A COMPARATIVE ANALYSIS OF TAX EFFECTIVENESS IN NIGERIA AND GHANA

INTRODUCTION

1. 1. BACKGROUND OF THE STUDY

From the days of Pharaohs in Egypt to modern day government, tax and taxation has always been part of society. There have being various reasons as to why taxes are being imposed. And there are various tax administration systems that have been adopted throughout history. In order to fund various government projects, tax is introduced as a compulsory charge, levied on individual and entities in a given society. The word tax is from a Latin word “taxo” which can be defined as a mandatory financial charge or some other type of levy imposed upon an individual or other legal entity (Taxpayer) by a governmental organization in order to fund various public expenditures (Wikipedia.com). There is a serve punishment for refusal to pay taxes and underpayment of taxes across all nations. We can ground tax in to two different forms; direct and indirect taxes. Shirley and Karen 2012 defined tax is a „?forced payment made to a governmental unit that is unrelated to the value of goods or services provided”. Before 2009, Ghana had various independent institutions and agencies in charge of tax collections and administration. As at December 2009, the three revenue agencies which include Customs Excise and Preventive Service, Internal Revenue Service, Value Added Tax Service and Revenue Agencies Governing Board Secretariat were formed in conformity with the Ghana Revenue Authority Act, 2009 (Act 791). Rai 2012 stated that collections of taxes are mandatory responsibility for all civilized countries. The reasons why taxes should be collected includes; to meet their day-to-day expenses related to maintenance of a free and fair society, to finance developmental activities, to control the economy through fiscal measures, and to a certain extent, to change the economic behavior of people. Tax administrations modern in era seek to optimize tax collections while minimizing administration costs and taxpayer compliance costs (Okello 2014). There is still room for improvement in the design and delivery of client-focused taxpayer service programs and better engage with the private sector and other stakeholders. The United states Tax administration, defined tax administration as the administration, management, conduct, direction, and supervision of the execution and application of the internal revenue laws or related statutes (or corresponding laws and statutes of a State) and tax principles to which the United States is a party; and the invention and formulation of Federal tax policy relating to internal revenue laws either existing or proposed, related statutes, and tax conventions. Taxation involves also assessment, collection, enforcement, litigation, publication, and statistical gathering functions under such laws, statutes, or conventions. (GAO report 2010) Research has shown that, Tax leakages that occur in developing countries happens due to poor or under– resourced or under–trained administrators, poor tax collection systems, failure of legal enforcement mechanism for tax collection and small penalties for non-payment. These factors make openings for local and external entities to manipulate the system since tax official mostly lack the required technical skills to uncover complex international fiscal structures that are used to escape taxation, and because penalties are insufficient to stop tax evasion (Boakye, 2011). In 1970 the government of Ghana tried to regionalize tax enforcement to the local level. The aim was to achieve district focused public administration. The collection of taxes especially income taxes was hence delegated to the Metro, Municipal and District office of the Ghana Revenue Authority. The main objective of the Ghana revenue authority is ensuring compliance laws. In 2009, a new tax law, The Internal Revenue Act 2000 (Act 592), was passed to administer Direct Taxes. The Internal Revenue Regulations, 2009 (L. I. 1675) was also introduced. There have been a number of amendments to the law and regulations. Bold changes in Ghana's tax administration played a key role in improving the country's revenue mobilization and overall fiscal health (Terkper1993). As mentioned earlier, Ghana as a nation collects taxes through various means and channels, from the national, regional, metropolitan, municipal, district to various towns and villages, there believe to be systems and officials put in place and in charge to administer tax collection. Nigeria operates a federal system of government; thus its fiscal operations also conform to the same principle. This system of government has a serious impact on how the tax system is executed and managed in the country. The government’s fiscal power in Nigeria is based on a three-tiered tax structure divided between the federal, state and local governments, each of which has different tax jurisdictions. About 40 different taxes and levies as of 2010 are divided by all three levels of government. The Nigerian tax system is lopsided, and dominated by oil revenue. The most authentic tax handles are under the control of the federal government while the lower tiers are in charge of the less buoyant ones—the federal government taxes corporate bodies while state and local governments tax individuals. While the federal government on average accounts for 90 per cent of the overall revenue annually, it only accounts for about 70 per cent of total government expenditure. In 1995, the breakdown of total tax and levy collection of the three tiers was 96.4 per cent for the federal government, 3.2 per cent for the state and 0.4 per cent for the local government (Phillips 2010). A major element contributing to this development was the prolonged military rule that had ignored constitutional provision. This study examined the comparative analysis of tax effectiveness in Ghana and Nigeria in West Africa.

