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This study was carried to investigate the relevance of petroleum profit tax to the Nigerian economy with a particular reference to Federal Inland Revenue Service (FIRS). To achieve this objective, three research questions and three research hypotheses were formulated to guide this study. The data was collected from both primary and secondary sources. The primary data were collected with the help of a well-structured questionnaire of two sections administered to the staff and management of Federal Inland Revenue Service (FIRS). The collected data were analyzed with tables and descriptive statistics to analyze the research questions while Pearson Correlation statistical method was used to test research hypotheses. All data were coded using SPSS software. The study reveals there is a significant relationship between petroleum profit tax and the growth of the Nigerian economy; there is a significant relationship between company income tax and economic growth in Nigeria and there is a significant relationship between personal income tax and economic growth in Nigeria. The study concluded with some recommendations that The Federal government should attend to the issues of tax avoidance and evasion by exploration and production companies. This study has laid down some of the major causes of tax avoidance and of all it was observed that respondent groups believe that the low quality of public goods provided by federal government reduces the tax morale of exploration and production companies when it comes to the issue of tax.
1.1 Background of the Study
The discovery of petroleum in Nigeria also heralded petroleum taxation. The policy is both employed as a fiscal policy and as well as income generating tool is widely employed by government in both developing and developed countries. The government at varying times decides on what level of taxes that can be imposed on the profits earned by petroleum outfit. For instance and over the years in Nigeria petroleum has been regarded as the main stay of the economy.
For the development and growth of any economy, the provision of basic infrastructure is quite necessary (Fagbemi, Uadiale & Noah, 2010). Among these are the provisions of schools, hospitals, construction of roads, bridges, railway lines, airports and seaports. Globally, government is saddled with the responsibility of providing some basic infrastructures for her citizens (Abiola & Asiweh, 2012). In lieu of this, the government of any society seeks sources of fund to maintain the development, and meet the needs of its society. Meeting the needs of the economy call for huge funds which an individual or society can’t contribute alone (Murkur, 2001).
Basically, there are two ways of financing government expenditure in Nigeria; these are, through oil revenue and through non-oil revenue. The Nigerian government sources a large proportion of its total revenue from oil since Nigeria has been seen as a country rich with this natural resource. According to Ogbonna & Ebimobowei (2012), from 1970 to 2009 the petroleum industry generated 82 per cent income for Federal Government while 18 percent came from non-oil revenue. The Petroleum Industry constitutes a major source of income and occupies a strategic position in the economic development of Nigeria. For the past decades, the industry has been playing vital and dominant role to the economic growth of Nigeria, both in foreign exchange earnings and domestic income generation (Azaiki and Shagari, 2007). One of the sources of petroleum income is the Petroleum Profit Tax (Ogbonna & Ebimobowei, 2012), this is just among others, as royalties, rents, oil pipeline and license fees, signature bonuses penalty from gas flared, NNPC earnings from direct sales, proceeds from local sales of crude oil to NNPC, proceeds from export sales of crude oil and gas etc. are sources of petroleum income. But for the purpose of this research, the researcher will be focusing on an aspect of the sources of petroleum income, which is, petroleum profit tax (PPT).
Petroleum refers to crude oil and natural gas or simply put, oil and gas. Petroleum, or oil and gas, production and export play a dominant role in the economy of Nigeria and account for about 70 per cent of the nation’s GDP and over 90 per cent of her foreign earnings. Nigeria has been seen to be the largest oil producing country in Africa and the eleventh in the world. Petroleum industry is the leading sector in the Nigerian economy. Oil being the mainstay of Nigerian economy plays a vital role in shaping the economic and political destiny of the country (Odularu, 2007). The contributions of the petroleum industry to public expenditure and growth of GDP have been phenomenal.
1.2 Statement of the Problem
Several arguments have trailed the place of petroleum profit taxes as a tool for enhancing infrastructural development in Nigeria. Some have submitted that petroleum profit tax has tremendously boosted the revenues base of the government and as such support economic growth. Others have it that the taxes have not significantly affect economic growth in Nigeria. In Nigeria the government is of lately attaching keen interests in getting its citizens (individuals and corporate to brace up to the responsibilities of paying taxes. Recently, the Federal Inland Revenue Service has also developed a slogan saying that “it pays to pay your tax”.
In Nigeria the citizens and companies avoid and evade tax because they do not know how revenue generated through tax is being spent by the government (Adegbie & Fakile, 2011). Yet, there has been a clamour by leaders that a huge sum of the resources which they are to use finds their way out of the economy through tax evasion (Fagbemi, Uadiale & Noah, 2010).
Nigeria is one of the few countries in the world where it is fashionable to evade tax (PwC, 2010). The various structures which are required to work together to make tax evasion difficult are not properly coordinated. Sikka & Hampton (2005) stated that tax evasion is one of the major social problems inhibiting development in developing countries and eroding the existing welfare state in developed economies in the world.
