PROJECT REPORT

On

"INVESTIGATION INTO THE CAUSES OF TAX

EVASION"
SUBMITTED TO
BARKATULLAH UNIVERSITY, BHOPAL (M.P.)

IN PARTIAL FULLFILLMENT OF
THE DEGREE OF

BACHELOR OF COMMERCE(TAX)
SESSION: - 2021-2022

Submitted By

Abhishek Rajput
Roll No.2051500369
Enrollment No.R205150280098

Under the Guidance of

Dr. Rashmi Jain
(Assistant Professor)
 AND TECHNOLOGY BHOPAL (M.P.) DEPARTMENT
OF COMMERCE

ACKNOWLEDGEMENT

I convey my sincere gratitude to DR. ANITA MISHRA PRINCIPAL OF

NVISMT for giving me the opportunity to prepare my project work in

"INVESTIGATION INTO THE CAUSES OF TAX I express my sincere

thanks to all the staff member of

Bachelor of Commerce Department I am thankful to Dr. Rashmi Jain

(Assistant Professor) for her/his guidance during my project work and sparing

her/his valuable time for the same.

I express my sincere obligation and thanks to the principal and all Faculties of the

Department of COMMERCE for providing me with guidance help motivation and

valuable advice at every stage for completing the project work successfully.

Signature:

Name: Abhishek Rajput

Roll No: 2051500369

 AND TECHNOLOGY BHOPAL (M.P.) DEPARTMENT OF
COMMERCE

DECLARATION

I do hereby declare that the project work entitled "INVESTIGATION INTO

THE CAUSES OF TAX submitted by me for the partial fulfilment of the

requirement for the award of Computer Application, is an authentic work completed

by me. The report being submitted has not been submitted earlier for the award of

any degree or diploma to any Institute or University.

Date:

Signature:

Name: Abhishek Rajput

Roll No: 2051500369

 AND TECHNOLOGY BHOPAL (M.P.) DEPARTMENT OF
COMMERCE

CERTIFICATION OF ORIGINALITY

This is to certify that the project report entitled "INVESTIGATION INTO THE

CAUSES OF TAX Submitted to Barkatullah University, Bhopal in partial

fulfilment of the requirement for the award of the degree of

Bachelor of

Computer Applications, is an original work carried out by Abhishek Rajput

Roll No.2051500349 Enrolment No.R205150280213

The matter embodied in this project is a genuine work done by the student and has

not been submitted whether to this University or to any other University / Institute for

the fulfilment of the requirement of any course of study.

Signature of the Guide Name,

Dr. Rashmi Jain

Assistant Professor
 TABLE OF CONTENTS
INTRODUCTION

CHAPETR-1 (COMPANY PROFILE)

INVESTIGATION INTO THE CAUSES OF TAX
EVASION

CHAPETR- 2 LITERATURE REVIEW

CHAPETR-3 RESEARCH METHODOLOGY

CHAPETR-4 DATA PRESENTATION AND ANALYSIS

AND INTERPRETATION

CHAPETR-5 SUMMARY,
RECOMMENDATION,
CONCLUSION,
REFERENCES
 CHAPTER-1
Introduction
INTRODUCTION
Company Profile

VISION

We envisage AISECT University as a world-class centre for knowledge

application and not just knowledge creation. Apart from imparting quality
education, we hope to inculcate values and skills that prepare our students
as responsible professionals who can rise above the ordinary and put
themselves at the globalised forefront of a progressive India.
MISSION

• To be recognized as a quality research campus with extensive research

conducted in the areas of renewable energy.
• To be recognized as a leading National University and garner accolades
for dedicated service towards the social and economic development of the
nation.
 • To be a university where the students are nurtured by an application and
research focused pedagogy along with, promoting a research oriented
culture.
• To be a place where education is imparted through extensive and
innovative use of technology and world-class facilities.
• To be a source of inspiration that nurtures the youth as responsible,
talented professionals by sowing the seeds of skill based education and
technical competency.
• To represent itself as one of the renowned research oriented universities
across the world, by collaborating with leading academic and corporate
bodies.
AISECT ACADEMY FOR IT & MANAGEMENT

Information Technology is one of the most important industries in the Indian

economy. The IT industry of India has in the last ten years grown at an

average annual rate of 30% making it currently a Rs. 400,000 crore industry.
The right kind of certification in the relevant IT technology can help enhance
career prospects, provide greater remuneration, more challenging job profiles,
better career paths and increased job security. Certifications are objective
measurements of skills and hence easy to use when it comes to comparing and
contrasting the talent pool. In some cases, it becomes the critical distinguishing
factor when candidates have similar skill sets and experience.

The AISECT Academy for IT & Management with the

 CVRU/AU certification gives an aspiring IT professional a
boost in his/her career. The programs have been specially
designed to address the IT industry needs and open up

prospects in the areas of IT Services, Software – both

Engineering and R&D and ITES-BPO space.

Sl. Program List Duration Eligibility

1 Diploma in Computer 12 10th Pass

Programming and Month
Applications (DCPA) s
2 Diploma in Computer 12 12th Pass
Application (DCA) Month
s

3 Post Graduate Diploma in 12 Graduate in

Computer Applications Month any
(PGDCA) s Discipline

12
4 Diploma in Entrepreneurship
Month 12th Pass
Development (DED)
s

5 Post Graduate Diploma in 12 Graduate in

AgriBusiness Month any
Management (PGDABM) s Discipline

6 Certificate in Computer 6 10th Pass

Applications (CCA) Month
s
7 Certificate in Web Technology 6 12th Pass
(CWT) Month

Certificate in Multimedia and 6

8 Animation Designing Month 12th Pass
(CMAD) s

9 Certificate in C++ (CC) 3 10th Pass

Month
s

3
Certificate in Office Automation
10 Month 10th Pass
and Internet (COA)
s

11 Certificate in Application 3 10th Pass

Software (CAS) Month
s

Certificate for Data Entry 3

12 10th Pass
Operator (CDEO) Month
 Certificate in Photocopy 3
14 Operation and Maintenance Month 10th Pass
(CPOM) s

3
Certificate in Spoken English
15 Month 10th Pass
(CSE)
s
Certificate in Desk Top 3
16 Publishing (CDTP) Month 10th Pass
s

Certificate in Word Processing/ 4

13 Typewriting (Hindi/English) Month 8th Pass
(CWP) s
 s

Certificate in Personality
17 1 Month 10th Pass
Development (CPD)

Certificate in Web Designing 4

18 using PHP & MY SQL Month 12th Pass
(CWDPM) s

4
Certificate for BPO & Call
19 Month 10th Pass
Center (CBCC)
s

Abstract
The study examines the causes of income tax evasion and avoidances in National

Capital Region (NCR) of India. Fiscal policy of an economy has four main

components: taxation, public expenditure, debt and deficit financing. Maximum part

of the revenue to the government comes from taxation. In taxation itself, direct tax

constitutes the major part. The problem arises when individuals/corporate don’t pay

their taxes, or reduce their tax liability fraud fully. It lessens the government revenue

and directly or indirectly harms the public utility services. Individuals adopt tax
avoidance or tax evasion to reduce their tax liability. Tax avoidance is legal reduction

in tax liability, using the loopholes of income tax provisions; tax evasion is fraudulent

method of reducing tax liability. Tax evasion is illegal as well as immoral while tax

avoidance is legal but immoral. Government takes various steps from time to time to

control tax evasion, avoidance and unearth the black money. The current paper aims

to study various causes of tax evasion or avoidance. In order to know the ways and

cause of tax evasion, primary data from 202 respondents is collected through

structured questionnaire. Data thus collected is analysed using different statistical

tools like arithmetic mean, standard deviation, factor analysis, etc. The results provide

five main causes of tax evasion and avoidance: complex income tax structure, lack of

incentives to honest taxpayers, need of more awareness/motivational programs for

paying income/corporate tax, illiteracy of tax payers, and inefficiency/indiscipline of

tax administration department. However, first three factors accounts for 95.715%

variance. High correlation among the reasons of tax evasion and avoidance indicating

towards mixed and synergized effect of these factors on tax evasion and avoidance.

INTRODUCTION

INVESTIGATION INTO THE CAUSES OF TAX

EVASION

1. 1 Background of the study

The concept of taxation has been a concern of global significance as it affects every

economy irrespective of national differences (Oboh etal., 2012). According to

Omotoso (2001), in his definition of the modern taxes, defined tax as a compulsory
charge imposed by a public authority on the income of individuals and companies as

stipulated by the government decrees, acts or cases laws irrespective of the exact

amount of services rendered to the payer in return. A more recent and comprehensive

definition was given by Dr. Ekenze Oliver of Buitas Consultancy to the effect that tax

is: “a compulsory levy imposed by an organization or Government on its member

citizens, for the sole purpose of providing common goods and services for the benefit

of all members”. He continued: “tax is designed to raise revenue required for the

expenditure authorized in a government budget expectation. It is also a veritable

instrument of promoting social and economic justice and equality amongst citizens of

a state or members of an organization”. As could be gleaned from the above

definitions, a tax is not therefore a voluntary payment; it is a compulsory pecuniary

burden placed upon the subjects of a given country to support the people. Thus, taxes

constitute the principal source of government revenue and the beauty of any

government is for its citizen to voluntarily execute their tax obligations without much

coercion and harassment. The greatest puzzle facing the Nigerian tax system is the

threat of tax evasion and tax avoidance. It is widely believed that there is a substantial

difference between estimated revenue from taxation every year and what is actually

collected.

Tax evasion is a major problem plaguing many emerging economies across the globe

and Nigeria situation seems unique when viewed against the scale of corrupt practices

evident in the country. Under the direct personal taxation as practiced in Nigeria, the

major problem lies in the collection of the taxes especially from the self-employed

such as the businessmen, contractors, professional practitioners like lawyers, doctors,

accountants, architects and traders in shops among others (Kiabel and Nwokah, 2009).

As observed by Ayua (1999) cited in Kiabel and Nwokah (2009) these persons

blatantly refuse to pay tax by reporting losses every year. Ayua (1999) further asserts

that many of these professionals live a lifestyle inconsistent with reported income,

which is usually unrealistically low for the nature of their businesses. The only

categories of individuals who fulfill their tax obligation in Nigeria are civil servants

and other salaried workers.

1. 2 Statement of the problem

Tax evasion in Nigeria has been a cause for a serious concern; this is because it has

led to the depletion in the internally generated revenue which has by extension

adversely affected our economic growth and development.

Taxation is an imperative part of fiscal policy of any economy. It is main source of

income of a nation, which is utilised for the benefit of society through public

expenditure. Taxes are of two kinds, one direct tax, levied directly on income/ wealth

of the assessee, second indirect tax, which is charged from individuals, indirectly.

Most important tax for nation is income tax, which is charged on income of the

individual. If the income of a person is more than exempted limit, he is liable to pay

tax on such excess income. This is revenue for the nation. Those with the mentality

that they work hard for earning; why should they pay a part of income to government,

indulge in activities to reduce their tax liability so that they can keep the maximum

earnings with them. However tax is charged by government to be spent for the

economy, for the benefit of all. It must be paid honestly.

Those who wish to reduce their tax liability mainly employ three methods:

i. Tax Planning:

It is planning of affairs by an individual in such a manner that maximum

reliefs, deductions, exemptions and rebates can be claimed. It is legal and

moral. Government makes such provision in the income tax act to motivate

assessees plan their affairs to contribute in economic development.

Government can achieve its objectives of industrial development, investment,

regional balancing through such provisions. It is for betterment of nation, if its

residents take advantage of tax planning. Tax planning requires the

knowledge of taxation law.

ii. Tax Avoidance:

It is taking advantage of loopholes of income tax act, 1961 to reduce tax

liability. It is legal but immoral because it contradicts the objectives of law.

