ELECTRONIC TAX SYSTEM, TAX COMPLIANCE AND REVENUE COLLECTION

EFFICIENCY
 CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND TO THE STUDY

Taxation is an important source of revenue to the government. Tax can be variously defined;

Anyanwu (1997) defined taxation as the compulsory transfer of payment (or occasionally of

goods and services) from private individuals, institutions or groups to the government.

According to Ogbonna and Appah (2012), tax is “a major source of government revenue all over

the world”. According to Chris and Elizabeth (2001) tax has three basic features namely, a

compulsory levy imposed by government, or local authority, for public purposes and to

encourage social justice. Taxation is machinery or process in which society and communities or

group of individuals are contributing into an agreed sum which is important for the resolution,

development and administration of the public (Ogundele, 1999). Taxes are essential contribution

levied by the government on citizens and corporate institutions for the provision of public

expenditure (Nightingale, 1997).

Taxation as a fiscal tool could be used to enhance a nation’s development process and its

economic activities, thereby improving the overall level of prosperity and economic well-being

of the entire citizenry (Anyaduba, 1999). Taxation is a tool for societal development and also a

means by which the rewards of development are redistributed (Oladiran, 2009). When the

taxpayers pay their taxes, the government is accountable to the citizens and are accountable to

make budget decisions accessible and transparent. In developing countries like Nigeria, the

Government faces challenges and issues when it comes to revenue collection (i.e. tax collection)

which ends up leaving the government collecting a lesser amount. According to a world bank
economic report on Nigeria published on the 1st of May 2013, it was stated that 95% of the

government’s budgeted expenditure depended on its projected oil revenue based on current

world oil prices. It was also recommended in the report that the Federal Government, through the

improvement of the domestic tax system it can increase its internal revenue and provide in the

event of a fall in oil prices a financial backup plan for the economy (The World Bank, 2013).

Globally, Electronic Tax System has been given attention through the increase in the use of

information technology and this affects the tax administration. Nisar (2013) argued that current

problems in public taxation stress the need of developing a system of tax assessment and

collection that involves internet services. Therefore, Electronic Tax System is an online platform

whereby the taxpayer is able to access through internet all the services offered by a financial

authority such as the registration for personal identification number, filing of returns, payment of

taxes and system for compliance certificate. E-Filing is a process where tax documents or tax

returns are submitted through the internet, usually without the need to submit any paper return.

In United States of America, the introduction of electronic tax administration including

electronic tax filing (e-filing) has been the largest in terms of citizens affected. Starting in the

1980s as a partnership between the Internal Revenue Service (IRS) and the tax preparer H&R

Block, the program has developed to a successful public-private partnership. In fact, the IRS has

been described as one of the most efficient tax collection agencies in the world (Fletcher 2003).

Recent announcements by the IRS indicate that e-filing has increased at an impressive rate since

its introduction in the late 1990s. Statistical analysis shows that e-filing for individual taxpayers

increased from an average of about 23% in 1999 and approximately 60% in 2007. More recent

IRS information indicates an individual e-filing rate of 61% in 2008 and 69% in 2009 (Pippin S

and Tosun M,2014).

In South Africa, SARS e-filing is the official online tax returns submission portal for South

African Revenue Service launched originally in 2001 through third-party companies, then

expanded and taken in-house by SARS in 2006. In the 2015/2016 tax year SARS e-filing

processed 36.80 million electronic submissions and payments which is equivalent to 98.7% of all

submissions and payments to SARS in South Africa (SAnews,2016). SARS e-filing is a free,

online process for the submission of returns and declarations and offer other related services.

The Nigerian Tax system is surrounded by numerous problems; therefore, the aim of E-Tax

system is to provide the tax authority a database with details of taxpayers and their transactions.

An example of E-Tax System in Nigeria is Integrated Tax Administration System (ITAS)

introduced in 2013 by the Federal Inland Revenue Service to improve tax administration in

Nigeria and improve the tax compliance process from the manual system which is monotonous

and bureaucratic. IATS has the following features; Online Submission of tax returns; Taxpayers

can submit their tax returns for different taxes such as Petroleum Profit Tax (PPT), Companies

Income Tax (CIT), Value Added Tax (VAT) and Capital Gains Tax(CGT) through the portal.

When the taxpayer is registered, a taxpayer’s e-filing account is created based on the taxes the

individual or company is liable to pay.

Electronic Tax Clearance Certificate (E-TCC) processing: Taxpayers can apply for a TCC online

which will be generated by the system. Although hard copies will still be available for collection,

a system generated TCC will be just as useful as the hardcopy. E-TCC is therefore a platform

that issues the TCC of a taxpayer. Validation of Tax Identification Number (TIN): The external

parties can validate the TIN of a taxpayer on the Integrated Tax Administration System (ITAS).

Automatic Imposition of Late Filing Penalties and Interests: The system has been designed to

automatically compute and impose interest and penalty for late submission of tax returns or late
payment of taxes. Electronic Tax Payment: Effective on March 2015, taxpayers can pay their

taxes online from their corporate bank accounts. This system which was developed in

conjunction with the Nigeria Inter-Bank Settlement System (NIBBS) is hosted on the respective

commercial bank’s internet-banking platform. The process requires the TIN, unique document

number generated on the E-filing platform and the necessary internet banking authentication.

(PWC Nigeria, 2015)

Tax compliance is the degree to which a taxpayer complies with the tax rules of his country. This

also means making tax payments and producing and submitting tax returns to the tax authorities

on time and in the required formats. The issue of tax compliance has been a vibrant issue in the

tax world in Nigeria. Most citizens have the view that since the government doesn’t provide us

with the basic amenities needed, why pay taxes? This is commonest reaction you get from

citizens who evade taxes. Tax evasion cannot be totally eliminated but can be controlled by the

tax authority. A more appropriate definition of compliance could include the degree of

willingness to complying with tax laws and administration that can be achieved without

immediate threat or actual system of enforcement activity. Tax compliance can be viewed in

terms of tax avoidance and evasion. These two are distinguished in terms of legality, tax

avoidance is legal while tax evasion is illegal. Compliance might therefore be better defined in

terms of compliance with the tax laws of the nation (James, Murphy and Reinhart 2005).

