CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Tax revenue is undoubtedly the most recognized primary source of government

revenue in the world. The Nigerian government have been working immensely in
diversification of economy, because, revenue accrued from crude oil is topping the revenue
accrued chart since its discovery in the 1970s. Therefore, tax is a major player in every
society of the world (Azubike, 2009). Taxation is an important fiscal policy instrument at the
disposal of governments to mobilize revenue and promote economic growth and
development. The tax system is an avenue for government to use in collecting additional
revenue needed in discharging its pressing obligations. A tax system is one of the most
effective means of mobilizing a nation’s internal resources and it lends itself to creating an
enabling environment to promote economic growth.

Towing this line of argument, Nzotta (2007), also argued that taxes constitute key
sources of revenue to the federation account shared by the federal, state and local
governments. Hence, a tax policy represents key resource allocator between the public and
private sectors in a country.

The role of government to provide for public (utilities) goods like roads, communication,
power, education and health and so on, continue to rise over the years, due to progressive
increases in the population of the people in Nigeria in the fourth republic. This has put the
Nigerian government on its feet to deliver well and sound growth and development of the
economy, by achieving various macroeconomic objectives: favorable inflationary rate, high
employment, sustainable economic growth, price stability, long viability of the balance of
payments and external equilibrium. To achieve these, the government requires funds to carry
out these duties and responsibilities, and the funds can be generated from tax revenue from
the citizens and organizations either on the base on residence or income sources. Effective tax
revenue mobilization reduces an economy’s dependence on external flows which is highly
volatile. Taxation also allow governments’ greater flexibility in designing and controlling
their development agenda; conditions states to improve their domestic economic policy
environment, thus creating a favorable environment for the much-needed foreign direct
investments; and strengthen the bonds of accountability between governments and the

1
citizens. The 2008/2009 global financial and economic crisis provided useful lessons for
countries on the need to direct more attention to domestic resources mobilization efforts,
including through increasing tax revenues. In recent time, the minister of finance Ahmed
Zainab (2019) said “the problem of the Nigerian economy is not the increasing rise in the
public expenditure procurement and public debts profile, but ability to generate sufficient
revenues from different channels of the economy”.

Thus, government use tax proceeds to render their traditional functions, such as the provision
of public goods, maintenance of law and order, defense against external aggression,
regulation of trade and business to ensure social and economic maintenance.

However, the use of tax as a source of revenue generation in financing development

activities in Nigeria has been a difficult issue. It is evidence that the role of taxation in
promoting economic growth and development in Nigeria is far fetch, primarily because of its
poor administration. The major challenges facing tax administration in Nigeria include
frontiers of professionalism, poor accountability, lack of awareness of the public on the
imperatives and benefits of taxation, corruption of tax officials, tax avoidance and evasion by
taxing units, connivance of taxing officials with taxing population, high rate of tax, poor
method of tax collection, and so on. Tax administration and individual agencies suffer from
limitations in labour, money, tools and machinery to meet the ever-increasing challenges and
difficulties. In fact, the negative attitude of most tax collectors toward taxpayers can be link
to poor remuneration and motivation. There is also the problem of accuracy of tax statistics.
Apart from some few states such as Delta, Lagos, Kaduna and Katsina and the Nigerian
Customs Services, where tax are known to be well kept, other agencies of the states and
relevant federal tax offices have serious failures in data management. On tax compliance,
Statistically, Nigeria has 6% tax to GDP, which considered one of the lowest tax compliance
rates in the world; Ghana has 15% and South Africa tax compliance rate stood at 24%.
Nigeria's tax compliance is 6% suggesting that there is huge tax evasion and tax avoidance.
Over 200,000 companies registered in Nigeria and never paid any tax, which creates setbacks
to what is been generated from tax. Several other effects of taxation can also be identified.
First, taxes can inhibit investment rate through high tax rates such as corporate and personal
income, capital gain taxes. Second, taxes can slow down growth in labour supply by
disposing labour leisure choice in favour of leisure. Third, tax policy can affect productivity
growth through its discouraging effect on research and development expenditures. Fourth,
taxes can lead to a flow of resources to other sectors that may have lower productivity.

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Finally, high taxes on labour supply can distort the efficient use of human capital high tax
burdens even though they have high social productivity.

In Nigeria, however, tax revenue accrued is a major concern, which has led to many
studies on impact of tax revenue on economic growth in Nigeria. Odusola (2004) in his study
asserted that, the tax system is lopsided and dominated by oil revenue which accounted for at
least 70% of the revenue; this indicates that traditional tax revenue has never assumed a
strong role in the country’s management of fiscal policy. In the same vein, (Festus & Samuel
2007) observed that, Revenue generated through tax has not meet the expectation of
government.

Government has equally expressed this disappointment and is working towards expanding the
non-oil tax revenue. Despite the lofty position of crude oil revenue accrued in the economy, it
is practically impossible to achieved development along the economic growth in Nigeria if
much revenue is not generated from other channels of revenue generation, most especially tax
revenue.

Many researchers, economists and Nobel Prize winners have tried to answer these
questions. Economic growth can be considered a main factor in the well-being and prosperity
of billions of people. Industrialization and advances in technology have left a gap between
developed countries and the developing ones. For example, in the 21 stcentury, the GDP/capita
of many poorer countries is lower than the GDP per capita of Europe and other advanced
countries of the world in the 19th century. Economic growth reached a pinnacle of the 20th
Century that ensured the development of the Western World and improved many people’s
living standards. In respect of the economic growth concept, Denison (1962) affirmed that
economic growth is the increase of real GDP or GDP per capita, an increase of national
product that is measured in constant prices.

Economic growth is influenced by indirect factors such as institutions (financial

institutions, private administrations etc.), the size of the aggregate demand, savings and
investment rates, the efficiency of the financial system, budgetary and fiscal policies,
migration of labour and capital and the efficiency of the government, to mention only a few.
There are also differences between economic and non-economic determinants.

“Proximate” or economic determinants refers to factors like capital accumulation,

technological progress, labour and “ultimate” or non-economic sources refers to factors like

3
government efficiency, institutions, political and administrative systems, cultural and social
factors, geography and demography (Acemoglu, Johnson, Robinson, &Yared,2009).

The three main roles of a government, as attributed to Asoni & Sanandaji (2009)are:
(i) protection of the society from violence and invasion by other independent societies’
military forces; (ii) protection of every member of the society from the injustice or oppression
of other members through administration of justice and; (iii) erecting and maintaining public
institutions and those public works, which cannot be expected that any individual, or small
number of individuals, should erect or maintain. The level of execution of all these three roles
depends on the state of the society and level of development. These views are similarly
expressed by Gwartney, Lawson, & Block (1996), who state the two main purposes of
government as protection of individual’s property Agunbiade, Olabode, Idebi, Alesanmi
Abraham rights and provision of public goods and services. In terms of economic theory,
government exists to intervene where there is market failure, due to markets failing to
maximize gains from efficient trade in achieving the most effective outcome for society (Adu
& Alagidede, 2012).

There are several ways that government intervenes in an economy; the most popular
of which constitutes taxation as a means of sourcing financing for the provision of public
goods and services. Tax in this regard represents the monetary value realized from taxation,
while taxation itself represents all the processes through which the tax is collected. A good
tax system has the traits of equity in terms of progressivity thereof and efficiency in terms of
collection thereof. The role of government of any country is to provide public goods and
services which cannot be provided by private individuals due mainly to the free riders’
challenge. In carrying out these functions, government levies taxes on relevant taxable
persons. In this regard, taxes have a role to play in the economic growth of any country of
which Nigeria is not an exception.

1.2 Statement of the Problem

There is a general lack of consensus among scholars on the contribution of tax

revenue to the economic growth of nations. And there has been series of diverse postulation
and assumptions of relationship between tax revenue and economic growth and economic
development in Nigeria. For instance, Ariyo, (1997) in his study on productivity of the
Nigerian tax system documented a satisfactory level of productivity of the tax system before
the oil boom (i.e. before 1970s).

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Eguaghide (2007) established that the role of tax revenue in promoting economic activities
and growth is not felt in Nigeria (between 1970s to date).

Nigeria and other African Countries are today facing series of challenges when it comes to
optimizing taxation revenue for economic and social growth while aiming to reach
development targets. The most glaring difficult challenge is how to find the optimal balance
between a tax regime that is business and investment friendly while at the same time
leveraging enough revenue for public service delivery which in turn makes the economy
more attractive to investors.

We see the taxation system in Nigeria as not being fully tapped and maximized and its
role in promoting economic and social activities and growth is not felt because of its poor
administration. In this direction, Olashore (1999) submitted that the economy has remained in
deep slumber or shamble as all macroeconomic indicators show that the economy is in urgent
need of changes, balancing and indeed radical reform.

In addition, the attitude of Nigerians towards taxation is worrisome as many prefer not to pay
tax. As a result of the unwillingness to pay tax as well as evading tax, the economy therefore
continues to lose huge amount of revenue. If this lost revenue is employed back into the
economy and well utilized, can change the fortune of the nation. In developing countries like
Nigeria, this problem has been lingering for so long which requires urgent attention and
solution. The cost of collecting tax in Nigeria is too high to the extent that if left unchecked
the cost may soon outweigh the benefit or value derived from such operation and that will not
be appropriate for the system as this unwholesome act is against the cannon of administrative
efficiency.

Administrative Efficiency being the process of levying and collecting taxes in an

administratively efficient, transparent manner and must not cause economic distortion.
Collection should be done in such way that the system brings in sufficient revenue to the
government at less cost. Economy of administration is an important quality of a good Tax,
whereby assessment and collection of taxes require personnel and equipment at minimal cost.
This means that the cost of collecting a tax should not be more than the revenue to be derived
from the tax itself but this is not so in Nigeria.

Identifying the impact of taxation on economic growth in Nigeria empirically is a research

work carried out at the right time as there is an urgent need to examine more deeply and to

5
look into the relationship between petroleum profit tax, company income tax, custom &
excise duties and economic growth in Nigeria.