1.2 STATEMENT OF PROBLEM

Nigeria therefore represented the most populous and highly corrupt nations in West Africa while Ghana represented the moderately populous and corrupt nations of West Africa. We are motivated to conduct this study because developing countries have struggled with tax collection over the years and this continues to negatively impact the level of social services the governments are able to provide their citizens. Collecting taxes in developing countries was challenging as citizens did not want to pay taxes. Most transactions in the countries were done by cash. There was a large informal sector in developing countries which included informal trading, traditional healing, footwear, refrigeration, spare parts, agriculture, dressmaking, credit facilities transportation, food preparation, gold and silver smiting, construction, electricity, livestock and distilleries. The informal sector led to a widespread lack of efficient record-keeping resulting in difficulty in ascertaining revenue. This presented challenges to the revenue collecting authorities who had their own set of problems (lack of personnel and logistics). Hence a comparative analysis of tax effectiveness in Ghana and Nigeria

1.3 AIMS AND OBJECTIVES OF THE STUDY

The major aim of the study is to examine a comparative analysis of tax effectiveness in Nigeria and Ghana. Other specific objectives of the study include;

1. To examine the tax system of Nigeria with respect to the tax system of Ghana.
2. To examine the use of tax system to improve revenue generation in the country.
3. To examine economic and social effects of taxation.
4. To examine the challenges with taxation in Ghana and Nigeria.
5. To examine the relationship between tax effectiveness and revenue generation.
6. TO addresses to challenges of taxation.

1. 1. RESEARCH QUESTIONS
2. What are the tax systems of Nigeria with respect to the tax system of Ghana?
3. How can tax system improve revenue generation in the country?
4. What are economic and social effects of taxation?
5. What are the challenges with taxation in Ghana and Nigeria?
6. What is the relationship between tax effectiveness and revenue generation?
7. How can we address the challenges of taxation?

1.5 RESEARCH HYPOTHESES

Hypothesis 1

H0: There is no significant economic and social effect of taxation on revenue generation.

H1: There is a significant economic and social effect of taxation on revenue generation.

Hypothesis 2

H0: There is no significant relationship between tax effectiveness and revenue generation

H1: There is a significant relationship between tax effectiveness and revenue generation

1.6 SIGNIFICANCE OF THE STUDY

The study is important in such that:

1. The outcome of this study would enhance the ability of the students offering course in taxation to understand the subject properly
2. The study would serve as an information bank for future research in the area of taxation.
3. The findings of this research would help government officials to utilize taxation in achieving desired goals.
4. It shall also serve as an eye opener to government of the present time that taxation can be used as economic tool for the control of money in circulation in order to avoid inflation, control high cost of living and low standard of living.
   1. SCOPE AND LIMITATION OF THE STUDY

The study is restricted to a comparative analysis of tax effectiveness in Nigeria and Ghana.

LIMITATION OF THE STUDY

Financial constraint: Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview)

Time constraint: The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

1.8 DEFINITION OF TERMS

Taxation: Taxation refers to compulsory levy imposed on private, individual, institutions or groups by the government.

Tax: Tax is the money paid by the citizens, according to their income, value of goods purchased etc to the government for public purposes.

Tax Payer: People, group of people or companies that pays tax.