CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Government responsibilities largely depend on the revenue it generates from various sources, especially taxes (Adefolake & Omodero, 2022). A well-designed tax system remains the primary mechanism for generating revenue to support critical infrastructure (Ogbonna & Appah, 2012). In Nigeria, taxation is recognized as the most significant source of government income (Aguolu, 2004).

Taxation refers to the process by which the government imposes a mandatory levy on the income, products, services, and properties of individuals, partnerships, corporations, and trustees (Samuel & Simon, 2011; Yunusa, 2003). Across the globe, taxation is acknowledged as a crucial instrument for national development, long-term growth, and funding government infrastructure.

The government’s authority to levy taxes ensures a steady revenue stream regardless of economic conditions. Taxation enables governments to meet urgent obligations and fund essential public services (Azubike, 2009). In Nigeria, the government heavily relies on taxes as a mandatory and reliable source of revenue (Ilallah, 2023; Adefolake & Omodero, 2022).

In recent years, Nigeria’s tax system has undergone significant reforms. These reforms aim to eliminate outdated provisions and simplify existing laws. The Nigerian Constitution and the Taxes and Levies (Approved List for Collection) Decree of 1998 clearly define the jurisdiction of federal, state, and local governments in tax administration. Each level of government has an official body responsible for collecting taxes.

The Federal Inland Revenue Service (FIRS) manages federal tax collection, including Companies Income Tax, Education Tax, Stamp Duties, Customs and Excise Duties, Withholding Tax, and Value Added Tax. State Boards of Internal Revenue administer personal income tax and state-level withholding taxes, while local governments oversee levies and minor taxes. The Joint Tax Board provides guidance, addresses double taxation, and recommends amendments to tax laws (PML, 2023).

Taxation in Nigeria is strictly regulated by law. No tax is legally enforceable without authorization by formal legislation. All taxes in Nigeria are classified as direct or indirect taxes, and they are backed by legislation passed by either the National Assembly or State Houses of Assembly (Ashibogwu & Bankole, 2018).

Despite continuous reforms and the centrality of taxation, tax evasion and avoidance remain persistent challenges in Nigeria. Some individuals and businesses fail to meet their tax obligations. Nigerian tax laws define tax offenses as violations of statutory, regulatory, or administrative requirements. Offenses may include both civil and criminal misconduct, with severe penalties for major breaches and fines for minor infractions (Selkur, 2019).

This study, therefore, examines the Nigerian tax system, offenses, and penalties under Nigerian tax laws to understand the issues and provide practical insights.

1.2 Statement of the Problem

Taxation is vital to Nigeria’s economic growth. However, tax evasion and avoidance are major obstacles. Collection of personal taxes from self-employed individuals—such as business owners, contractors, lawyers, doctors, accountants, and shopkeepers—poses a significant challenge. Many self-employed taxpayers underreport income or claim excessive losses while maintaining lifestyles inconsistent with their declarations (Ayua, 1999).

Civil servants and salaried employees also sometimes exploit allowances and reliefs to minimize tax payments. Most taxpayers in Nigeria are married with dependents, yet compliance remains low. Despite government efforts, self-employed individuals continue to adopt various avoidance strategies (Nnenna & Carol, 2016).

Tax offenses in Nigeria include any act that violates tax law, whether intentional or unintentional. Authorities may impose civil or criminal penalties to enforce compliance (Selkur, 2019). Despite these measures, the government has not achieved full compliance.

The complexity of tax laws further complicates the situation. Many taxpayers find Nigerian tax legislation difficult to understand, and even legal professionals may struggle to interpret certain provisions. This complexity hinders effective enforcement and compliance (Selkur, 2019).

Hence, there is a need to examine the Nigerian tax system, identify common offenses, assess penalties, and evaluate challenges in enforcement to propose solutions for improved compliance.

1.3 Aim of the Study

The aim of this study is to examine the Nigerian tax system, offenses, and penalties under Nigerian tax laws.

1.4 Objectives of the Study

The study seeks to:

1. Examine the Nigerian tax system and the laws governing taxation.

2. Identify penalties for tax offenses and their role in promoting compliance.

3. Assess the effectiveness of these penalties in ensuring compliance.

4. Explore challenges faced in enforcing penalties for tax offenses.

1.5 Research Questions

The study will answer the following questions:

1. What is the Nigerian tax system, and which laws govern taxation?

2. What are the penalties for tax offenses, and how do they promote compliance?

3. How effective are penalties in enforcing tax compliance?

4. What challenges are encountered in implementing penalties for tax offenses?

1.6 Justification of the Study

This study contributes to knowledge about Nigeria’s tax system, offenses, and penalties. It will benefit law students and practitioners by improving understanding of tax legislation and enforcement. Furthermore, the findings may assist the government in enhancing tax administration, increasing compliance, and refining policies to address tax evasion effectively.

1.7 Scope of the Study

The study focuses on the Nigerian tax system, including offenses and penalties under existing laws. It covers various taxes in Nigeria, the laws regulating them, the penalties for non-compliance, and challenges in enforcing these penalties. The research also offers recommendations to strengthen Nigeria’s tax administration and compliance framework.