This study will not only guarantee improved revenue base for the country but also
position the country properly to take full advantage offered by the new millennium global tax
reform system. Therefore, this research work examines the impact of tax revenue on
economic growth in Nigeria by analyzing the tax gap in the system over the years and so
revealing the critical challenges that needs to be bud. Hence, the need for further study of the
current tax performance and its effect on the Nigerian economy.

1.3 Objectives of the Study

The main objective of this study is to assess taxation and its effect on Nigeria
economy. The other specific objectives are to:

i. To assess the impact of Petroleum Profit Tax on the economic growth and
development in Nigeria.

ii. To investigate the impact of company income tax on the economic growth and
development in Nigeria.

iii. To investigate the impact of custom and excise duties on the economic growth and
development in Nigeria.

iv. To investigate the impact of value added on the economic growth and development in
Nigeria.

1.04 Research Questions

In pursuit of the research objective of the study, the following research questions have
been formulated.

i. What is the effect of Petroleum Profit Tax on the economic growth and development
in Nigeria?

ii. What is the effect of Company Income Tax on the economic growth and development
in Nigeria?

iii. What is the relationship between Customs and excise Duties and the development of
the economy of Nigeria?

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iv. What is the effect of Value Added Tax on the economic growth and development in
Nigeria?

1.05 Research Hypotheses

The following hypotheses will be tested in this study, the study formulated the

following null hypotheses to guide the study:

H01: Petroleum Profit Tax has no significant impact on economic growth and development
in Nigeria

H02: Company Income Tax has no significant impact on economic growth and
development in Nigeria

H03: Custom and Excise Duties have no significant impact on economic growth and
development in Nigeria

H04: Value Added Tax has no significant impact on economic growth and development in
Nigeria

1.06 Scope of the Study

The scope of this study covers the effect of tax revenue on the Nigerian economic
growth and development over a period of 20 years (from 2012 to 2021). The trend of
Company Income Tax, Petroleum Profit Tax, Customs and Excise Duty and Value Added
Tax are examined for the period to determine their correlation with the Nigerian economy
growth and development which will be captured as Gross Domestic Product (GDP). The
focus will be based on data obtained at the Federal Inland Revenue Service (FIRS) and State
Revenue Service.

1.07 Justification of the Study

A study on the effect of tax revenue on economic growth and development in Nigeria
is justified based on the need for the various level of government in Nigeria to ensure
continuous economic growth and development through the utilization of tax revenue from
various taxes ranging from Petroleum Profit Tax, Company Income Tax, Custom and Excise
Duty and Value Added Tax.

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The need for this research work can be explained through the unresolved inherent problems
associated with administration and collection of capital gain Tax revenue as an instrument for
economic growth and development in Nigeria. This research work will go a long way
providing an insight to the policies makers in Nigeria on how to ensure the adequate and
efficient administration and collection of taxes towards ensuring economic growth and
development.

1.08 Significance of the Study

Tax revenue is one of the sources of revenue to the government. This can be used to
achieve economic growth and development, maintain equilibrium in the economy by
combating elements of depression, inflation or deflation, achieve equity in income and wealth
distribution and address issues of poverty and promote socioeconomic development. One of
the significance of this research study is to establish at which tax revenue has effect on the
economic growth and development in Nigeria.

The research findings would be of importance to policy makers at both state and federal level
in the country as they formulate and implement tax and revenue policies. This will provide an
insight on how to ensure that tax revenue meets the purpose it intended to achieve.
Policymakers, especially the Federal Inland Revenue Service will use the outcome of the
study to gauge its performance, and determine the level of input it would have to make to
impact positively to the Nigerian economy.

This study will also be of great important to students at various level of learning
especially those that intend to carry out further research on this subject. It will students to
understand the present effect of Capital Gain Tax revenue on the total revenue of the
government of Nigerian and on the economic growth and development.

Also this study will be of great importance to further researchers, scholars and academicians
will find the literature arising from the research work to be of great value as it will be added
to the existing literature.

1.09 Operational Definition of Key Terms

Taxation: This is a process whereby charges are imposed on the incomes of individual and
organizations by the government and her agencies to raise funds for public purposes.

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Revenue generation: This is a tool for receiving money from members of the public by the
government to finance its projects and to render essential services like roads, electricity, and
bridges in return to the taxpayers (citizens)

Tax system: this is a legal system for assessing and receiving tax from individuals, and
cooperate organizations of a country.

Tax evasion: tax evasion is an illegal practice where a person, organization or cooperation
intentionally avoids paying his/her/ true tax liability to the government.

Tax avoidance: tax avoidance is the use of legal methods and platforms to modify an
individual’s financial situation in order to lower the amount of income tax owed.

Economic Growth: it is described as a measure of increase in the value of outputs (goods

and services) in terms of Gross Domestic Product (GDP)

Economic Development: this is a measure of improvement in the general welfare and

standard of living due to more equitable distribution of incomes, goods and services

Tax Authorities: these are the bodies scheduled with the administration an implementation
of tax laws and principles in relation to specific jurisdictions.

Value Added Tax: this is described as a type of indirect tax levied on goods and services
purchased by individuals and organizations.

Petroleum Profit Tax: this is a type of tax paid by organizations that are involved in the
extraction (downstream) and the marketing of petroleum (upstream) in Nigeria.

Personal Income tax: This is a type of tax levied on the income of individuals such as civil
servants, self-employed people etc.

Custom Duty: it is a type of tax levied on imported and exported good in Nigeria.

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 CHAPTER TWO

LITERATURE REVIEW

Preamble

Tax revenue is a veritable source of government revenue; however, it is still debatable

in the literature especially in determining the optimal tax revenue to be imposed to enhance
development without unjustly inflicting welfare cost. Economic theories of taxation approach
the question of how to minimize the loss of economic welfare through taxation and also
discuss how a nation can perform redistribution of wealth in the most efficient manner.

Unegbu and Irefin, (2011) described tax as a compulsory levy imposed on the taxable
income of every taxable individual, companies, institutions or products by the government
within a particular jurisdiction, to defray expenditure on public goods. Taxation is the
concept and science of imposing tax on taxable income of tax payers within a particular
jurisdiction. The tax collected is used for common good of every citizen within the state for
the production of certain services, which are considered to be of paramount importance to the
wellbeing of the citizens (Enahoro & Olabisi 2012). The above description of taxation
underlines the main purpose of taxation which is to raise revenue to defray the cost of
services provided by the government. It also includes reduction of inequalities arising from
the distribution of wealth, to restrain certain types of consumption, to protect home industries
and to control certain areas of the country‘s economy. Examples of this include balance of
payment, employment, savings, investment and productivity. According to Oladipupo and
Ibadin, (2015) other purposes are to increase efficient productivity, increase the services
provided by the government, provision of employment, enhancement of modern technology
the system and rationalization of terms and conditions of the economic system.

Tax is assessed in accordance with some reasonable rules of apportionment on

persons or property within tax jurisdiction. Anyanwu (1997) defined tax revenue as a
compulsory transfer or payment from private individuals, institutions or groups to the
government. Jarkir (2011) asserted that tax is a contribution exacted by the state; it is a
compulsory and unrequited transfer of resources from the private to the public sector, levied
on the basis of predetermined criteria. The classical economists were of the view that the only
objective of tax revenue was to generate revenue for the government. But with the change in
circumstances and ideologies, the aim of taxes has changed. These days apart from raising

10
revenue, tax is levied to affect consumption, production and distribution with a view to
achieving social welfare through economic development. According to Nzotta (2007), four
key issues must be understood for tax revenue to play its functions in the society. Firstly, a
tax is a compulsory contribution made by the citizens to the government and this contribution
is for common use. Secondly, tax imposes a general obligation on the tax payers. Thirdly,
there is a presumption that the contribution to the public revenue made by the tax payer may
not be equivalent to the benefits received. Finally, a tax is not imposed on citizens by the
government because it has rendered specific services to the citizens. Thus, it is evident that a
good tax structure plays a multiple role in the process of economic development of any
nation. This research work focuses on taxation and its effect on Nigeria economy. This
chapter provides reviews of diverse literatures as well as the conceptual framework,
theoretical and empirical review of the study.

2.1 Conceptual Review

2.1.1 Concept of Taxation

The word 'tax' is derived from the Latin word ‘taxo’, that is to estimate the value or
compute the value (Lewis, Short, Andrews, & Freund, 1975). ‘Tax’ is defined as a regular
and compulsory payment made by citizens to the government to pay for governmental
services consumed by the citizens. These types of payments to the state are as old as the
"State" itself. For centuries, the public domain was the major source of public revenue.

Azubike (2009) equally defined tax as a compulsory levy imposed on a subject or his or her
property by the government to provide social amenities and create conditions for the
economic prosperity of the society. Likewise, Chigbu & Njoku (2015) emphasize that taxis a
major source of revenue for every economy and it’s usually an instrument used in reducing
the gap between the rich and the poor.

Taxation is also looked at by Afuberoh & Okoye (2014) as a compulsory levy by the
government through its agencies on the income, consumption and capital of its subjects.
These levies are made on personal income, such as salaries, business profits, interests,
dividends, discounts and royalties as well as company’s profits, petroleum profits, capital
gains. Tax can further be defined as a compulsory levy enforced by tax authorities on income,
expenditure, wealth or people, for which nothing is received by the taxpayers directly or
specifically in return (Shang, 2016). Among the many ways that governments can generate

11
revenues, tax revenue is recognized as the most important financial source for governmental
public expenditures (Frecknall-Hughes, 2014).

Taxation, apart from providing rapid economic growth, can also be used to encourage
or discourage certain activities considered to be socially, friendly and unfriendly. To Udabah
(2002), tax is evil necessary to meet the cost of those services a society wishes its
government to provide. He sees it as an obligatory transfer from taxpayers to the public
authority. According to Ogbonna & Appah (2016), tax is “a major source of government
revenue all over the world”. Azubuike (2009), noted that government uses tax proceeds to
render their traditional function such as the provision of public goods, maintenance of law
and order, defense against external aggression, regulation of trade and business to ensure
social economic maintenance. Musgrave, Musgrave, & Bird (1989) observed that the
economic effects of tax include micro effects on the distribution of income and efficiency of
resource use as well as macro effect on the level of capacity output, employment, prices and
growth. Ebimobowei (2010) stated that a tax is a compulsory payment imposed on income,
profit, wealth, estate, property, goods and services of individuals and corporate bodies by the
government for the sustenance of the government and for which there is no guaranteed direct
benefit. Taxes represent potent instrument of fiscal policy used by government to manage the
economic development of the state.