1.2 STATEMENT OF THE PROBLEM

Electronic Taxation System remains a great concern worldwide especially in developing

countries like Nigeria. Electronic Tax System was introduced by the Federal Inland Revenue

Service in 2013 to increase revenue collection, effective tax administration, curb tax evasion,

avail services to the tax payers all the time from anywhere, improve tax compliance and reduce
the costs of compliance process. The first need of any modern government is to generate enough

revenue which the backbone of the state is. Thus, taxation is one of the most significant source of

revenue for the government (Ogbonna and Appah,2012).

The E-filing offers many benefits to the tax authorities. To the tax authorities, e-filing minimizes

their workload and operational cost due to the submission of tax returns online. It also reduces

the cost of processing, storing and handling of tax returns. Despite these benefits associated with

e-filing, tax authorities face some major challenges towards the implementation of the e-filing

system. One of the challenges is the public perception of the e-filing system. After using an e-

service over the Internet, the public may find the e-service system easy and useful or otherwise.

Since the public cannot directly communicate with tax personnel, see or touch the tax forms as

the service is provided online, the e-filing service system delivered to them may not perform as

expected because even though there are online support centres, computer illiteracy is a factor

amongst some taxpayers and these support centres cannot provide all the relevant details at all

times. The public may be burdened by the time and effort spent learning the new system and

accommodating any services failure.

Sani and Umar (2014), Tax evasion has been an issue of concern in the Nigerian tax system for

years. Tax evading attitude can have an adverse effect on government funds, government’s

socio-economic and political programs. This situation is being blamed on the tax administrators

by many analysts and commentators, for not living up to expectation with regards to tax

administration; others attribute the case to the unpatriotic attitude and willingness of the

taxpayers. When the issue of tax non-compliance arises, it is expected that since electronic tax

system has been introduced, tax compliance should have increased overtime leading to an

increase in the tax revenue. Therefore, the gap between the tax revenues to be collected and the
tax revenues collected then becomes a problem. Most taxable persons evade tax due to tax justice

not achieved, intentionally and for some other reasons leading to shortage in revenue generation.

Hence, the e-Tax system is necessary in order to capture more taxpayers to increase the revenue

of the State because the government needs revenue in providing the basic amenities and also

keeping track on these taxpayers.

1.3 OBJECTIVES OF THE STUDY

The general objective of this study is to examine the effect of the use and introduction of the e-

tax system on the tax compliance among self-employed taxpayers and SME owners.

The study was guided by the following specific objectives;

1. Examine the effect of the e-tax system on the tax compliance among self-employed

individuals.

2. Examine the effect of the e-tax system on the tax compliance among SME employees.

3. Examine the relationship between the perceived ease of use and the electronic tax system.

4. To establish the effect of the electronic tax system on revenue collection efficiency of the

tax authority.

1.4 RESEARCH QUESTIONS

In order to achieve the objectives highlighted above, the following research questions were

formulated as follows:

1. To what extent does e-tax system have an effect on the tax compliance of self-employed

individuals?
2. To what extent does e-tax system have an effect on the tax compliance of SME

employees?

3. What is the relationship between e-tax system and the perceived ease of use?

4. To what extent does the electronic tax system have an effect on the tax revenue collection

efficiency of the tax authority?

1.5 RESEARCH HYPOTHESIS

Hypothesis I

H0: There is no effect of e-tax system on the tax compliance of self-employed individuals.

Hi: There is an effect of e-tax system on the tax compliance of self-employed individuals.

Hypothesis II

H0: There is no effect of e-tax system on the tax compliance of SME employees.

Hi: There is an effect of e-tax system on the tax compliance of SME employees.

Hypothesis III

H0: There is no significant impact on the extent of mobilization of funds to finance capital

projects.

Hi: There is a significant impact on the extent of mobilization of funds to finance capital

projects.

1.6 SIGNIFICANCE OF THE STUDY

The Lagos State government relies heavily on taxes to fund its infrastructural and recurrent

development expenditure. An increase or decrease in the tax compliance of taxpayers has a direct

bearing on the economy of Nigeria as a country.

Tax Authority and Other Government Institutions: The study is likely to reveal the strengths or

weaknesses associated with implementation of new technology and its benefits on tax

compliance among small taxpayers, enriching knowledge to other state government institutions

planning to introduce electronic tax system. This study will also enlighten the tax authority on

how the e-tax system has significantly increased tax compliance among SMEs and Self-

employed taxpayers, using the platform or otherwise.

Students: It will also be of use to the student and researchers for further research study who wish

to understand the practical aspect of taxation. It will assist students in their knowledge and

appreciation of the practical E-tax system of the government. The research will also contribute to

the existing body of literature knowledge and may form the basis for further research in the area

of E-tax system and tax compliance in Nigeria. International Analysts: This study will be

significant to international analysts that are interested in the electronic tax system in Lagos State

and how it has impacted the tax compliance and the effectiveness of this system in its ability of

capturing more taxpayers by comparing the system to that of developed countries.

