Meaning, Types and Functions of Taxation in Nigeria


Meaning, Types and Functions of Taxation in Nigeria

All levels of government need funds to finance their activities. They must find ways of obtaining money to pay for their expenditure. Some of the sources of finance available to the government include taxes, royalties, levies, fines, penalties, loans, grants, and donations given to the government, proceeds from the sale of government-owned companies, lands, buildings and other assets, profits or surpluses made by government-owned enterprises, dividends paid to government on shares owned in companies, interest received on loans made by the government, rent received on government-owned properties, income from the sale of government services, etc.

The major source of federal government revenue in Nigeria is the revenue from the sale of crude oil. On the other hand, state and local governments in Nigeria are financed mostly through the statutory allocations from the federation account. Nevertheless, taxation is still a very important source of revenue to the federal, state and local governments.

In this article, you should be able to:

· Define of tax and taxation

· Understand the purposes/objectives/uses of taxation

· Know the canons/principles of taxation


Meaning of Tax and Taxation

There are quite a number of definitions of Tax and Taxation depending on the qualities it possesses which are as follows:

Be a compulsory payment: A tax is a compulsory payment. A levy, the payment of which is voluntary is not a tax but a contribution or donation.

Be a payment to the Government: Tax must be a payment to a public authority or a government. Where a tax is paid to an individual such as a King, it must be in his capacity as embodiment of the society or state. If not, then, it is extortion and not a tax.

Be common benefit: A tax must be for common use. It must be for common good. This has to do with the intended purpose(s) of the tax. Thus, where such contribution is made for the use of the an individual, it is not a tax.

Have a known formula: the contribution must be in accordance with a known formula. In the traditional society, it may have flat rate or graduated according to age groups or gender. Nowadays, rates are used.

Have distinctive beneficiary: The beneficiary society must be a definite and distinctive one such as a kingdom in Yoruba –land or an Emirate in Hausa land. In modern administrations, it can be government at Federal, State or Local level. In the light of the foregoing, the following definitions can be considered fair:

A tax is the “levy by public authorities with a tax jurisdiction, of compulsory contributions by the citizens to defray part of the cost of government activities in providing the needs of the society”. 

Taxation is “the process or machinery by which communities or groups of persons are made to contribute in some agreed quantum and method for the purpose of the administration and development of the society”. “Taxation is the transfer of real economic resources from the private sector to the public sector to finance public sector activities” Tax can simply be defined as a charge on income of individuals and corporate bodies by the government.

More technically, tax can be defined as compulsory payment imposed by the government through its agents on income of individuals and corporate bodies as well as on goods and services.

A tax is a compulsory payment made by individuals and organizations to the government in accordance with predetermined criteria for which no direct or specific benefit is received by the taxpayer. This definition is similar to the one given by Pritchard and Murphy.

According to them, a tax is “a payment to central government, calculated by laid down rules for which nothing specifically usable by that taxpayer alone is transferred.”

In Mathew’s v Chikory Marketing Board (Victoria) (1938), Chief Justice Latham of the Australian Supreme Court defined a tax as “a compulsory extraction of money by a public authority for public purposes”, or taxation is raising money for the purpose of government by means of contributions from individual persons.”

As defined by Black (1990, p. 1457), a tax is “an enforced contribution of money or other property, assessed in accordance with some reasonable rule or apportionment by authority of a sovereign state on persons or property within its jurisdiction for the purpose of defraying the public expenses.

It is important to note that tax is imposed by the government and not individuals or corporate bodies. Revenue generated from taxation is usually used for developmental purposes. The essence of all taxes is the removal of resources from private hands of the individual, corporate bodies, trusts, families, societies and communities into the public sector to finance activities that have to do with whole society.


Purposes/Objectives/Uses of Taxation

Government imposes tax not just for revenue generation but to accomplish various economic objectives. Tax is imposed for the following reasons:

1. To cover the cost of administration, internal and external defense, maintenance of law and order as well as social services required by the citizens.

2. To protect companies in infant stage industries by reducing their tariffs this will invariably reduce the cost of production relative to imported products.

3.  Are substitutes.

4. To discourage the consumption of dangerous/harmful products.

5. To control the importation, production and consumption of certain goods and services thereby preventing dumping. This can be achieved by increasing tax payable on such goods and services.

6. To redistribute wealth and income among various income earners through progressive tax system. This helps to reduce income inequality.

7. To counter inflation by reducing volume of purchasing power.

8. To provide subsidies in favor of preferred sectors of the economy, e.g agriculture and selected industries.

9. To service national debt and provide retirement benefit etc.


Canons/Principles of Taxation

For a tax system to achieve its objective, it must possess certain principles which include:

1.  Principle of Equity: A good tax system should be equitable in the distribution of tax burden. To ensure this, person’s ability to pay is to be borne in mind by the authority. Progressive tax system possesses this quality.

2.  Principle of Convenience: This is in respect of timing and mode of payment. The timing and mode of payment should be convenient to the tax payer. Any inconvenience caused by the mode of payment and timing should be avoided.

3.  Principle of Certainty: This stipulates that the time, mode and amount to be paid should be clear to the taxpayer. The procedure for computation should be stated.

4. Principle of Simplicity: A good tax system should be coherent, simple and straightforward. It should be well understood by both the tax payer and tax administrators. It should not be complicated or ambiguous.

5. Principle of Economy: This relates to cost of administering tax. It provides that the imposition of tax is uneconomical if the cost of collection is in excess of revenue generated. A tax can be considered economical if the cost of administration is not excessive so that a loss is not incurred in the process.

6.  Principle of Impartiality: This advocates that a tax system should not discriminate between tax payers under similar circumstances. It requires that all persons should similarly be placed under the same condition, to pay the same tax.

7.  Principle of Productivity/Fiscal Adequacy: This recognizes that the yield from a tax should be adequate to cover government expenditure in terms of promoting economic growth and development. The essence of economic growth and development is to improve the living standard of the citizens (tax payers).

8. Principle of Flexibility: A good tax system should be responsive to changing realities especially in a federal and democratic country where there are always changes of government. It proposes that a tax system should be adjustable to allow for scrapping of obsolete tax system and replacing same with meaningful tax process.


Meaning, Types and Functions of Taxation in Nigeria

In conclusion, the discussions in this article are indispensable to readers/students since they provide overview/background knowledge on the concept of tax and taxation, purposes, uses as well as the principles of taxation in Nigeria. This background knowledge is needed by readers as it will enable them know the meaning of taxation as well as the principles governing taxation.

The article has drawn attention to background knowledge on the concept of tax and taxation in Nigeria. Specifically, the following aspects have been dealt with:

· Definition of tax and taxation

· The purposes/objectives/uses of taxation

· The canons/principles of taxation

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