Anyanwu (1993) stated that tax is more or less compulsory, non-returnable

contribution of money used occasionally for goods and services and flows from private
individuals, institutions or groups to the government. It may be levied upon wealth or income
of a person or body corporate or in form of surcharge on prices. To Okpe (1998), taxation is
regarded as a compulsory charge imposed by the public authority (Federal, State and Local
Government) for the general purposes of Government. It is also defined as the act of laying a
tax or imposing taxes on the subjects of a state by government or on the members of a
corporation or company by the proper Authority. Once levied, every taxable person must pay
tax.

2.1.2 Concept of Taxation and Tax Administration in Nigeria

According to the (black law dictionary, 1999), tax is a ratable portion of the produce
of the property and labor of the individual citizens, taken by the nation, in the exercise of its
sovereign rights, for the support of government, for the administration of the laws, and as the
means for continuing in operation the various legitimate functions of the state. The Institute

12
of Chartered Accountants of Nigeria, (2006) and the Chartered Institute of Tax Revenue of
Nigeria, (2002) view tax as an enforced contribution of money, enacted pursuant to
legislative authority. If there is no valid statute by which it is imposed, a charge is not tax.
Tax is assessed in accordance with some reasonable rule of apportionment on persons or
property within tax jurisdiction.

Anyanwu, (1997) defined tax revenue as the compulsory transfer or payment from
private individuals, institutions or groups to the government. Sanni, (2007) advocated tax as
an instrument of social engineering which can be used to stimulate, general or special
economic growth and development. From Onairobi, (1994), taxes are generally either of two
types: Direct and Indirect taxes. A direct tax is levied on income or profit while an indirect
tax is levied on goods and services. Good examples of Direct Tax include Personal Income
Tax, Capital Gain Tax, Profit Tax and Wealth Tax. Examples of Indirect Tax include Excise
Taxes, Export Taxes, Import Duties, Expenditure Tax, Sales Tax and Value Added Tax.

Jarkir, (2011) stated that tax is a contribution exacted by the state; it is a non-penal but
compulsory and unrequited transfer of resources from the private to the public sector, levied
on the basis of predetermined criteria. The classical economists were of the view that the only
objective of tax revenue was to raise government revenue. But with the changes in
circumstances and ideologies, the aim of taxes has also been changed. These days apart from
the objective of generating .revenue, taxes is levied to affect consumption, production and
distribution with a view to ensuring the social welfare through the economic development of
a country.

According to Nzotta, (2007), four key issues must be understood for tax revenue to
play its functions in the society. First, a tax is a compulsory contribution made by the citizens
to the government and this contribution is for general common use. Secondly, tax imposes a
general obligation on the tax payer. Thirdly, there is a presumption that the contribution to
the public revenue made by the tax payer may not be equivalent to the benefits received.
Finally, a tax is not imposed on a citizen by the government because it has rendered specific
services to him or his family. Thus, it is evident that a good tax structure plays a multiple role
in the process of economic development of any nation which Nigeria is not an exception
Appah, (2010).

In the words of Enegbu, (2011), the Nigerian tax system has undergone several
reforms geared at enhancing tax administration with minimal enforcement cost. The recent

13
reforms include the introduction of TIN, (Taxpayer Identification Number), which became
effective since February2008, automated tax system that facilities tracking of tax positions
and issues by individual taxpayer, E-payment system which enhances smooth payment
procedure and reduces the incidence of tax touts, Enforcement scheme which engages special
tax officers in collaboration with other security agencies to ensure strict compliance in
payment of taxes Section 8 of FIRS Establishment Act 2007 has led to an improvement in the
tax administration in the country, thus, the integrated tax offices and authorities now have
autonomy to assess, collect and record tax. Despite this improvement, there are still a number
of contentious issues that require urgent attention and among them are appropriate tax
authority to administer several taxes, the issue of multiple taxes severally administered by all
the three tiers of government which sometimes imposes welfare cost and the issue of the
paucity of data base, which contributes to tax avoidance in the country Tanzi, (1995)

The concepts of tax and tax revenue in prior researches have been largely discussed in
different contexts by tax experts, academic scholars, international organizations as well as
different governments. For example, (The World Bank, 2000) noted that taxes are a
compulsory transfer of resources to the government from the rest of the economy, while
Jakir, (2011) described tax as a liability on account on the fact that the taxpayer has an
income of a minimum amount and from certain specified source(s).

However, in a simple term for the purpose of this study, tax is a compulsory fee
individuals as well as corporate bodies are obliged to comply with as stipulated by the tax
laws, while tax revenue is the process of administering the tax laws in the way that achieves
government objectives. And so, tax revenue is a major source of fund for any government
and the availability of fund is a very crucial aspect of running a State. Although, several
options according to Soyode and Kajola, (2006) are available to governments for raising
fund, tax revenue remains the principal source Phillips, (2001).

2.1.3 Origin of Taxation in Nigeria

Historically, according to Osiegbu and Nnamdi, (2009) income tax in Nigeria was first
introduced in 1904 by the late Lord Lugard of Britain, when community tax became
operative in Northern Nigeria. The Nigeria taxation can be traced back in the northern
territory. It was a convenient place to experiment the system of direct taxation because the
people of the area were used to paying tax. Under Fulani administration and also because the

14
Muslim religion adhered to by the people approved of taxation as being consistent with the
tenants of Islam. The laws passed by the British commissioner include:

(i) Land and revenue proclamation of 1904 (ii) Native revenue proclamation of 1906

(iii) Direct taxation ordinance of 1940 (iv) Native revenue ordinance of 1917.

This taxation was in operation of northern and western regions in Nigeria. It was later
introduced in the eastern Nigeria in 1928. It was the federal system of government taxation
1950, it was at this time that the Raisman Fiscal commission recommended the introduction
of uniform basic principle for taxing income in 1958.

2.1.4 Tax Capacity and Tax Efforts

Tax revenue which is always seen as the key revenue form in the government’s fiscal
budgetary revenue system, has drawn the attention of many scholars for a very long time. In
terms of the measurement of the tax performance, two questions are very germane: what is
the potential of tax revenue, and how are these tax revenue potentials utilized to generate tax
revenue by government that is responsible for the utilization of the tax revenue to provide
public goods and services. Hence, two important terms are discussed: the tax capacity, which
measures the potential tax revenues; and the tax effort, which indicates the efficiency of tax
collection (Le, Moreno-Dodson, & Bayraktar, 2012). Tax capacity means: to what extent can
government raise its tax revenue to achieve a perfect balance with economic growth? Thus,
tax capacity is the hypothetical ability of tax authority units to raise revenue for the purpose
of public finance, within the existing available tax base (Shang, 2016). Tax effort on the other
hand states that: given the hypothetical ability to collect tax revenue, how do tax collection
authority units direct their effort to collect taxes? In other words, tax effort refers to the extent
to which an area or governmental body generates tax revenue from its tax capacity (Shang,
2016).

2.1.5 Types of Taxes (Classification of Taxes)

There are two types of taxes and they are direct and indirect taxes which differs only
in terms of the taxpayers’ awareness or in awareness of the incidence of a particular tax. The
burden of the tax is distributed among the taxpayers who bears the tax payment knowingly or
unknowingly. The tax burden is incidentally collected from the tax payers proportionally,
progressively and/or regressively and they differ from one another on the bases of the

15
relationship between tax base and tax rate. The tax base is the object that is being tax or that
is to be taxed such as the income tax while tax rate refers to the percentage of the net value of
the tax base or may be of a flat rate say 10%.

16
Conceptual Framework

TAXATION

DIRECT TAX DIRECT TAX

Petroleum Profit Tax Custom and Excise Duty

Company Income Tax, Value Added Tax, e.t.c
e.t.c

Revenue to the Revenue to the

Government Government

Expenditure on education, Expenditure on education,

housing, power, healthcare, housing, power, healthcare,
agriculture, constructing roads, agriculture, constructing roads,
national defense, etc. national defense, etc.

ECONOMIC
GROWTH

Source: Researcher’s Compilation 2023

17
2.1.5.1 Direct Tax

This is a tax that is levied directly on a person or company and such a person or
company is expected to pay the tax, as the taxpayer has been advised by notification, called
assessment notice. Any tax authority personnel so empowered to collect tax and who did not
comply with the above is a quack and an impostor. The taxpayer must be notified of the
incidence of such tax (Abomaye-Nimenibo, 2017). Therefore, Direct tax is a tax levied
directly on the income and property of individuals and Companies which includes the
following: Personal income tax, Company income tax, Petroleum Profit tax, Capital gains tax
etc.

2.1.5.2 Indirect Tax

These are taxes levied on persons or groups who are not intended to bear the burden
or incidence but who will shift them to other people. They are normally levied on
commodities or services which incidence does not fall directly on the producer or first payer
but on the final payers and consumers. They include; Custom duty, excise duty, Stamp duties
and Value Added Tax.

The Nigerian economy has undergone series of changes over time with different policy
regimes up to 1990; the economy witnessed some gains which were associated with increased
deregulation and liberalization in economic management. However, the scenario changed
in1999, with the return of democratic governance in the country. Democratic governments
have introduced series of reforms that were aimed at redressing the distortions in the
economy and to restore economic growth following the period of economic decline. In 2004,
the government’s economic agenda was formally launched and tagged the National
Economic Empowerment and Development Strategy (NEEDS). Within the context of the
Central Bank of Nigeria (CBN), a medium-term policy framework adopted since 2002 was to
free monetary policy implementation from the problem of time inconsistency and minimize
over-reaction to temporary shocks.

