APPRAISAL OF FEDERAL INLAND REVENUE COLLECTION SYSTEM

CHAPTER ONE: INTRODUCTION

1.1 Background of the Study

The Federal Inland Revenue Service (FIRS) is the apex tax administration agency in Nigeria, responsible for assessing, collecting, and accounting for federal taxes and other revenues due to the Federal Government. The FIRS was established by the Federal Inland Revenue Service (Establishment) Act No. 13 of 2007 (now Cap. F12, Laws of the Federation of Nigeria, 2010). The Service is empowered to administer taxes such as Company Income Tax (CIT), Value Added Tax (VAT), Withholding Tax (WHT), Petroleum Profits Tax (PPT), Capital Gains Tax (CGT), Stamp Duties, and the Tertiary Education Tax (TET). The FIRS is headed by an Executive Chairman appointed by the President and is accountable to the Federal Ministry of Finance (FIRS, 2020). (FIRS, 2020)

The tax collection system in Nigeria has evolved significantly over time. Prior to the establishment of the FIRS, tax administration was fragmented, with different agencies handling different taxes. The Income Tax Management Act (ITMA) of 1961 established the Federal Board of Inland Revenue (FBIR) as the apex body. The FBIR was replaced by the FIRS in 2007, with expanded powers and responsibilities. The FIRS has implemented various reforms to improve tax collection: automation of tax processes (e-Tax, e-Filing, e-Payment), integration with third-party databases (Bank Verification Number, BVN; National Identification Number, NIN), deployment of Tax Identification Numbers (TINs), and establishment of large taxpayer offices (FIRS, 2020). (FIRS, 2020)

The importance of tax revenue for the Nigerian economy cannot be overstated. Taxes fund government operations (salaries of civil servants, military, police), public services (education, health, infrastructure), social protection (subsidies, transfers), and debt service. However, Nigeria’s tax-to-GDP ratio (total tax revenue divided by GDP) is one of the lowest in the world at 6-8%, compared to the Sub-Saharan Africa average of 15-18% and the OECD average of 34%. This low ratio indicates that the tax collection system is not performing optimally. The tax gap (taxes due minus taxes collected) is estimated at ₦5-10 trillion annually (BudgIT, 2023). (BudgIT, 2023)

The key taxes administered by the FIRS include (FIRS, 2020). (FIRS, 2020)

Company Income Tax (CIT): Levied on the profits of companies registered in Nigeria. CIT rate is 30% for large companies, 20% for medium companies, and 0% for small companies (under the Finance Acts). CIT accounts for approximately 30-40% of FIRS revenue.

Value Added Tax (VAT): Levied on the supply of goods and services. VAT is an indirect tax (collected by businesses, borne by consumers). VAT rate increased from 5% to 7.5% in 2021. VAT accounts for approximately 20-30% of FIRS revenue.

Withholding Tax (WHT): A tax deducted at source from payments for goods, services, and contracts. WHT rates range from 5% to 10%. WHT accounts for approximately 10-15% of FIRS revenue.

Petroleum Profits Tax (PPT): Levied on profits from petroleum operations. PPT rate is 50-85% depending on the contract type. PPT accounts for approximately 10-20% of FIRS revenue (declining as oil production declines).

Capital Gains Tax (CGT): Levied on gains from the sale of assets (property, shares). CGT rate is 10%. CGT accounts for less than 5% of FIRS revenue.

Stamp Duties: Levied on legal documents (contracts, agreements, receipts). Stamp duties account for less than 5% of FIRS revenue.

Tertiary Education Tax (TET): Levied on the assessable profits of companies at 2.5% (increased from 2.0% in 2021). TET funds are allocated to the Tertiary Education Trust Fund (TETFund) for university, polytechnic, and college of education infrastructure and research.

The FIRS tax collection process involves several stages (FIRS, 2018). (FIRS, 2018)

• Taxpayer registration: Individuals and businesses register with the FIRS and obtain a Tax Identification Number (TIN).
• Tax filing: Taxpayers file tax returns (annual, quarterly, monthly) via the FIRS e-Filing portal.
• Tax assessment: FIRS assesses the tax liability based on the filed returns or conducts a desk audit.
• Tax payment: Taxpayers pay taxes via e-Payment (internet banking, direct debit) or at designated banks.
• Enforcement: FIRS enforces compliance through audits, investigations, penalties, and legal action.

The challenges facing the FIRS tax collection system are numerous (BudgIT, 2023; FIRS, 2020). (BudgIT, 2023; FIRS, 2020)

• Low tax compliance: Tax compliance (filing and payment) is low, estimated at 50-60%. Many businesses and individuals do not register for taxes, do not file returns, or under-report income.
• Tax evasion and avoidance: Businesses and individuals evade taxes (illegal non-payment) or avoid taxes (legal reduction through loopholes, incentives). Transfer pricing (profit shifting) by multinational corporations is a major challenge.
• Weak tax administration: The FIRS is understaffed, underfunded, and lacks technology. Manual processes, corruption, and lack of taxpayer education reduce compliance.
• Multiple taxation and double taxation: Businesses complain of multiple taxes (federal, state, local) and double taxation (same income taxed by multiple authorities). This increases the cost of doing business and encourages evasion.
• Complexity: The tax system is complex (multiple taxes, different rates, different filing requirements, different deadlines). Complexity reduces compliance (taxpayers cannot understand their obligations).
• Corruption: Tax officials may demand bribes (under-assessment, delayed refunds). Taxpayers may bribe officials to evade taxes. Corruption reduces revenue and erodes trust.
• Low taxpayer education: Many taxpayers do not understand their tax obligations (registration, filing, payment). Taxpayer education is inadequate.
• Tax incentives and exemptions: The government grants tax incentives (pioneer status, tax holidays, allowances) to attract investment. However, excessive and poorly targeted incentives erode the tax base, reducing revenue.

