadens the taxpayer base, reduces administrative costs, and lowers opportunities for tax evasion (Kagan, 2023). Despite its importance, there is limited empirical data on WHT’s impact on government revenue in Nigeria. This study addresses this gap.

1.2 Statement of the Problem

Globally, governments rely on tax revenue to finance investments in human capital, infrastructure, and public services (World Bank, 2023). In Nigeria, the WHT system has become a critical mechanism for generating such revenue.

Previous studies, including Adegbite and Fasina (2019) and Eneojo and Gabriel (2014), confirm that taxation significantly contributes to national revenue. However, few studies specifically examine the economic impact of WHT on government revenue in Nigeria. Therefore, this study seeks to fill this gap by analyzing how WHT affects government revenue generation.

1.3 Aim of the Study

The study aims to assess the impact of withholding tax (WHT) on government revenue generation in Nigeria.

1.4 Objectives of the Study

The study seeks to:

1. Determine the impact of WHT on government revenue by comparing tax collections before and after policy implementation.

2. Assess compliance with the WHT policy and its effect on revenue generation.

3. Evaluate the impact of WHT on economic activity in affected sectors and its effect on government revenue.

4. Investigate the influence of WHT on foreign investment and its effect on government revenue.

1.5 Research Questions

1. How does WHT impact government revenue when comparing collections before and after policy implementation?

2. What is the level of compliance with the WHT policy, and how does it affect government revenue?

3. How does WHT affect economic activity in the sectors it targets, and how does this influence revenue?

4. How does WHT influence foreign investment, and what is its effect on government revenue?

1.6 Research Hypotheses

H1: Tax revenue collected before and after WHT implementation has no significant impact on government revenue.
H2: Compliance with WHT policy has no significant effect on government revenue generation.
H3: Economic activity in sectors affected by WHT has no significant impact on government revenue.
H4: WHT policy has no impact on foreign investment and no significant effect on government revenue.

1.7 Justification of the Study

Understanding WHT’s effect on government revenue is essential for evaluating policy efficacy and identifying areas for improvement. By examining revenue trends, compliance levels, economic activity, and foreign investment, policymakers can assess how WHT policies influence revenue generation.

The study also provides insights for taxpayers, businesses, and investors by clarifying how WHT policies affect economic behavior. Overall, the research supports efficient tax policy design, promotes sustainable revenue generation, and contributes to economic growth in Nigeria.

1.8 Scope of the Study

This study focuses on the economic impact of WHT on government revenue generation in Nigeria. It examines revenue before and after WHT implementation, compliance rates, sectoral economic activity, and foreign investment effects. The study covers the period from 2010 to 2020 and analyzes both primary and secondary data sources.