However, periodic amendments are constantly made to the policy guidelines in the
light of developments in the financial markets and performance of the economy. Thus, in
2005, some new reforms were introduced as “amendments and addendum” to the 2004/2005
monetary policy circular. Even though, emphasis on techniques and instruments to achieve
these objectives continually changed over the years, the authority has continued to sanitize

18
and restructure the financial sector. Thus, in 2004 the banking sector consolidation was
initiated aimed at recapitalizing the banks and ensuring a sustainable and stable financial
system that would support the real sector of the economy.

2.1.6 Companies Income Tax (CIT)

Company income tax is a tax imposed by the Government on the income and profits
of companies operating in the country. The law governing the administration of Companies
Income Tax is the Companies Income Tax Act. The law which was first enacted in 1961 has
undergone so many amendments, the latest being that of April, 2007. Companies Income Tax
(CIT) is a tax on the profits of registered companies in Nigeria. It also includes the tax on the
profits of foreign companies carrying on business in Nigeria. The tax is paid by limited
liability companies inclusive of the public limited liability companies. It is therefore
commonly referred to as the corporate tax (Onyeyiri, 2019). All public limited liability
companies in Nigeria outside the Petroleum sector of the economy are required to pay income
and education tax. The rate is 30% of total profit for income tax and 2% of assessable profit
for education tax. Total profit is profit after deducting previous year losses carried forward
and capital allowances.

Assessable profit is obtained prior to deducting capital allowances. Resident

companies are incorporated under the Companies and Allied Matters Act (CAMA) 2004. The
administration of the Companies Income Tax is vested on the Federal Inland Revenue
Service which used to be known as the Federal Board of Inland Revenue (FBIR) until the
enactment of the Federal Inland Revenue Establishment Act in April, 2007 which scrapped
the FBIR and replaced it with Federal Inland Revenue Service (Pwc, 2019). The current Tax
rate in any year of assessment for a company in Nigeria is 30%. The tax is payable on the
profits accruing in, derived from, brought into or received in Nigeria.

These profits are in relation to the following activities: Any trade or business carried
out; Rent or any premium arising from a right granted any person for the use or occupation of
any property; Dividends, interest, discounts, royalties, charges or annuities; Any source of
annual profits not falling under any of the fore-goings; Fees, dues, and allowances for
services rendered; Any amount of profits or gains arising from acquiring or disposing short-
term money instruments like the federal government securities, Treasury Bills and Savings
Certificates, Debenture Certificates and Treasury Bonds. Any amount deemed to be income
or profit with respect to any benefit arising from a pension or provident fund under the

19
Personal income tax act (Olumuyiwa, 2019). Where in any year of assessment the
ascertainment of total assessable profit from all sources of a company results in a loss, or
where a company’s ascertained total profits result in no tax payable or tax payable which is
less than the minimum tax, there shall be levied and paid by the company a minimum tax as
prescribed by subsection (2) of section 33 of CITA (Babatunde, 2019).

The minimum tax to be levied and paid are as follows: If the turnover of the company
is N500,000 or below and the company has been in business for at least four calendar years,
the minimum tax shall be: 0.5% of gross profit; or 0.5% of net assets; or 0.25% of paid-up
capital; or 0.25% of turnover of the company for the year; If the turnover is higher than
N500,000, be whatever is payable as per any of the above, plus such additional tax on the
amount by which the turnover is in excess of N500,000 at a rate which shall be 50% of the
rate used above of 0.25% (Babatunde, 2019).

2.1.7 Petroleum Profit Tax (PPT)

Petroleum Profit Tax is a tax on the income of companies engaged in upstream

petroleum operations in lieu of CIT. Petroleum profit tax (PPT) is a tax applicable to
upstream operations in the oil industry. It is particularly related to rents, royalties, margins
and profit sharing elements associated with oil mining, prospecting and exploration leases. It
is the most important tax in Nigeria in terms of its share of total revenue contributing 95 and
70 percent of foreign exchange earnings and government revenue, respectively (Afuberoh &
Okoye, 2014).Petroleum operation as defined in the PPTA essentially involves petroleum
exploration, development, production and sale of crude oil.

The Petroleum Profit Tax is regulated by the Petroleum Profit Tax Act of 1959as
amended by the Petroleum Profit Tax Act of 2007. Although the initial law was passed in
1959 to capture the first oil export made in that year (Okeke, Mbonu & Amahalu, 2018).
Section 8 of Petroleum Profit Tax Act (PPTA) states that every industry engaged in
petroleum operations is under an obligation to render return, together with properly annual
audited accounts and computations, within a specified time after the end of its accounting
period. Petroleum profit tax involves the charging of tax on the incomes accruing from
petroleum operations (Abdullahi, Madu & Abdullahi, 2015). The importance of petroleum to
the profitability of oil and gas firms in Nigeria gave rise to the enactment of a different law
regulating the taxation of incomes from petroleum operations. The petroleum profit tax is
charged, assessed and payable upon the profits of each accounting period of any industries

20
engaged in petroleum operations during any such accounting period, usually one year
(January to December) (Okeke, Mbonu & Amahalu, 2018).

The profits of a industries in relation to the accounting period is the aggregate of:
(a)the proceeds of sale of all chargeable oil during that period;(b)the value of all chargeable
oil disposed of in that period;(c)the value of all chargeable natural gas in that period; and all
income of the industries of that period incidental to and arising from any one or more of its
petroleum operations (i.e. winning or obtaining and transportation of petroleum or chargeable
oil in Nigeria by or on behalf of a industries, for its own account by any drilling, mining,
extracting or other like operations or process, not including refining at a refinery, in course of
a business carried on by the industries engaged in such operations, and all other operations,
incidental there to and any sale of or disposal of chargeable oil by or on behalf of the
industries.

2.1.7 Value Added Tax (VAT)

VAT is a consumption tax that is relatively easy to administer and difficult to evade
and it has been embraced by many countries world-wide Federal Inland Revenue Service,
(1993). Value Added Tax Act, 1993 is the law that regulates the collection of tax due on
vatable goods orservices. Adereti, (2011). It was introduced to replace the old sales tax. It is a
consumption tax levied at each stage of the consumption chain, and is borne by the final
consumer. It requires a taxable person upon registering with the Federal Board of Inland
Revenue to charge and collect VAT at a flat rate of 5% of all invoiced amounts of taxable
goods and services. Ariyo, (1998) and Adereti, (2011) explained that evidence so far supports
the view that VAT revenue is already a significant source of revenue in Nigeria. For example,
actual VAT revenue for 1994 was N8.189billion, which is 36.5% higher than the projected
N6 billion for the year.

Similarly, actual VAT revenue for 1995 was N21 billion compared with the projected
N12 billion. In terms of contributions to total federally collected revenue, VAT accounted for
about 4.06 % in 1994 and5.93% in 1995. As much as N404.5 billion was collected on VAT
(5.1% of total revenue) in2008. Every person, whether resident in Nigeria or nonresident in
Nigeria, who sells goods or renders services in Nigeria under the VAT Act (as amended) is
obligated to register for VAT within six months of its commencement of business in Nigeria.
Registration is with the Federal Board of Inland Revenue (FBIR).

21
2.1.8 Personal Income Tax

The tax is on the Pay As you Earn (PAYE) basis that is the tax payable depend on
how much is earned by the tax payers. The tax is easy to collect from civil servants as it is
deducted from source by the appropriate authorities unlike the private sector who will have to
file returns of each tax payer which is not done in most cases Abu, (2012). Documentations
from different scholars indicated that even with all efforts through the various tax reforms
undertaken by Nigerian government to increase tax revenue over the years, prior statistical
evidence has proven that the contribution of income taxes to the government‘s total revenue
remained consistently low and is relatively shrinking.

However, of all the taxes, personal income tax has remained the most disappointing,
nonperforming, unsatisfactory and problematic in Nigerian tax system Asada, (2005),
Specifically, the contribution of personal income tax remained marginal and comparatively
low in Nigeria‘s tax revenue. At the state and local government levels, where the major
source of internal revenue is expected to be individual income tax, its contribution to the total
revenue of these levels dropped from 20.18 and 7.7% in 1999 to 12.4 and 1.6% in
2008,respectively CBN, (2008). The PAYE tax payer is payable to both the Federal Inland
Service and the state Board of Internal Revenue depending on the sector in which the tax
payer is employed. The tax is regulated by personal Income Tax Act 2004.

2.1.9 Custom and Excise Duties

Customs duties in Nigeria are the oldest form of modern tax revenue. Their
introduction dates back to 1860 known as import duties, which represents taxes on imports
into Nigeria, charged either as a percentage of the value of imports or as a fixed amount of
contingent on quantity Buba, (2007). Customs duty is a major source of revenue for the
Federal Government which is payable by importers of specified goods Buyonge, (2008).

Adegbie, (2011) studied the Customs and Excise Duties Contribution towards the
development and growth of Nigerian economy. The study reveals that there is a strong
relationship between customs and excise duties and economic development of Nigeria. This
shows that this is a source of income that Nigeria should develop. Also, the study further
shows that fraud and financial malpractices have negative impact on the contribution of
customs and excise to Nigerian economic development. Going by the statement of Buba,

22
(2007), excise duties were also introduced on several goods to broaden the revenue base in
Nigeria in 1962.

Customs and excise duties is an important component of the non-oil revenue and has
remained an important source of revenue before and after the discovery of oil in Nigeria and
over the years contributed significantly to national development. He further stated that the
Nigeria Custom Service is saddled with the responsibility of collecting duties, excise, fees,
tariffs, and other levies imposed by the Federal Government on imports, exports and statutory
rates. It is a crucial facilitation of trade and key instrument of state sovereignty. However, the
institution is much criticized for corruption and inefficiency and its upper echelon is often
driven with intrigue and in-fighting. All these need to change if Nigeria dream of economic
development is to be achieved.