1.7 SCOPE AND LIMITATION OF THE STUDY

E-tax system is referred to as the transmission of tax information directly to the tax

administration using the Internet (Edwards-dowe, we, 2008). The E-tax system makes an

effective impact on the economy toward improving the level of tax compliance by the taxpayers

and income generation. This is because of its convenient, time saving, cost effectiveness for both

the tax administrators and the taxpayers. The reason for using Lagos State as the case study for

this research is because Lagos State is highly populated with a population of over 21 million

persons (world population review 2016), famously known as the city that never sleeps and this

indicates the large number of taxable persons that can be captured using the e-tax system. FIRS
introduced integrated tax administration system in Nigeria in 2013 offering services like E-TCC,

e-Filing, e-Payment and e-Registration to the taxpayers. The internally generated revenue of

Lagos State moved from a monthly average of about 600 million Naira in 1999 to approximately

20.5 billion Naira in 2013, making Lagos State one of the states in Nigeria with the highest IGR

(internally generated revenue) and less dependent on proceeds the Federation Account (LIRS,

2016).

There were difficulties and limitations in getting sufficient secondary data because little research

has been done on Electronic Tax System. The tax officials, self-employed individuals and SME

employees filled the questionnaires in a hurry, because they had to get back to their work

activities, reducing the quality of their answers. Time was essential in this research and this also

affecting the researcher. The tax offices were also particular about the amounts of questionnaires

brought to their work stations.

1.8 OPERATIONALIZATION OF VARIABLES

This research is based on two variables, Independent Variable (E-Tax System) and Dependent

Variable (Tax Revenue). The dependent variable is tax revenue which is measured using the

following parameters:

Y1= Tax Compliance (TC)

Y2= Revenue Collection Efficiency (RCE)

X= E-Tax System (ETS)

Y1= y1 y2 y3

Y2= y4
Y1= Tax Compliance among Self-employed Individuals (TCSE)

Y2= Tax Compliance among SME Employees (TCSME)

Y3 = Perceived Ease of Use (PEOU)

Y4= Tax Revenue Collection Efficiency (TRCE)

X= Electronic Tax Payment (ETP)

TCSE= f (ETS) -----------------------------------------------------------------EQUATION 1

TCSME= f (ETS) ---------------------------------------------------------------EQUATION 2

PEOU= f (ETS) -----------------------------------------------------------------EQUATION 3

TRCE= f (ETS) ------------------------------------------------------------------EQUATION 4

The relationship between E-Tax System, Tax compliance and Revenue Collection Efficiency is

expressed by the following equations:

TC, RCE= f (ETS)

1.9 DEFINITION OF TERMS

TAX: This is a compulsory contribution to state revenue, levied by the government on workers'

income and business profits or added to the cost of some goods, services and transaction.

E-TAX SYSTEM: This is an online platform whereby the taxpayer is able to access through

internet all the services offered by a financial authority such as the registration for personal

identification number, filing of returns and system for compliance certificate.

TAX COMPLIANCE: This is the degree to which a taxpayer complies with the tax rules of his

country. This also means making tax payments and producing and submitting tax returns to the

tax authorities on time and in the required formats.

SME: The full meaning of SME is small and medium-sized enterprises. These are non-

subsidiary, independent firms which employ fewer than a given number of employees. The

medium-sized has less than 250 staffs, small-sized has less than 50 staffs and micro-sized has

less than 10 staffs.

SELF-EMPLOYED: An individual is self-employed when he or she works for him/herself

instead of working for an employer that pays a salary or wage.

ELECTRONIC TAX FILING: This is a process where tax documents or tax returns are

submitted through the internet, usually without the need to submit any paper return.

TAX ADMINISTRATION: This is the administration, management, conduct, direction, and

supervision of the execution and system of a government, country or state's taxation laws and

related statutes. E.g. LIRS.

TAX REVENUE: Tax revenue is defined as the revenues collected from taxes on income and

profits, taxes levied on goods and services, payroll taxes, taxes on the ownership and transfer of

property, and other taxes.

TAXPAYERS: This includes all taxable persons be it individuals, partnerships and corporate

bodies.

TAX SYSTEM: A legal system for assessing and collecting taxes.

ELECTRONIC PAYMENT: An electronic payment (e-payment), in short, can be simply

defined as paying for goods or services on the internet. It includes all financial operations using

electronic devices, such as computers, smartphones or tablets. (Securionpay)

REVENUE COLLECTION EFFICIENCY: Revenue collection efficiency is the comparison

of what is actually performed by the tax officials with what can be achieved with the same

consumption of resources (money, time, labour, and so on)

 CHAPTER TWO

LITERATURE REVIEW

2.1 INTRODUCTION

This chapter gives an insight into various studies conducted by outstanding researchers, as well

as explained terminologies with regards to the electronic tax system, tax compliance and revenue

collection efficiency. The chapter also gives a resume of the history and present status of the

problem delineated by a concise review of previous studies into closely related problems.

2.2 CONCEPTUAL FRAMEWORK

Concept of E-Tax System

A publication by the URA (e-Registration, 2010) introduces E-Tax as a name given to an

Integrated Tax Administration System (ITAS) that provides online services to the taxpayer on a

24 hour basis. The Stride Magazine (URA, 2009) reveals that the system was acquired by the

Domestic Taxes Department (DTD) of the URA to modernize tax service and infrastructure, with

the aim of reducing tax administrative and compliance costs, which is in concurrence with

Tumuhimbise (2000) who recognizes low costs of compliance as an essential principle for tax

administration.

Electronic Tax System Electronic tax system is the system of collecting taxes from the taxpayers

electronically. This is an online platform whereby the taxpayer is able to access through the

internet all the services offered by the tax administration such as the registration for a personal

identification number, filing of returns and system for compliance certificate. The Electronic tax

system in Nigeria introduced the following e-services; e-Filing, e-Payment, e-Registration, e-

Stamp duty, e-receipt and e-TCC. E-filing enables taxpayers file their tax returns through the

FIRS’ Integrated Tax Administration System (ITAS). E-payment is a service rendered for

payment of all Federal government taxes and levies through any of the following platforms;

Nigeria Inter-Bank. Settlement System (NIBSS), Remita and Interswitch. E-registration is for the

registration of new taxpayers with the Internal or Inland Revenue Service for the various taxes.