Tax is avoided using the measures:  Tax Sheltering: Tax shelters are

investments that allow and purport to allow, a reduction in one's income tax

liability. Although things such as home ownership, pension plans, and

Individual Retirement Accounts (IRAs) can be broadly considered "tax

shelters", insofar as funds in them are not taxed, provided that they are held

within the individual retirement account for the required amount of time, the

term "tax shelter" was originally used to describe primarily certain

investments made in the form of limited partnerships, some of which were

deemed by the

U.S. internal revenue service to be abusive.  Tax haven: Tax haven is a

 territory or state, outsides jurisdiction of one’s home country where tax is

charged on income on a very low rate or not at all charged. In effect, almost

every nation is a tax haven for non-nationals because it wants to attract foreign

capital by offering incentives.  Transfer mispricing: Fraudulent transfer

pricing, sometimes called transfer mispricing, also known as transfer pricing

manipulation, refers to trade between related parties at prices meant to

manipulate markets or to deceive tax authorities.

iii. Tax Evasion:

Tax evasion is illegal as well as immoral. It is distortion of affairs by

individuals to tax authorities to reduce tax liability. It is done through reporting

less income, profits, and gains or by reporting more expenses claiming

exemptions and deductions falsely. According to Batra (2014), tax can be

evaded by:

 Out of book transactions.

 Parallel books of accounts.

 Manipulation of books of accounts, sales/receipts.

 Under reporting production.
 Manipulation of expenses.

 Manipulations by way of international transactions through

associate enterprise.

 Manipulation of capital, closing stock and capital expenses.

 Land and real estate transactions.

  Bullion and jewellery transactions.

 Financial market transactions, non-profit sector, informal sector

and cash economy.

 External trade and transfer pricing.

Tax Planning belongs to NO WORRY zone for the economy; in fact it is

designed by government for economic development. Tax avoidance and tax

evasion are the matter of concern as it reduces the income of nation which is

detrimental to national objectives

OBJECTIVE OF THE STUDY

The following are the aims and objectives of this study

1. To examine the major causes of tax evasion in Nigeria.

2. To examine the relationship between tax evasion penalty and tax

evasion in Nigeria.

3. To examine the relationship between high tax rate and tax evasion

in Nigeria.

4. To know if many business owners pay tax.

Causes of Tax Evasion:

 Low educational level of the population.

 Lack of simplicity and accuracy of the tax legislation.

 Inflation.

 Tax pressure high rates.

 A significant informal economy

 Permanent regularization regimes (moratoriums, whitewashing, etc.)

 Possibility of failing to comply without greater risks.

 Promotional regimes (tax incentives, exemptions and tax expenses).

 Lack of dissemination regarding the use of resources originating from taxes.

 Lack of citizens tax integrity.

 Inefficiency of the Tax Administrations (AATT).

 Presence of multinational enterprises with aggressive tax planning.

 Tax havens jurisdictions of null or low taxation or as it is said in many

countries, non-cooperating jurisdictions.

 Great weight of intangibles, which makes it difficult to assign them their

true value and determine their place of origin.

 Financial system with multiple sophisticated figures that allow for

mobilizing money in a speedy and simple manner.

 Proliferation of special tax regimes for attracting investments (e.g. tax rulings)

 Difficulty to control the transfer prices of related multinational enterprises:

currently over 60% of world trade is carried out through these enterprises

and 50% are intragroup operations.

 Digital economy, with the significant technological development: electronic

commerce, collaborative platforms, digital currencies and new ways of

commercializing goods and services, there are increasing difficulties for

taxing and controlling.

Tax Evasion in India:

In India there are various ways through which people evade tax are Smuggling,

evasion of sales and Value Added Tax, Evasion of Income Tax, Evasion of Wealth

Tax, Evasion of Customs Duty and Evasion of Excise Duty. Also, officials takes

bribery and helps in making fabricated statements instead of reporting to tax

authorities. Idealist wilfully fails to file return, submit false returns, submits false

certificates to get deduction, exemptions and claim low income, charging personal

expenses to revenue, fails to pay dues within due date and so on to evade tax.

Effect of Tax Evasion in India:

Taxes are the major source of revenue of India government. Tax evasion causes
economic inequality that is how some people are getting richer and others are getting
poorer. Many reform measures and initiatives of government have to be set aside and
welfare activities are getting affected. Black money causes inflation and value erosion.

Measures Taken by Indian Government to Curb Tax Evasion:

Several steps as below have been taken by Indian government to avoid tax evasion. In
India, tax evasion is regarded as a crime. Prosecution and Penalties are imposed under
different acts by government. Income tax reward scheme has been introduced by
Income Tax Department which gives rewards to informers about tax evasion.
Recently, India has entered into pact with US to avoid tax evasion by Americans
through Indian financial organizations. Special Bearer Bond Scheme (Immunities and
Exemptions Act, 1981) enable person in possession of black money to invest in
special bonds. Voluntary Compliance Scheme (Amnesty Scheme) was another one.

Government increased the tax slab, reduced deduction rate, and increased legal tax
avoidance measures. Most recently, Tax Administration Reform Commission was set
up by Government to make structural reform to tax matters to simplify and streamline
tax procedures. Earlier India had set up several committees like Taxation Enquiry
Committee, Indian Tax Reforms Committee, and Direct Taxes Enquiry Committees
etc. Transfer Pricing Audit was introduced by Finance Bill to audit undisclosed
transactions to curb tax evasion.

To examine the relationship between tax evasion penalty and tax

evasion in Nigeria
Tax evasion is a phenomenon present in all societies using taxes to finance
government expenditures. There is a huge body of literature on the estimate of its
extent. This study examines the relationship between culture (represented by legal
enforcement, trust in government and religiosity) and personal income tax evasion in
Nigeria. The study uses the chi square statistics and ordinary least squares regression
to estimate the relationship between tax evasion and the independent variables namely
legal enforcement trust in government and religiosity. Four hypotheses were tested. It
was found that legal enforcement and trust in government have positive impact on
personal income tax evasion in Nigeria. However, the study could not establish a
significant relationship between tax evasion and the religious variables. Government
policymakers should find the results of this study useful in assessing the likelihood of
tax evasion from legal, political and religious perspectives, and in developing tax
reform policies aimed at minimizing tax evasion.
 Correlation Matrix of Tax Evasion and Government
Variables

Correlation Matrix of Tax Evasion and Religious Variables

To examine the relationship between high tax rate and tax

evasion in Nigeria.
The desire to uplift one’s society is the first desire of every patriotic citizen

(Allingham & Sandmo, 1972). Tax payment is a demonstration of such a desire.

The payment of tax is a civic duty and an imposed contribution by government on

her subjects and companies to enable her finance or run public utilities and perform

other social responsibilities. Taxes, thus, constitutes the principal source of

government revenue. However, one of the greatest problems facing Nigerian Tax

System as well as Africa is the problem of tax evasion and tax avoidance. While

tax evasion is the willful and deliberate violation of the law in order to escape

payment of tax which is unquestionably imposed by law of the tax jurisdiction, tax

avoidance is the active means by which the taxpayer seeks to reduce or remove

altogether his liability to tax without actually breaking the law. These “Twin

devils” have created a great gulf between actual and potential revenue. The

government has for the umpteenth time complained of the widespread incidence of

tax avoidance and evasion in the state as companies and other taxable persons

employ various tax avoidance devices to escape or minimize their taxes or

deliberately employ fraudulent ways and means of evading tax altogether

sometimes with the active connivance of the tax officials. As pointed out by

Rynoids (1963), since tax is a principal source of government revenue, if persons

are able to escape by legal or illegal means the tax to which they should logically

be subject under the general scope of the tax, the theoretical equity of the tax to a

large measure is lost. Tax evasion and avoidance no doubt deny any government

the tax revenue due to her, which results in a gap between the potential and actual

tax collections. This study is aimed at bridging this gap.

Although tax evasion and avoidance are problems that face every tax system, the

Nigerian situation seems unique when viewed against the scale of corrupt practices

prevalent in Nigeria. Under direct personal taxation as practiced in Nigeria, the

major problem lies in the collection of the taxes especially from the self-employed

such as the businessmen, American Journal of Humanities and Social Sciences 126

contractors, professional practitioners like lawyers, doctors, accountants, architects

and traders in shops among others. As observed by Ayua (1999) these persons

blatantly refuse to pay tax by reporting losses every year. According to him, many

of these professionals live a lifestyle inconsistent with reported income, which is

usually unrealistically low for the nature of their businesses. Civil Servants and

their salaried workers are the only class of people that actually pay tax in Nigeria.

However, even among the salaried workers, he added, many have turned the

statutory personal allowances and relief into a fertile ground for tax evasion.

Almost all Nigerian taxpayers are married with four children! Similarly, despite the

tax provision meant to plug loopholes through which taxable persons can minimize

tax liability the selfemployed persons employ all kinds of avoidance schemes to

minimize or escape tax liability and makes you wonder whether there are still any

tax officials working in that capacity. Such scenarios, no doubt, say a lot about tax

administration system in Nigeria both in its design and in the disposition of some

taxpayers towards taxation. While it immediately presupposes that there are legal

framework put in place to punish tax evaders it perhaps raises a poser on the

efficiency and effectiveness of tax laws and tax administration in Nigeria. Some

state governments in an effort towards solving this problem had even gone to the
extent of engaging the services of tax consultants. This government effort,

notwithstanding, the problem of tax evasion and avoidance still persists (Alabi,

2001 as cited by Ayodele,2006). There is no doubt that revenue due any

government will be reduced by the unpatriotic act of tax evaders thereby affecting

economic growth.

The main objective of the study is to find out why people evade and avoid taxes

and suggest ways of minimizing the practice in Nigeria. Other specific objectives

are as follows:

1. To determine the effect of tax evasion and avoidance on personal income tax

generation in Nigeria.

2. To examine the relationship between the tax rates, tax evasion and tax

avoidance. Hypotheses

3. There is no significant relationship between tax avoidance tax evasion and the

personal income tax administration in Nigeria. Ho: there is no significant

relationship between tax rates, tax avoidance and tax evasion. Empirical Review

There is a clear cut difference between tax avoidance and tax evasion. One is

legally accepted and the other is an offence (Skanda and Kumarasingam, 2002

as cited by James and Nobes, 2008). Tax avoidance is the legal utilization of the

tax regime to one’s own advantage, to reduce the amount of tax that is payable

by means that are within the law. By contrast, tax evasion is the general term for

efforts not to pay taxes by illegal means (Sharma and Dang 2011 as cited by

Mohammed and Mohammed, 2012). It is also perceived that both tax avoidance

and tax evasion are linked with shadow economy and Schneider and Enste
(2000) as cited by Faseun (2001) reported that shadow economy is that

economy in which people do not show their real income and taxable income

that they have earned through legal activities including batter and monitory

activities in order to avoid paying tax. According to Muhammed and

Muhammed (2012), government has protested against these two above

mentioned evils for number of times but corporations and all other persons

whose income is taxable, they make use of tax avoidance strategies to get away

or curtail the taxes or they willfully employ fake techniques with the support of

tax officials to evade the total tax. Lefebvre et aL (2011) conducted study in

Netherlands, France and Belgium (Flanders and Wallonia) while examining the

behavior of people. He compared the behavior of people regarding welfare

dodging and tax evasion. Results indicated that people adopt less evaded

behavior in tax treatment than in welfare treatment; and people evade more tax

in Netherlands and France but tax evasion is more in Flemish than Walloons.

Liadiale et al. (2010) conducted study in Nigeria while examining relationship

between personal income tax evasion and cultural factors like religiosity, trust

in government, and legal enforcement. Study found positive impact on personal

income tax of trust in government and legal enforcement. However, no

significant relationship found between religious variables and tax evasion in

Nigeria. Boylan and Sprinkle (2001) conducted study in which he tried to

explore the behavioral of the determinants of tax evasion. He used experiment

technique in order to acquire desired objectives such as to identify the factors

that motivate the tax compliance and characteristics of noncompliant taxpayers.

Pommerehne et al. (1994) conducted study in order to recognize the

determinants of tax evasion. They used the presence of grievance in absolute

terms in their study. Results indicated that as the sentiments of grievance

increased in absolute terms, the level of tax evasion also increased and the level

of tax moral

belief decreased. Fisher et at (1989) also examined the behavior of taxpayers in

order to explore the behavioral determinants of tax evasion. He used random

survey technique in order to acquire desired objectives like to identify the

factors that motivate the tax compliance and characteristics of noncompliant

taxpayers. Skinner and Slemrod (1985) conducted a study in order to investigate

the determinants of tax evasion. In this study, only strict economic determinants

proposed by seminal models were taken. Study found that considerable share of

effective tax compliance cannot be explained by using these solely variables.