Fasoranti, (2013) described Import duty as a levy on imports by custom authorities in

Nigeria to raise revenue for the government and protect domestic industries from predator
competitors abroad. Oladipupo and Ibadin (2015), Import duty is generally on the value of
goods or on the weight, dimensions or some other criteria that are determined by the
government. They are charged as a percentage of the value of import or a fixed amount of
specific quantity (Fasoranti, 2013).Import duties are either fixed or calculated as a percentage
of the product’s value, which can change (Olurotimi, 2013). Sometimes, government may
want to protect certain domestic product from foreign competition. One way of doing so is by
imposing import duty, which makes foreign products more expensive, thus keeping the same
domestic products more competitive (Ilaboya, 2012). Okoye and Gbegi (2013) held that
government sometime imposes duties to hurt another country by making its exports more
expensive.

This is usually done as a retaliatory measure in a trade war. It is based on the value of
goods called ad valorem duty or the weight, dimensions, or other criteria of the item such as
its size (Oladipupo &Ibadin, 2015). Olurotimi, (2013) asserted that export duty is levied on
the goods passing through a customs area with a route to another area or country. Point of
taxation will be occurring from the date of export or from the movement of transferring
goods from one country to another (Okoye & Gbegi 2013). Export duties are no longer used
to a great extent, except for certain mineral, petroleum, and agricultural products. Several
resource-rich countries depend on export duties for much of their revenue (Ugochukwu &
Azubike, 2015). Export duties were common in the past; however, were significant elements

23
of mercantilist trade policies. Inyiama, Ikechukwu and Madubuko, (2016) affirmed that an
excise duty is the type of tax charged on goods produced within the country (as opposed to
customs duties, charged on goods from outside the country). Though the collection of excise
duty augments revenue generated by the government to provide public goods and services,
however, over the years it has been used as an instrument of fiscal policy to stimulate
economic growth (Olurotimi, 2013).

2.1.10 Economic Development

Economic development' is a process in which a nation is being improved in the sector

of the economic, political, and social well-being of its people (Krueger & Myint, 2019).
Economic development is the process by which emerging economies become advanced
economies. Economic development also refers to the process by which the overall health,
well-being, and academic level the general population improves. During the development,
there is a population shift from agriculture to industry, and then to services. A longer average
life expectancy, for example, is one of the results of economic development. Improved
productivity, higher literacy rates, and better public education, are also consequences (Sen,
2019). Economic development is all about improving living standards. Improved living
standards refer to higher levels of education and literacy, workers’ income, health, and life
spans. It is the process in which an economy grows or changes and becomes more advanced,
especially when both economic and social conditions are improved. Economic development
is the process in which people in a country become wealthier, healthier, better educated, and
have greater access to good quality housing (Behrman, 2017).

2.1.11 Role of Tax Revenue in Economic Growth and Development

A country‘s tax system is a major determinant of other macroeconomic indices.

Specifically, for both developed and developing economies, there exists a relationship
between tax structure and the level of economic growth and development. Indeed, it has been
argued that the level of economic development has a very strong impact on a country‘s tax
base and tax policy objectives vary with the stages of development. Vincent. (2001).

According to Olopade and Olopade, (2010) Growth means an increase in economic

activities. Kuznets, (1999) defined a country‘s economic growth as a long-term rise in
capacity to supply increasingly diverse economic goods to its population, this growth

24
capacity is based on advancing technology and the institutional and ideological adjustment
that it demands.

Economic growth represents the expansion of a country‘s potential GDP or output. Rostow,
(1999) carried out a research on growth of public expenditure where he focused mainly on
the utilization of taxes as the major revenue source, concluded that, at the early stages of
economic development, the rate of growth of public expenditure will be very high because
government provides the basic infrastructural facilities (social overheads) and most of these
projects are capital intensive, therefore, the spending of the government will increase
steadily. The investment in education, health, roads, electricity, water supply are necessities
that can launch the economy from the practitioner stage to the take off stage of economic
development, making government to spend an increasing amount with time in order to
develop an egalitarian society.

Development in human society is a one-sided process; this in turn remains the goals
of every society at all times. The term ‘development’ until recently meant growth measured
by GNP or rise in per capital income. Yet development is not growth. Perhaps it could be
growth coupled with social justice, Kayode, (1993). Development implies changes that lead
to improvement or progress; it is believed that an economy that raises its per capita level of
real income over time without transforming its social and economic structure is unlikely to be
perceived as developing.

The main purpose of tax is to raise revenue to meet government expenditure and to
redistribute wealth and manage the economy Ola, (2001). Jarkir (2011) outlined that for
economic growth of a country, tax can be used as an important tool in the following manner:

i. Optimum allocation of available resources: Tax is the most important source of

public revenue. The imposition of tax leads to diversion of resources from the taxed to
the non taxed sector. The revenue is allocated on various productive sectors in the
country with a view to increasing the overall growth of the country. Tax revenues
may be used to encourage development activities in the less developments areas of the
country where normal investors are not willing to invest.

ii. Reduction of inequalities in income and wealth: Through reducing inequalities in

income and wealth by using an efficient tax system, government can encourage
people to save and invest in productive sectors.

25
iii. Acceleration of Economic Growth and Price Stability: Tax policy may be used to
handle critical economic situation like depression and inflation. In depression, tax is
set to increase the consumption and reduce the savings to increase the aggregate
demand and vice-verse. Thus the tax policy may be used to strengthen incentives to
savings and investment. In under developed countries, there is another role to
maintain price stability to ensure growth with stability.

iv. Control mechanism: Tax policy is also used as a control mechanism to check
inflation, consumption of liquor and luxury goods and to protect the local poor
industries from the uneven competition. Tax revenue is the only effective weapon by
which private consumption can be curbed and thus resources transferred to the state.
Thus the economy can ensure sustainable developments.

v. Promotion of local industries: there is always a strong tendency for local industries
to strive in a country if taxes are effectively administered. The use of custom duties
and others taxes could prevent local industries from facing strong competition from
other industries in developed countries.

2.1.12 Taxation and it Effect on Per Capital Income and Economy Growth of Nigeria

Gross Domestic Product (GDP) is a monetary measure of the market value of all final
goods and services produced in a period. Nominal GDP estimates are commonly used to
determine the economic performance of a whole country or region, and to make international
comparisons. The OECD (2017) defines GDP as an aggregate measure of production equal to
the sum of the gross values added of all resident and institutional units engaged in production
(plus any taxes, and minus any subsidies, on products not included in the value of their
outputs). Coyle (2014) states that "GDP measures the monetary value of final goods and
services - that is, those that are bought by the final user - produced in a country in a given
time. GDP is considered the "world's most powerful statistical indicator of national
development and progress. Total GDP can also be broken down into the contribution of each
industry or sector of the economy.

In most developed and developing countries, Tax revenue accounts for a significant
portion of their revenue. According to OECD (2015) Denmark, Finland, Norway, Sweden,
Timor-Leste have a tax-to-GDP ratio of above 50% in 2015, with Timor-Leste recording the

26
highest ratio (61.5% ). In Africa, Cote d’Ivoire has a tax to GDP ratio of 15.3% , Cameroon
has 18.2% , and Ghana has 20.8% while Nigeria has 6.1% .

According to Etim (2020), economic growth is a sustained increase in per capita national
output or net national product over a long period. Economic growth is the study process of
increasing the national income through government’s conscious effort of influencing
economic variables through fiscal policy or monetary policy measures (Etim, Nweze,
Umoffong and Elias, 2020). This as well contribute to the Growth of a nation.

2.1.13 Gross Domestic Product

Anidiobu, Agu and Ezinwa, (2016) defines Gross Domestic Product as "an aggregate
measure of production equal to the sum of the gross values added of all resident and
institutional units engaged in production (plus any taxes, and minus any subsidies, on
products not included in the value of their outputs). Eme & Johnson (2012) that "GDP
measures the monetary value of final goods and services - that is, those that are bought by the
final user - produced in a country in a given period of time (say a quarter or a year)."

Total GDP can also be broken down into the contribution of each industry or sector of the
economy. The ratio of GDP to the total population of the region is the per capita GDP and the
same is called Mean Standard of Living.

Gross domestic product (GDP) according to Anidiobu and Okolie, (2016) a

monetary measure of the market value of all final goods and services produced in a period
(quarterly or yearly) of time. Nominal GDP estimates are commonly used to determine the
economic performance of a whole country or region, and to make international
comparisons. Nominal GDP per capita does not, however, reflect differences in the cost of
living and the inflation rates of the countries; therefore using a basis of GDP per capita at
purchasing power parity (PPP) is arguably more useful when comparing differences in living
standards between nations.

27
Conceptual Model

INDEPENDENT VARIABLES

X = TAX REVENUE

Value Added Tax DEPENDENT VARIABLE

(VAT) Y = ECONOMIC GROWTH

Companies Income
Tax (CIT) Gross Domestic
Product (GDP)

Petroleum Profit Tax

(PPT)

Custom and Excise

Duty (CED)

Source: Researcher’s compilation 2023

28
2.2 Theoretical Framework

The theoretical framework of this paper is anchored on the expediency theory of

taxation. The theory proposed that every tax proposal must pass the test of practicality. It
must be the only consideration weighted by authorities in choosing a tax proposal. Economic
and social objectives of the state and the effects of a tax system should be treated as irrelevant
(Bhartia, 2009).

Bhartia (2009) explained that the expediency theory is based on a link between tax liability
and state activities. It assumes that the state should charge the members of the society for the
services provided by it. This reasoning justifies imposition of taxes for financing state
activities by inferences, which provides a basis, for apportioning the tax burden between
members of the society. This proposition has a reality embedded in it, since it is useless to
have a tax which cannot be levied and collected efficiently

2.2.1 Theoretical Review

2.2.2 Expediency theory

This theory asserts that every tax proposal must pass the test of practicality. It must be
the only consideration weighing with the authorities in choosing a tax proposal. Economic
and social objectives of the state and the effects of a tax system should be treated irrelevant
Bhartia, (2009). Anyafo, (1996) Bhartia, (2009) explained that the expediency theory is based
on a link between tax liability and state activities. It assumes that the state should charge the
members of the society for the services provided by it. This reasoning justifies imposition of
taxes for financing state activities by inferences, provides a basis, for apportioning the tax
burden between members of society. This proposition has a truth in it, since it is useless to
have a tax which cannot be levied and collected efficiently.

