CHAPTER 1 BACKGROUND TO THE STUDY 1.1 Introduction

Government needs revenue for social, political and economic activities and for which there are various sources of government revenue, among these are: taxation, borrowing (loans), profit from government companies and investments, other miscellaneous sources such as: aids from other countries or international organizations, etc. Of all these sources, tax is the most important sources of government revenue. This is because it contributes not less than 50 percent of the total government revenue if effectively administered.

Therefore in simple terms, “tax is a compulsory contribution, levied by a sovereign power, on the incomes, profits, goods, services or properties of individuals and corporate persons, trusts and settlements and for which there is no direct benefit to the tax payer; such taxes when collected are used for carrying out government functions”. For example, maintenance of law and order, provision of infrastructure, defence, health and education of the citizens, or as a fiscal tool for controlling the economy (ICAN 2016).

Whereas, Ine-Tonbarapa (2013), refers economic growth as the increase in the capacity of an economy to produce goods and services, compared from one period of time to another. It is the quantitative and qualitative changes in human capacity, increasing literacy ratio, improve infrastructure, health and other areas that aims at increasing the general welfare of the citizens in an existing economy. Economic growth can be measured in nominal terms, which include inflation, or in real terms. It is conventionally measured as the percent rate of increase in real gross domestic product (GDP).

Thus, the whole essence of tax is to generate revenue to advance the welfare of the people of a state with focus on promoting economic growth and development of a state through the provision of basic amenities for improved public services via proper administrative system, and structures. Therefore, tax revenue plays a crucial role in promoting economic growth and development. Through tax revenue, government ensures that resources are channelled towards important projects in the society, while giving succour to the weak. The role of tax revenue in promoting economic activity and growth may not be felt if poorly administered. This calls for a need for proper examination of the relationship between revenue generated from taxes and the economy, to enable proper policy formulation and strategy towards its efficiency (Olashore, 1999).

According to Kiabel (2009), the Rivers state economy has remained in a deep slumber with macroeconomic indicators reflecting an economy in dire need of rejuvenation, revival and indeed radical tax reform. A tax system is a major determinant of other macroeconomic indexes, specifically, for both developed and developing economies; there exists a relationship between tax structure and the level of economic growth and development. Indeed, it has been argued that the level of economic growth has a very strong impact on the state tax base and tax policy objectives vary with the stages of development. Similarly, the economic criteria by which a tax structure is to be judged and the relative importance of each tax source vary over time.

According to Anyanwu, (1997), the nature of tax arrangement illuminates worry that while the Federal Government of Nigeria may have the fiscal capacity to perform all its devolved responsibilities, states and local governments may not have the capacity to perform. This is caused by the fact that high yielding  tax revenue sources are assigned to the Federal while states depend on tax revenue sources with low revenue yield which include personal income (excluding those of the army, police, external affairs and FCT-retention of proceeds); capital gains tax (retention of proceeds); stamp duties, withholding tax (individuals) football pools and other betting taxes; land tax including land registration fees, vehicle license and driving license fees, other fees licenses and earnings on items relating to state government functions, inter-alia. These taxes are obtained or collected internally by the Rivers State Board of Internal Revenue Service (RSBIRS) unbehalf of the state government. Its collection and service to the government depends largely on the government itself.

More so, these activities are considered as sabotaging the economy and are readily presented as reasons for the underdevelopment of the state (Adereti, Sanni, and Adesina, 2011). Government exists in order to effectively collect taxes from available economic resources and make use of same to create economic prosperity such that available and willing human and other resources are gainfully employed, infrastructures provided, essential public services (such as the maintenance of law and order) are put in place etc. Tax resistance only makes the development process unattainable. (Onairobi, 1998).

1.2   Statement of the Problem

The first need of any modern government is to generate enough revenue which is indeed “the breath of its nostril”.  Thus taxation is by far the most significant source of revenue for the government.  Nigerians regard payment of tax as a means whereby government raises revenue for the provision of infrastructure and improvement of the standard of living of the citizen of the country. It is imperative to note that no tax system works effectively without the taxpayer’s co-operation.  Here, we can ask some thought-provoking questions such as: what makes taxation such a difficult issue?  Why do people feel cheated when it comes to tax?  Is government making judicious use of taxpayer’s money? Has tax impacted positively or negatively in the economy? In view of these questions above, this study is going to be carried out to offer solution to them Festus and Samuel, (2010).Again Adereti, Sanni, and Adesina, (2011), state that despite the tax revenue and the capital expenditure reported year in year out by the government, the physical state of the state in terms of infrastructure and social amenities is backward. This is evidential in the lack of electricity supply, portable drinking water, basic health care delivery, bad roads, just to mention but a few.