Srinivasan (1973) also introduced seminal theoretical models and conducted

study while exploring the determinants of tax evasion. In this study, he

explained that the behavior of tax evasion was based on level of risk aversion,

amount of penalty imposed, and probability of being audited. Likewise, study

found an ambiguous relationship between marginal tax rate or income and tax

evasion. Orewa (1957) conducted study and investigated the characteristics of

tax evasion. Study found that high degree of inter-district mobility is the main

reason of tax evasion on the part of taxpayers and argued that mobility of wage

earners, salaried persons and self-employed persons with permanent and known

addresses is an important factor of tax evasion because they keep themselves in

movement from one place to another in order to earn legal money. He also

found the reasons of partial evasion such as: resentment toward illiterate

persons that present only their salaries arid wages as taxable income and traders

maintain inadequate records. The previous studies have done much in the area

of tax evasion and avoidance but failed to cover the relationship between tax

evasion and avoidance and personal income tax administration which this study

will cover the gap

Personal Income Tax

This is a tax levied on employment income and any other income received by

individuals. Individuals here being those in paid employment and those in self-

employment, i.e. those engaged in a trade, business, profession or vocation such

as lawyers, accountants, doctors, traders in shops etc. The assessment and

collection of this tax in Nigeria is regulated by the Personal Income Tax Act

No. 104 LFN, 1993. It is this law that gives the necessary procedures and

administrative powers to impose and collect taxes from persons, individuals,

partnerships, executors, trustees Family or Communities Corporation sole or

body of individuals. Personal Income Tax is collected by the various state

governments through the State Board of Internal Revenue (SBIR) from

individuals resident in the tax territory. Taxes from certain categories of

individual - members of the Armed Forces, the Nigeria Police, FCT residents,

External Affairs Officials and nonresident individuals- are collected by the

Federal Government via the Federal Board of Inland Revenue (FBIR). By the
provisions of the Approved list for Collection Decree (Decree No. 21 of 1998),

the following taxes/levies are collectible by State Governments in Nigeria: 1.

Personal Income Tax: (a) Pay-as-you-earn (PAYE), (b) Direct (Sell and

government) Assessment (c) Withholding Tax (individuals only). 2. Capital

Gains Tax (Individuals only) 3. Stamp Duties (instruments executed by

individuals); 4. Pools Betting and Lotteries, Gaming, and casino Taxes; 5. Road

Taxes; 6. Business premises registration and renewal levy: (i) Urban areas as

defined by each state: maximum of N10, 000.00 for registration and N5, 000.00

for renewal per annum, (ii). Rural areas: Registration: N2000.O0; - Renewal: N

l000.00 per annum. 7. Development Levy (individuals only) not more than

N100.00 per annum on each taxable individual; 8. Naming of street registration

fee in state capitals; 9. Right of occupancy fees on land owned by the state

government in urban areas of the state. 10. Market taxes where state finance is

involved. Conceptual issues Tax avoidance arises in a situation where the

taxpayer arranges his financial affairs in a way that would make him pay the

least possible amount of tax without infringing the legal rules. In short it is a

term used to denote those various devices which have been adopted with the

aim of saving tax and thus sheltering the taxpayers’ income from greater

liability which would have been otherwise incurred (Kiabel, 2001). Ani et al

(1978) had described tax avoidance as follows: the taxpayers knowing what the

law is decide not to be caught by it, arranges his business in such a mariner as to

escape tax liability partially or entirely. It is a lawful trick or manipulation to

evade the payment of tax. The meaning of tax avoidance is vividly captured in
the case involving Ayrshire Pullman Motor Services and David M. Ritchin Vs

Commissioner of Inland Revenue when the Lord President Lord Clyde held

that: No man in this country is under the smallest obligation moral or otherwise

so to arrange his legal relations to his business or to his property as to enable the

Inland Revenue to put the largest possible

shovel into his stores. The Inland Revenue is not slow and quite rightly to take

every advantage, which is open to it under the taxing statutes for the purpose of

depleting the taxpayer’s pocket And the taxpayer is in like manner entitled to be

astute to prevent so far as he honestly can the depletion of his means by the

Revenue. Thus, it is clear that tax avoidance is legal or at least not illegal since

one is mostly probably using the tax laws to limit his tax liability under the

same laws. Examples of tax avoidance include: (i) Seeking professional advice;

(ii)Reducing one’s income by submitting claims for expenses in earning the

income; (iii) Increasing the number of one’s children (in Nigeria the maximum

allowable is four); (iv) Taking additional life assurance policies. Tax avoidance

is thus considered to be a matter of being sensible. While the law regards tax

avoidance as a legitimate game tax evasion is seen as immoral and illegal. Tax

evasion is an outright dishonest action whereby the taxpayer endeavors to

reduce his tax liability through the use of illegal means. According to Farayola

(1987), tax evasion is the fraudulent, dishonest, intentional distortion or

concealment of facts and figures with the intention of avoiding the payment of

or reducing the amount of tax otherwise payable. Tax evasion is accomplished

by deliberate act of omission or commission which in them constitutes criminal

acts under the tax laws. These acts of omission or commission might include:

(a) failure to pay tax e.g. withholding tax; (b) failure to submit returns; (c)

omission or misstatement of items from returns; d) darning relief (in Personal

Income Tax), for example, of children that do not exist; (e) understating

income; (f) documenting fictitious transactions; (g) overstating expenses; (h)

failure to answer queries. The most common form of tax evasion in Nigeria is

through failure to render tax returns to the Relevant Tax Authority. A tax evader

may be charged to court for criminal offences with the consequent fines,

penalties and at times imprisonment being levied on him for evading tax

(Faseun 2001). And as observed by Sosanya (1981): Tax evading has become

the favorite crime of the Nigerian, so popular that it makes armed robbery seem

like minority interest. It has become so widespread that there now exists a cash

economy of vast proportions over which the taxman has no control and which is

growing at several times the rate of the national economy. No doubt, tax

evasion and avoidance had robbed the Nigerian government of substantial tax

revenue. According to the Nigerian Stock Exchange, 85 percent of corporate tax

revenue in the country accrues from the 196 companies listed on the exchange

compared to the 30,000 companies registered with the Corporate Affairs

Commission. This is a serious indictment of the administrative machinery and

capacity of the tax authorities in Nigeria

Causes of Tax Evasion and Tax Avoidance in Nigeria

The causes of tax evasion and avoidance are universal, as they are applicable in

any country that tax is imposed. Some are peculiar to different areas, however.
In Nigeria some of these causes as identified by Onuigbo (1986) include: The

Absence of a “Quid Pro Quo”

The average human being abhors the payment of tax. He sees taxation as a

discredited imposition and evidently obnoxious. This stems mainly from the

absence of a “quid pro quo” i.e. something of value given in return by the

Government) for the taxes paid. It is commonly argued, taxes should not be paid

as the authority does not provide amenities which are in any way commensurate

with the taxes paid. There is no guaranteed compensatory benefit.

Inequitable Distribution of Amenities

In many parts of Nigeria citizens are opposed to the payment of any form of

taxes and rates on the ground that government had been unfair in the

distribution of amenities and other good things of life. This thinking is often a

root cause of most civil disturbances in parts of the country.

Misuse or Mismanagement of Collections Made

More often than not there are reports in the news media of how government

functionaries misuse taxpayer’s money. Evidences of wastage of public funds

abound in the form of inflated contract prices, in unexecuted but paid contracts

or in the criminal acts of using diverse methods and loopholes to exhaust funds

voted for ministries and governmental departments before the financial year run

out. The cumulative effect thereby produced is the resolve of many honest

taxpayers never to pay theft due taxes again, or at most pay under compulsion.

Remoteness of Taxpayers from the Government

There is this common belief which most taxpayers have about the nature of

government. The average Nigerian has an inborn bias or hatred against most

government functionaries who in most cases live apart from the taxpayers. It

hurts, most taxpayers would reason, for one to part with his hard earned

resources for the upkeep of these (imagined) enemies. The creation of local

government councils, which is supposed to bring government closer to the

people, had not helped matters. As argues by Kiabel (2001), a solution to the

problem probably lies in the proper education and orientation of the taxpayers

towards government and its functionaries.

Absence of Spirit of Civic Responsibility

Most Nigerians probably due to illiteracy and ignorance fail to understand that

they owe certain responsibilities to government, one of which is the payment of

tax. Even when the government says it is poor they would rather argue that the

government should print more money to solve her problems. This lack of spirit

of civic responsibility amongst the majority of Nigerians is a major cause of tax

evasion in Nigeria. Some other authors have at one time or the other attributed

the causes(s) of tax evasion and avoidance to various reasons. For example

Orewa (1957) had earlier investigated the characteristics of evasion and found

that complete evasion results from high degree of inter-district mobility on the

part of the taxpayers. According to him, due to mobility, evasion is more

pronounced on the part of self- employed taxpayers who move from compound

to compound at frequent intervals than it is, with salary and wage earners with

known and permanent address. He contended also that partial evasion may be
due to inadequate accounting records maintained by traders, mistaken belief on

the part of some illiterate taxpayers that only wages and salaries represent

taxable income. Kiabel (2001) has argued that some businessmen do not see any

reason why they should pay tax irrespective of the fabulous profits made- This

is the direct display of the spirit of unpatriotic: Such people take the stand that

no matter the income or revenue that was acquired during the year nothing will

be paid as tax or they may prepare their accounts in such a way that a loss will

be reflected. Generally tax evasion which is illegal achieves the same goal as

tax avoidance.

Effects of Tax Evasion and Avoidance on Government Revenue

Tax evasion and avoidance have adverse effect on government revenue. Tax

avoidance generates investment distortion in the form of the purchase of assets

exempted from tax or under-valued for tax purposes. Avoidance takes the form

of investment in arts collection, emigration of persons and capital. And as

observed by Toby (1983) the taxpayer indulges in evasion by resorting to

various practices. These practices erode moral values and build up inflationary

pressures. This point can be buttressed with the fact that because of the evasion

of tax, individuals and companies have a lot of money at their disposal.

Companies declare higher dividends and individuals have a high take home

profit. This increase the quantity of money in circulation but without a

corresponding increase in the goods and services. This then build up what is

known as inflationary trends where large money chases few goods.

Theoretical Framework
Theory of taxation

According to Eftekhari, (2009) taxation has always been an issue for the

government and taxpayers alike from the early years of civilization. The issue

of taxation has generated a lot of controversy and severe political conflicts over

time. According to its importance, several economic theories have been

proposed to run an effective system. Taxes are generally classified under three

different theories as given: ability to pay principle, benefit approach and equal

distribution principle. However, in this paper is guided by the ‘‘ability to pay

principle’’. Ability-to-Pay Principle: As the name suggests, it says that the

taxation should be levied according to an individual’s ability to pay. It says that

public expenditure should come from “him that hath” instead of “him that hath

not”. The principle originated from the sixteenth century, the ability-topay

principle was scientifically extended by the Swiss philosopher Jean Jacques

Rousseau (1712- 1778), the French political economist Jean- Baptiste Say

(1767-1832) and the English economist John Stuart Mill (1806-1873). This is

indeed the basis of ‘progressive tax,’ as the tax rate increases by the increase of

the taxable amount. This principle is indeed the most equitable tax system, and

has been widely used in industrialized economics. The usual and most

supported justification of ability to pay is on grounds of sacrifice. The payment

of taxes is viewed as a deprivation to the taxpayer because he surrendered

money to the government which he would have used for his own personal use.

However, there is no solid approach for the measurement of the equity of

sacrifice in this theory, as it can be measured in absolute, proportional or

marginal terms. Thus, equal sacrifice can be measured as: (i) Each taxpayer

surrenders the sane absolute degree of utility that s/he obtains from her/his

income;

(ii) Each sacrifice the same proportion of utility she/he obtains from her/his

income;

(iii) Each gives up the same utility for the last unit of income; respectively.

Research Design

The researcher adopts survey research design while carrying out the study. Both

primary and secondary sources of data collection were used. Questionnaire was

used to obtained information for primary source while text books, journals and

internet were used for secondary source. The questionnaire was closedended

with strongly agreed, agreed, disagreed and strongly disagreed responses. The

questionnaire was administered on face to face to the employees of Federal

Inland Revenue Service (FIRS) Abuja, Federal Capital Territory, Nigeria. The

population for this study comprises of one thousand two hundred and ninety

eight (1298) employees of Federal Inland Revenue service

Sample Size and Sample Techniques

The research derived the sample size statistically by using Yaro

Yamane (Abdullahi, 2012 as cited by Mohammed and

Mohammed, 2012), as follows: n= N /1+n(e)2

Where n = Sample size

N = Population
 e = Level of significance (0.05)

n = 1298 1+1298(0.05)

n = 1298 1+1298(0.0025)

n = 1298 4.245 n= 305.17142 The sample size consists of three

hundred and five (305) employees of Federal Inland Revenue

Service..