E-stamp duty is for the payment of stamp duties on qualifying documents. E-receipt is for

receiving and verifying e-receipts generated for taxes paid through the new e-payment. E-TCC is

the platform that enables taxpayers apply for, receive and verify authenticity of their electronic

tax clearance certificate (eTCC), (Deloitte,2017).

E-tax Service Systems: A tax is financial charge or other levy imposed upon a taxpayer (an

individual or non individuals) by a state or functional equivalent of a state, such that failure to

pay is punishable by law. Professor Seligman too defines tax as a compulsory contribution from

the person to government to defray the expenses incurred uncommon interest of all without

reference to special benefit concurred. It includes; income tax from the income tax Act (CAP.340

Laws of Nigeria), Value Added Tax (VAT), property tax. Tax can be introduced so that it

emitters face the full social cost of the emissions (Nicholas, 2006). At the national or regional

level Government would want to choose a policy frame work that it’s suited to their specific

circumstances, tax policy can all play a role (Nicholas, 2006). Electronic refers to utilizing

devices constructed of working, by methods or principles of electrons. E-tax refers to the

electronic filing of returns, and it includes taxes imposed on goods and services traded on line

among others. It offers faster-faster services than transactions via mail and they are safe and

secure.
Electronic tax filing systems are an e-government system that is being utilized with increasing

frequency all over the world. Such systems are particularly favorable for governments because

they avoid many of the mistakes taxpayers make in manual filings, and they help to prevent tax

evasion by data matching (Manly et al, 2005). The data houses developed using electronic tax

filings can allow tax inspectors to analyze declarations more thoroughly, and enable policy

makers to develop fairer and more effective. (Kun, et al, 2008).

Components of E-tax

Computerization of the tax collection process enables easy detection of defaulters, and also helps

to reduce corruption by reducing personal interaction between tax officials and taxpayers that is

necessitated by inefficient manual systems (Kayaga, 2007). With that view, URA introduced E-

tax and these are elements that constitute E-tax service system. The E-tax service system

includes many components which enable tax payers to effectively use the system. These

components are in most cases used by Business Enterprises. The major components of the E-tax

service system include the following.

Tax Content Services. This looks at the creation, maintenance and management of E-tax. This

system is used for reference of the tax matters when dealing with the business enterprises. It has

the tax system to model the details of the tax setup for all company’s tax requirements. Sub

components include Basic tax configuration, tax jurisdictions, party tax profiles, and country

default controls and many more.

Tax Content Repository. This stores data from the tax content service, which would be used for

reference in other components for easy management of the system. The faster returns can be
processed then faster tax payments can be put to work managing cash flow, investing excess for

a return (Hopkinton, 2010).

Tax Service Request Manager. This requires only one representative who needs to register for

everyone in the firm to be able to use the services. This component manages the access to all tax

data and services, this enables Integration with E-tax services, integration with tax service

providers and eventually there would be a Standard interface for E-tax Suite systems to add tax

services to their business process flows, this will help tax agents and advisers deal with the

department more effectively.

Tax Determination Services. This looks at the different tax services and how best they can be

applied. Every tax within a tax regime has its own regulations that determine when the tax is

applicable, that is, when the tax needs to be charged or paid. The tax determination contains two

components including Tax Determination Management and the tax rule management which

manages the requirements and processes around automatic tax calculation based on transaction

details and tax setup information (Stacey, 2010).

Tax Record Repository. This contains the components used to record all the tax

documentations and transactions, which makes reference easy incase the need arises (Stacey,

2010). Properties are conveyed free and clear of the tax and municipal claims, and charges of

whatsoever kind, depending on how it is designed separately for tax issues.

Tax Administration Services. This looks at the operations of the outstations to provide a

convenient option for persons to pay their taxes, without having to visit a tax office or pay

online. This one manages the accounting for all tax transactions. It would includes; Value Added

Tax (VAT), Income Tax (IT) filings and property tax many more.
Tax Reporting Ledger. This component manages the record Repository and the Tax Content to

enable reporting where the need arises. This reduces the time that would be spent by the revenue

officials preparing the reports for the stake holders.

Structure/Format of the Web Portal and E-Tax System:

All procedures to do with filing of domestic taxes and monitoring their progress are handled by

the E- Tax system. For web-based information systems to remain useful, they must contain new,

enhanced attributes. Belanger, et al (2006) argue that they are several success criteria for a web

site depending on the variety of goals such as selling, informing and advertising. The authors

further argue that web site success is audience specific and it should take account of diverse

perspectives of users and owners. It should be noted that sometimes these perspectives might be

even competing. For example, in electronic tax filing systems users are usually unenthusiastic to

pay tax and the site owner (government) is eager to collect it.

Transparency in E - Tax System: The structure of the system allows users to openly interface

with the revenue collection considering that procedures to be followed are all given on the web

portal. As stressed by Satish & Clive (1996) transparency is essential for an effective tax

administration system and the ITAS, The Stride Magazine confirms, will provide an effective

and transparent system across the domestic tax regimes, adding that it will include, among others

tax registration and return processing.

Concept of Tax Compliance

Tax compliance has been defined by the Harvard law school (2000) as paying taxes on time and

timely reporting of correct tax information. Therefore, tax compliance means seeking to pay the

right amount of tax (but no more) in the right place at the right time. Where right means that the
economic substance of the transaction undertaken coincides with the place and form in which

they are reported for tax purposes.

According to Brown and Mazur (2003), tax compliance is categorized into three multi faceted

components; filling, reporting and payment. Holtzman (2007) states that tax compliance is the

value of the tax payer’s own time and resources along with any out of pocket costs paid to the

tax preparers and other advisors, invested to ensure compliance with the laws while Carroll

(1987) asserts that tax compliance is the provision of tax information at the proper time and

ensuring returns accurately report tax liability.