Ine-Tonbarapa (2013), investigated the impact of tax rates and revenue generated for economic development of Niger Delta states, which shows that the impact of tax rates have not contributed significantly to the revenue generated over the states which also reflect negatively the states gross domestic products (GDP). This calls for the need to further investigate the current tax performance vis-à-vis the Rivers state economy.

We shall also look at the following issues and offer recommendations.

1. Problems affecting personal income tax revenue and infrastructural growth in Rivers State.
2. Problem of accessing and measuring withholding tax revenue and economic development in Rivers state.
3. Problems of tax administration and its effects in the economy of Rivers state.

1.3   Conceptual Framework

The independent variable on the stated topic is the “tax revenue” while the dependent variable is “economic growth” thus under these variables there are other variables which are shown using the chart below.

1.4   Objectives of the Study

Broadly, the purpose of this study is to assess the impact of tax revenue on the Rivers state economic growth from 2006-2015. Other specific objectives include:

1. To investigate the impact of personal income tax on infrastructural development of Rivers state.
2. To investigate the impact of withholding tax on industrial growth of Rivers state.

1.6   Research Hypotheses

From the objectives of this study, the following hypotheses have been formulated:

H01: Personal income tax has no significant relationship with infrastructural development of Rivers state.

H02: Withholding tax has not impacted on the improvement of industrial growth of Rivers State.

1.7   Significance of the Study

Tax revenue is one of the sources of revenue to the government. This can be used to achieve economic growth, maintain equilibrium in the economy by combating elements of depression, inflation or deflation, achieve equity in income and wealth distribution and address issues of poverty and promote socioeconomic development, hence the need to find out the extent tax revenue impacts on Rivers state economic growth.

The research findings would be of importance to policy makers at national and state level as they design policies aimed at enhancing economic growth and development through a better tax revenue system. Policy makers, especially the State Inland Revenue Service will use the outcome of the study to gauge its performance, and determine the level of input it would have to make to impact positively to the Nigerian economy.

Students, academicians and other scholars who wish to undertake further research on taxation will find the literature arising from this study to be of great value, as it will be added to the existing literature.

1.8   Scope of the Study

The scope of this study covers the impact of tax revenue on the Rivers state: with respect to Port Harcourt City Local government Area and Obio/AkporLocal Government Area economic growths over a period of 10 years (from 2006-2015). The trend of personal income tax, withholding tax and stamp duties are examined for the period to determine their correlation to various sectors the Rivers State economy. The analysis scope will be based on statistical data obtained at the Rivers state Inland Revenue Service (RIRS) (2017) and Nigeria Extractive Industries Initiative (NEITI) (2016).

1.9   Definition of Terms

Tax: is a compulsory levy imposed on income, profits, properties of individuals and companies by government or its agency with lay down criteria in order to generate revenue to the government and for which there is no direct benefit to the payer.

Taxation: it the process or act of collecting tax, administering tax and enforcing tax laws and regulations in a country by a recognized body.

Tax Revenue: it is the income accrued from taxes to the government. It the revenue generated from taxes of personal income taxes, company income taxes, VAT, custom duties and excise duties, petroleum profit taxes, etc.

Economic Growth: refers to the increase in the capacity of an economy to produce goods and services, compared from one period of time to another. Economic growth can be measured in nominal terms, which include inflation, or in real terms. It is conventionally measured as the percent rate of increase in real gross domestic product, or real GDP.

Economic Development: is the quantitative and qualitative changes in human capacity, increasing literacy ratio, improve infrastructure, health and other areas that aims at increasing the general welfare of the citizens in an existing economy.

Personal Income Tax (PIT): Personal income tax (PIT) is a tax that is imposed on individuals who are either in employment or are running their own small business under a business name or partnership.

Capital Gains Tax (CGT): Capital gains tax was introduced at its inception in 1967; it currently charges 10% on gain accruing to any person in connection with the disposal of assets during the assessment year.

Stamp Duties: Stamp duties is applied to documents, for example, conveyance document concerning land transfers, bonds, debentures, conventions and warrants, but not to transactions or individuals.

Withholding tax: Withholding tax, also called a retention tax, is a government requirement for the payer of an item of income to withhold or deduct tax from the payment, and pay that tax to the government.

Rivers State Inland Revenue Service (RIRS): is the only agency authorized by the Rivers state government to receive and collect various taxes on behaves of state government.