According to him, prior the to social contract, man lived in a state of nature - man’s state of nature was one of a chaotic condition of constant fear and life in the state of nature was solitary, poor, nasty, brutish and short. To overcome these hardships, man entered into two agreements:• Pactum unionis• Pactum subjectionisUnder the pact of unionis, men sought protection of their lives and properties. This resulted in the formation of a society where people undertook to respect each other and live in peace and harmony. With the second pact of subjectionis, people united together and pledged to obey an authority and surrendered the whole or part of their freedom and rights to an authority in exchange for a guarantee of protection of life, property, social amenities and to a certain extent, liberty. Thus, the authority of the government or the sovereign or sate came into being. This authority also includes making policies, one of which is the fiscal policy.Fiscal policy describes two actions by the government. The first is taxation - by levying taxes the government receives revenue from the populace. Taxation is a transfer of assets from the people to the government. The second action is government spending. This is in fulfilment of pactum subjectionis and may take the form of wages to government employees, social amenities, security, roads, free or discounted health care, education, transportation or electricity. When the government spends, it transfers assets from itself to the public. Since taxation and government spending represents reversed asset flows, it is nearly given that taxation is the swivel for a sustainable, efficient and effective economy.History and Principles of Taxation in NigeriaThe history of taxation in Nigeria goes back to pre-colonial rule. There was a system of taxation in existence in the form of contribution of compulsory service, money, farm produce, goods and labour, which were essentially meant to support the various monarchies. Mainly, these taxes were levied in the form of ground rent, palm fruit tax, farm produce tax, cattle ownership tax, etc.The modern tax system in Nigeria was first introduced in the year 1904 by Lord Lugard as community tax in the then Northern Nigeria. He later made changes, which resulted, to the Native Revenue Ordinance of 1917 in Northern Nigeria. The ordinance was extended to the eastern part of Nigeria in 1929. During colonial rule, taxes were imposed on individuals and corporate entities through a series of promulgations by the colonial power. In 1940, two major legislations were passed; these were the Direct Taxation Ordinance No. 4 of 1940 and the Income Tax Ordinance No. 3 of 1940. The Direct Taxation Ordinance of 1940 applied to all citizens except those in Lagos Township. The Income Tax Ordinance No. 3 of 1940 applied to expatriates and to Nigerians living in Lagos. The Income Tax Ordinance was passed in 1943 repealing the 1940 Ordinance. The 1943 Ordinance together with the Direct Taxation (Amendment) Ordinance 1943 continued to apply until 1956. In 1956, the Eastern Region passed the Finance Law No. 1 of 1956. The basis of computation of tax provided in the Finance Law No. 1 of 1956 was basically the same as in the Ordinance of 1943. In 1956 tax allowances were provided for married taxpayers, and additional allowances for families with up to a maximum of three children. It also introduced the Pay-As-Your-Earn (PAYE) system of taxation. The Eastern Region Finance Law number 1 became operative in the region on April 1 1956, thus abrogating the application of Direct Taxation Ordinance in the Region. Another law was passed in 1962 repealing the 1956 Law. The Western Region departed from the Direct Taxation Ordinance by passing the Income Tax Law in 1957. The PAYE system was introduced in the region by the Income Tax (Amendment) Law 1961. To ensure uniformity in both the application and incidence of taxation on individuals throughout Nigeria, the Income Tax Management Act (ITMA) was enacted in 1961, thus repealing all previous laws applicable to individuals, and making the main provisions applicable to all individuals throughout Nigeria. In the same vein, the Companies Income Tax Act (CITA) of 1961 was also promulgated. Subsequently, ITMA 1961 was repealed and replaced by Personal Income Tax Act (PITA) 1993, which came into being through Decree No. 104 of 1993, while the CITA of 1961 was repealed by the enactment of the CITA of 1979. The tax Acts which went through series of amendments, reassessments and reviews, are now included in the Laws of the Federation of Nigeria, 2004. Thus, codifying them as PITA CAP P8 LFN 2004 and CITA CAP C21 LFN 2004.Principles of TaxationThese are the rules, qualities, conditions, standards or yardsticks by which the quality of a tax system is measured and by which a good tax policy can be formulated. Adams Smith was noted to have been the first person to mention the principles of taxation, which he called the canons of taxation in his book “The Wealth of Nations” in 1776. Although Adams Smith mentioned only four principles, scholars that came after him made some generally accepted additions. Some of these principles include the following:Principle of Equity: This principle states that a good tax system should be as just as possible by ensuring that all persons who ought to pay the tax are covered by the tax and that each taxpayer pays exactly what is just and equitable considering his circumstance and ability. There are two types of equity i.e. vertical and horizontal equity. Vertical equity is the unequal treatment of taxable persons with varied taxable income. While horizontal equity is the equal treatment of taxpayers with the same taxable income.Principle of Economy: This principle states that the cost of collecting tax should not be too high so as to outweigh the benefits derivable from the imposition of tax. For example if it costs a government N9 million to collect tax revenue of N10 million, the tax system is said to lack economy.Principle of Certainty: This principle states that the amount to collect as tax, the time of payment, the mode of payment and the place of payment must be made clear to the taxpayer, so that the taxpayer is not left at the whims and caprices of the tax authorities. In other words, the taxpayer should be fully informed about taxes to be able to arrive at a conclusion as to the amount of tax payable by him with reference to the provision of the tax law, as well as, to prevent him from being subjected to cheating by unscrupulous people and dishonest tax officials.Principle of Convenience: This principle states that tax should be imposed at a time, in a manner and at a place that the taxpayer is in position to pay, so that collection of tax would be easy for the tax administrators. For example, a salary earner should be asked to pay tax when he receives his salary and not at the middle or the end of the month when the salary may have been exhausted. This is why PAYE is deducted at source, because it is more convenient than requiring the taxpayer to pay after collection of salary. A farmer should be asked to pay tax when he harvests his crops and not when he is doing the planting or clearing the farm.Principle of Simplicity: This principle states that a good tax system and the tax law should be as simple as possible, both in interpretation and application. This requirement is particularly important in developing economies where the rate of illiteracy is high and where the culture of record keeping has not been imbibed by most small scale entrepreneurs. Principle of Neutrality: This principle states that a good tax system should neither distort the consumption habits nor the production decisions of a taxpayer. In other words, a good tax system should not interfere with people’s willingness to work, produce, consume, save and invest.Principle of Efficiency: This principle states that a good tax system should make it difficult for tax evasion (i.e. should make it difficult for non-payment of tax or illegal reduction of one’s tax liability).Principle of Flexibility: This principle states that a good tax system and tax law should be such that it can be easily amended when the need arises, without unnecessary protocol.
To be continued.
If you are happy to be contacted by a Daily Trust journalist please leave a telephone
number that we can contact you on. In some cases a selection of your comments will
be published, displaying your name as you provide it and location, unless you state
otherwise. Your contact details will never be published. When sending us pictures,
video or eyewitness accounts at no time should you endanger yourself or others,
take any unnecessary risks or infringe any laws. Please ensure you have read the
terms and conditions.