Byaruhanga (2007) asserts that compliance is still low due to the fact that tax authorities have not

sufficiently addressed the key shortfalls in the administration systems which include unregistered

tax payers, inadequate clear tax literature, tax evaders and as well delinquent tax payers.

Tax compliance can either be through voluntary tax compliance or involuntary tax compliance.

Voluntary tax compliance involves obeying the tax laws without any state enforcement actions

that leads to maximizing revenues because administration costs are low in both the economic and

psychic sense. The government wastes little money and time in collecting the tax and tax payers

suffer little alienation in parting with their money.

According to the neo classical economic view, people obey tax laws when it is in their interest to

do so. Compliance results from the individual’s rational choice aimed at maximizing individual

outcome. Compliance builds an atmosphere of trust and corporation because a person feels that

others are accounting in a reciprocal manner.

According to Jackson and Million (1986), the major influences of tax compliance are; age,

gender, income levels, education, income source, occupation status, sanctions, peer influence,

ethics, complexity, probability of detection, tax rates and contact with tax authorities.

However, Gilligan and Grant (2005) assert that the perception of tax fairness is one of the most

important variables that can influence tax compliance behavior. Public perception that the tax

system is fair and equitable is important if that system relies for its success on significant degree

of voluntary tax compliance, which of course the contemplary reality for many jurisdictions.

Wadhavan and Gray (1998) state that voluntary compliance is not only promoted by the

awareness of the rights and expectations but also by clear simple and user friendly administrative

systems and procedures.

According to Gilligan (1999), an analysis that takes into account the impacts of legitimacy can

be helpful when examining developments in a regulatory context such as tax compliance because

regulatory norms can be of local, national or international phenomena.

Non compliance is believed to have corrosive effects on tax compliance. If compliant tax payers

believe that everyone else is paying his or her fair share of the taxes, they are most likely to

remain compliant. If the compliant tax payers feel like they are over paying, some will reach a

point where they resent it and stop complying or comply at a lower level. The degree of

compliance may breed more compliance and non-compliance.

Tax Payer Attitudes.

An attitude is an individual’s characteristic way of responding to an object or situation (Graham,

1989). It is based on one’s experience and leads to certain behavior or the expression of certain
opinions. Attitudes are related to values, perceptions and group belonging but can be modified by

environmental changes and new information.

Bird (1989) stresses that the willingness of the tax payers to comply with their obligations

depend to a large extent upon the perception that the funds taken from them are put to some good

use. Similarly the seriousness with which the government enforces the revenue laws will also

have profound effect on public attitudes. The extent to which government over reaches in trying

to tax income may affect overall compliance (Gordon, 1990).

In more recent theoretical advances, the tax payer’s behavior towards tax compliance depends

entirely on his/her attitude towards risk. Tax payers can reasonably be expected to be troubled by

the awareness that high income individuals and profitable corporations pay little or no tax, even

if methods being used to avoid taxes are totally legal. Unless the perception that the tax system is

unfair can be reversed, tax payer morale is undermined and evasion may become uncontrollable.

On the other hands however, if one believes that mostly negative outcome will result from the

behavior, he or she will hold a negative attitude towards it and the reverse is true.

Torgler (2003) regarded attitude as the individual’s positive or negative behavior towards

innovation adaptation. Attitude can be portrayed by perceptions for the usefulness of taxes,

perceived ease of assessment, tax administration system and any other tax payer preference.

Tax payer’s attitudes is composed of one’s attribute beliefs about the object and perceived

importance of having that attribute in making the decision to comply. According to the theory,

reasoned action attitude is made up of the beliefs that person accumulates over his life time.

Some beliefs are formed from direct experience, some are from outside information and others

are inferred or self generated.

According to Azjen and Fishbein (2000) attitude is an individual’s salient belief about whether

the outcome of his action will be positive or negative. The beliefs are rated for the probability

that engaging in the behaviors will produce the believed outcomes whether positive or negative.

Azjen and fishbein (2000) believe that attitude is the degree of favorableness and

unfavourableness of an individual’s feeling towards a psychological object. This can result into

behaviors such as voluntary registering as a tax payer, making tax assessments and filling returns

and finally paying taxes due to the tax authority.

Surrey (1967) on the other hand argues that voluntary compliance depends on national attitudes

towards the tax system and tax administration and those national attitudes can be affected by the

administration and vice versa. If the administration brings about stability and honesty in its

operations, the self respect thus achieved can form basis for respect and compliance from the tax

payer.

Tax payer Attitudes and Tax Compliance.

Wenzel (2004) states that the interaction between the tax authority and the tax payer creates a

good relationship that impacts on the tax payer attitude. Alm et al (2006) asserts that the trust

the tax payers have in the state improves the positive attitude and commitment to paying taxes.

The eventual effect is reflected through voluntary compliance by willingly reporting and filling

tax returns and as well as paying the tax obligations as and when they fall due.

Effects of Computerization on Organizational Performance.

In the current generation, the computer is indisputably a central symbol. No other technology,

perhaps no other object of any kind is so widely implicated in the emergency of the world of the
future. Hence, computers have become the source of a special and new form of human

community.

It is argued that in computing there is the prospect for enhancement of job content and

enrichment of work (Ernest, 1982). However, in these same changes the prospect of oppression

and degradation on the job has been sighted. It should be noted that computer based systems

were introduced in early 1960s in America to speed up the entry of data and the processing of

transactions (Ernest, 1982).

The computer systems were first introduced in banking institutions. They were mainly used by

the tellers probably because they were handling big transactions. Computerization movements

have evolved and have helped set the stage on which the computer industry expanded. In all

these cases, computers were preferred to the old system of manual data processing. Similarly it

has been observed that computer systems are powerful technologies that managers can

effectively use to transform their organizations into a more efficient and competitive entities.

