ENEMS MICROSYSTEMS RESEARCH SPOT: Tax Fraud

EFFECT OF TAX AUTHORITY IN THE PREVENTION AND DETECTION OF TAX FRAUD IN OYO STATE

ABSTRACT

This study examines the effect of tax authority in the prevention and detection of tax fraud in Oyo state. Specifically, the study seeks to identify the legal and administrative measures in Oyo state to combat tax evasion, ascertain the weaknesses in addressing tax fraud by tax authorities in Oyo State and determine the effect of tax fraud offense on the revenue of the Government in Oyo state. The project made use of primary data and secondary data. Primary data was generated through the administration of 133 questionnaires and all the questionnaires were returned. Secondary data was collected from journals and records. Responses from the questionnaires were classified accordingly. Frequency and contingency tables were constructed. The study reveals that there is relationship between ineffective, inefficient tax management and tax fraud. The significance of the study is that the outcome of the research will serve as a useful guideline to tax administrators, government and also to tax payers, financial analysts, auditors and company executives who pay taxes.

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Taxation is not a new word in Nigeria or the world as a whole. In Nigeria, taxation has been in existence even before the coming of the colonial men or the British. Taxation can be defined as the system of imposing a compulsory levy on all income, goods, services and properties of individuals, partnership, trustees, executorships and companies by the government (Akindele, 2021). Income tax is one of the major sources of revenue to all government. In Nigeria, it is a factor to be reckoned with in Federal Government’s budget the taxes so collected come back to the taxpayer in form of services. This has over the years encouraged or discouraged some activities in the private sector; though, this depends on whether the policy of the government is towards discouraging or encouraging such companies (Akindele, 2021). Taxation is recognized as a very important tool for national development and growth in most societies. It has viewed as a major vehicle for long term development of infrastructures of the state.

With the growth and increasing globalisation of businesses (including the increased mobility of capital and rise of e-commerce), the opportunities for taxpayers to violate tax laws are expanding, prompting the need for the tax administration to continually update and broaden the strategies it uses to deal with this problem (Chiezey and Onu, 2013).

Economic losses due to tax fraud and another tax evasion by taxpayers are huge, which means less investment and less money for the government. Tax evasion and the tactics of the tax authorities often do not live up to expectations. It can have a big impact on the economy, public trust in government, and the reputations of those who are involved in tax fraud, among other things. Many developing countries do not manage their tax policies well, have low levels of compliance, and do not have enough tax administration capacity. This all leads to tax systems that are not up to par with the best practices in the world. This also affects how much money can be raised. Even in countries that are not very rich, indirect taxes are becoming more common. Up to two-thirds of all taxes in many of these countries are paid in the form of indirect taxes, like value-added taxes (VAT). Tax fraud is still stealing money that should be used for public projects. They have to pay the bill. People do not believe that the revenue system is going to be fair because of this (Chiezey and Onu, 2013).

Taxes and levies that are paid by people in the state are not well organized and can be easily cheated on, which costs the state money. Due to a lack of funds, the government cannot finish important projects like road repairs, building or renovating hospitals, and schools. There are no rules in the tax system that say that businesses like electronic shops, saloons, hawkers, petty shop owners, and barbershop owners can be charged taxes, levies, or other fees. To collect taxes from businesses, the state takes a random amount that could be below or overpaid. The officer in charge of collecting them can send a reasonable amount back to the state government or not send it at all. A lack of proper infrastructure means that the state government cannot figure out how much money each small business makes in terms of Naira and Kobo, how many petty shops or saloons each location has, and how many people own them.

Tax fraud occurs when an individual or business entity willfully and intentionally falsifies information on a tax return in order to limit the amount of tax liability. Tax fraud essentially entails cheating on a tax return in an attempt to avoid paying the entire tax obligation. Examples of tax fraud include claiming false deductions; claiming personal expenses as business expenses; and not reporting income. Most developed countries are characterized by a broad base for direct and indirect taxes with tax liability covering the vast majority of citizens and firms. Developing countries, in contrast, are confronted with social, political and administrative difficulties in establishing a sound public finance system. As a consequence, developing and emerging countries are particularly vulnerable to tax fraud activities of individual taxpayers and corporations. This can be considered one of the primary reasons for large differences in the ability to mobilize own resources between developed and developing countries (Mohd, 2020).