Table 1. Enlightenment and adequate utilization of tax revenue on public goods

will discourage tax avoidance and tax evasion.

Options Frequency Percentage

(%)

Strongly agree 198 69%

Agree 56 20%
No Idea 9 3%
Disagree 13 5%
Strongly disagree 10 3%
Total 286 100%

Method of Data Analysis

Data collected were presented in table with simple percentage and the hypotheses

were tested using the analysis of variance (ANOVA). Model specification is the

analysis of variance (ANOVA). As thus: SSB = r∑ (xij – x)2

SSW = ∑∑ (xij – x)2

Where: SSB = btw treatment sum of square

SSW = within treat sum of the square

Xij = individual observation around their column

mean x = grand mean column

df = degree of freedom

(c-1) (n-1) c = number of column

N = number of observation

r = Number of row

∑ = Summation Level of significance (0.05)

Data Presentation, Analysis and Interpretation

Data presented here are those collected from the field survey on the study. This

would form the basis for the testing of the research hypotheses. Three hundred and

five copies of questionnaire were administered and two hundred and eighty six

were fully filled and returned. From the Table 1, 196 respondents represent

representing 69% of the total respondents strongly agree that enlightenment and

adequate utilization of tax revenue on public goods will discourage tax avoidance

and tax evasion, 56 respondents representation 20% of the total respondents agree

with the above statement. While 9 respondents representing 3% said no idea.

Apparently, 13 respondents representing 5% of the total respondents disagree with

the above statement and 10 respondents representing 3% of the total respondents

strongly disagree with the above statement.

From table 2, 158 respondents representing 55% of the total respondents strongly

agree that high tax rate encourages tax avoidance and tax evasions, 110
respondents representing 38% of the total respondents agree with the above

statement While 2 respondents representing 1% said no idea whether

Table 2: High tax rate encourages tax avoidance and tax evasion.

Options Frequency Percentage (%)

Strongly agree 158 55%

Agree 110 38%
No Idea 2 1%
Disagree 12 4%
Strongly disagree 4 1%
Total 286 100%
From table 2, 158 respondents representing 55% of the total respondents strongly

agree that high tax rate encourages tax avoidance and tax evasions, 110

respondents representing 38% of the total respondents agree with the above

statement While 2 respondents representing 1% said no idea whether high tax rate

encourages tax avoidance and tax evasion or not. 12 respondents representing 4%

of total respondents disagree that high tax rate encourages tax avoidance and

evasion and 4 respondents representing 1% strongly disagree to the above

statement.

Conclusion

The study finds out why people evade and avoid taxes and suggested ways of

minimizing the practice. The study established a relationship between tax

avoidance, tax evasion and the personal income tax generation in Nigeria. It also

emphasized on the relationship between tax rates, and tax avoidance and tax

evasion. The government should therefore embark upon public enlightenment

campaign and adequate utilization of tax revenues on public goods to discourage

tax avoidance and tax evasion and also the reduction in tax rate. This will certainly

enhance and boost revenue generation in the state as is being pursue with vigour so

as to survive in the present day economic meltdown, and inflationary setbacks. For

Nigeria Government to meet up with its revenue targets especially now that the

services of tax consultants have been discontinued it would be appropriate to take a

look at the factors responsible for the incidence of tax evasion and avoidance since

a check on these factors will go a long way in reducing if not eradicating the

problem

Research Hypotheses

There is no significant relationship between high tax rates and tax evasion in Nigeria

: There is no significant relationship between high tax rates and tax evasion in Nigeria

: There is no significant relationship between weak penalties and tax evasion in

Nigeria.: There is no significant relationship between weak penalties and tax evasion

in Nigeria.

Empirical evidence indicates that formal economic models of tax behavior lack

conclusive empirical evidence. The deterrent effects of economic determinants, such

as audit-frequency and sanction, were found not to be sufficient in order to fully

describe and explain individual tax behavior. Moreover, in addition to economic

determinants of tax decisions also psychological factors, such as perceived fairness,

cooperation or social norms, were found to be important in describing and

understanding tax behavior. Thus, despite the fact that from an economic viewpoint,

legal considerations apart, tax avoidance, tax evasion, and tax flight have similar
effects on the national budget and are based on the same desire to reduce the tax

burden, we hypothesize from a psychological viewpoint that taxpayers discriminate

between them, and evaluate tax avoidance, tax evasion, and tax flight differently.

According to the macro-perspective of the economic line of reasoning, social

representations are investigated in order to contrast predictions of economics and

psychology on the same data level. Hypothesis 1: An analysis of social representations

of tax avoidance, tax evasion, and tax flight allows for a clear distinction between the

concepts, indicating that tax avoidance, tax evasion, and tax flight are perceived

socially differently, despite their identical reductions of revenue yields. Moreover, we

do not only expect that tax avoidance, tax evasion, and tax flight are clearly

discriminated from one another, but that they are also perceived as unequally fair by

the taxpayers. Since tax avoidance is a legal means to reduce one’s tax burden,

whereas tax evasion involves a criminal and illegal offence, we hypothesize that the

former is perceived as fairer than the latter. Tax flight, however, defined as the

relocation of businesses, only in order to save taxes, is less unambiguous. While tax

flight is clearly no criminal offence, it still seems immoral, since individuals involved

in tax flight only intend to reduce their tax burden. Thus, we hypothesize that tax

flight is perceived as less fair than legal tax avoidance, but at the same time as fairer

than illegal tax evasion. Hypothesis 2: Tax avoidance is expected to be evaluated

fairer than tax flight which in turn is expected to be evaluated fairer than tax evasion.

Empirical evidence indicates that tax knowledge is correlated with tax compliance.

Groenland and van Veldhoven (1983) report that profound tax knowledge implies low

tax compliance, whereas the results of a study by Kirchler and Maciejovsky (2001)
imply the opposite to be true, little tax knowledge was associated with low tax

compliance. Eriksen and Fallan (1996) show that following an increase in tax

knowledge, respondents consider their own tax evasion -5- as more serious, the

perceived fairness in taxation increased, and attitudes towards other people’s tax

evasion became stricter. Since Kirchler and Maciejovsky (2001) report that little tax

knowledge is associated with low tax compliance, one plausible explanation could be

that tax knowledge is positively correlated with attitudes towards legal tax avoidance

and at the same time negatively correlated with attitudes towards illegal tax evasion.

Thus, profound tax knowledge is assumed to lead one to perceive tax avoidance more

positively than tax evasion, whereas little tax knowledge is assumed to imply the

opposite, namely to perceive tax evasion more positively than tax avoidance.

Hypothesis 3: Tax knowledge is positively correlated with attitudes towards legal tax

avoidance and negatively correlated with attitudes towards illegal tax evasion.

Empirical evidence also shows that the opportunity to evade taxes influences

individual tax compliance (e.g., Porcano, 1988; Wärneryd and Walerud, 1982;

Wallschutzky, 1984; Weigel, Hessing and Elffers, 1987). Since in most industrialized

countries, taxes for the employed are usually withheld from their salaries and wages,

whereas self-employed and entrepreneurs pay taxes out of their pocket, based on their

own information provided, we hypothesize that the latter show less compliance than

the former. Clotfelter (1983) analyzed a sample of 47,000 individual tax returns for

the year 1969 and found that underreporting varies with respect to employment group,

and Groenland and van Veldhoven (1983) report that experience with black money

varies between employed and unemployed. Thus, with respect to opportunity we

 hypothesize that individual tax compliance in our study is lower for the group of

business entrepreneurs than for the employed groups of business lawyers and fiscal

officers. Since business students do not have a regular income from work, they are not

considered in our analysis.

Method
Participants and design
Overall, 252 fiscal officers, students of economics and business administration
specializing in auditing and accounting, business lawyers, and entrepreneurs
participated in the study. A detailed description of the sub-samples is provided in
Table 1.
The study was conducted as a 3 x 4 factorial design. Independent variables were (i) a
fictive scenario of a person engaged in tax avoidance, tax evasion, or tax flight, and
(ii) respondents’ employment groups (tax officers, business students, business
lawyers, and entrepreneurs). It should be emphasized that the terms tax avoidance, tax
evasion, and tax flight were never used in the scenarios explicitly. Both experimental
factors were between-subjects factors, and participants were randomly presented one
of the three scenarios. The assignment of employment groups to scenario conditions is
shown in Table 2.

Material and procedure

Participants read one of the three scenarios (see Figure 1), produced spontaneous

associations to it, and evaluated them as positive, neutral or negative. Before starting

the associative task, participants were asked to answer a control question about the

scenario for a manipulation check. Overall, ten participants failed to respond correctly.

Their data were excluded from the analyses. In addition to the associations,

participants were asked to judge perceived fairness of tax avoidance, tax evasion, and

tax flight (scale ranging from 1 = unfair to 9 = fair), and to respond to a multiple-
choice test on tax knowledge (see Appendix B). Those participants confronted with

the scenario describing a person engaged in tax evasion were also asked to state how

much they think the person described in the scenario would honestly declare to the tax

authorities.

Socio-demographic characteristics of the sample

Characteristics Fiscal officers Business Business Entrepreneurs Total

students lawyers
N 75 82 56 39 252
Sex
Female
34 40 17 8 99
Male 32 40 39 29 140
Missing values 9 2 0 2 13
Age
M
28.84 26.13 33.43 45.74 31.62
SD 7.06 6.86 6.17 12.50 10.28
Missing values 19 2 0 4 25
Formal education
Compulsory school
0 0 0 16 16
Secondary school 45 74 0 12 131
College/university 23 6 56 8 93
Missing values 7 2 0 3 12
Net monthly income in
Austrian Shillings
< 10,000
0 55 0 4 59
10,001 – 20,000 51 9 4 9 73
20,001 – 30,000 11 5 13 6 35
30,001 – 40,000 1 2 11 15 29
> 40,000 0 0 26 0 26
Missing values 12 11 2 5 30
Note: 100 Austrianings equal 7.27 Euro or 6.92 US$ (June, 2000)
Shill

Table 2: Participants by experimental condition

Scenario

Employment groups Tax avoidance Tax

Tax Incorrectly answered Total
evasion flight control question
Fiscal officers 21 21 33 3 75
Business students 27 28 27 5 82
Business lawyers 19 16 21 0 56
Entrepreneurs 13 15 11 2 39
Total 80 80 92 10 252
 Fiscal officers were approached during a further education program; students at

lectures at the university; business lawyers were contacted through large law

agencies; and entrepreneurs were contacted in their firms and stores. Responding to

the questionnaire took approximately 25 minutes.

Results and Discussion

In the following, free associations of four employment groups on tax avoidance, tax
evasion, and tax flight were analyzed, (i) for detection of a possible central core and
the peripheral system of social representations, and (ii) for semantic contents.
Moreover, (iii) attitudes towards tax behavior and (iv) fairness judgments were
investigated, (v) tax knowledge, as well as (vi) individual tax compliance within the
context of employment group.

Central core of social representations towards tax behavior

Participants were asked to produce spontaneous associations to the scenario in the

questionnaire. Overall, 880 associations were produced, 507 of them were

different. In the condition with the scenario on tax avoidance, 261 associations

were counted

of which 156 were different. In the condition on tax evasion, 309 associations were

generated of which 182 were different, and in the condition on tax flight,

participants produced 310 different associations of which 169 were different.

