Features of a good tax system

Taxes are the enforced proportional contributions from persons and property, levied by the state by virtue of its sovereignty for the support of government and for all public need. From the above definition it is seen that taxes are contributions to a common pool by the people for the use of the people. Government all over the world need taxes in order to sustain its relevance and to provide for the needs of its citizenry.

A tax system is expected to be fair and non-discriminatory. For a tax system to meet these requirements, it must have the following attributes.

1. Neutral – A Neutral tax must be unbiased across economic activities, and not overly penalize work in favour of leisure, nor tax income used for saving and investment more heavily than income used for consumption.
2. Visibility – A very large segment of the population must be keenly aware that government costs money, government spending should be held to levels at which its benefits match its costs. This is a critical factor in most developing countries (including Nigeria) where the citizenry believe that tax revenues are not being expeditiously administered.
3. Fairness – This is often stated as making the rich pay higher share of their income in taxes than the poor. There should be some amount of income exempt from tax to shelter the poorest citizens.
4. Simplicity – A tax system should be easy for the government to administer and enforce, and be easy and inexpensive for taxpayers to comply with. There should be clear definition of income and elimination of multiple layers of tax would create a system that is much simpler and easier to administer, enforce and comply with. These are critical issues in Nigeria tax systems that require urgent attention. Our tax laws are old and complex, given room for varied interpretations and applications.
5. Convenience – A good tax system should be convenient in terms of time and mode of payment to the taxpayer.
6. Administrative Efficiency – The process of levying and collecting taxes must be administratively efficient, transparent and economical without any distortion.
7. Productive – A tax system should be such that brings in sufficient revenue to the Government. Since tax payment involves the outflow of money or money’s worth from the treasury of taxpayers, some Taxpayers have adopted many strategies to evade tax, tax evasion is defined as “the wilful attempt to defeat or circumvent the tax law in order to legally reduce one’s tax liability”. Tax evasion is punishable by both civil and criminal penalties.
   Tax avoidance on the order hand, is defined as “the act of taking advantage of legally available tax-planning opportunities in order to minimize one’s tax liability. While tax evasion is criminal tax avoidance is legal. This was aptly supported by the celebrated case of Ayrshir Pullman Motor Services & D.U. Ritche V.CIR (1929). The fact of the case and the judgement is as follows:-

The taxpayer changed the structure of its business from sole proprietorship to partnership with 5 of his children to minimise tax. He appealed to the Court of Session against an assessment which failed to recognise the change. Allowing the appeal, Lord Clyde held:

No man in this country is under the smallest obligation, moral or other, to so arrange his legal relations to his business or property as to enable 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 in like manner is entitled to be astute to prevent, so far as he honestly can, the depletion of his means by the Revenue.

TAX COMPLIANCE TOOLS

In order to encourage compliance taxpayers to continue to comply, and bring non compliance taxpayers into the tax net, to increase tax base and revenue, governments all over the world have put in place some compliance strategies backed by appropriate legislations.

Section 26(1) of the Federal Inland Revenue Service Establishment Act (FIRSEA) 26(1) gives the Service to call for returns, books, documents and information.

FIRSEA 27 – Gives additional power to the Service to call for further returns and payment of tax due.

FIRSEA 28 – Requires every bank upon demand by the Service to provide quarterly returns specifying:-

(a) In the cases of an individual, all transaction involving the sum of N5,000,000.00 and above

(b) In the case of a body corporate, all transactions involving the sum of N10,000,000.00 and above, the names and address of all customers of the bank connected with the transactions and deliver the returns to the Service.

(c) Section 28 (3) – Provides sanction to any bank that contravenes above provisions.

FIRSEA 29 – Gives power to access lands, buildings, books and documents

FIRSEA 32 – Gives power of addition for non-payment of tax and enforcement of payment.

FIRSEA 33 – Tax Investigation; this section empowers the Service to employ special purpose Tax officers to assist any relevant law enforcement agency in the investigation of any offence under this Act.

FIRSEA 47 – Gives the Service powers to prosecute any of the offences under this Act subject to the powers of the Attorney – General of the Federation.

THE ROLE OF TAX AUDIT

In addition to all the tax provisions mentioned above, FIRSEA S:26(4) and S.60(4) CITA went further to state:-

“Nothing in any other provision of this Act shall be constructed as precluding the Service from verifying by tax audit or investigation into any matter relating to any return or entry in any book, document, accounts including those stored, on a computer, in digital, magnetic, optical or electronic media as may, from time to time, be specified in any guideline by the Service”.

All the above provisions, among others, are compliance tools meant to ensure that a taxpayer does not pay less or more than what he is required to pay by law. This objective is achieved through tax audit exercises.

The purposes of tax audit are to:-

v To educate taxpayers

v Maintain self assessment system

v Collect taxes as imposed by the laws through the encouragement of voluntary compliance

v Maintain public confidence in the integrity of tax system.

v Provide deterrent effects on other taxpayers not yet audited, as they may quickly file their returns in order to avoid sanctions.