There are pressures from economic, social and political groups. Every group tries to
protect and promote its own interests and authorities are often forced to reshape tax structure
to accommodate these pressures. In addition, the administrative set up may not be efficient to
collect the tax at a reasonable cost of collection. Tax revenue provides a powerful set of
policy tools to the authorities and should be effectively used for remedying economic and
social ills of the society such as income inequalities, regional disparities, unemployment, and
cyclical fluctuations and so on.

29
Adolph Wagner advocated that social and political objectives should be the deciding factors
in choosing taxes. Wagner did not believe in individualist approach to a problem. He wanted
that each economic problem be looked at in its social and political context and an appropriate
solution found thereof. Accordingly, a tax system should not be designed to serve individual
members of the society, but should be used to cure the ills of society as a whole. This theory
relates to a normal development process and represents a benchmark against which country
specific empirical evidence may be compared.

This study therefore focuses on the expediency theory which enables us to assess the
extent to which the Nigerian tax system conforms to this scenario where the link between tax
liability and economic activities are linked. If applicable, such a characterization will enhance
accurate tax revenue projection and targeting of specific tax revenue sources given an
ascertained profile of economic development. It will also assist in estimating a sustainable
revenue profile there by facilitating effective management of a country‘s fiscal policy, among
others. This is because the expediency theory focuses on the fact that taxes are collected to
achieve economic objectives which enhances the growth and development of a society in all
its spheres. The socio-political, benefit and faculty theory are relevant but they lay more
emphasis on political, relationship and ability to be objectives.

Otu and Adejumo (2013) argued that every tax proposal normally passes the test of
practicality and is the only consideration for government authority to choose a tax policy.
This theory which is embedded in the canon of taxation explains the economy, effectiveness
and efficiency of tax collection instruments. Taxation provides a powerful set of policy tools
to the authorities and should be effectively used for remedying economic and social ills of the
society such as income inequality, regional disparities, and unemployment (Afuberon &
Okoye 2014).

Economic and social objective of the state is to put in place an effective tax system
which should be relevant to the economic growth of a nation (Kiabel, 2009). Kiabel (2009)
added that this proposition has a truth in it, since is useless to have a tax system which cannot
be levied and collected efficiently. Since there are pressures from economic, social and
political groups, and every group tries to protect and promote its own interests, hence, the
authorities are often forced to reshape tax structure to accommodate these pressures. In
addition, the administrative set up may not be efficient to collect the tax revenue at a
reasonable cost. Ihenyen and Ebipanipre (2014) posited that taxation provides a powerful set

30
of policy tools to the authorities and should be effectively utilized for remedying economic
and social disturbance in the society such as income inequalities, regional disparities,
unemployment, cyclical fluctuations.

2.2.3 Benefit Theory:

According to this theory, the state should levy taxes on individuals according to the
benefit conferred on them. The more benefits a person derives from the activities of the state,
the more he should pay to the government. This principle has been subjected to severe
criticism on the following grounds: Firstly, if the state maintains a certain connection
between the benefits conferred and the benefits derived. It will be against the basic principle
of the tax. A tax, as we know, is compulsory contribution made to the public authorities to
meet the expenses of the government and the provisions of general benefit. There is no direct
quid pro quo in the case of a tax. Secondly, most of the expenditure incurred by the slate is
for the general benefit of its citizens, it is not possible to estimate the benefit enjoyed by a
particular individual every year.

This theory is based on the assumption that there is basically an exchange relationship
between taxpayers and the state because the state provides certain goods and services to the
members of the society, therefore, members of the society should contribute to the cost of
these supplies in proportion to the benefits received (Bhartia, 2009). Anyanfo (1996),
supports this postulation by saying that taxes should be allocated on the basis of benefits
received from government expenditure.

Thirdly, if we apply this principle in practice, then the poor will have to pay the
heaviest taxes, because they benefit more from the services of the state. If we get more from
the poor by way of taxes, it is against the principle of justice.

2.2.4 The Cost of Service Theory

Some economists were of the opinion that if the state charges actual cost of the
service rend from the people, it will satisfy the idea of equity or justice in taxation. The cost
of service principle can no doubt be applied to some extent in those cases where the services
are rendered out of prices and are a bit easy to determine, e.g., postal, railway services,
supply of electricity, etc. But most of the expenditure incurred by the state cannot be fixed for
each individual because it cannot be exactly determined. For instance, how can we measure

31
the cost of service of the police, armed forces, judiciary, etc., to different individuals? Dalton
has also rejected this theory on the ground that there is no quid pro qua in a tax.

2.2.5 Ability to Pay Theory

The most popular and commonly accepted principle of equity or justice in taxation is
that citizens of a country should pay taxes to the government in accordance with their ability
to pay. It appears very reasonable and just that taxes should be levied on the basis of the
taxable capacity of an individual. For instance, if the taxable capacity of a person A is greater
than the person B, the former should be asked to pay more taxes than the latter. It seems that
if the taxes are levied on this principle as stated above, then justice can be achieved. But our
difficulties do not end here. The fact is that when we put this theory in practice, our
difficulties actually begin. The trouble arises with the definition of ability to pay.

The economists are not unanimous as to what should be the exact measure of a
person's ability or faculty to pay. The main viewpoints advanced in this connection are as
follows:

(i) Ownership of Property: Some economists are of the opinion that ownership of the
property is a very good basis of measuring one's ability to pay. This idea is out rightly
rejected on the ground that if a person earns a large income but does not spend on buying any
property, he will then escape taxation. On the other hand, another person earning income
buys property, he will be subjected to taxation. Is this not absurd and unjustifiable that a
person, earning large income is exempted from taxes and another person with small income is
taxed?

(ii) Tax on the Basis of Expenditure: It is also asserted by some economists that the ability
or faculty to pay tax should be judged by the expenditure which a person incurs. The greater
the expenditure, the higher should be the tax and vice versa. The viewpoint is unsound and
unfair in every respect. A person having a large family to support has to spend more than a
person having a small family. If we make expenditure as the test of one's ability to pay, the
former person who is already burdened with many dependents will have to pay more taxes
than the later who has a small family. So this is unjustifiable.

(iii) Income as the Basics: Most of the economists are of the opinion that income should be
the basis of measuring a man's ability to pay. It appears very just and fair that if the income of
a person is greater than that of another, the former should be asked to pay more towards the

32
support of the government than the latter. That is why in the modern tax system of the
countries of the world, income has been accepted as the best test for measuring the ability of
a person to pay tax.

2.2.6 Faculty Theory

According to Anyanfo (1996), this theory states that one should be taxed according to
the ability to pay. It is simply an attempt to maximize an explicit value judgment about the
distributive effects of taxes. Bhartia(2009), shares this same view by arguing that a citizen is
to pay tax just because he can, and his relative share in the total tax burden is to be
determined by his relative paying capacity.

2.3 Empirical Review

2.3.1 Effect of Petroleum Profit Tax on Economic Growth

Akwe (2014) analysed the impact of oil Tax Revenue on Economic Growth from
1993 to 2012 in Nigeria. To achieve this research objective, relevant secondary data were
used from the 2012 Statistical Bulletin of the Central Bank of Nigeria (CBN). These data
were analyzed using the Ordinary Least Squares Regression. The result from the test shows
that there exists a positive impact of Non-oil Tax Revenue on economic Growth in Nigeria.

Ogbonna and Ebimobowei (2012) investigated the impact of petroleum profit tax on
the economic growth of Nigeria. To achieve the objective of this paper, relevant secondary
data were collected from the Central Bank of Nigeria (CBN) and the Federal Inland Revenue
Service (FIRS) from 1970 to 2010. The secondary data collected from the relevant
government agencies in Nigeria were analysed with relevant econometric tests of Breusch-
Godfrey Serial Correlation LM, White Heteroskedasticity, Ramsey RESET, JarqueBera,
Johansen Co-integration and Granger Causality. The results show that there exists a long run
equilibrium relationship between economic growth and petroleum profit tax. It was also
found that petroleum profit tax does granger cause gross domestic product of Nigeria.

Omoh (2007) analyzed the revenue generating capacity of the nine oil producing
states. He disposed that the nine states generated internally of total of N97.293bn between
1993 and 2003. He employed simple comparative and descriptive analysis for the study. He
posits that the internally generated revenue when compared to the N886.57bn they collected
from the federation account between June 1999 and July 2004 is just 10.97 percent of

33
federation allocation to the nine states. He further disclosed that Rivers State generated the
highest revenue of N33.217bn during the period which is about 22.78 percent of the net
allocation to states from the federation account in the last five years.

2.3.2 Impact of Company Income Tax on Economic Growth

Adegbie and Fakile (2011) examined the relationship between company income tax
and Nigeria’s economic development for the period 1981 – 2007. They used the GDP to
capture the Nigerian economy which was measured against total annual revenue from
company income tax for the same period. They employed the use of chi square and multiple
linear regression analysis method to analyze data obtained from both primary and secondary
sources. Their variables included various taxes regressed against GDP. With an R squared of
98.6% and an adjusted R squared of 98.4%, revealing that company income tax impact on
GDP is very high and impressive. It further showed that there is a significant relationship
between company income tax and Nigerian economic development and that tax evasion and
avoidance are the major hindrances to revenue generation. Overall the study examined only
company income tax which calls for the need to see the impact of all tax revenues on the
Nigerian economy.

In their study of the relationship between company income tax and Nigerian economic
development, Festu and Samuel (2007) reported that in Nigeria, the role of tax revenue in
promoting economic activities and growth is not felt primarily because of its poor
administration, perception and often an undesirable imposition which bears no relation to the
responsibilities of citizenship or t the service provided by the government. Their study further
revealed that an efficient and effective tax administration results in increased revenue yield,
but this is not possible because of the presence of evasion and avoidance due to loop holes in
the tax laws. On the other hand, Adedeji and Oboh (2010) stated that people expect that by
sacrificing their private resources to the state in the form of taxes, government is expected to
reciprocate by spending public revenue in a way that will enhance their welfare.