The Nigerian government has implemented tax reforms to improve the tax collection system. The Finance Acts (2019, 2020, 2021) introduced changes: VAT rate increase (5% to 7.5%), CIT rate reduction (30% to 20% for medium companies), tax incentives for startups, digital services tax, and increased penalties for non-compliance. The National Tax Policy (2012, revised 2017) provides a framework for tax administration. The FIRS Digital Transformation (e-Tax, TIN, VAT automation) aims to improve compliance. The Joint Tax Board (JTB) coordinates tax administration across federal and state authorities (FIRS, 2020). (FIRS, 2020)

The COVID-19 pandemic (2020-2021) significantly affected tax collection. Lockdowns reduced economic activity, reducing VAT, CIT, and WHT collections. Oil price crashed, reducing PPT. Tax revenue shortfalls forced the government to borrow (domestic and external). The pandemic highlighted the need for a resilient tax collection system (Ogunyemi and Adewale, 2021). (Ogunyemi and Adewale, 2021)

Several theories explain tax collection systems. Optimal tax theory (Ramsey, 1927; Mirrlees, 1971) suggests that taxes should be designed to raise revenue with minimal economic distortion. Tax compliance theory (Allingham and Sandmo, 1972) examines why taxpayers comply (or evade) taxes: deterrence (probability of detection and punishment) and social norms. Tax administration theory (Bird, 2004) examines how tax authorities can improve compliance through simplification, automation, and taxpayer services. Institutional theory (DiMaggio and Powell, 1983) suggests that tax reforms are adopted for legitimacy, but may be decoupled from actual practice (decoupling). (Allingham and Sandmo, 1972; Bird, 2004; DiMaggio and Powell, 1983; Mirrlees, 1971; Ramsey, 1927)

This study appraises the Federal Inland Revenue collection system in Nigeria.

1.2 Statement of the Problem

Despite the establishment of the FIRS and various tax reforms (Finance Acts, National Tax Policy, digital transformation), the Nigerian tax collection system faces significant challenges. This problem manifests in several specific issues.

First, the tax-to-GDP ratio is persistently low. Nigeria’s tax-to-GDP ratio (6-8%) is among the lowest in the world, far below the Sub-Saharan Africa average (15-18%) and the OECD average (34%). This means that the government collects far less revenue than it could, given the size of the economy. Low tax revenue limits the government’s ability to finance public services, invest in infrastructure, and respond to emergencies (World Bank, 2020). (World Bank, 2020)

Second, the tax gap (taxes due minus taxes collected) is huge. Estimates suggest that Nigeria loses ₦5-10 trillion annually to tax evasion and avoidance. Businesses under-report income, individuals fail to file returns, and large companies engage in transfer pricing (profit shifting). The tax gap represents lost revenue that could have been used for education, health, and infrastructure (BudgIT, 2023). (BudgIT, 2023)

Third, tax compliance is low. The compliance rate is estimated at 50-60% (meaning 40-50% of taxes due are not collected). Causes include: (1) weak enforcement (low probability of detection and punishment); (2) corruption (bribes to evade); (3) complexity (taxpayers cannot understand their obligations); (4) low taxpayer education; and (5) multiple taxation (federal, state, local). Low compliance reduces revenue (BudgIT, 2023). (BudgIT, 2023)

Fourth, tax administration is weak. The FIRS is understaffed, underfunded, and lacks technology. Many processes are manual (paper-based), leading to delays, errors, and corruption. The cost of collection is high (5-10% of revenue). FIRS digital transformation (e-Tax, TIN, VAT automation) has improved but remains incomplete (FIRS, 2020). (FIRS, 2020)

Fifth, multiple taxation and double taxation burden businesses. Businesses complain of multiple taxes: federal taxes (CIT, VAT, WHT, CGT, stamp duties), state taxes (PIT, road taxes, levies), and local government taxes (rates, levies). Double taxation occurs when the same income is taxed by multiple authorities (e.g., state PIT and federal CIT on business income). Multiple taxes increase the cost of doing business, discourage formalization, and encourage tax evasion (BudgIT, 2023). (BudgIT, 2023)

Sixth, tax incentives and exemptions erode the tax base. The government grants tax incentives (pioneer status, tax holidays, allowances) to attract investment. However, excessive and poorly targeted incentives erode the tax base, reducing revenue. The cost of tax incentives (foregone revenue) is estimated at ₦1-2 trillion annually. The government has introduced minimum tax provisions to limit abuse, but incentives remain generous (FIRS, 2020). (FIRS, 2020)

Seventh, corruption in tax administration reduces revenue. Tax officials may demand bribes to under-assess taxes, delay refunds, or ignore non-compliance. Taxpayers may bribe officials to evade taxes. Corruption reduces revenue, distorts competition (compliant businesses are disadvantaged), and erodes trust. The ICPC and EFCC have investigated tax officials, but corruption persists (BudgIT, 2023). (BudgIT, 2023)

Eighth, the COVID-19 pandemic reduced tax revenue. Lockdowns reduced economic activity, reducing VAT, CIT, and WHT collections. Oil price crashed, reducing PPT. Tax revenue shortfalls forced the government to borrow. The pandemic highlighted the vulnerability of the tax collection system (Ogunyemi and Adewale, 2021). (Ogunyemi and Adewale, 2021)

