As the price of petroleum is on a downside in the international market, an alternative means of generating fund for proper Governance and actualization of Government objective is needed. One alternative option in generating fund is through TAXATION.
Taxation is the process where the citizenry in fulfilling the obligation imposed on him by the Government make financial contribution to the Government revenue for the realization of societal goals which failure to do so is not without sanction by the Law.
According to TOLBY R.A in his book “THE THEORY AND PRACTICE OF INCOME TAX”, the tax system can be describe as a universal contrivance where the state imposes upon his citizens a compulsory financial levy or contribution for the benefit of the society as a whole.
The tool of taxation is an important and highly potent one. There is a popular saying that there are two constant things in life that is DEATH AND TAX. Thus for constant revenue generation for the Nigeria Government, the reliable tool is Tax. A person is expected to compulsorily pay certain contribution to the Government from his income. It is not a question whether the tax payer gets anything in return for his or her contribution.
Taxation is a civic obligation imposed by law on behalf of the Government on its citizens for the purposes of financing its obligation to its citizen and promoting public welfarism. This tool of generating fund have had its effectiveness affected by different factors and one of such factors is TAX PREVENTION. Tax prevention are methods employed by tax-payers to escape their tax liability completely or reduce their liability to the barest minimum. Tax prevention is further divided into: TAX EVASION AND TAX AVOIDANCE.
Tax evasion and tax avoidance has become an issue of concern in Nigeria tax system even in the International scene as it reduce the amount of Government revenue. The question that has been what is responsible for the continued existence of tax evasion and avoidance. Some blame the citizens for their unpatriotic attitude towards paying tax.
Some blame the situation on the tax authorities for not living up to expectation in relation to the proper and effective administration of tax. While other blames the accountants and tax professional who are expected to promote transparency of the practice and detect fraud but instead uses their expertise to facilitate tax evasion and avoidance.
Tax evasion is a deliberate and willful act of not disclosing the full income which is subject to tax in order to reduce its tax liability. Thus paying less tax or not paying at all what is legally expected of a person characterize tax evasion. Tax evasion is a way a tax payer arrange his affairs in such a way that he pay less through illegal means. It also include wrong tax reporting, declaring less income,profit,gain than actually made or overstating deductions, claiming relief which not entitled to.
Tax avoidance, according to BLACK LAW DICTIONARY, is the minimisation of one’s tax liability by taking advantage of legally available tax planning opportunities. It is a means of reducing one’s tax liability to a lesser amount or no liability at all through Legal means. A person practice tax avoidance when he uses the loopholes in the law to minimise his tax liability.
There is a concrete difference between tax avoidance and tax evasion. While tax evasion is reducing one’s tax liability through illegal means such as deliberately concealing certain income or profit which is subject to taxation. Tax avoidance is an act of legal reduction by taking advantage of loopholes in the law. Therefore the main difference between tax evasion and tax avoidance is the question of legality of the taxpayer act.
Tax evasion is seen as morally wrong considering from the moralistic view. Apart from being morally wrong, it is a breach of legal provision. While it is settled that Tax evasion is both morally and legally prohibited same cannot be said of Tax avoidance .in the case of LEVENE V. I.R.C (1928) AC 217,VISCOUNT SUMNER commented that
“It is a trite law that His majesty ’ s subject are free, if they can, make their own arrangement, so that their cases may fall outside the scope of the taxing Acts. They incur no legal penalties and, strictly speaking, no moral censure if, having considered the lines drawn by the legislature for the imposition of taxes, they make it their business to walk outside them”.
It can be deduced from the judicial attitude toward tax avoidance that although tax avoidance id morally wrong but it does not attract any legal sanction.
There are two school on the issue of Tax Avoidance. A school of thought believe that tax avoidance can only be said to be morally wrong but will not impose any tax liability on the tax payer. This is school of thought base their argument on two (2) justification for tax Avoidance. One of their justification is based on the principle on interpretation of tax statutes. The General rule in the interpretation of tax statute is that the taxpayer is entitled to rely on the strict, express, literal wordings of the applicable statutes.
Thus if the law does not expressly prohibit an act, no matter how unpatriotic it may be, it’s not illegal. Another justification is given by the court in addressing the issue of Tax Avoidance. In AYRSHIRE PULLMAN MOTOR SERVICES V. COMMISSIONER OF INLAND REVENUE (1929) 14TC 754, the court held that “Every man is entitled if he can to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result ,then, however unappropriated the commissioners of the inland Revenue or his fellow taxpayer may be of his integrity ,he cannot be compelled to pay an increased tax.”
Another school of thought believe that allowing a taxpayer to rely on the provision of the tax statutes to escape or minimise his tax liability is in violation of one of the rationale of Taxation that all taxpayer is to pay tax. Allowing such will result in distributing their tax liability on other taxpayers which will constitute extra burden. They believe the provision of the law should be given wide interpretation in fulfilment of the intent and purpose of taxation in order to cover any tax avoidance. Few judicial decision has followed this position. In GREEN V. INLAND REVENUE COMMISSIONER (1971) AC 109 at 137, LORD REID state that “it would appear that the courts are now favourably disposed towards the widely drawn anti-avoidance provisions. By their very wide nature, anti-avoidance provisions have to be drawn so that the net is wide enough to pull in many activities that would otherwise have escaped taxation” This position was followed in the Nigeria case of MOBILE OIL V. F.B.I.R (1977)3 S.C 53 at 113.
The effect of the continuous operation of tax avoidance and evasion will have a great impact on the Government Revenue and the economy as tax form a reliable source of generating income for Government. It will also have adverse impact on the society as a whole as there would not be revenue to carry out the plans of Government for the benefit of the General populace.
In conclusion, although tax avoidance does not attach any legal sanction as its only frown upon on moral ground, alongside tax evasion is detrimental to the growth and proper functioning of the society.