Detecting and preventing tax fraud and making sure that it cannot be repeated is not solely the responsibility of tax authority and tax officials. Without the cooperation of general public working in high risk areas, it is very difficult to detect illegal tax malpractice and illegitimate personal gain. Therefore, it is up to all levels of hierarchy in public institutions to create an environment of transparency, ethical conduct and accountability in order to ensure proper handling of the very important issues of prevention, detection and handling of tax fraud cases in among the general taxpayer.

1.2 Statement of the Problem

Tax Fraud and other tax offences perpetrated by tax payer heavily harm the economy, lower investment levels and reduce government revenue generation. Anti-tax fraud and tax authority strategies are often not effective enough. Damages done to economy and their budgets as a result of tax fraud can be enormous ranging from financial loss to reduction of economy performance, reputation, credibility and public confidence.

Tax systems in many developing countries are characterized by tax structures being not in line with international standards, by lack of tax policy management, low compliance levels and inappropriate capacities in tax administration. The difference in revenue mobilization also stems from economic conditions (size of the informal sector).

In fact, most developing countries show a trend towards the prevalence of indirect taxation. Many of them rely to a great extent on indirect taxes such as value-added taxes (VAT) with indirect taxes amounting for up to two-thirds of total tax revenues, yet it is not new that, the negative menace of tax fraud deprives governments of revenues needed for public spending Forces honest taxpayers to pick up the tab Erodes community confidence in the equity of the revenue system.

Finally, the current method of collecting taxes/levies from tax payers lack proper organization and prone to obvious fraudulent activities, thereby resulting to loss of funds by the State Government. This however, leads to the inability of the Government meeting the basic projects requirements like rehabilitation of roads, building/ renovation of hospitals, schools and so on. The tax administration system does not clearly states the strategy that is being used to apportion taxes or levies or charges to some key business enterprise like electronic shops, saloon, hawkers, petty shops, barbing saloon, recharge card resellers, cosmetics shops, super markets etc. Random amount is being collected as taxes/levies from these business enterprises, which might be below or over charged taxes; and most times the levies/taxes might not be remitted to the state Government or if remitted, a reasonable amount would have been diverted by the officers in charge of the collection. This situation occurs because there is no proper structure on ground to determine the exact monies and the number of petty shops or saloons in a given location, to enable the State Government to ascertain the actual figures, in terms of Naira and Kobo that is generated from most small scale businesses majority of who are individual taxpayers.

1.3. Objectives of the Study

The main objective of this research work is to examine the effect of tax authority in the prevention and detection of tax fraud in Oyo state.

The specific objectives of the study include:

To identify the legal and administrative measures in Oyo state to combat tax evasion
To ascertain the weaknesses in addressing tax fraud by tax authorities in Oyo State
To determine the effect of tax fraud offence on the revenue of the Government in Oyo state

1.4. Research Questions

What are the legal and administrative measures used to address tax frauds in Oyo state?
Are there any weaknesses in addressing tax fraud by tax authority in Oyo state?
Are there any effect of tax fraud offence on the revenue of the Government in particular and the economy of the country, as a whole?

1.5 Hypotheses of the study

Following the objectives of the study the following hypotheses were formulated and tested

Hypothesis one

Ho: Tax fraud offences does not have significant impact on the revenue of the Government

H1: Tax fraud offences have significant impact on the revenue of the Government

Hypotheses two

Ho: Tax Authority is Not effective in the prevention and detection of Fraud in Oyo state

H1: Tax Authority is effective in the prevention and detection of Fraud in Oyo state

1.6 Significance of the Study

Tax fraud is a general phenomenon that is probably as old as taxation itself. Wherever and whenever authorities decide to levy taxes, individuals and firms try to avoid paying them. Though this problem has always been present, it becomes more pressing in the course of globalization as this process extends the range of opportunities to circumvent taxation while simultaneously reducing the risk of being detected. For the purpose of this study, this research study would contribute to the existing literature on tax fraud by focusing on reform of tax laws and policy in Oyo state with a view to identifying the critical problems on the collection of tax levy and causes of tax fraud among taxpayers so that appropriate measures could be taken to tackle them.