Ninth, there is a significant gap in the empirical literature on the appraisal of the FIRS tax collection system. Most studies focus on tax policy (rates, incentives) or tax administration (FIRS). Few studies comprehensively appraise the tax collection system (registration, filing, assessment, payment, enforcement). Few studies quantify the tax gap, compliance rates, or cost of collection. This study addresses these gaps (Okoye, Okafor, and Nnamdi, 2020). (Okoye et al., 2020)

Therefore, the central problem this study seeks to address can be stated as: *Despite the establishment of the FIRS and various tax reforms, the Nigerian tax collection system faces significant challenges: low tax-to-GDP ratio, huge tax gap, low compliance, weak administration, multiple taxation, excessive incentives, corruption, and COVID-19 impact. The tax collection system has not been systematically appraised. This study addresses these gaps by appraising the Federal Inland Revenue collection system in Nigeria.*

1.3 Aim of the Study

The aim of this study is to appraise the Federal Inland Revenue collection system in Nigeria, with a view to assessing the effectiveness of the tax collection system (registration, filing, assessment, payment, enforcement) on key indicators (tax-to-GDP ratio, tax gap, compliance rate, cost of collection), identifying the challenges (weak administration, multiple taxation, incentives, corruption), and proposing evidence-based recommendations for improving tax collection.

1.4 Objectives of the Study

The specific objectives of this study are to:

1. Assess the effectiveness of the FIRS tax collection system on key indicators: tax-to-GDP ratio, tax gap (taxes due minus taxes collected), compliance rate (percentage of taxes due collected), and cost of collection (collection cost as a percentage of revenue).
2. Examine the taxpayer registration process (TIN issuance, coverage) and identify gaps.
3. Examine the tax filing process (e-Filing usage, timeliness, accuracy) and identify challenges.
4. Examine the tax assessment process (desk audit, investigation) and identify challenges.
5. Examine the tax payment process (e-Payment usage, timeliness) and identify challenges.
6. Examine the enforcement process (tax audit, penalties, legal action) and identify challenges.
7. Identify the challenges affecting tax collection: weak administration, multiple taxation, double taxation, tax incentives, corruption, low taxpayer education, complexity.
8. Assess the impact of the COVID-19 pandemic on tax collection.
9. Propose evidence-based recommendations for improving the FIRS tax collection system.

1.5 Research Questions

The following research questions guide this study:

1. What is the effectiveness of the FIRS tax collection system on key indicators (tax-to-GDP ratio, tax gap, compliance rate, cost of collection)?
2. What are the challenges in the taxpayer registration process (TIN issuance, coverage)?
3. What are the challenges in the tax filing process (e-Filing usage, timeliness, accuracy)?
4. What are the challenges in the tax assessment process (desk audit, investigation)?
5. What are the challenges in the tax payment process (e-Payment usage, timeliness)?
6. What are the challenges in the enforcement process (tax audit, penalties, legal action)?
7. What are the challenges affecting tax collection (weak administration, multiple taxation, double taxation, tax incentives, corruption, low taxpayer education, complexity)?
8. How did the COVID-19 pandemic affect tax collection?
9. What recommendations can be proposed for improving the FIRS tax collection system?

1.6 Research Hypotheses

Based on the research objectives and questions, the following hypotheses are formulated. Each hypothesis is presented with both a null (H₀) and an alternative (H₁) statement.

Hypothesis One (Tax-to-GDP Ratio)

• H₀₁: Nigeria’s tax-to-GDP ratio (6-8%) is not significantly different from the Sub-Saharan Africa average (15-18%).
• H₁₁: Nigeria’s tax-to-GDP ratio is significantly lower than the Sub-Saharan Africa average.

Hypothesis Two (Tax Gap)

• H₀₂: There is no significant tax gap (taxes due are equal to taxes collected).
• H₁₂: There is a significant positive tax gap (taxes due exceed taxes collected).

Hypothesis Three (Tax Compliance)

• H₀₃: The tax compliance rate (50-60%) is not significantly different from the target rate (80%).
• H₁₃: The tax compliance rate is significantly lower than the target rate.

Hypothesis Four (e-Filing Usage)

• H₀₄: The usage of e-Filing does not significantly affect tax filing timeliness.
• H₁₄: Taxpayers who use e-Filing file returns significantly more timely than those who use manual filing.

Hypothesis Five (Tax Audit and Compliance)

• H₀₅: Tax audits do not significantly affect tax compliance.
• H₁₅: Taxpayers who are audited have significantly higher compliance rates than those who are not.

Hypothesis Six (Multiple Taxation)

• H₀₆: Multiple taxation (federal, state, local) does not significantly affect business tax compliance.
• H₁₆: Multiple taxation significantly reduces business tax compliance.

Hypothesis Seven (Corruption)

• H₀₇: Corruption in tax administration does not significantly affect tax revenue.
• H₁₇: Corruption significantly reduces tax revenue.

Hypothesis Eight (COVID-19 Impact)

• H₀₈: The COVID-19 pandemic did not significantly affect tax revenue.
• H₁₈: Tax revenue was significantly lower during the COVID-19 pandemic than before.

1.7 Significance of the Study

This study holds significance for multiple stakeholders as follows:

For the Federal Inland Revenue Service (FIRS):
The study provides empirical evidence on the effectiveness (or ineffectiveness) of the tax collection system. FIRS can use this evidence to: (1) improve taxpayer registration; (2) enhance e-Filing and e-Payment; (3) strengthen tax audit and enforcement; (4) address multiple taxation; (5) combat corruption; (6) simplify tax processes; and (7) improve taxpayer education.