It’s been observed that high profile companies in Nigeria do evade tax. And oil companies are included in this class of high profile companies. This observation says a lot about tax administration system in Nigeria both in its design and in the disposition of some oil companies towards taxation. This presupposes that there are legal framework put in place to punish tax evaders it perhaps raises a poser on the efficiency and effectiveness of tax laws and tax administration in Nigeria (Kiabel and Nwoka, 2009). The Nigerian government in an effort towards solving this problem had even gone to the extent of engaging the services of tax consultants. Despite the effort of government, tax evasion still persists (Alabi, 2001).
As it has been earlier stated, revenue derived from taxation of petroleum profits amounts to a great portion of total tax collections of the Nigeria government. The evasion of tax by oil companies could have a drastic effect on the development of the economy of Nigeria. Reacting to this problem, the former Chairman of the Federal Inland Revenue Service, Mrs. Ifueko Omogui-Okauro stated, during a public hearing of ad-hoc committee on subsidy regime at the national assembly that the service has decided to move against oil companies that didn’t pay tax (Asabor, 2012). Oil companies in Nigeria have, over the years, devised means of getting away with every breach of the law. Oil companies justify their actions due to the corrupt nature of the government; they perceive the tax officials and government as a whole embezzle the revenue derived from petroleum profit tax.
Tax evasion in Nigeria is becoming uncontrollable; yet, the Nigerian government has failed to pay attention to the analysis of the major causes of tax evasion in its economy, especially the evasion of tax on petroleum profit since this is said to have a significant addition to the total collections of total tax collections. According to Chiumya (2006), when revenue required for smooth operation cannot be raised, the government most times resort to increase tax rates or borrowing which may not only crowd out the private sector of its economy but may also lead to debt traps. This can lead to economic growth stagnation and far much reaching socio-economic repercussions (Fagbemi, Uadiale & Noah, 2010).
The petroleum profit tax structure, in Nigeria, has been characterized with tax evasion, tax avoidance, corruption and poor tax administration filled with loopholes. Hence, this research work has been set out to provide answers and possible solutions to the problems already identified.
1.3 Objectives of the Study
The main objective of this study is to investigate the relevance of petroleum profit tax to the Nigerian economy. The specific objectives include the following:
1. To determine the significant relationship between petroleum profit tax and the growth of the Nigerian economy.
2. To examine the significant relationship between company income tax and economic growth in Nigeria.
3. To examine the relationship between personal income tax and economic growth in Nigeria.
1.4 Research Questions
The following research questions were formulated to guide this study.
1. What is the significant relationship between petroleum profit tax and the growth of the Nigerian economy?
2. What is the significant relationship between company income tax and economic growth in Nigeria?
3. What is the relationship between personal income tax and economic growth in Nigeria?
1.5 Research Hypotheses
The following research hypotheses were formulated to guide this study.
H0: There is no significant relationship between petroleum profit tax and the growth of the Nigerian economy.
H0: There is no significant relationship between company income tax and economic growth in Nigeria.
H0: There is no significant relationship between personal income tax and economic growth in Nigeria.
1.6 Significance of the Study
This study will be immense benefits to the following:
1. Government: This research would enable the government to cherish the importance of tax in the shaping of the economy. More attention will be given to the area of taxation as a result of this research work.
2. Society: This study would help the society on how to know the role petroleum profit tax plays in shaping the economy. It also affects their thoughts towards government about the utilization of revenue gotten from petroleum profit tax.
3. Researchers: The research work would serve as a foundation or basis for other researchers who are willing to research along the same line. Future researchers can continue from where this research work stops.
4. Petroleum Companies: It would helps petroleum companies to know how they play a vital role in shaping the destiny of Nigeria’s economy and understand how remitting their taxes can be of great importance to the economy of the nation at large.
5. Tax Authorities: This research will enable tax authorities give attention to contentious areas in the taxation of petroleum profit and will enable them understand how these areas affect the standing of the Nigerian economy.
6. Students: It will give students a better understanding about petroleum profit tax and how it affects the economy.
1.7 Scope of the Study
This study concerns about the relevance of petroleum profit tax to the Nigerian economy with a particular reference to Federal Inland Revenue Service (FIRS).
1.8 Limitation of the Study
There is no study undertaken by a researcher that is perfect. The imperfection of any research is always due to some factors negatively affecting a researcher in the course of carrying out research. Therefore, time constraint has shown no mercy to the researcher. The limited time has to be shared among many alternative uses, which includes reading, attending lectures and writing of this research, also distance and its attendant costs of travelling to obtain information which may enhance the writing of this study was a major limitation.
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