Tax avoidance Tax evasion Tax flight

Associations f M Associations f M Associations f M

Legal 15 2.33 Illegal 12 2.08 Tax saving
Tax saving 108 1.401.63 Fraud 7 1.86 Lower taxes abroad 9 3.40
Clever 8 3.00 Income declaration 7 3.29 Double tax agreement 5 3.20
Good idea 5 1.60 Criminal prosecution 6 2.00
Costs 5 2.60 Risk 5 2.80
Tax-audit 5 3.60
 Black money 5 5.00

Most likely core elements of the associations on tax avoidance, tax evasion, and tax flight

displays the frequencies of associations and the mean rank in the series of production
(terms mentioned by less than five participants are not included). Only those
associations were analyzed which were not literal repetitions of what was written in
the scenarios. The most likely core elements of the associations on tax avoidance, tax
evasion, and tax flight are those mentioned frequently and at the beginning of the
associative task. Since no significant differences between the sub-samples were found,
the total sample was analyzed.
Tax avoidance was associated with legal, with an intention to save taxes, with
cleverness and a good idea as well as with costs. Tax evasion, on the other hand, was
associated with illegal, fraud, criminal prosecution, risk, tax-audit, punishable,
penalty, and the risk of getting caught. Also, rather neutral associations like income
declaration and tax saving as well as black money were produced. Tax flight was
associated with an intention to save taxes, with an impression that taxes are
substantially lower abroad as well as with double tax agreement and costs of
relocation.
Participants clearly distinguished between tax avoidance, tax evasion, and tax flight in
their spontaneously produced associations as expected under hypothesis 1. The most
likely core elements of tax avoidance refer to legality and cleverness, whereas tax
evasion was considered to be illegal, a criminal offence, and as being risky.
Eventually, tax flight was associated with the lower perceived tax burden abroad and
with an intention to save taxes, but also with associated costs of relocating and with
the restriction of double tax agreements. Interestingly, tax saving was considered to be
a motive for all three tax-reduction possibilities, namely for tax avoidance, tax
evasion, and for tax flight. However, they differ with respect to the perceived
importance of that motive. Tax saving was highly considered to be a central motive
for tax flight and tax avoidance, but was only mentioned relatively late in the
association process for tax evasion, indicating that the wish to save taxes is overlaid
by thoughts of illegality, risk, or by criminal prosecution.
Semantic content of social representations towards tax behavior
In a further step of analysis, the 507 different associations were regrouped in
categories of synonyms. First, four experts developed a category scheme according to
the associations. Overall, 35 semantic categories plus an additional category for those
associations that do not fit in the regular scheme were developed. Then, three further
experts were explained the categories and instructed to categorize independently all
different associations into the 36 categories. In case of disagreement the experts had to
further discuss until an agreement was reached. Table 4 (in the Appendix A) shows
the categories and the respective characteristic associations as well as frequencies of
associations by experimental conditions. The categories "literal repetition of the
scenario" as well as the "rest"-category were not included in the analysis.1

A correspondence analysis on frequencies displayed in Table 4 yielded two

dimensions which explained 31% and 23% of the variance. The two dimensions
divide the data according to (i) legality and (ii) to morality. Figure 2 (also in the
Appendix A) indicates that the produced associations on tax avoidance, tax evasion,
and tax flight are clearly differentiated from one another as indicated by the
corresponding clusters, irrespective of the employment group.
Tax avoidance was perceived as legal and as moral, tax evasion as illegal and
immoral, and finally tax flight as legal and as immoral. More precisely, tax avoidance
was associated with the acceptance of tax reduction, the make use of tax allowances,
legal tax reduction, horizontal justice, and with tax loophole. Tax evasion was
associated with risk tendency, peccadillo, intentional evasion, audit and sanction,
opportunity, black money, unacceptance, unintentional errors, and with vertical
justice. Hence, tax evasion again is basically associated with shadow economy and is
considered as a criminal offence.2 Tax flight was associated with tax havens, negative
consequences of tax flight, with flight abroad, bureaucracy, economic advantages of
tax flight, economic consequences, with unprofitable, with criticism on the tax system,
and with the wish to reduce the tax burden. It might be interesting to note that
sanctions and audits – determinants of evasion considered in economic models – were

1
An additional correspondence analysis was run with all 36 categories leading to similar results.
 associated with tax evasion. However, also vertical justice and opportunity to evade
were typical associations. Opportunity and justice considerations are frequently
studied variables in psychological investigations (e.g., Dornstein, 1987; Kirchler,
1997; Spicer and Becker, 1980; Spicer and Lundstedt, 1976). While vertical justice
proved to be relevant with tax evasion, horizontal justice was associated with tax
avoidance. Also reactance and injustice in general were related to tax avoidance. Tax
flight, on the other hand, seems to be considered if bureaucray is increasing.

Attitudes towards tax behavior

Participants were asked to evaluate their spontaneously produced associations.

According to these responses attitudinal indices were computed (de Rosa, 1996).

The polarity index results from the difference between the number of positive and

negative associations, related to the total number of associations produced by a

participant. It ranges from -1 (negative attitude) to +1 (positive attitude). The

neutrality index is calculated as the relative frequency of neutral associations

related to the total number of associations. It varies from 0 to 1.

Subjective fairness of tax behavior

Participants in all experimental conditions were asked to answer three items on
subjective fairness of tax avoidance, tax evasion, and tax flight on a nine-step scale,
ranging from 1 = unfair to 9 = fair. We hypothesized that despite the fact that tax
avoidance, tax evasion, and tax flight lead to identical economic consequences, they
are not perceived as equally fair by taxpayers.

It was expected that tax avoidance is evaluated fairer than tax flight which in turn is
evaluated fairer than tax evasion.

A repeated analysis of variance with tax avoidance, tax evasion, and tax flight as
repeated factor and employment group as independent factor indicates significant
differences between the sample (F(3; 243) = 9.18, p < .001). Fiscal officers found all
forms of tax reduction less fair than business students, business lawyers, and
entrepreneurs. These results may reflect the high moral standards of fiscal officers,
leading them to generally evaluate all forms of tax reduction more negatively than
others.

In all employment groups tax avoidance was considered to be fairest (M = 8.17; SD

= 1.84), whereas tax evasion was considered to be least fair (M = 2.92; SD = 2.27).

Subjective fairness of tax flight was rated in between tax avoidance and tax evasion

(M = 6.34; SD = 2.79),

as expected under hypothesis 2. Figure 3 indicates that fiscal officers generally

perceived all three tax-reduction possibilities to be less fair, whereas entrepreneurs

considered tax flight to be fairer in comparison to others, outlining that

entrepreneurs are the only employment group in our analysis that can consider tax

flight as a way to reduce their tax burden

Perceived fairness of tax avoidance, tax evasion, and tax flight with respect to employment group
fairness
9

1
Tax avo1idance Tax ev2asion Tax f3light

Fiscal officers

Business students Business

lawyers Entrepreneurs

Attitudes and perceived fairness within the context of tax knowledge

Overall, participants were asked to answer 10 multiple-choice questions on tax

knowledge (see Appendix B; Cronbach α = .62). In each question they had to choose

the correct answer out of four possible ones. An index was computed out of the ten

questions, ranging from 0 = no correct answers to 1 = all questions correctly

answered.

An analysis of variance with tax knowledge as dependent factor and employment

group as independent factor yields significant differences between the sample with

respect to knowledge (F(3; 238) = 74.88, p < .001). Fiscal officers scored highest (MF

= .94, SDF = .08), followed by business students (M S = .88, SDS = .12), and business

lawyers (ML = .80, SDL = .20). Entrepreneurs, on the contrary, achieved the poorest
results (ME = .51, SDE = .18), may be because they rely on professional advice when

tax issues are concerned.

With respect to hypothesis 3, it was investigated whether tax knowledge is positively

correlated with attitudes towards tax avoidance and negatively correlated with

attitudes towards tax evasion. Our results, however, do not confirm this conjecture.

Considering the whole sample, tax knowledge is neither correlated with the perceived

fairness of tax evasion (r(238) = -.06, p = .33), nor with the perceived fairness of tax

avoidance (r(242) = -.02, p = .80). However, for the sub-sample of business lawyers

and entrepreneurs it was shown that profound tax knowledge is positively correlated

with perceived fairness of tax avoidance

(r(56) = .56, p < .001; r(37) = .33, p < .05), indicating that the better the knowledge the

fairer was tax avoidance perceived. For the sub-sample of fiscal officers, on the other

hand, it could be shown that tax knowledge is negatively correlated with perceived

fairness of tax evasion (r(70) = -.24, p < .05), indicating that the lower the knowledge

about taxes the fairer illegal evasion was judged.

3.6 Individual tax compliance within the context of employment group

Participants assigned to the experimental condition "tax evasion" were asked to state

how much they think the person described in the scenario would honestly declare to

the tax authorities. In line with previous empirical evidence, we hypothesized that

opportunity influences individual tax compliance. More precisely, it was expected that

individual tax compliance would be lower for the group of business entrepreneurs than

for the employed groups of business lawyers and fiscal officers. Since business
students do not have a regular income from work, they are not considered in the

subsequent analysis.

An analysis of variance with individual tax compliance as dependent factor and

employment group as independent factor yields no significant differences between the

sample (F(1; 42) = 0.02, p = .96). The relative frequency of declared income was not

statistically significantly lower for the group of business entrepreneurs (M = .24, SD =

.27) compared to the group of business lawyers and fiscal officers (M = .24, SD =

.39). Thus, our results do not confirm the role of opportunity with respect to individual

tax compliance, we therefore cannot reject the null-hypothesis, indicating that

individual tax compliance is the same for business entrepreneurs as well as for

business lawyers and fiscal officers. However, in line with previous empirical studies

showing that income is negatively correlated with individual tax compliance (e.g.,

Anderhub, Giese, Güth, Hoffmann and Otto, 1999; Maciejovsky, Kirchler and

Schwarzenberger, 2001), we found – at least for the group of business entrepreneurs –

that a higher income is connected to a low tax compliance (r(31) = - .39, p < .05).

Conclusion

The results show that despite the similar effects of tax avoidance, tax evasion, and tax

flight on revenue yields, 252 fiscal officers, business students, business lawyers, and

entrepreneurs clearly discriminated in their spontaneously produced associations

between them. Tax avoidance was perceived as legal and as moral, and was amongst

others associated with intention to save taxes, with cleverness and with a good idea.

Tax evasion, on the other hand, was perceived as illegal and immoral, and was, for
 instance, associated with fraud, criminal prosecution, risk, tax-audit, and with penalty.

Finally, tax flight was perceived as legal and as immoral, and was amongst others

associated

with intention to save taxes, with an impression that taxes are lower abroad and with

costs of relocating.

The results also indicate that taxpayers not only discriminate between tax avoidance,

tax evasion, and tax flight, but also perceive them as unequally fair. Tax avoidance

was more positively evaluated than tax flight and than tax evasion, which was least

positively evaluated. These results were found to hold irrespective of employment

group. However, fiscal officers perceived all three forms of tax reduction to be less

fair, whereas entrepreneurs considered tax flight to be fairer in comparison to others.

In addition, the results indicate that for business lawyers and for entrepreneurs

profound tax knowledge is positively correlated with perceived fairness of tax

avoidance, indicating that the better one’s knowledge about tax law the fairer one

perceives legal tax avoidance. To the contrary, the results show that for fiscal officers

tax knowledge was found to be negatively correlated with perceived fairness of tax

evasion, indicating that the lower the knowledge about taxes the fairer illegal evasion

was perceived. Furthermore, our results could not confirm the role of opportunity in

individual tax compliance, indicating that business entrepreneurs were not less

compliant than business lawyers and fiscal officers. However, in line with previous

empirical studies it was found that income is negatively correlated with tax

compliance.

Significance of the study

As a matter of fact and obligation, every individual, whether resident or non-resident

in Nigeria, persons in paid employment or businesses, or persons who derive their

income from Nigeria, as well as companies that operate in Nigeria, are all liable to pay

tax. Failure to deduct and remit tax or failure to pay taxes of any kind as the case may

be attracts punitive fines and penalties.

Like other countries, the main function of the Nigerian tax system is to generate

revenue for the running of the government at all levels and provide infrastructure to

the public. Effective tax drive is achieved through an efficient tax administration and

tax system reforms. These elements also create a tax culture, reduced incidences of

corruption and tax evasion.