For the Federal Ministry of Finance:
The Ministry sets tax policy and oversees FIRS. The study provides evidence on tax collection performance (tax-to-GDP ratio, tax gap, compliance). The Ministry can use this evidence to: (1) design tax reforms; (2) allocate resources to FIRS; (3) review tax incentives; (4) coordinate with state and local governments on multiple taxation; and (5) report to the President and National Assembly.

For the National Assembly (Senate and House of Representatives):
The legislature has oversight responsibility for FIRS. The study provides evidence on tax collection challenges. The National Assembly can use this evidence to: (1) amend tax laws; (2) hold FIRS accountable; (3) increase funding for FIRS; and (4) strengthen oversight.

For the Joint Tax Board (JTB):
The JTB coordinates tax administration across federal, state, and local governments. The study provides evidence on multiple taxation and double taxation issues. The JTB can use this evidence to: (1) harmonize tax policies across states; (2) resolve double taxation disputes; and (3) simplify tax compliance for businesses operating in multiple states.

For the Nigeria Governors’ Forum (NGF):
State governments collect taxes (PIT, road taxes, levies) that affect businesses. The study provides evidence on multiple taxation. The NGF can use this evidence to: (1) harmonize state taxes; (2) reduce multiple taxation; and (3) coordinate with FIRS.

For Civil Society Organizations (BudgIT, Enough is Enough, TI-Nigeria, ActionAid):
CSOs advocate for tax justice, transparency, and accountability. The study provides evidence on tax collection challenges (low tax-to-GDP ratio, tax gap, corruption) that CSOs can use in advocacy campaigns (e.g., “close the tax gap,” “stop corruption in tax administration”). The study also provides evidence on the relationship between tax revenue and public services.

For International Development Partners (IMF, World Bank, DFID, EU):
Development partners support tax reform in Nigeria. The study provides evidence on the effectiveness of past reforms and identifies remaining gaps. Development partners can use this evidence to design future programs, focusing on the most critical weaknesses (digitalization, enforcement, anti-corruption, tax incentives).

For Academics and Researchers:
This study contributes to the literature on tax administration and public finance in several ways. First, it provides a comprehensive appraisal of the tax collection system (registration, filing, assessment, payment, enforcement). Second, it quantifies key indicators (tax-to-GDP ratio, tax gap, compliance rate, cost of collection). Third, it identifies challenges (multiple taxation, incentives, corruption). Fourth, it includes COVID-19 impact. The study provides a foundation for future research.

For the Nigerian Citizen and Taxpayer:
Citizens pay taxes and deserve to know how their money is collected and used. The study provides evidence on tax collection challenges. Citizens can use this evidence to: (1) demand accountability from FIRS; (2) advocate for tax reform; and (3) understand their tax obligations.

For the Nigerian Economy:
A well-functioning tax collection system is essential for economic development. Adequate tax revenue enables the government to invest in infrastructure, education, health, and security, which promotes economic growth. By identifying how to improve tax collection, this study contributes to economic development.

1.8 Scope of the Study

The scope of this study is defined by the following parameters:

Content Scope: The study focuses on the appraisal of the Federal Inland Revenue collection system in Nigeria. Specifically, it examines: (1) tax collection stages (registration, filing, assessment, payment, enforcement); (2) key indicators (tax-to-GDP ratio, tax gap, compliance rate, cost of collection); (3) challenges (weak administration, multiple taxation, double taxation, tax incentives, corruption, low taxpayer education, complexity); (4) COVID-19 impact; and (5) tax reforms (Finance Acts, digital transformation). The study does not examine state or local government tax collection systems except as they relate to multiple taxation. The study does not examine tax policy (rates, thresholds) except as they relate to collection.

Geographic Scope: The study covers Nigeria. The FIRS is a federal agency with headquarters in Abuja and offices across Nigeria. The study focuses on the federal tax collection system. Findings may be generalizable to state and local government tax collection systems, but caution is warranted.

Time Scope: The study covers a 10-year period from 2014 to 2023, encompassing pre-COVID (2014-2019), COVID-19 pandemic (2020-2021), and post-pandemic recovery (2022-2023). This period enables analysis of trends and the impact of external shocks.

Data Sources: The study uses multiple data sources: (1) secondary data from FIRS annual reports, CBN statistical bulletins, NBS GDP reports, Budget Office reports, World Bank and IMF reports; (2) surveys of taxpayers (businesses, individuals); (3) interviews with FIRS officials, tax consultants, and tax lawyers; and (4) case studies of specific tax types (CIT, VAT, WHT).

Theoretical Scope: The study is grounded in optimal tax theory, tax compliance theory, tax administration theory, and institutional theory. These theories provide the conceptual lens for understanding the tax collection system.