Computer systems that are capable of manipulating data in many ways or automatically applying

relatively complex decision rules are more likely to transform organizations than are systems that

just print and store data for example, word processing, electronic mail and billing (Rule and

Attewel, 1989).

Worth noting is the rapid use of computer-based systems is largely based on the assumption that

they are instruments of organizational rationality capable of providing new opportunities for

managers to choose courses of action based on a more careful and explicit assessment of

alternatives. This is in line with Night (1999) who found out that computerization had increased

clerical staff performance, improved the professional exposure and encourage further training.
However, despite the positive effects of computerization on organizational performance, use of

computers has also been the source of problems that get relatively little exposure in the popular

press and professional magazines. Some of the problems are pragmatic-the dilemmas of dealing

with imperfect computer systems that foul up bills, lose key data or are just much harder to work

with than they should be. These kinds of problems can simply seem like minor irritations;

however, they foreshadow social problems of much greater significance (Dunlop and Kling,

1991).

Technology can allow access to facilities round the clock, permitting global operations across

multiple time zones. Citizen services can also be provided around the clock reflecting the change

in working life style and permitting citizens to access the services at their convenience both in

temporal and spatial terms.

Computerization and tax payer attitudes.

When informational tools are directly related to tax payers and include all means accessible to

them to consult and interact with the administration as well, we can talk about electronic

administration. Developments in this area in several countries helped to stream line the entire

process of filing tax returns and improve relations between tax payers and tax administration.

Electronic connection with tax administration has been possible in countries like Brazil,

Portugal, Netherlands, Spain, United States of America and Canada (Rains et al., 1997).

Concept of Revenue Collection Efficiency

Revenue collection performance is vital in promoting efficiency in the service delivery and

economic development of county governments. However, most county governments face serious

challenges in their revenue collection performance as noted by Balunywa, Nangoli, Mugerwa,

Teko and Mayoka (2014), where governments are not able to collect sufficient funds to cover

their budget expectations. Furthermore, for many years, revenue collectors have not been

channeling all the amount of money they collect to the County Treasury (Ngotho & Kerongo,

2014).

Local revenue collection helps to achieve service delivery in county governments by co-funding

development projects, hence an increasing need by the county government to collect much

revenue to face the increasing financial expenditures budgeted for. Automated systems have

been proven to be capable of introducing massive efficiencies to business processes that can

result in increased revenue collections (Gideon & Alouis, 2013)

Owuor, Chepkuto, Tubey and Kuto (2012) note that revenue collection in developing economies

like Kenya has not always been as effective as it should be. There are various challenges in

revenue collection performance, where counties are not able to collect sufficient funds to cover

their budget expectations and thereby causing huge local revenue collection gaps. Ismail (2016)

indicates that the main challenges in revenue collection rotate around revenue collection system.

The performance of revenue collection in County governments is deteriorated by corrupt

practices issues which result into tax evasion through corruption by corrupt revenue collection

officers

(Balunywa et al., 2014).

As Visser and Erasmus (2005) note, revenue collection should comply with best practices of

equity, ability to pay, economic efficiency, convenience and certainty. Furthermore, for a

government to match its performance with the needs and expectations of its citizens, it should

increase its fiscal depth without incurring costly recurring overheads (Tetteh, 2012). For good
governance and effective delivery of service, county governments require sufficient and reliable

sources of revenue and the Constitution of Nigeria 2010 provides a framework for county

funding through own revenue.

2.3 THEORETICAL FRAMEWORK

The Theory of Taxation

The standard theory of taxation posits that a tax system should be chosen to maximize a social

welfare function subject to a set of constraints. The literature on taxation typically treats the

social planner as a utilitarian: that is, the social welfare function is based on the utilities of

individuals in the society. In its most general analyses, this literature uses a social welfare

function that is a nonlinear function of individual utilities. Nonlinearity allows for a social

planner who prefers, for example, more equal distributions of utility. However, some studies in

this literature assume that the social planner cares solely about average utility, implying a social

welfare function that is linear in individual utilities. For our purposes in this essay, these

differences are of secondary importance, and one would not go far wrong in thinking of the

social planner as a classic “linear” utilitarian.

To simplify the problem facing the social planner, it is often assumed that everyone in society

has the same preferences over, say, consumption and leisure. Sometimes this homogeneity

assumption is taken one step further by assuming the economy is populated by completely

identical individuals. The social planner’s goal is to choose the tax system that maximizes the

representative consumer’s welfare, knowing that the consumer will respond to whatever
incentives the tax system provides. In some studies of taxation, assuming a representative

consumer may be a useful simplification. However, as we will see, drawing policy conclusions

from a model with a representative consumer can also in some cases lead to trouble.

After determining an objective function, the next step is to specify the constraints that the social

planner faces in setting up a tax system. In a major early contribution, Frank Ramsey (1927)

suggested one line of attack: suppose the planner must raise a given amount of tax revenue

through taxes on commodities only. Ramsey showed that such taxes should be imposed in

inverse proportion to the representative consumer’s elasticity of demand for the good, so that

commodities which experience inelastic demand are taxed more heavily. Ramsey’s efforts have

had a profound impact on tax theory as well as other fields such as public goods pricing and

regulation. However, from the standpoint of the taxation literature, in which the goal is to derive

the best tax system, it is obviously problematic to rule out some conceivable tax systems by

assumption. Why not allow the social planner to consider all possible tax schemes, including

nonlinear and interdependent taxes on goods, income from various sources, and even non-

economic personal characteristics?

But if the social planner is allowed to be unconstrained in choosing a tax system, then the

problem of taxation becomes too easy: the optimal tax is simply a lump-sum tax. After all, if the

economy is described by a representative consumer, that consumer is going to pay the entire tax

bill of the government in one form or another. Absent any market imperfection such as a

preexisting externality, it is best not to distort the choices of that consumer at all. A lump-sum

tax accomplishes exactly what the social planner wants.

