CHAPTER ONE

1.0 INTRODUCTION

1.1 BACKGROUND OF STUDY

Taxation is a main source of revenue to governments across the world; thus tax becomes a burden that every citizen must bear to support the government as well has some functions to perform for the well-being of those it governs (Kehind, 2007). The scope of these functions depends on the political and economic orientation of the members of the society, their needs, aspirations, willingness and ability to pay tax amongst others. Among the traditional functions of government is the provision of collective or public goods; thus, goods that cannot be divided among the separate members of the society but which must be used for the benefit of all. Such goods include the maintenance of law and order, defence against external aggression, regulation of trade and business to ensure social and economic justice.

        Revenue is an income collected by public authorities with fair jurisdiction of compulsory contribution from persons or body to finance expenditure (Gupta, 2009). It is an income required by government to finance its growing expenditure. Revenue can be fund required by the government to finance its activities which includes; donations from individuals and corporations, support from government agencies, income from activities related to the organization’s mission, and income from fund raising activities, membership dues, and financial investment (Dandago and Alabade, 2010).

        On the other hand a withholding tax is the tax required by Law to be withheld by a party from each payment made to another contracting party from the income or services rendered (Okon, 2008). This tax, when deducted and withheld, is required to be remitted periodically to the Government Inland Revenue Service. The Inland Revenue Service is in turn required to issue a Withholding Tax Credit Note for the benefit of the latter party, part of whose income was withheld.

Withholding tax is not a final tax. As mentioned above, the paying party is required upon withholding and paying this tax to obtain on behalf of the other party a Tax Credit Note. The latter Note automatically becomes a tax credit to the other party from whose income the tax was deducted.

A withholding tax payment, as a tax credit, allows the latter party mentioned above to claim it as part of its tax benefits when filing its yearend tax returns. The applicable Laws on withholding tax in Nigeria are Sections 60, 61, 62 and 63 of the Company Income Tax (CITA) and Sections 69 – 72 of the Personal Income Tax (PITA).

1.2 STATEMENT OF RESEARCH PROBLEM

Every system designed to achieve an objective is faced with a lot of challenges. The Tax administration in Nigeria is also faced with a lot of challenges which account for the reasons why enough revenue have not been generated from it; one of the major problems faced by tax administration in Nigeria is the issue of withholding tax. Tax administration in Ogun state is similar to what operates in order parts of the country. The tax administration problems encountered in Ogun State are also evident in other States of the Federation. The incessant review of revenue capacity of all revenue units is a major challenge which has impacted negatively on efficient collection of tax (Enahore et al, 2012). Naiyeju (2005) pointed out that most of the tax authorities in Lagos State Local Government lack the desired institutional capacity to administer tax system effectively; same applicable to Ogun state. Most of those who pay tax are those on government pay roll. Those in the private sector and informal sector hardly pay tax. Ekpo and Ndebbio (1998) were of the opinion that other problem of tax administration centres on inadequate personnel in terms of quantity and quality. Tax collectors in the state and local government are mostly non-accountants who do not understand tax practice. So also is the challenge of corruption on the part of the tax practitioners. There is high tendency for them to exonerate eligible payers from paying tax by collecting bribe from them. So also, some of the practitioners do not remit what they have collected as tax to do account of the state. The problem of over reliance on direct allocation, borrowing and grant by past governments has made the state to lose its sense of reasoning in exploring other sources of revenue generation. The Ayoola Commission also provided sufficient evidence to show that tax clerks live above their incomes and their ostensible livings have been found to be totally unrelated to their salaries and status (Naiyeju 2005). It is to this regard that the researcher desired to carry out an analysis on withholding tax using Ogun State as the case study.

1.3 AIM AND OBJECTIVES OF STUDY

The main aim of the research work is to carry out an analysis on withholding tax in Ogun State. Other specific objectives of the study are:

1. to determine the importance of  withholding tax in Ogun state
2. to determine the effect of withholding tax on revenue generation in Ogun State
3. to examine whether government policies have significant effect on withholding tax in Ogun State
4. to proffer solution to the problems of withholding tax in Ogun state

1.4 RESEARCH QUESTIONS

The study came up with research questions so as to ascertain the above stated objectives of the study. The research questions for the study are:

1. What are the causes of withholding tax in Ogun state?
2. What is the effect of withholding tax on revenue generation in Ogun State?
3. Do government policies have significant effect on withholding tax in Ogun State?
4. What is the way forward to the problems of withholding tax in Ogun state?

1.5 STATEMENT OF RESEARCH HYPOTHESIS

H0: withholding tax has no significant effect on revenue generation in Ogun State

H1: withholding tax has significant effect on revenue generation in Ogun State

1.6 SIGNIFICANCE OF STUDY

The study on the analysis of withholding tax will be of immense benefit to the tax administration department in Ogun state, the government (local, state and the federal) and other researchers that desire to carry out similar research on the above topic as the findings of the study will educate the above population on withholding tax, the importance of withholding tax and the effect of withholding tax on revenue generation in Ogun state. Finally the study will contribute to the body of existing literature and knowledge in this field of study and provide a basis for further research

1.7 SCOPE OF STUDY

The study on the analysis of withholding tax is limited to tax administration office in Ogun state. The study will cover on tax withholding, the causes of tax withholding and the effect of tax withholding on revenue generation in Ogun state

1.8 LIMITATION OF STUDY

Financial constraint- Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

Time constraint- The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work

1. DEFINITION OF TERMS

Tax: This is a compulsory contribution imposed by government on individual and corporate bodies for the use of government to provide facilities or service in the nation

Tax Liability: This is the amount that is borne by the tax payer

Paye(Pay As You Earn): This type of tax is based as the earning of the tax payer

Capital Gain Tax: This is the type of tax that is based on the gain realized from the sale of capital goods

Corporate Tax: This is the type of tax that is based on the profit a company

Tax Laws: These are acts decree or regulations guiding the assessment and collection of taxes in the country