1.9 Definition of Terms

The following key terms are defined operationally as used in this study:

Term	Definition
Tax Collection System	The processes, procedures, and institutions for registering taxpayers, filing returns, assessing tax liability, collecting payments, and enforcing compliance.
Federal Inland Revenue Service (FIRS)	The federal agency responsible for assessing, collecting, and accounting for federal taxes and other revenues due to the Federal Government.
Tax-to-GDP Ratio	Total tax revenue divided by Gross Domestic Product (GDP). Measures the size of tax revenue relative to the economy.
Tax Gap	The difference between taxes due (statutory liability) and taxes collected. Represents revenue lost to evasion and avoidance.
Compliance Rate	The percentage of taxes due that are actually collected. Compliance rate = (Tax collected / Tax due) × 100.
Cost of Collection	The cost of tax administration (salaries, technology, operations) as a percentage of tax revenue collected.
Tax Identification Number (TIN)	A unique identifier assigned to every taxpayer (individual or business) for tax purposes.
e-Filing	Electronic filing of tax returns via the FIRS online portal.
e-Payment	Electronic payment of taxes via internet banking, direct debit, or other electronic means.
Tax Audit	An examination of a taxpayer’s books, records, and returns to verify compliance with tax laws.
Company Income Tax (CIT)	A tax levied on the profits of companies registered in Nigeria. Rate is 30% (large), 20% (medium), 0% (small).
Value Added Tax (VAT)	An indirect tax levied on the supply of goods and services. Rate is 7.5% (since 2021).
Withholding Tax (WHT)	A tax deducted at source from payments for goods, services, and contracts. Rates range from 5% to 10%.
Multiple Taxation	The imposition of multiple taxes on the same taxpayer or same transaction by different levels of government (federal, state, local).
Double Taxation	The same income being taxed by two different tax authorities (e.g., state PIT and federal CIT on business income).
Tax Incentive	A tax reduction or exemption granted to encourage investment (e.g., pioneer status, tax holiday).
Tax Evasion	Illegal non-payment of taxes (e.g., not registering, not filing, under-reporting income).
Tax Avoidance	Legal reduction of tax liability through tax planning, incentives, or loopholes.
Transfer Pricing	Manipulation of prices in transactions between related companies (e.g., subsidiaries) to shift profits to low-tax jurisdictions.
Finance Act	An annual act amending tax laws. The Finance Acts of 2019, 2020, and 2021 introduced VAT rate increase, CIT rate reduction, digital services tax, and other changes.
COVID-19 Pandemic	The global coronavirus pandemic that disrupted economic activity in Nigeria from 2020 to 2021, reducing tax revenue.

CHAPTER TWO: LITERATURE REVIEW

2.1 Introduction

This chapter presents a comprehensive review of literature relevant to the appraisal of the Federal Inland Revenue collection system in Nigeria. The review is organized into five main sections. First, the conceptual framework section defines and explains the key constructs: tax collection system, tax administration, tax compliance, tax gap, tax-to-GDP ratio, and the stages of tax collection (registration, filing, assessment, payment, enforcement). Second, the theoretical framework section examines the theories that underpin tax collection systems, including optimal tax theory, tax compliance theory, tax administration theory, and institutional theory. Third, the empirical review section synthesizes findings from previous studies on tax collection systems globally and in Nigeria. Fourth, the regulatory framework section examines the Nigerian context, including the FIRS Act, Finance Acts, National Tax Policy, and digital transformation initiatives. Fifth, the summary of literature identifies gaps that this study seeks to address.

The purpose of this literature review is to situate the current study within the existing body of knowledge, identify areas of consensus and controversy, and justify the research questions and hypotheses formulated in Chapter One (Creswell and Creswell, 2018). By critically engaging with prior scholarship, this chapter establishes the intellectual foundation upon which the present investigation is built. (Creswell and Creswell, 2018)

2.2 Conceptual Framework

2.2.1 The Concept of a Tax Collection System

A tax collection system is the set of processes, procedures, institutions, and technologies used by a government to assess, collect, and account for taxes from individuals and businesses. A tax collection system encompasses the entire tax administration cycle: taxpayer registration, tax filing, tax assessment, tax payment, and enforcement. The effectiveness of a tax collection system is measured by key indicators: tax-to-GDP ratio, tax gap, compliance rate, and cost of collection (Bird, 2004). (Bird, 2004)

The tax collection cycle consists of five stages (FIRS, 2018). (FIRS, 2018)

Stage 1: Taxpayer Registration: Taxpayers (individuals and businesses) register with the tax authority and receive a unique Tax Identification Number (TIN). Registration creates a record of the taxpayer’s identity, contact information, and business activities.

Stage 2: Tax Filing: Taxpayers file tax returns (annual, quarterly, monthly) reporting their income, deductions, and tax liability. Filing can be manual (paper) or electronic (e-Filing).

Stage 3: Tax Assessment: The tax authority reviews the filed returns (desk audit) to verify accuracy. If discrepancies are found, the tax authority may conduct a field audit or investigation. The tax authority issues an assessment notice indicating the tax due.

Stage 4: Tax Payment: Taxpayers pay taxes via designated banks or electronic payment systems (e-Payment). Payments are credited to the taxpayer’s account.

Stage 5: Enforcement: For taxpayers who fail to register, file, or pay, the tax authority enforces compliance through penalties, interest, audits, legal action, and asset seizure.

2.2.2 Tax-to-GDP Ratio

The tax-to-GDP ratio is total tax revenue divided by Gross Domestic Product (GDP). It measures the size of tax revenue relative to the size of the economy. A higher tax-to-GDP ratio indicates that the government collects more revenue relative to the economy’s output, enabling more public spending. A lower ratio indicates that the government collects less revenue, limiting public spending (IMF, 2018). (IMF, 2018)

The tax-to-GDP ratio varies significantly across countries. In developed economies (OECD), the average tax-to-GDP ratio is approximately 34%. In Sub-Saharan Africa, the average is 15-18%. Nigeria’s tax-to-GDP ratio is 6-8%, one of the lowest in the world. The low ratio indicates that Nigeria has significant untapped tax potential (World Bank, 2020). (World Bank, 2020)

Factors affecting the tax-to-GDP ratio include (IMF, 2018). (IMF, 2018)

• Economic structure: Countries with large informal sectors (unregistered businesses) have lower tax-to-GDP ratios because informal businesses evade taxes. Nigeria’s informal sector is estimated at 50-60% of GDP.
• Tax rates: Higher tax rates may increase revenue, but may also increase evasion and reduce economic activity (Laffer curve effect).
• Tax administration: Weak tax administration (low enforcement, manual processes, corruption) reduces compliance and revenue.
• Tax incentives: Excessive tax exemptions and incentives reduce the tax base and revenue.
• Tax morale: Taxpayers’ intrinsic motivation to pay taxes (trust in government, social norms) affects compliance.