In the world, there are good reasons why lump-sum taxes are rarely used. Most

important, this tax falls equally on the rich and poor, placing a greater relative burden on the
latter. When Margaret Thatcher, during her time as the Prime Minister of the United Kingdom,

successfully pushed through a lump-sum tax levied at the local level (a “community charge”)

beginning in 1989, the tax was deeply unpopular. As the New York Times reported in 1990,

Widespread anger over the tax threatens Mrs. Thatcher's political life, if not her physical safety.

And it may prove to be the last hurrah for her philosophy of public finance, in which the goals of

efficiency and accountability take precedence over the values of the welfare state” (Passell,

1990). The tax was quickly revoked, and not coincidentally, Thatcher’s term of office ended not

long after.

As this episode suggests, the social planner has to come to grips with heterogeneity in taxpayers’

ability to pay. If the planner could observe differences among taxpayers in inherent ability, the

planner could again rely on lump-sum taxes, but now those lump-sum taxes would be contingent

on ability. These taxes would not depend on any choice an individual makes, so it would not

distort incentives, and the planner could achieve equality with no efficiency costs. 1 Actual

governments, however, cannot directly observe ability, so the model still fails to deliver useful

and realistic prescriptions.

James Mirrlees (1971) launched the second wave of optimal tax models by suggesting a way to

formalize the planner’s problem that deals explicitly with unobserved heterogeneity among

taxpayers. In the most basic version of the model, individuals differ in their innate ability to earn

income. The planner can observe income, which depends on both ability and effort, but the

planner can observe neither ability nor effort directly. If the planner taxes income in an attempt

to tax those of high ability, individuals will be discouraged from exerting as much effort to earn

that income. By recognizing unobserved heterogeneity, diminishing marginal utility of

1
consumption, and incentive effects, the Mirrlees approach formalizes the classic tradeoff

between equality and efficiency that real governments face, and it has become the dominant

approach for tax theorists.

In the Mirrlees framework, the optimal tax problem becomes a game of imperfect information

between taxpayers and the social planner. The planner would like to tax those of high ability and

give transfers to those of low ability, but the social planner needs to make sure that the tax

system does not induce those of high ability to feign being of low ability. Indeed, modern

Mirrleesian analysis often relies on the “revelation principle.” According to this classic game

theoretic result, any optimal allocation of resources can be achieved through a policy under

which individuals voluntarily reveal their types in response to the incentives provided. 2 In other

words, the social planner has to make sure the tax system provides sufficient incentive for

highability taxpayers to keep producing at the high levels that correspond to their ability, even

though the social planner would like to target this group with higher taxes.

The strength of the Mirrlees framework is that it allows the social planner to consider all

feasible tax systems. The weakness of the Mirrlees approach is its high level of complexity.

Keeping track of the incentive-compatibility constraints required so that individuals do not

produce as if they had lower levels of ability makes the optimal tax problem much harder.

Since the initial Mirrlees contribution, however, much progress has been made using this

approach. General treatments of the Mirrlees approach are found in Tuomala (1990), Salanie

(2003), and Kaplow (2008a).

Theory of Tax System

2
There is an extensive literature on the determinants of tax compliance by individuals. The major

impetus for tax compliance research in economic theory is a seminal paper by Allingham and

Sandmo (1972), with some important earlier exceptions. Before formally presenting the

Allingham and Sandmo (AS) model, determinants of tax compliance are briefly reviewed. As in

all individual choice situations, there are two essential elements which determine the final

outcome of tax compliance choices by individuals: What choices are feasible and what choices

are considered desirable by individuals. As in much of neo-classical analysis, amoral individuals

are assumed to desire more income but to be risk averse.

The Allingham-Sandmo Model

In the classic Allingham and Sandmo (1972) paper, an amoral but risk averse taxpayer, with true

income Y, chooses the fraction of income to declare to tax authorities to maximize her expected

utility of income. The policy environment is given by the legally mandated income tax function,

T(Y), the penalty rate on detected but underpaid taxes, π, and the probability of tax audit and

detection, p.15 For simplicity, we assume a proportional tax function with tax rate t here. The

fraction of income reported voluntarily to tax authorities (or the level of compliance) is denoted

by x. The taxpayer’s decision problem can be written as:

MaxE(U) = (1-p)U[YN] + pU[YC] (1) x

Where YN = Y – txY and YC = Y - txY – (1+π)(1-x)tY represent, respectively, net (after tax and

penalty) income if evasion remains undetected (Not caught) and is detected (Caught) by tax

authorities. U[.] is the Von-Neumann Morgenstern utility function of the taxpayer, assumed to be

strictly concave, implying risk aversion.16 Utility is assumed to depend only on after-tax income.
This model predicts that, provided the expected additional payment on detection p(1+π)tY is

below the tax due when income is reported honestly (tY), the taxpayer will not comply fully,

choosing to report less than 100 percent of her income. However, there will be greater

compliance if there is stricter enforcement either by raising p or π.

In studies attempting to empirically verify the AS model, it has been pointed out that since

expected additional payments if evasion is detected observed in practice are always less than

taxes due, taxpayers would always evade taxes if they behaved in accordance with the AS model.

Tax evasion, however, is not resorted to by all taxpayers, in evidence from countries like the

USA. This has prompted an enormous number of extensions of the AS model over the past 30

years, leading to the identification of many of the compliance determinants reviewed above.