This study shall also seeks to set out, a concrete analysis of other tax fraud offences such as tax evasion/avoidance perpetrated by individual tax payers and corporations, and it will also consider the ‘dark’ side of professional practice by examining the involvement of tax officials in facilitating tax fraud, tax avoidance, tax evasion and other related tax offences in Oyo state.

Finally this study will be of great significance to government, tax officials, tax authority, small scale entrepreneur, investors, corporate organizations, schools and students who are regular taxpayers, it will serve as a reference point for student who would like to make future research or contribute to the existing literature.

1.7 Scope and Limitation of the Study

In the light of broad coverage, the researcher focuses on the role of tax authority in detection and prevention of tax fraud in Nigeria, particularly among tax payers in Oyo State. The research is further limited staff of Oyo State Board of Internal Revenue.

The researcher encountered some constraint in the course of the study; Little time and inadequate funds: the researchers was not able to generate complete and concrete research material, this is because of time and money constraints at the disposal of the researchers, on one hand, and the unwillingness and the busy schedule of the Tax officials, in the other, in order to provide us with more appeal cases and their valued opinions.

However, we had to convince the respondents by giving gentlemen word that the names of the corporate firms would not be disclosed in our study and the materials would be used for this study purpose only.

Not enough previous research work has been carried out on this study, thus creating a lump sum of work for the researcher, and extending the duration initially budgeted for the completion of the research study.

1.8 Definition of Terms

Tax fraud: tax fraud occurs when an individual or business entity willfully and intentionally falsifies information on a tax return in order to limit the amount of tax liability.

State Taxes: Personal Income Tax, Road Taxes, Pools betting and lotteries, Business premises registration, Development Levy, Naming of street registration in state capitals, Right of occupancy on land owned by state, and Market taxes on state financed taxes.

Tax evasion: Tax evasion in general refers to illegal practices to escape from taxation. To this end, taxable income, profits liable to tax or other taxable activities are concealed, the amount and/or the source of income are misrepresented, or tax reducing factors such as deductions, exemptions or credits are deliberately overstated (see Alm and Vazquez, 2001 and Chiumya, 2006). Tax evasion can occur as an isolated incident within activities that are in other aspects legal. Or tax evasion occurs in the informal economy where the whole activity takes place in an informal manner this means the business is not only evading tax payments but is also not registered as formal enterprise at all.

Tax avoidance: Tax avoidance, in contrast, takes place within the legal context of the tax system that is individuals or firms take advantage of the tax code and exploit “loopholes”, i.e. engage in activities that are legal but run counter to the purpose of the tax law. Usually, tax avoidance encompasses special activities with the sole purpose to reduce tax liabilities. An example for tax avoidance is strategic tax planning where financial affairs are arranged such in order to minimize tax liabilities by e.g. using tax deductions and taking advantage of tax credits.

Non-Compliance: can be defined as the failure on the part of a taxpayer to correctly file returns, report actual income, claim the correct deductions, reliefs and rebates and remit the actual amount of tax payable to the authority on time.

Tax: is a compulsory levy payable by individual economic units or corporate bodies to government without any direct quid pro quo from the government.

Fraud: is an act or course of deception, deliberately practiced to gain unlawful or unfair advantage; at the detriment of another.

Direct and Indirect Tax: direct taxes are levied on persons or property, while indirect taxes are levied on manufacture, sale, consumption, and the like, and are indirectly paid by the consumer.

1.9 Organization Of The Study

This research work is organized in five chapters, for easy understanding, as follows Chapter one is concern with the introduction, which consist of the (overview, of the study), statement of problem, objectives of the study, research question, significance or the study, research methodology, definition of terms and historical background of the study. Chapter two highlight the theoretical framework on which the study is based, thus the review of related literature. Chapter three deals on the research design and methodology adopted in the study. Chapter four concentrate on the data collection and analysis and presentation of finding. Chapter five gives summary, conclusion, and recommendations made of the study.

Tuesday 21 March 2023

EFFECT OF TAX AUTHORITY IN THE PREVENTION AND DETECTION OF TAX FRAUD IN OYO STATE

EFFECT OF TAX AUTHORITY IN THE PREVENTION AND DETECTION OF TAX FRAUD IN OYO STATE