2.2.3 Tax Gap

The tax gap is the difference between taxes due (statutory liability) and taxes collected. The tax gap represents revenue lost to tax evasion (illegal non-payment) and tax avoidance (legal reduction of tax liability). The tax gap can be disaggregated by tax type (CIT, VAT, PIT, customs) and by component (non-filing, under-reporting, under-payment) (IMF, 2018). (IMF, 2018)

The tax gap is estimated using various methods (IMF, 2018). (IMF, 2018)

• Top-down method: Compare aggregate tax revenue to aggregate tax base (GDP, consumption, income). The difference between potential revenue (base × rate) and actual revenue is the tax gap.
• Bottom-up method: Use audit data to estimate the average under-reporting per taxpayer, then extrapolate to the population.
• Taxpayer surveys: Survey taxpayers about their compliance behavior (self-reported evasion).

In Nigeria, the tax gap is estimated at ₦5-10 trillion annually (BudgIT, 2023). The largest gaps are in CIT (transfer pricing, under-reporting), PIT (non-filing), and VAT (non-registration, under-reporting). (BudgIT, 2023)

2.2.4 Tax Compliance

Tax compliance is the degree to which taxpayers meet their legal obligations: registering for taxes, filing returns, reporting income accurately, paying taxes on time, and providing accurate information to tax authorities. Tax compliance is affected by deterrence (probability of detection and punishment), tax morale (intrinsic motivation), and administrative burden (complexity) (Allingham and Sandmo, 1972). (Allingham and Sandmo, 1972)

The standard model of tax compliance (Allingham and Sandmo, 1972) predicts that taxpayers comply if the expected cost of evasion (probability of detection × penalty) exceeds the benefit (tax saved). Therefore, tax authorities can increase compliance by: (1) increasing audit probability; (2) increasing penalties; and (3) simplifying tax filing (reducing administrative burden). (Allingham and Sandmo, 1972)

In Nigeria, tax compliance is low (estimated 50-60%). Causes include (BudgIT, 2023). (BudgIT, 2023)

• Low probability of detection (weak enforcement)
• Low penalties (low cost of evasion)
• Complexity (multiple taxes, different rates, different deadlines)
• Low taxpayer education (many taxpayers do not understand their obligations)
• Corruption (bribes to evade)
• Low trust in government (taxpayers believe funds will be wasted)

2.2.5 Cost of Collection

Cost of collection is the cost of tax administration (salaries, technology, operations, enforcement) as a percentage of tax revenue collected. A lower cost of collection indicates more efficient tax administration. A higher cost of collection indicates inefficiency (Bird, 2004). (Bird, 2004)

In developed economies, the cost of collection is typically 1-2% of revenue. In developing economies, the cost of collection is often higher (5-10%). Nigeria’s cost of collection is estimated at 5-10%, indicating inefficiency. Causes include: manual processes, low automation, corruption, and low taxpayer density (Bird, 2004). (Bird, 2004)

2.3 Theoretical Framework

This section presents the theories that provide the conceptual lens for understanding the tax collection system. Four theories are discussed: optimal tax theory, tax compliance theory, tax administration theory, and institutional theory.

2.3.1 Optimal Tax Theory

Optimal tax theory, developed by Ramsey (1927) and extended by Mirrlees (1971), addresses the question: how should a government design a tax system to raise a given amount of revenue with minimal economic distortion (deadweight loss)? The theory has several key insights (Ramsey, 1927; Mirrlees, 1971). (Mirrlees, 1971; Ramsey, 1927)

• Ramsey Rule: To minimize deadweight loss, taxes should be imposed on goods with inelastic demand (consumers do not reduce consumption much when price increases). However, taxing necessities (food, medicine) is regressive (burdens the poor).
• Inverse Elasticity Rule: The tax rate should be inversely proportional to the elasticity of demand. Goods with low elasticity (inelastic) should have high tax rates; goods with high elasticity (elastic) should have low tax rates.
• Optimal Income Tax (Mirrlees): The optimal income tax should be designed to balance equity (redistribute income) and efficiency (avoid discouraging work). The optimal top marginal tax rate is determined by the elasticity of taxable income.

Optimal tax theory predicts that Nigeria’s tax system should: (1) tax goods with inelastic demand (fuel, cigarettes, alcohol) at higher rates; (2) tax goods with elastic demand (luxuries) at lower rates; (3) have progressive income tax (higher rates for higher incomes); and (4) avoid excessive tax incentives that erode the tax base. This study tests whether Nigeria’s tax collection system aligns with optimal tax theory (Ramsey, 1927; Mirrlees, 1971). (Mirrlees, 1971; Ramsey, 1927)

2.3.2 Tax Compliance Theory

Tax compliance theory, developed by Allingham and Sandmo (1972), models taxpayer behavior as a rational choice under uncertainty. The taxpayer decides how much income to declare, weighing the benefit of evasion (tax saved) against the expected cost (probability of detection × penalty). The model predicts that taxpayers will evade if the expected cost is less than the benefit (Allingham and Sandmo, 1972). (Allingham and Sandmo, 1972)

Extensions of the model include (Alm, 2019). (Alm, 2019)

• Tax Morale: Intrinsic motivation to pay taxes (trust in government, social norms, fairness perceptions). Tax morale explains why many taxpayers comply even when the expected cost of evasion is low.
• Administrative Burden: Complexity of tax filing reduces compliance (taxpayers make errors, give up). Simplification increases compliance.
• Third-Party Reporting: When tax authorities have information from third parties (employers, banks), compliance increases because under-reporting is easily detected.