Taxes and Tax Laws in Nigeria

Over the years, various tax laws in Nigeria have made provision for different taxes. A

review of the various tax laws presents an insight into the different taxes in Nigeria;

1. Companies Income Tax (CIT):

This is a tax imposed on profit of a company from all sources. It is one of the main

taxes administered and collected by the Federal Inland Revenue Service (FIRS). It is a

tax paid on the income of incorporated companies. Company's Income taxes are

regulated by the Companies Income Tax Act (CITA), Cap. C21, LFN 2004 (as

amended). The rate on this tax is 30% of a company of total profit less all expenses for

the period which a company reasonably incurred in generating the taxable profit.
 2. Personal Income Tax (PIT):

This tax is imposed on income of individuals (employees), corporate sole or body of

individuals, communities, families or trustees or executors of any settlement as the

case may be. It also covers taxation of sole traders, partnership assessment, and

taxation of estates. PIT is regulated by the Personal Income Tax Act Cap P8 LFN

2004 (as amended). The relevant tax authority responsible under the law to administer

this type of tax may vary from the FIRS to the various State Boards of Internal

Revenue.

3. Value Added Tax (VAT): This is a tax charged on the sale of specified goods

and services at the rate of 5%. It is also referred to as a consumption tax and it

is mostly borne by the final consumer. The FIRS is vested with the power of

administration and management of VAT in Nigeria. It is regulated by the VAT

Act and the VAT (Amended) Act 2007. Recently, the Federal Government of

Nigeria has approved a 50% increase in VAT for supply of goods and services,

from 5% to 7.5%. The new rate is schedule to take effect from 2020.

4. Capital Gains Tax (CGT): This is a tax charged where there is a disposal of

assets. Where any capital sum is derived from a sale, lease, transfer,

assignment, compulsory acquisition or any disposition of properties classified

as chargeable assets. It is regulated by the Capital Gains Tax Act, Laws of the

Federation CAP C1 LFN, 2004 (as amended). CGT is usually charged at a flat

rate of 10% on chargeable assets. CGT may not be charged from assets which
 are not in connection with any trade carried on by the organisation. CGT is also

not be applicable to charitable or educational institution of public character.

5. Withholding Tax (WHT):

This is an advance tax payment deduction made on any income or disbursement due to

a taxable person or a taxable corporation, for onward remittance to the relevant

government authority. This tax when deducted from source is subsequently remitted to

the relevant tax authorities. WHT in Nigeria varies and ranges from 2.5 to 10% for

companies and 5 to 10% for individuals depending on the nature of the transaction.

Section 78 of the Companies' Income Tax Act (as amended) provides that where a

company makes a payment to another company or to another individual, either as

interest (with interbank deposit and royalty included), rent, dividend, etc. such a

company shall at the time of making the time of making the payment deduct an

advance tax of 10% of the gross amount that is paid and remit such deducted and

withheld tax to the FIRS forthwith.

6. Stamp Duties:

The Stamp Duties Act, CAP S8 LFN 2004 (as amended) regulates stamp duties in

Nigeria. Stamp duties due from individuals are paid to the respective State

Government, while corporate bodies pay theirs to the Federal Government. The stamp

duties rates applied by FIRS are in two forms, namely; flat rate charges and ad

valorem charges. In line with the Federal Inland Revenue Service (Establishment)

Act, FIRS is empowered to administer taxes for stamp duties listed in the first

schedule to
the Act. It is also administered by the respective States Internal Revenue Services

(IRS)

7. Custom and Excise Duties:

These are taxes charged at the Nigeria's Port of Entry on certain imported goods. It is

usually administered and collected by the Nigerian Customs Service by virtue of the

Customs and Excise Management Act. There are two types of taxes charged at the

Nigeria Port of Entry; one is in certain imported goods and the other is on some

exported good. Thus, custom and excise taxes are imposed on goods either for

revenue purposes or to discourage consumption of such products. This is why it is a

times referred to as consumption tax.

8. Education Tax (EDT):

This tax is regulated by the Education Tax Act, CAP E4, Laws of the Federation of

Nigeria, 2004 and administered by the FIRS. It is also governed by Tertiary Education

Trust Fund (Establishment, Etc.) Act 2011. EDT is imposed on all companies

registered in Nigeria. The rate of the tax is 2% of assessable profit. The amount in the

Fund is distributed between Universities, Polytechnics and Colleges of Education in

the ratio 2:1:1 respectively.

9. Petroleum Profit Tax (PPT):

This tax is imposed on income of companies in petroleum operations (Upstream). The

tax is governed by the Petroleum Profits Tax Act, Cap P13 LFN 2004 (as amended).

Companies liable to PPT are not liable to Companies Income Tax (CIT) on the same

income.

The administration of these laws involves assessment, collection and accounting for

revenues accruing to the Government of the Federation.

Then in 1970s-1990s, some economists such as Amartya Sen came to re-define

development as that which must be conceived as a “multidimensional process

involving major changes in social structures, popular attitudes, acceleration of

economic growth, the reduction of inequality, and the eradication of poverty.” It must

represent a whole gamut of change by which an entire social system turns to the

diverse basic needs and desires of individuals and social groups within that system,

moves away from a condition of life widely perceived as unsatisfactory towards a

situation or condition of life regarded as materially and spiritually better (Todaro &

Smith, 2006). It has also come to mean the progress of the economy which constitutes

the road for development of a nation. It was from this perspective that Pope Paul VI in

his encyclical letter Populorum Progresso noted that, “economic development has to

be integral and promoting to all men.” For Pope Paul VI (1967) therefore, “every

development is a passage, for everyone and for all, from the condition of life more or

less human.” From this perspective, economic development should be seen as the

process of social transformation of the conditions of the life of people within a given

population. Karl Marx on his own part focused his critique of development on the
capitalist system. According to him, the social, political and spiritual life of a given

society is determined by the mode of production. Neo-classical economists, on the

other hand, advocated that competitive market conditions, which ensure more efficient

allocation of resources, result in greater national income. From the above analysis, it

follows that all development theories must take into account, capital stock, the stock

of human agents, land and natural resources, and technology (Uzonwanne, 2008).

Economic development, among other things, means the attainment of a number of

ideas of modernization such as a rise in productivity, social and economic

equalization, improved institutions and values. It involves something more than

economic growth. In short, development means growth plus change (Aderinto &

Abdullahi, 2007). Such qualitative changes include improved performance of factors

of production. It also includes increasing man’s control over nature. It may also reflect

in the development of institutions and a change in the attitudes and values. Although

the increase in the real income per head is one of the primary objectives or goals of

economic development, it has also become common to interpret economic

development in terms of a number of other sub goals such as a certain distribution of

income policy objective, a diminution in economic inequality among the citizens,

avoidance of marked disparities in the prosperity and growth of different regions

within a country. Narrowing it down to the state, we will then define state

development, as the capacity of a state economy, whose initial economic condition has

been more or less static for a long time to generate and sustain an annual increase in

its gross domestic product (GDP) at 5% to 7% or more. It is the capacity of increasing

the standard of living of the citizens, applying structural and infrastructural change in
 the state or nation. It is the freedom for operation as well as greater choice for the

general well-being of the people in the economy.

Scope/Limitations of the study

This study on causes of tax evasion in Nigeria with Ikeja LGA in Lagos state serving
as the case study
Limitations of study

1. 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).

2. 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.

-The goal of this study is to assess several factors that influence tax avoidance and

evasion in Nigeria, with a focus on Wukari, Taraba State. Particularly this study is

aimed to ascertain the influence of corruption on individual tax avoidance and

evasion in Nigeria, whether lack of transparency and accountability in public

institutions influences individual tax avoidance and evasion in Nigeria, to examine

the influence of tax system injustice on individual tax avoidance and evasion in

Nigeria, and to evaluate the impact of tax system complexity on individual tax

avoidance and evasion in Nigeria. Design/methodology-This study adopts a survey

research design with a sample size of 308 questionnaires administered and 230

questionnaires were collected which represents 75% response rate. Descriptive

 statistics like mean, standard deviation and percentages, in-ferential statistics like

multiple regressions were used. Results-It was found that corruption, lack of

transparency and accountability, tax system injustice and tax system complexity all

have a substantial impact on tax avoidance and evasion in Nigeria. Urgent step

should be taken by public office holders in particular and government

representatives in general to live above board when it comes to transparency and

accountability. In addition, there should be zero tolerance for corruption within and

outside the tax system; anyone found guilty of corruption should be made to face

the wrath of the law. Conclusively, Nigeria government should make deliberate

efforts to ensure the nation's financial statement is published depicting our revenue

as well as expenditure incurred regularly (monthly basis, quarterly or annually).

Limitation/Suggestion-This study concentrated on only four factors identified to

have an influence on tax avoidance and evasion in Nigeria. It is also constrained to

Wukari, Taraba State which is just one amongst the sixteen local governments in

the State and as such may not be applicable to other local governments within and

outside the State.

Definition of terms

Tax: A compulsory contribution to state revenue, levied by the government on

workers’ income and business profits, or added to the cost of some goods, services,

and transactions.

Evasion: To escape or avoid (someone or something), especially by guile or trickery.

Revenue: The income generated from sale of goods or services, or any other use

of capital or assets, associated with the main operations of an organization

before any costs or expenses are deducted

Tax evasion is an illegal activity in which a person or entity deliberately avoids

paying a true tax liability. Those caught evading taxes are generally subject to

criminal charges and substantial penalties. To will fully fail to pay taxes is a

federal offense under the Internal Revenue Service (IRS) tax code.

KEY TAKEAWAYS

 Tax evasion can be either the illegal non-payment or underpayment of actual

tax liabilities due.

 Tax evasion can be determined by the IRS regardless of whether or not tax

forms were filed with the agency.

 To determine tax evasion, the agency must be able to show that the avoidance

of taxes was willful on the part of the taxpayer.

 While tax evasion is illegal, tax avoidance includes finding legal ways (within

the law) to reduce taxpayer obligations.

Understanding Tax Evasion

Tax evasion applies to both the illegal non-payment as well as the illegal

underpayment of taxes. Even if a taxpayer fails to submit appropriate tax forms, the

IRS can still determine if taxes were owed based on the information required to be

sent in by third parties, such as W-2 information from a person’s employer or 1099s.
Generally, a person is not considered to be guilty of tax evasion unless the failure to

pay is deemed intentional.

Requirements for Tax Evasion

When determining if the act of failure to pay was intentional, a variety of factors are

considered. Most commonly, a taxpayer’s financial situation will be examined in an

effort to confirm if the nonpayment was the result of committing fraud or of

the concealment of reportable income.

A failure to pay may be judged fraudulent in cases where a taxpayer made efforts to

conceal assets by associating them with a person other than themselves. This can

include reporting income under a false name and Social Security number (SSN),

which can also constitute identity theft. A person may be judged as concealing

income for failure to report work that did not follow traditional payment recording

methods. This can include acceptance of a cash payment for goods or services

rendered without reporting them properly to the IRS during a tax filing.

In most cases of corporate tax evasion listed on the IRS website, the tax liability was

underrepresented. Many business owners undervalued the sums of their receipts to

the agency, an act which was deemed to be the purposeful evasion of tax. These were

documented to be sources of income, revenue, and profits that were not accurately

reported.
Tax Evasion vs. Tax Avoidance

While tax evasion requires the use of illegal methods to avoid paying proper taxes,

tax avoidance uses legal means to lower the obligations of a taxpayer. This can

include efforts such as charitable giving to an approved entity or the investment of

income a tax deferred mechanism, such as an individual retirement account (IRA).

CHAPETR-2
 LITERA-
TURE
REVIEW Literature Review

The first step in this research is review the existing literature. The goal of the

literature search is to update a topic with the most recent information

acknowledged by different authors. It provides an overall view of subject area

and gives significant information to start a research. Pirttila (1999) studied tax

evasion in transition economies and particularly Russian economy. He

suggested the imposition of heavy penalty or implementation of a strict

auditing policy to deter tax evasion. He also suggested for tax policy to be

considered in conjunction with public expenditure policy. According to him, to

deter tax evasion, one necessity is to reduce corruption which is linked to tax

evasion directly or indirectly. Nielson et al. (2002) state that

internationalisation may pose a challenge to national tax systems. They studied

the patterns of migration from Denmark for the years 1993-1999. They viewed
migration as a tool of income tax avoidance. They found an indirect tool to

measure the extent of tax evasion by comparing the size of income tax base of

an economy with corresponding consumption base. Christensen et al. (2004)

advocated that economic liberalization and cross border movement of capital

has left the nationally based tax systems struggling, so as to protect themselves

from tax avoidance by high net worth individuals. They also state the tax

competition by many governments as leading to tax avoidance. They suggest

widening the corporate governance standards so as to include taxation so that

while publishing their accounting information, businesses should list the

countries in which they and their subsidiaries trade, the profits derived from

activities in different countries, so as to accurately measure the extent of tax

avoidance, evasion and control it. Cobham (2005) provides the effects of tax

avoidance and evasion on the financing of development. He studied tax

structures of different regions of the world and identified three kinds of

leakages from tax revenue and suggested to address all the leakages

simultaneously. He also suggested the reconsideration of direct taxation. He

recommended the requirement of sufficient political commitment and

international support to fight leakages. He suggested the use of progressive

taxation system or cash transfer for redistribution of income. Uslaner (2007)

has explained the problem of tax evasion in context of transition economies.