However, government and tax collectors have been dubiously mismanaging the public
treasury. There is high level of manipulation and diversion of tax revenue by the collectors.
The dwindling tax revenue as presently witnessed results from lack of encouragement to the
taxpayer, due to the fact that there is very little evidence to show for taxes collected. For
these reasons, there are increased cases of tax evasion. Therefore, this gap in existing
literature on tax revenue and economic growth needs to be filled.

34
2.3.3 Impact of Custom And Excise Duty on Economic Growth

Owolabi and Okwu (2011) evaluated the contribution of VAT to the development of
Lagos State economy. Development aspects considered included infrastructural development,
environmental management, education sector development, youth and social development,
agricultural sector development, health sector development and transportation sector
development. Result showed that VAT revenue contributed positively to the development of
the respective sectors. However, the above studies show there is paucity of comprehensive
research on the impact of tax revenue on the Nigerian economy. Rather, most research has
focused only on a single aspect of the tax sources.

Tosun and Abizadeh (2005) in their study of economic growth of tax changes in
OECD countries from 1980 to 1999 reveal that economic growth measured by GDP per
capita has a significant effect on the tax mix of the OECD countries. The analysis reveals that
different taxes respond to the growth of the GDP per capita. It is shown that while the shares
of personal and property taxes have responded positively to economic growth, shares of the
payroll and goods and services taxes have shown a relative decline.

Okafor (2012) investigated the impact of income tax revenue on the economic growth
of Nigeria as proxied by the gross domestic product (GDP). The study adopted the ordinary
least square (OLS) regression analysis technique to explore the relationship between the GDP
(the dependent variable) and a set of federal government income tax revenue heads over the
period 1981-2007. The regression result indicated a very positive and significant relationship
between the components of tax revenue and the growth of the Nigeria economy.

Adereti, Sanni and Adesina (2011) studied value added tax and economic growth in
Nigeria. Time series data on the Gross Domestic Product (GDP), VAT Revenue, Total Tax
Revenue and Total (Federal Government) Revenue from 1994 to 2008 sourced from Central
Bank of Nigeria (CBN) were analyzed, using both simple regression analysis and descriptive
statistical method. Findings showed that the ratio of VAT Revenue to GDP averaged 1.3%
compared to 4.5% in Indonesia, though VAT Revenue accounts for as much as 95%
significant variations in GDP in Nigeria. A positive and significant correlation exists between
VAT Revenue and GDP. Both economic variables fluctuated greatly over the period though
VAT Revenue was more stable. No causality exists between the GDP and VAT Revenue, but
a lag period of two years exists.

35
 Onaolapo, Aworemi, and Ajala (2013) examined the impact of value added tax on
revenue generation in Nigeria. The Secondary Source of data was sought from Central Bank
of Nigeria statistical Bulleting (2010), Federal Inland Revenue Service Annual Reports and
Chartered Institute of Taxation of Nigeria Journal. Data analysis was performed with the use
of stepwise regression analysis. Findings showed that Value Added Tax has statistically
significant effect on revenue generation in Nigeria.

Anyanwu (2014) investigates the effects of taxes on Nigeria’s economic growth using
the Ordinary Least Squares technique and Cochrane- Orcuttand data set from 1981 to 1996.
He concludes that both company income tax customs and excise duties have positive and
significant relationship with Gross

Domestic Product, while petroleum profits tax is positively but insignificantly related to
economic growth. He discovers also that personal income tax negatively and insignificantly
affects economic growth.

Darrah (2005) argues that the political economy of a feudal rather than fiscal
federalism financially emasculates state governments to the point where they are unable to
generate substantial revenue for sustainable programmes. He concludes that some revenue
yielding items on the exclusive-legislative list in part I of the 1999 constitution should be
reassigned to states.

Hino and Weilbert (2001) argue that states differ significantly in their individual
abilities to generate revenue. They further posit that states in the west and East (rivers state
inclusive) have stronger ability to generate income more than states in the North reflecting
disparities in agricultural endowment and level of industrialization. They also revealed that
fiscal analysis in Nigeria is hampered by the lack of reliable and comprehensive data on the
financial operations of all tiers of government, particularly sub-national government.

Mbanefoh (2012) compared the proportion of the combined revenues of the federal
and state governments collected by each and found that for the period 1970 to 1993 state
governments independent revenue as a proportion of the federal and state government
average about 6.6 percent. This explains why the state governments depend on federal
government for over 70 percent of their recurrent revenue. On the average, state governments
generated only 22.5 percent of their total current revenue from internal sources and only 18
percent of state government total expenditures are financed from their independent revenue

36
sources in the period 1970 to 1993. Furthermore, there is an observed horizontal fiscal
imbalance between, per capita distribution of income and wealth and volume of business
transactions among the states. These differences result in wide disparities in per capita
revenue collection potentials of the states. These disparities reflect the possible differences in
the fiscal capacity, fiscal need and fiscal comfort or stress of each state.

The extant reviewed literatures drawn from both developed and developing
economies as being related to theme of this study is discussed as follows: Adegbie and Fakile
(2011) assessed the relationship between petroleum profit tax and economic development of
Nigeria. Primary and secondary data were used to collect the research data, while chi-square
and multiple regression statistical models were used to analyze the results of the field work.
The findings revealed that there is a very strong relationship between petroleum profit tax and
economic development of Nigeria, tax avoidance and evasion are major hindrance to income
growth in this sector, poor tax administration is a problem to effectiveness and efficiency of
this source of income, and lack of corporate social responsibilities is causing unrest in the
crude oil production zone.

Ogbonna and Ebimobowei (2012) examined the impact of tax reforms on the
economic growth of Nigeria from 1994 to 2009. The data collected were analyzed using
relevant descriptive statistics and econometric models such as White test, Ramsey RESET
test, Breusch Godfrey test, Jacque Berra test, Augmented Dickey Fuller test, Johansen test,
and Granger Causality test. The results from the various test showed that tax reforms is
positively and significantly related to economic growth and that tax reforms granger cause
economic growth. Feng and Eko (2014)determined the relationship between tax revenue and
economic growth of Hebei Province from 1978-2011 by the simple and amended tax
multiplier effect theory and the polynomial distributed lag (PDL) model. The results showed
that the negative impact of increase of tax revenue on economic growth may not be as serious
as one might think and tax cuts would create more positive effects in Hebei Province.
Akenbor and Arugu (2014) investigated state government taxation in Nigeria with a view to
determine its impact on economic growth using the Central Bank of Nigeria (CBN) Statistical
Bulletin for a period of 13 years (1999-2012). The data were analyzed with multiple
regression analysis. The findings revealed that state government taxation has a significant
impact on economic growth in Nigeria.

37
 Edame and Okoi (2014) examined the impact of taxation on investment and economic
growth in Nigeria from 1980-2010. The ordinary least square method of multiple regression
analysis was used to analyze the data. The annual data were sourced from the central bank of
Nigeria statistical bulletin and NBS. The result of the analysis showed in conformity to a
priori expectation because the parameter estimates of corporate income tax (CIT) and
personal income tax (PIT) appears with negative signs, this means that an inverse relationship
exist between taxation and investment. The economic implication of the result is that a one
percent (1%) increase in CIT will result in decrease in the level of investment in Nigeria.
Ajani (2015) examined the petroleum profit tax Act, which is in fact one the many tax heads,
under which different arms of the government levy charges to the petroleum industry. The
field is populated by a winding mass of legislations, (both principal and subsidiary);
directives from government and numerous parastatals, and many contractual and quasi-
contractual arrangements. The major finding was that petroleum profits taxation system is a
hopeless jumble, which requires an objective appraisal and therefore a reform that would
ensure transparency and accountability in the interest of all stake holders.

Ogbonna and Odoemelam (2015) investigated the impact of taxation on economic

development of Nigeria proxied by the gross domestic product (GDP).The study further
looked at the relation between companies income tax (CIT), petroleum profit tax (PPT) and
gross domestic product in post-IFRS period. The data were analyzed using descriptive
statistics, econometric model with the aid SPSS version 20. The results showed that a strong
positive and significant relationship exist between economic development and Tax variables
used. It also documented a decline in tax revenue in post –IFRS period. Afrrev (2015)
examined tax reforms in Nigeria with respect to value added tax (VAT). Afrrev highlighted
the reasons for the replacement of sales tax with value added tax (VAT), yearly contributions
of value added tax to the total revenue base of the nation and revealed that Value Added Tax
(VAT) was designed to favour development at the lower tier level of government.

Nur-Arifah, Abdul and Sahibzada (2016) identified the role and impact of tax in
economic growth. The study used 27 selected Asian countries for 5 year time period (panel
data). The relationship between the dependent variables (GDP per capita and FDI rate) and
independent variables (individual income tax, corporate tax, and consumption tax) was
investigated in order to identify the role of tax in economic growth. Descriptive analysis and
regression analysis was adopted to analyze the data. The data were collected based on GDP
per capita, FDI rate, corporate tax, individual income tax and consumption tax extracted from

38
the information that has been published in the World Bank official websites. E-Views
software was adopted to analyze descriptive correlation and regression analysis. A significant
positive relationship was found between GDP per capita, FDI rate, corporate tax, individual
income tax and consumption tax.

Gylych, Abdulrahman and Abdurrahman (2016) examined the impact of tax reforms
on the economic growth of Nigeria from 1986 to 2012. To achieve the objective of the study,
relevant secondary data were collected from Central Bank of Nigeria publications, Federal
Inland Revenue Service publications and the publications of Federal office of statistics, text
book, published and unpublished thesis. Using the E-views Windows, the OLS regression
results showed that tax reforms is positively and significantly related to economic growth and
that tax reforms indeed causes economic growth.