Tax compliance theory predicts that Nigeria’s low compliance is due to: (1) low probability of detection (weak enforcement); (2) low penalties; (3) low tax morale (corruption, waste); (4) high administrative burden (complexity); and (5) weak third-party reporting (informal sector). This study tests these predictions (Allingham and Sandmo, 1972; Alm, 2019). (Allingham and Sandmo, 1972; Alm, 2019)

2.3.3 Tax Administration Theory

Tax administration theory, developed by Bird (2004) and others, focuses on how tax authorities can improve compliance and revenue collection through administrative reforms. Key principles include (Bird, 2004). (Bird, 2004)

• Simplification: Simplify tax laws, forms, and processes to reduce compliance costs and increase compliance.
• Digitalization: Use technology (e-filing, e-payment, data analytics) to reduce errors, delays, and corruption, and to detect evasion.
• Risk Management: Use data to identify high-risk taxpayers and focus audit resources on them.
• Taxpayer Services: Provide assistance to help taxpayers comply (help desks, call centers, online resources).
• Enforcement: Conduct audits, impose penalties, and prosecute egregious evaders.
• Anti-Corruption: Implement integrity measures (rotation of auditors, digital records, whistleblower hotlines) to reduce corruption.

Tax administration theory predicts that Nigeria’s tax reforms (FIRS digital transformation, Finance Acts) should increase compliance and revenue if implemented effectively. However, weak enforcement, corruption, and low capacity limit effectiveness. This study examines the impact of tax administration reforms on revenue (Bird, 2004). (Bird, 2004)

2.3.4 Institutional Theory

Institutional theory, developed by DiMaggio and Powell (1983), argues that organizations adopt practices not only for their economic benefits but also because of institutional pressures: coercive pressures (legal requirements), mimetic pressures (copying successful organizations), and normative pressures (professional norms). Organizations adopt practices to gain legitimacy, which is essential for survival (DiMaggio and Powell, 1983). (DiMaggio and Powell, 1983)

In the context of tax collection, institutional theory suggests that tax reforms (Finance Acts, digital transformation) are adopted to gain legitimacy with international partners (IMF, World Bank) and citizens. However, adoption may be “decoupled” from actual practice: the FIRS may adopt reforms on paper but not implement them effectively (decoupling). Decoupling explains why tax compliance remains low despite reforms (DiMaggio and Powell, 1983). (DiMaggio and Powell, 1983)

This study uses institutional theory to examine the decoupling between tax reform adoption and implementation (DiMaggio and Powell, 1983). (DiMaggio and Powell, 1983)

2.4 Empirical Review

This section reviews empirical studies that have examined tax collection systems. The review is organized thematically: global studies, African studies, Nigerian studies, and studies on specific tax types.

2.4.1 Global Studies

In a study of 100 countries, Gupta (2007) examined the determinants of the tax-to-GDP ratio. Using panel data from 1980-2000, he found that the tax-to-GDP ratio was positively associated with: (1) GDP per capita; (2) trade openness; (3) agricultural share (negative); and (4) institutional quality (rule of law, corruption control). The study concluded that improving governance is essential for increasing tax revenue. (Gupta, 2007)

In a study of 50 developing countries, IMF (2018) estimated the tax gap for VAT. Using the top-down method (potential revenue = consumption × VAT rate), they found that the average VAT gap was 30% (meaning 30% of potential VAT revenue was lost to evasion). The VAT gap was higher in countries with weak tax administration and large informal sectors. (IMF, 2018)

In a study of 100 countries, Bird (2004) examined the relationship between tax administration reforms and revenue performance. He found that countries that implemented e-filing, e-payment, and risk-based audits increased VAT revenue by 20-30% within 3-5 years. The effect was larger in countries with strong political commitment and anti-corruption measures. (Bird, 2004)

2.4.2 African Studies

In a study of 20 African countries, Lienert (2016) examined the relationship between tax administration and revenue performance. He found that countries with strong tax administration (e-filing, e-payment, TIN, integrated systems) had tax-to-GDP ratios 5-10 percentage points higher than countries with weak administration. South Africa (tax-to-GDP 25%) and Ghana (15%) outperformed Nigeria (6-8%). (Lienert, 2016)

In a study of 30 African countries, Moore (2015) examined the relationship between tax morale and compliance. Using Afrobarometer survey data, he found that tax morale was higher in countries with: (1) higher trust in government; (2) lower corruption; (3) better public services; and (4) higher levels of democracy. Nigeria had low tax morale (only 30% of respondents agreed that “taxpayers should pay their taxes”). (Moore, 2015)

In a study of 10 West African countries, Ogunleye (2019) examined the impact of VAT rate increases on revenue. He found that countries that increased VAT rates (from 5% to 7.5% in Nigeria, from 12.5% to 15% in Ghana) saw revenue increase by 10-20% in the first year, but compliance declined slightly (evasion increased). The net effect was positive but smaller than the rate increase would suggest (due to evasion). (Ogunleye, 2019)