Explaining the psychology of people, he states that people believe that the

money they pay goes to pockets of officials because of widespread corruption.

He states tax evasion to be a result of corruption, impotent legal system, shaky

economies and inefficient governments, because of their inability of providing

essential services, i.e. spending of public expenditure. He gave a lesson

“People pay taxes when they are getting something for their money.” He gives

more importance to a fair judicial system than an efficient one. Alm (2007)

tried to analyse taxation compliance in Latin American and Caribbean

countries, where a large part of workforce is found in informal sector. They

studied the size and effects of informal sector. They suggest that societal

institutions are critical in having a thorough knowledge of tax compliance

issues in LAC countries. They suggest strengthening the social norms to

ensure compliance. Murphy (2008) studied two approaches of taxation

enforcement namely deterrence based and accommodative. He advocated that

deterrence based enforcement strategies could generate feeling of resistance

and in long run, it could be ineffective. In contrast to this, strategies based on

persuasion and cooperation could fetch the faith of assessees and nurture

future compliance among tax evaders. He gave implications for regulators and

authority figures to more effectively nurture compliance. Simser (2008)

studied the cases of tax evasion and tax avoidance to give implications for tax

advisors. Tax advisors consider tax evasion as unacceptable and tax avoidance

as perfectly acceptable. He states the complexity of commercial transactions

and taxation system one of the reasons of tax avoidance. Mughal & Akram

(2012) studied the reasons of tax avoidance and evasion in Pakistan. They state

absence of public enlightenment campaign, lack of adequate tax incentives,

poor relationship of tax payers and authority, proliferation of taxes and

illiteracy of tax calculation to be the top 5 reasons of tax evasion and tax

avoidance. Their study also revealed the presence of correlation between

various reasons of tax evasion (in most of cases except between non-existence

of an equitable and efficient tax system and high tax rates, and no relation

between poverty and non existence of an equitable and efficient tax system).

Wadhwa & Pal (2012) studied sample of 150 respondents NCR (Faridabad,

Gurgaon, Panipat, Murthal, Sonipat) to analyse the causes of tax evasion in

India. This study states high tax rates, corruption in public sector unit, multiple

taxes and inefficient tax authorities to be the main reasons of tax evasion in

India. He states the reduction in economic growth, creation and continuation of

parallel economy and decreased country reputation globally as the offspring of

tax evasion. They suggest the creation of a transparent, friendlier and less

discriminatory administrative system. Adebisi & Gbegi (2013) studied the

effect of tax avoidance and tax evasion on personal income tax administration

in Nigeria. They suggested Nigerian government to use more means of

publicity to inform tax payers about change in tax legislation and need for

compliance. They recommend the simplicity in tax forms. They advocated the

decentralization of handling of tax clearance certificates. To encourage

voluntary compliance, they suggested that government should provide social

amenities to every place in nation, not in the capital only and use of taxation

proceeds for social purposes transparently. Khan & Ahmad (2014) studied

causes of tax evasion in Pakistan (in southern Punjab). They state the absence

of progressive taxation system, high tax rates, absence of incentives to tax

payers, corrupt government officials, complication of tax structure, ignorance

about taxation system among people, absence of punishment in case of non

payment of tax and irresponsible behaviour of tax payers and officials to be the

reasons of tax evasion. Batra (2014) has explained the opinion of income tax

professionals regarding tax evasion in India. In his opinion income tax evasion

is prevalent in India. He opined that high tax rates, corruption in public sector

units, multiple tax rates and inefficient tax authorities are the main causes of

tax evasion. He suggested that reduction in tax rates, simplifications of tax

laws, removal of loopholes in the tax system can be best tools for improving

Indian tax compliance. Therefore, there is a need for creating transparent,

friendlier and less discriminatory administrative system. Moreover, there is

also a need to educate the people about Indian tax law and create such an

environment in which they pay their payable taxes, do not evade the tax and

feel delighted in satisfying their duty to pay the taxes. Gravelle (2015) studied

about techniques through which assessees transfer their incomes to tax haven

i.e. to low tax jurisdiction and evade tax on passive income (interest, dividend

and capital gain). Casaburi & Troiano (2015) studied the electoral response to

the ghost buildings program, a nationwide anti-tax evasion policy in Italy

designed to target buildings hidden from tax authorities by using innovative

monitoring technologies. This program gave monetary and non-monetary

incentive to non-evaders. This program actually resulted in increased

compliance.
In theory, the maximization of fi scal revenue is the main administrative goal

of any government of any country in any period. It is no doubt that tax evasion

has weakened the government’s tax and lowered the ability of government to

provide public goods. Additionally, the tax evasion also causes some other

problems being adverse to the economic development. For example, the tax

evasion distorts the tax system, increasing the deadweight loss. While

increasing the government’s law enforcement costs, it also reduces the

government tax revenue and the ability to repay. Therefore, to study the

determinants of tax evasion is very important for us.

CHAPETR- 3
Research
methodology
Sources of Data Collection

Recently a standing committee of Parliament tabled a report on the status of

unaccounted income and wealth, both inside and outside India. Three national

bodies allocated the task of arriving at estimates, had come up with varying

answers ranging from 7 to 12 percent of GDP, which were impossible to reconcile.

While deposing before the committee, the Chairman of CBDT (the Central Board

of Direct Taxes) provided a window into the various Big Data Analytics efforts

used by the tax department. These are complex systems that collect data from
multiple sources, including social media, to assemble a profile of the taxpayer. A

non-filers monitoring system or NMS focuses attention on non-filers with potential

tax liabilities. The system assimilates and analyses in-house information as well as

transactional data received from “third parties", to identify persons who had

undertaken high value financial transactions but did not file their returns.

With the usage of Big Data Analytics, India is set to join a group of developed

countries such as Belgium, Canada, USA, UK and Australia which already use Big

Data to keep a check on tax evasion.

Another project called Project Insight has been initiated to strengthen the non-

intrusive information driven approach for improving compliance and effective

utilisation of information in all areas of tax administration. Under Project Insight,

an integrated data warehousing and business intelligence platform is being rolled

out in a phased manner.

Under this project, the Income Tax Transaction Analysis Centre (INTRAC) has

been operationalised for handling data integration, data warehousing, data quality

management and data enrichment including data analytics. A dedicated reporting

portal has also been launched to provide a comprehensive interface between

reporting entities and the Income Tax Department. The ‘Insight Platform’ is being

used for identification of high-risk non-filers under NMS, selection of cases under
Computer Aided Scrutiny Selection and for a centralised processing of information

received under automatic exchange of information.

While questions of privacy and the overall security of personal information

continue to remain, the availability of Big Data seems to have created a fertile pool

for hunting for filers. Questions still remain on whether the data is being

effectively trawled to reveal insights to bring non-filers to book.

Another example of the terra-bytes of data available is the linkage of the GSTN

with the income tax information that further richens the data pool. GSTN has

individual transaction-by-transaction data and in a single stroke, a data scientist

can theoretically assemble a full profit and loss of a business which could be

compared with the income tax paid by the business.

Already there are reports of several municipalities and states in India using drones

to validate land and building records. Spatial surveys are used to generate 3D

images of buildings, digitise land records and link assets on ground to transfer

deeds and property tax assessments. It has been reported that the Lucknow

Municipal Corporation will now use drone cameras to improve efficiency of its

property tax assessment and collection process. The drones will be able to detect

new properties which were otherwise hidden in normal surveys. This will increase

the municipal revenue and enable the LMC to manage city infrastructure

efficiently
Population of the study

Despite considerable efforts for widening the tax base, still the number of taxpayers in

our country, is about 82.7 million people which is 6.25 per cent of the over 132 crore

population, which is too small for our country.

Only 1 per cent of the Indian population pays income tax and declares earnings above

the non-taxable income. Only 5.78 crore income tax returns were filed by individual

taxpayers for the financial year 2018-19 till February 2020. Out of this, only 1.46

crore individual taxpayers filed returns declaring income above Rs 5 lakh, Anurag

Singh Thakur, MoS, Ministry of Finance, said in a reply to a question in Lok Sabha.

Individual taxpayers with income up to Rs 5 lakh are not required to pay any income

tax from Assessment Year 2020-21 onwards. Tax evasion is at the core of the low tax

base in the country.

 Just one percent of population paid income tax

The government said that it has taken several steps such as searches and seizures,

surveys, inquiries, assessment of income, levy of taxes, penalties, and filing of

prosecution complaints in criminal courts, for the timely detection of tax evasion. It

added with the increase in electronic form of information being available, such as

Computer Assisted Scrutiny Selection (CASS); Non-filers Monitoring System (NMS);

and Income Tax Business Application (ITBA), the I-T Department has developed a

wide range of non–intrusive methods for detecting tax evasion.

Mandatory quoting of PAN for various cash transactions, restrictions on cash

transaction of Rs 2 lakh or more; levy of TDS at 2 per cent on the amount of cash

withdrawal by a person exceeding Rs 1 crore from one or more accounts; and

prohibiting taxpayers from accepting loans or deposits of more than Rs 20,000 in cash

are the other steps that the government has placed to curb tax evasion. However,

despite the efforts, the number of cases of tax evasion is at elevated levels.
Meanwhile, not only the direct tax but indirect tax is also struggling with the incidents

of tax evasion. During the period of July 2017 to August 2020, there were 906 cases

booked against exporters for fraudulent claims of GST refund, according to the

parliament papers. In these cases, the quantum of tax evasion was Rs 2,551.15 crore,

out of which, only Rs 293 crore could be recovered

Sampling and sampling

The study employed purposive and stratified random sampling. The purposive

sampling was applied to head of departments and top officials, these participants are

actively participates in daily management in the organization. Stratified was used to

select equal number among taxpayers in Arusha, for the sake of observing ways of tax

evasion. Taxpayers were stratified according to their income and business they run.

The research results help to identify and clarify driving factors that influence Tax

Payers to evade Tax where the following are expected to be causes for Tax evasion in

Tanzania

a) Difficult to comply with correctly due to lack of knowledge of the detailed

provisions of all the tax laws which consist with main laws, regulations and finance

acts.

b) Wasteful Government revenues spending and lack of clear benefits to

taxpayers through improved social services.

c) Low prospect of detection and serious punishment to tax evaders and

deficiencies in the legal structure of the tax laws.

d) High marginal tax rates and frequent changes in tax rates such as sales tax and

import duty, withholding tax etc.

e) Administrative inefficiency, collusion with taxpayers and corruption of tax

official

Validation of research instrument

Documentary review, observation and interview are proposed for the exercise.

However the researcher is expected to be flexible to employ any data collection

method depending on the response of the respondent and prevailing circumstances.

Gathering large-scale data on tax evasion is an undisputable challenge in and of itself.

Doing so in a country in transition from a communist to a democratic system is even

more difficult. This paper discusses the challenges and presents a case study to show

how they can be dealt with effectively. One important implication of the paper is that

such a sample survey can be successful if it combines a careful sample design,

research method and questionnaire design, and explicitly takes country-specific

institutional and cultural features into account.

Method of data analysis

There are three important types of tax collection methods: cadastral, at the source

(before the receipt of the income) and through self-assessment (at the declaration of

the income).

The cadastre method implies the use of the cadastre. The cadastre is a register of

all the typical objects (land, real estate) classified according to physical features and
where the average profitability of the object is determined. Physical features include:

for the land tax–the size of the land area, the distance from transportation ways and

markets; for the house tax–the number of windows, pipes, doors, the type of the

building; for industry tax–the number of employees and machines. The average

profitability of the object, which is based on physical features, may differ significantly

from actual profitability; this constitutes the main disadvantage of this method.