Onakoya, Babatunde and Afintinni, (2016) investigated the cointegration relationship

between tax revenue and Economic growth in Nigeria from 1980 to 2013. Various
preliminary tests including descriptive statistics, trend analysis, and stationary tests using
Augmented Dickey Fuller (ADF) test were conducted. The Engle-Granger Cointegration test
was employed to determine whether a long run relationship existed between the variables.
The Vector Error Correction Model was employed to confirm the long run relationship and
determine the short run dynamics between the variables. Findings indicated that a long run
(but no short run) relationship existed between taxation and economic growth in Nigeria. The
result also, revealed a significant positive relationship at 5% level of significance between
Petroleum profit tax, Company Income tax and economic growth, but a negative relationship
between economic growth and customs and Excise Duties.

Kalaš, Mirović and Andrašić (2017) provided an empirical approach to taxes and
economic growth in the United States in the period 1996-2016. Correlation matrix reflects a
strong and positive relationship between tax revenue growth and corporate income tax on the
one side and gross domestic product growth, on the another side. The model showed a
significant effect of tax revenue growth and social security contributions, while personal
income tax and corporate income tax do not have a significant impact on gross domestic
product growth. Interestingly, personal income tax as the main tax form in the tax structure of
the United States has no significant impact on economic growth compared to social security
contributions which percentage share is lesser.

39
 Aminu and Eluwa (2017) examined the impact of tax reform policy on revenue
generation of the Federal Government of Nigeria. The primary objective of the study was to
prepare a case study on tax policy reforms in Nigeria, with the specific objectives of
examining the main tax reforms in the country, highlighting tax revenue profile and
contributions of the three categories of taxes identified as personal, company and custom
duties to the total revenue collection. The techniques of data analysis adopted for the
empirical study were the Analysis of Variance Method and the Schaffer’s Multiple
Comparison techniques.

Neway, Kenenisa and Woldemicael (2018) identified determinants of tax revenue in

Ethiopia by using secondary data and multiple variable regression model using OLS method.
Quantitative research method was employed on time series data set for the years 1999/00 to
2015/16. Both descriptive statistics and econometric tools were employed to analyze and
present the data collected from concerned bodies. The finding revealed that, industry sector
share to GDP, per capita income and trade openness as measured by share of export and
import to GDP have significant positive effect on tax revenue whereas; agriculture sector
share to GDP and annual rate of inflation have significant and negative effect on tax revenue
as measured by share of tax revenue to GDP.

Yahaya and Bakare (2018) evaluated the effect of petroleum profit tax and company
income tax on Nigerian economy growth. Fully Modified Least Square (FMOLS) Regression
Technique was used to estimate the model over a 34 year period (1981-2014) while
Augmented Dickey Fuller Unit Root Test and Single Equation Co-integration Test were
carried out. It was found that petroleum profit tax (PPT) and company income tax (CIT) have
positive significant impact on gross domestic product (GDP) in Nigeria with the Adjusted R²
of 87.6% which directly enhanced growth in Nigeria. The study concluded that PPT and CIT
served as the major source of revenue to the Nigeria economy, and contributes to the growth
of Nigeria economy.

Asaolu, Olabisi, Akinbode and Alebiosu (2018) examined the relationship between
tax revenue and economic growth in Nigeria. The results of the study showed that VAT and
CED had a significant relationships with economic growth (p<0.05), while CIT has negative
significant relationship with economic growth (P<0.05). However, PPT had no significant
relationship with economic growth. The study concluded that the role of taxation in nation’s
building is irreplaceable. Taxation remains a strong socio political and economic tool for

40
economic prosperity. It is therefore recommended that government should engage in a
complete re-organization of tax administrative machinery to reduce incidence of tax evasion
and avoidance to the barest minimum in order to improve tax revenue and bring more people
and establishments into the tax net. Also, tax revenue should be judiciously utilized to
provide enabling environment for business survival and economic growth in Nigeria.

Olaoye and Ayeni (2019) examined value added tax and customs duties on revenue
generation in Nigeria. Secondary data were sourced from Federal Inland Revenue Service
(FIRS) ranging from 2000 to 2016. Autoregressive Distributed Lag (ARDL) and Granger
causality tests were used as the estimation techniques. The findings of the study revealed that
the F-statistics value was 2.883868 which is lesser than both the lower bound and the upper
bound values of 3.79 and 4.85 respectively at the 5percent level of significance which implies
that there is no long-run relationship among value-added tax, customs duties and revenue
generation. It was equally revealed that there is no causality among Value-Added Tax,
customs duties, and revenue generation.

Omondi (2019) analyzed the effect of custom and excise duties on economic growth
in Kenya for the period 1973 to 2010. The study was motivated by two developments. First,
by the inconsistency in existing empirics and secondly by the wide knowledge gap
occasioned by the paucity of empirical literature on Kenya. Therefore, the study attempted to
reconcile the different positions and also close the knowledge gap. The study adopted a
correlation research design based on its ability determine the strength and direction of
relationships between variables while the theoretical framework was anchored on endogenous
growth model.

2.4 Gap in Literature

In the previous studies discussed there are strong arguments that taxation is a great source of
generating revenue for the government. There are number of studies supporting that tax
management should be one of the major concern of the government. However, there is a little
empirical research undertaken as far as can be ascertained to investigate the build- ups that
explains the effects of taxation, this constituting a literature gap. Also, a number of studies
focused on seeing the effects of taxation in a developed country. In this light, this study will
attempt to fill the gaps and empirically explain taxation and its effect on Nigeria Economic
Growth within the period of (2012-2021).

41
 CHAPTER THREE

METHODOLOGY

3.1 Preamble

This chapter explains the methods that will be used in carrying out the research.
Based on this, the chapter will discuss the following: the research design, population of the
study, sample size, sampling technique, research instrument, and validation of measuring
instrument, method of data collection and method of data analysis.

3.2 Research Design

Research design is a kind of blueprint that guides the researcher in carrying out the
research work. It contains a description of methods and procedure employed in data
collection, design and validation of test instrument. It x-rays the format employed by the
researcher in order to systematically apply the scientific methods in problem investigation.
The design used in this research is ex-post facto, as the study entails the use of time series
data for the periods under study as it allowed for the collection of past documented data. This
provided the basis for the full establishment of the relationship between the variables. Ex post
facto research is a logical experimental investigation in which the researcher does not have
uninterrupted manipulation of independent variables because their expressions have at
present happened or because they are essentially not influenced (Kpolovie, 2010).

42
3.3 Population of the Study

Population refers to the totality of all conceivable elements or subjects relating to a

particular phenomenon of interest to the researcher. The subjects or elements are the
individual items that make up the population, which may be observed or physically counted
(Tahir, 2012).

The population of this study is 10 years. It covers taxation and its effect on Nigeria economy;
it's impact on GDP of Nigeria for the period 2012 – 2021. Therefore, data from 2012 - 2021
were extracted for econometrics analysis.

3.4 Sampling Technique

Purposive sampling were used for this research study. Purposive sampling, also
known as judgmental, non- statistical, selective, or subjective sampling, is a form of non-
probability sampling in which researchers rely on their own judgment when choosing
members of the population to participate in their surveys.

The sampling technique were used because the study is interested in selection of data
available for both the dependent and independent variables with applicability of regression
analysis to run this sample obtained for the study.

3.5 Sample Size

Based on the purposive sampling technique used for this study, the sample size were
limited to the tax payers in Abeokuta, Ogun state.

3.6 Source of Data

The data used for this research study were sourced from annual report of Central Bank
of Nigeria (CBN) Statistical Bulletin, both Federal and state Inland Revenue Service.

3.7 Method of Data Collection

The data used for this research study were secondary data. It were sourced from
annual report of Central Bank of Nigeria (CBN) Statistical Bulletin, both Federal and state
Inland Revenue Service. It involves a time series data which spanned through the year 2012 –
2021.

3.8 Method of Data Analysis

43
 Analysis of data is a process of inspecting, cleansing, transforming, and modeling
data with the goal of discovering useful information, suggesting conclusions, and supporting
decision-making.

Descriptive statistics and inferential were used to analyze the secondary data for this study.
Descriptive statistics summarize the characteristics of a data set while inferential statistics
allow you to test a hypothesis or assess whether your data is generalizable to the broader
population.

Historical data covering a period of 10 years are to be estimated using Auto

correlation test, it often occurs in time series data and it can make an OLS inefficient for
drawing inferences. Heterskedasticity test is also a factor commonly associated with time
series data. It affects the standard error as well as the t-statistics. Bound test is a test for
measuring long run relationship. It measures whether a long run relationship exists between
the independent variables and the dependent variable. The Auto Regressive Distributed Lag
Model (ARDL) are standard least squares regressions that include lags of both the dependent
variable and explanatory variables as repressors’ (Greene, 2008).

3.9 Validity and Reliability

The reliability and validity of secondary data depends upon the reputation of the
source(i.e the person or organization). Since the data is gotten from the annual report of
Central Bank of Nigeria statistical Bulletin, it is very reliable and valid.

3.10 Model Specification

This research set out to examine the impact of oil revenue on the economic growth in
Nigeria. This relationship is designed on a linear regression model assuming a linear relationship
between the variables. The model is given as:

Y is Economic Growth ………………………… 1

X is Tax Revenue Economic Growth is measured by Gross Domestic Product (GDP} .. 2

Where Tax Revenue is measured by:

VAT = Value Added Tax is represented by x1;

CIT = Companies Income Tax is represented by x2;

44
PPT= Petroleum Profit Taxis represented by x3; and

CED = Custom and Excise Duty is represented by x4

Hence, Y = f (X) ……………………. 3

X = (x1, x2, x3,x4) ……………………. 4

Y= f(x1, x2, x3,x4) …………………… 5

GDP t = β0 + β1 VAT t +β2CITt +β3PPTt + β4CED t + ℮t ………………. 6

β0 = constant

β1 – 4= co-efficient of independent variable

e = error term

t = time series variable

3.11 Measurements of Variables

The study used dependent and independent variables. The dependent variable is
Economic Growth proxied byGross Domestic Product (GDP) while the independent
variablesareValue Added Tax (VAT), Companies Income Tax (CIT), Petroleum Profit Tax
(PPT) and Custom and Excise Duty (CED)

45