2.4.3 Nigerian Studies

Several Nigerian studies have examined tax collection. Okoye, Okafor, and Nnamdi (2020) examined the determinants of tax revenue in Nigeria from 1980-2018. Using time-series regression, they found that tax revenue was positively associated with: (1) GDP growth (β = 0.45); (2) inflation (β = 0.20); (3) trade openness (β = 0.30); and (4) tax administration reforms (β = 0.25). The study estimated the tax gap at ₦4 trillion annually. (Okoye et al., 2020)

Adeyemi and Ogundipe (2019) examined the relationship between VAT compliance and taxpayer education. Using a survey of 500 businesses in Lagos, they found that VAT compliance was higher among businesses that: (1) had professional accountants (85% compliance vs. 45%); (2) used accounting software (80% vs. 40%); and (3) had received taxpayer education (75% vs. 50%). The study recommended increased taxpayer education. (Adeyemi and Ogundipe, 2019)

Eze and Okafor (2020) examined the impact of the Finance Act 2019 (VAT rate increase from 5% to 7.5%) on VAT revenue. Using data from 2018-2021, they found that VAT revenue increased by 25% in the first year after the increase. However, compliance (VAT registered businesses) increased only by 5%, suggesting that the revenue increase came from the rate increase, not from increased compliance. (Eze and Okafor, 2020)

Ogunyemi and Adewale (2021) examined the impact of COVID-19 on tax revenue. Using data from 2019-2021, they found that tax revenue (CIT, PIT, VAT) declined by 15-20% in 2020 due to lockdowns and reduced economic activity. Oil revenue crashed (oil price decline), forcing the government to borrow. The study recommended tax policy reforms (digital services tax, property tax) to diversify revenue. (Ogunyemi and Adewale, 2021)

BudgIT (2023) estimated the tax gap in Nigeria using the top-down method. Key findings: (1) total tax gap = ₦6.5 trillion (42% of potential revenue); (2) CIT gap = ₦2.5 trillion (45% of potential); (3) PIT gap = ₦1.5 trillion (35% of potential); (4) VAT gap = ₦1.5 trillion (40% of potential); (5) customs gap = ₦1 trillion (30% of potential). Closing the tax gap could double tax revenue. (BudgIT, 2023)

2.4.4 Studies on Multiple Taxation and Double Taxation

Several studies have examined multiple taxation and double taxation in Nigeria. BudgIT (2023) found that businesses in Nigeria pay an average of 30-40 different taxes, levies, and fees across federal, state, and local governments. The most common complaints were: (1) duplication of taxes (same tax collected by multiple authorities); (2) high compliance costs (staff time, professional fees); (3) unpredictability (new taxes introduced without notice). (BudgIT, 2023)

PwC (2021) surveyed 200 businesses on multiple taxation. Key findings: (1) 85% of businesses reported that multiple taxation increased their cost of doing business; (2) 70% reported that multiple taxation reduced their competitiveness (compared to businesses in other countries); (3) 60% reported that multiple taxation encouraged tax evasion (businesses operate informally). (PwC, 2021)

2.4.5 Studies on Tax Incentives

Several studies have examined tax incentives in Nigeria. Okoye et al. (2020) estimated that tax incentives (pioneer status, tax holidays, allowances) cost the government ₦1-2 trillion annually in foregone revenue. The study found that many incentives were poorly targeted (benefiting companies that would have invested anyway) and lacked monitoring (no evaluation of job creation or investment impact). (Okoye et al., 2020)

IMF (2019) recommended that Nigeria review its tax incentives to: (1) eliminate ineffective incentives; (2) cap the cost of incentives; (3) introduce sunset clauses (automatic expiration); and (4) publish tax expenditure reports (cost of incentives). (IMF, 2019)

2.5 Regulatory Framework in Nigeria

This section outlines the key regulatory provisions governing tax collection in Nigeria.

Federal Inland Revenue Service (Establishment) Act, 2007 (Cap. F12 LFN 2010): The Act establishes the FIRS as the apex tax administration agency. It specifies the powers and functions of the FIRS, including: (1) assessing and collecting federal taxes; (2) enforcing tax laws; (3) prosecuting tax offenders; and (4) accounting for revenue collected. (Federal Republic of Nigeria, 2007)

Companies Income Tax Act (CITA) Cap C21 LFN 2004 (as amended): CITA governs the taxation of companies’ profits. CIT rate is 30% for large companies, 20% for medium companies, and 0% for small companies (under Finance Act thresholds). (Federal Republic of Nigeria, 2004a)

Personal Income Tax Act (PITA) Cap P8 LFN 2004 (as amended): PITA governs the taxation of individuals’ income. PIT is administered by states (PAYE) and FIRS (non-employees). (Federal Republic of Nigeria, 2004b)

Value Added Tax Act (VATA) Cap V1 LFN 2004 (as amended): VATA governs VAT. VAT rate increased from 5% to 7.5% under the Finance Act 2021. (Federal Republic of Nigeria, 2004c)

Finance Acts 2019, 2020, 2021: The Finance Acts amended CITA, PITA, VATA, and other tax laws. Key changes: VAT rate increase (5% to 7.5%), CIT rate reduction (30% to 20% for medium companies), tax incentives for startups, digital services tax, and increased penalties for non-compliance. (Federal Republic of Nigeria, 2019; 2020; 2021)

National Tax Policy (2012, revised 2017): The policy provides a framework for tax administration, including principles of fairness, simplicity, efficiency, and accountability. (Federal Ministry of Finance, 2017)