Taxation at the source is calculated and deducted at the accounting unit of the

company, which pays the income of the taxation subject. In this way is deducted the

tax from wages and salaries. The tax is subtracted by an intermediary–the collector

(tax agent) before the receipt of the tax by the subject, which excludes the possibility

of tax evasion. Collection at the source is done for taxing income of employed

personnel and for other relatively fixed incomes. The same method is used in other

countries for the income of joint ventures. Tax collection at the source implies

collection before the receipt of the income by its owner.

Tax collection upon self-assessment represents the deduction of a part of the

income after its receipt and implies that the taxpayer submits to the taxation

authorities a self-assessment, i.e. an official statement about the income received.

Taxation authorities, taking into consideration the size of the taxation object and the

taxation rates, verify the accuracy of tax calculations. This method is usually applied

for the taxation of non-fixed revenues and for the cases when the taxpayer has

multiple income sources. Self-assessment collection is convenient for the taxpayers

because it creates conditions for tax evasion due to the weakness of the taxation

apparatus and due to commercial confidentiality.

This method entails a number of variations: 1) in advance payments during the

taxation period, when the state receives an approximate amount estimated on the basis

of the income earned during the previous period or on basis of the tax paid; 2)

payment by the taxpayer at the due date on basis of self-assessment at the time or after

the presentation of the income self-assessment: the tax payer independently subtracts

the tax amount and transfers it to the state; 3) additional payments determined by the

tax authority required after the examination or verification of the submitted self-

assessment.

The results also indicate that taxpayers not only discriminate between tax avoidance,

tax evasion, and tax flight, but also perceive them as unequally fair. Tax avoidance

was more positively evaluated than tax flight and than tax evasion, which was least

positively evaluated..

CHAPTER-4
 DATA PRESENTATION AND
ANALYSIS AND INTERPRETATION

DATA PRESENTATION AND ANALYSIS AND INTERPRETATION

Data was collected and analysed by using Microsoft excel. Qualitative analysis

involves

factual and logical interpretation of the study findings. On the other hand, the use of

simple statistics was involved especially the use of percentages, graphs, charts and
 tables. This was simplified by the use of tables which include a lot of clear

information followed by brief explanations. On the other hand percentages was often

be used to help the reader see the data in a simple way. Frequency and percentage

distribution of response was also used for data description as a most common and

simple way of data analysis tools (Alreck and Settle, 2004). Frequency tables provide

a very complete picture of the distribution of data for the variable. The frequency of a

particular matter represents the frequency of respondent’s answers

Data processing
Data collected from various documents and publications were read carefully and

compared with the responses from respondents on the questionnaires and interview

guides. This was therefore edited for completeness and accuracy and tabulated where

appropriate.

Problems confront

Like any other research study, a number of problems were facing up to the process

of conducting the study:

o Communication was a problem as some of the respondents (market

venders and street traders) were not able to read and speak English and

in which case the questionnaires had to be translated.

o Lack of co-operation from the respondents as some of them had an ‘I

don’t care

o attitude’. Here the research was forced to give more clarification and more

o explanation as to why the research was being carried out. This gave them more
 o confidence and they were able to respond positively.

o The researcher got a problem in finding the official concerned with

giving necessary information. It was hard retting these respondents since

the study was conducted during working hours. These made it difficult

for the respondents to leave their work for the sake of answering

questions.

o The research required a lot of funds which were not available. This

would not only impact on the sample size but also on the amount of

information to be received.

o Research requires a lot of time amidst busy schedules of the

researcher especially that I was doing research alongside other course
units

o Non responses especially market venders thought that the

information being collected was for the taxation purposes.

o More so, few people were willing to disclose information about

their status and position as regards taxes. Some had to be convinced
to fill questionnaires.

o There was also a problem of inability to obtain some information

from Arusha DC due to an information was regarded as confidential
and could not be given out.

3.9 Research Ethical Consideration

What is ethics in general?

Ethics is a system of moral principles. They affect how people make decisions

and lead their lives. It’s concerned with what is good for individuals and society

and is also described as moral philosophy.

The term Ethic is derived from the Greek word ethos which can mean custom, habit,

character or disposition. It covers the following dilemmas: how to live a good life,

rights and

responsibilities, the language of right and wrong and moral decisions - what is good

and bad?

Tax evasion and fraud detection using Big Data analytics methods The State Tax

Inspectorate (STI) is constantly faced with improved tax evasion and tax evasion. The

best way to deal with such cases is to constantly improve their detection methods and

algorithms. KTU together with the State Tax Inspectorate and VU are currently

implementing the project "Establishment of the Center for Analysis

 CHAPTER-5

Summary
Recommendation
Conclusion
 Summary
This chapter provides summary conclusion and policy implication or

recommendations on specific objectives and then on general objectives Also it shows

the summary of research findings, conclusions, and recommendations drawn from

conclusions. The purpose of this study was to evaluate the factors influencing tax

evasions at Arusha DC. In this study, data was collected using questionnaires from

heads of departments, other staffs other tax officials and market vendors.

Summary of findings Finds explaining as follows below:

Influences of Accountability

The first objective was to establish the impact of accountability on finance. The

results revealed that 74% of the respondents indicated that lack accountability in the

public sector influences tax evasion 82 while the rest (18%) of them indicated that the

accountability did not affect procedures. However, it is worth noting that timely

disbursement of funds, flexibility of tax collection system, and bureaucratic

bottlenecks in time of payments do affect the tax function in the county.

Accountability had an influence on the tax evasion at Arusha DC. Measurement of

goals and results, explanation of those results to internal or external monitors and

punishment or sanctions for non-performance or corrupt behaviour appear to be

meticulously done in such a way that it favoured the tax defaulters.

Influences of Transparency and Corruption on Tax Evasion

Corruption and transparency influenced the effectiveness tax collection at Arusha DC.

According to most of the respondents corruption had an influence on the effectiveness

of tax collection. According to most respondents professionalism was not fully

embraced and this was bound to affect the tax collection and most of the respondents

engaged in dishonesty or unethical actions. However, most respondents showed that

organizational structure, record keeping, division and segregation of duties,

authorizations and approvals, internal checks and competency of the staff as adopted

or implemented was sufficient to steer effective management of the tax function.

Influences of Tax Rates to the Tax evasions

The imposing of high tax seems to be one among of the reasons for taxpayers to evade

from paying tax in Arusha, as more than 42% of the respondents were strongly agreed

with high tax rate influences tax evasion, 31% said it affect to an agreed with the high

tax rates influences tax evasion and only 10% said it does not affect. However, it

emerges that the high tax rate level influences tax payer to evade from paying tax as

according to most respondents

Recommendation
1 Reduce tax rate

There is a significant relationship between tax rates and evasion, such that; if the tax

rates are increased; more people would evade or avoid tax liability, whereas, if the tax

rates are reduced more people would be encouraged to pay taxes and stop from tax

irregularities.

2 Education

Many of our respondents recommended that Arusha still has the duty to educate

taxpayers on the importance of paying tax voluntarily as this will reduce the cost of

collection hence increase ability of the Council in services provision.

3 Tax evasion has a significance relationship with the government revenue; hence

government revenue is being seriously affected by tax irregularities. The overall

evidence suggests that tax evasion and tax avoidance are very significance and the

degree of the significance depends on the extent to which the government relies on

taxation as a means of government revenue.

4 Availability of Receipts

Respondents’ shows the concern that some time taxes can be paid but no receipt to be

issued, this tendencies do encourage bribery and miss use of the taxes collected. Now

a days TRA introduce EFD machine but it is very expensive, government should look

availability of affordable machine so that everyone who doing business can have it
and use it regular.

5 AWARENESS
Taxpayers seek for awareness on the use of revenue collected; this is because there is

a general agreement among the tax payers that the amount collected as tax is not

according with service government claims to use the money provided.

6 Reporting

The study shows that there no reports on the amount collected provided to citizen.

Respondents have shown their concern on this part and recommended that reports on

the amount collected and spent should be known as it will encourage tax payers

paying the tax voluntary.

7. Perfect tax system

The study shows that Tanzania tax system is not efficient and effective in its totality;

there is no available database of all taxable individuals, the mechanism in place for the

assessment and collection of taxes are not enough and there are no strict measures in

place.

8. Lastly

It was submitted that tax evasion could be reduced and possibly eliminated.

Exploitation a lot of possible avenues like radio programs, Seminars and LC

market officials in order to sensitize the public about the benefit of paying taxes.

This will play an important role in improving revenue collection

Limitations of the Study

On conducting this study, the researcher noted that time is the major limiting factor.

The researcher asserted that small and medium taxpayers are very liable to unforeseen

social dynamics and therefore if the time frame of the study is prolonged findings are

likely to be affected by unexpected events.

Areas for further Research

The researcher recommends that further studies should be carried out in other City

Councils and Municipalities in the country. Furthermore, this study ought to involve

other tax agencies like local government and share practical experience on tax

collection process from the small and medium taxpayers. It would be insightful if such

studies cover wider areas of the country and especially in the rural areas where most

of the Tanzanians live and operate their businesses informally

Contribution to World of Knowledge

Results from the study indicate that voluntary tax compliance is the result of

taxpayers’ compliance with the tax laws without being compelled by the tax agencies.

High level of tax compliance is a result of the tax morale of society that fosters self-

enforcement of tax compliance. The presence of affordable costs which a taxpayer has

to bear to gather the necessary information, fill out tax forms and eventually paying a

tax can be an additional reason for tax compliance and enhanced tax evasion. This

study posits that a presence of well-functioning tax administration, especially with

respect to identifying and administering those citizens and firms that are liable to tax

payments is vital for voluntary tax. Problems of insufficient capacity may also occur

due to the organizational set up of the tax administration and its relationship with the

Treasury

Conclusion
In general conclusion tax payment at Arusha are fairly complied and there some

factors limiting full tax compliance which are existence of tax administration, bribery

to local authority staffs, fraud and unequal treatment in local tax collection. In

motivating of SMEs practitioner most findings shown are to increase awareness of

taxes paid to SMEs, proper use of collected charges, seminars to increase compliance,

seminar to SMEs in importance and procedures of paying tax and Reduce tax rates.

Moreover, SMEs practitioner themselves are not satisfied with taxes required to be

paid and are not getting any reports from the council concerning taxes collected.

Increasing the motivation of SMEs practitioner in being satisfied with taxes paid The

effect of tax evasion on the Arusha DC cannot be overemphasized. The revenue of

government has been greatly affected by the current tax system being used gives room

for loopholes, the corrupt tax officials, the lack of adequate data and many more have

worsened the situation. In addition, a reduction in tax rate is even not an optimum

solution to the problem, simply because some people would still attempt to evade or

avoid taxes no matter the rates of taxes. Therefore, there should be completely

overhauled of the Tanzania tax system. The existence of substantial number of tax

evaders in Arusha DC should be a matter of concern to the policy makers and tax

administrators. The level of punishment should also be stricter and the legal

provisions for doing this should be clearly stated. Continuous education for citizenry

has to be embarked upon and step has to be taken to convince the tax payers that the

money collected in form of taxes are judiciously spent. The state Board of internal

Revenue and the Revenue collecting officers at the Local Government must wake up

to their duties. Finally, database for tax administration at all levels of government

should be
promptly computerized to ensure that the system of information storage processing

and retrieval is efficient. Tax clearance should also be presented where an individual

wants to transact business with government agencies.

The study finds out why people evade and avoid taxes and suggested ways of

minimizing the practice. The study established a relationship between tax avoidance,

tax evasion and the personal income tax generation in Nigeria. It also emphasized on

the relationship between tax rates, and tax avoidance and tax evasion. The government

should therefore embark upon public enlightenment campaign and adequate utilization

of tax revenues on public goods to discourage tax avoidance and tax evasion and also

the reduction in tax rate. This will certainly enhance and boost revenue generation in

the state as is being pursue with vigour so as to survive in the present day economic

meltdown, and inflationary setbacks. For Nigeria Government to meet up with its

revenue targets especially now that the services of tax consultants have been

discontinued it would be appropriate to take a look at the factors responsible for the

incidence of tax evasion and avoidance since a check on these factors will go a long

way in reducing if not eradicating the problem. Moreover, SMEs practitioner

themselves are not satisfied with taxes required to be paid and are not getting any

reports from the council concerning taxes collected. Increasing the motivation of

SMEs practitioner in being satisfied with taxes paid The effect of tax evasion on the

Arusha DC cannot be overemphasized.

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