2.4 EMPIRICAL REVIEW

Jankeeparsad, Jankeeparsad, and Nienaber (2016) in their study, acceptance of electronic method

of filing returns by South African tax payers: An exploratory study utilised the decomposed

theory of planned behaviour with factors adjusted specifically for South Africa as a developing

country to identify the possible determinants of user acceptance of the e-Filing system among

taxpayers. Ayodeji (2014) studied impact of electronic tax systems on tax administration in

Nigeria. The purpose of this study was to assess the impact of electonic taxation on tax

administration in Nigeria. The researcher argued that the dwindling global fortune occasioned by

the fall in the price of crude oil, the major source of wealth for Nigeria shifted the attention of the

government and major stakeholders in the country to the revenue generated locally. But the

daunting task of boosting the Internally Generated Revenue necessitates the adoption of

electronic tax systems technologies to drive Tax administration and concluded that electronic tax

systems plays an important role in the increase of internally generated revenue in Nigeria by
ensuring compliance thereby boosting productivity and economic activities in the country. It is a

change agent for accelerated growth and poverty reduction in Nigeria and the whole of African

continent at large Oriakhi and Ahuru (2014) examined the relationship between federally

collected revenue and specific tax revenue generation sources such as custom and Excise Duties

(CED), value added tax (VAT), petroleum profit tax (PPT), company income tax (CIT).

Secondary data were collected for each of the tax sources from 1981 – 2011. The study

employed advanced econometric analysis such as regression, co-integration, error correction

modelling and pairwise granger causality tests. The various income taxes were used as the

independent variables while federally collected Revenue was used as the dependent variable. The

study concludes that the various income taxes were statistically significant and have positive

relationship with federally collected revenue. The Granger causality shows that custom and

excise Duties and value-added Tax granger causes federally collected revenue. Oriakhi and

Ahuru (2014) examined the relationship between federally collected revenue and specific tax

revenue generation sources such as custom and Excise Duties (CED), value added tax (VAT),

petroleum profit tax (PPT), company income tax (CIT). Secondary data were collected for each

of the tax sources from 1981 – 2011. The study employed advanced econometric analysis such as

regression, co-integration, error correction modelling and pairwise granger causality tests. The

various income taxes were used as the independent variables while federally collected Revenue

was used as the dependent variable.

E Tax, being a web-based system can be accessed at anytime and anywhere at the taxpayer’s

convenience. With the E-Tax system, basically most transactions can be done at the taxpayer’s

desk, a move which greatly reduces compliance costs and improves enforcement. In regard to the

tax structure, the E-Tax system applies mainly to domestic taxes and non-tax revenues like motor
vehicle registration, licensing services but currently does not apply to customs and excise taxes.

This leaves a gap and creates a loophole for loss of revenue, much as the URA has

acknowledged an improvement in domestic tax collections with the introduction of E-Tax (URA,

2010). Assessment process under the E-Tax is automatic, but depends on the information availed

by the taxpayer. If the taxpayer gives wrong information then the system in turn gives a wrong

assessment; this poses a challenge despite the fact that the law calls for penalties in case a

taxpayer gives misleading information, as tax officials may still go ahead and collude with the

taxpayers to give wrong or misleading information.

2.5 SUMMARY OF LITERATURE REVIEW

The review was done under the following: theoretical framework conceptual framework and

review of empirical studies. Some trends in tax policy look like at least partial victories for

optimal tax theory. Perhaps the most important is the worldwide trend toward reduced taxation

of capital income, at least in statutory tax rates. In addition, the worldwide trend toward tax

systems with flatter tax rates might be seen as a reflection of lessons from theoretical work.

Recall that the motivation of the original Mirrlees (1971) model was to provide a framework in

which to derive an optimal structure of tax rates, which (surprisingly) often turned out to be

nearly flat over a broad range. The robustness of this conclusion remains open to debate, as it

depends on details of the ability distribution and individual utility function that are hard to pin

down. But it is at least arguable that the movement toward flatter taxes is consistent with

prescriptions from theory.

 On the other hand, some results from optimal tax theory cannot be easily identified in

actual policy and seem unlikely to be found there anytime soon. The theory predicts that

policymakers should use exogenous “tags” that are correlated with income-producing ability,

such as gender, height, and race. Recent work recommends capital taxation that is regressive in

labor income changes, according to which capital income is taxed for those who earn

surprisingly little and subsidized for those who earn surprisingly much. Few economists

advising political candidates or elected government officials would have the temerity to advance

these ideas in any practical discussion of tax policy.

The study was an exploratory study and was conducted by means of a questionnaire survey. For

taxpayers using the manual method, lack of facilitating conditions such as access to computer

and internet resources was the most significant barrier to e-Filing usage, while taxpayers using

the electronic method reported perceived usefulness as the primary determinant in their decision

to use e-Filing. The target population consisted of taxpayers located in Abuja, during the period

1 August 2013 to 1 October 2013. This period was specifically chosen as it was tax filing season.
 CHAPTER THREE

RESEARCH METHODOLOGY

3.1 Introduction

This chapter covers the description and discussion on the various techniques and procedures used

in the study to collect and analyze the data as it is deemed appropriate

3.2 Research Design

For this study, the survey research design was adopted. The choice of the design was informed

by the objectives of the study as outlined in chapter one. This research design provides a quickly

efficient and accurate means of assessing information about a population of interest. It intends to

study electronic tax system, tax compliance and revenue collection efficiency. The study will be

conducted in Lagos state.

3.3 Population of the Study

The population for this study were tax payers in Alimosho local government area, Lagos state,

Nigeria. A total of 134 respondents were selected from the population figure out of which the

sample size was determined. The reason for choosing Lagos state is because of its proximity to

the researcher.

3.4 Sample and Sampling Techniques

The researcher used Taro Yamane’s formula to determine the sample size from the population.

Taro Yamane’s formula is given as;

n = N
 1+N (e)2

Where N = Population of study (134)

n = Sample size (?)

e = Level of significance at 5% (0.05)

1 = Constant

.: n = 134 = 134 = 134

1 + 134 (0.05)2 1+134(0.0025) 1+0.335

n = 134 = 100

1.335

The sample size therefore is 100 respondents.

3.5 Research Instrument and Instrumentation

Data for this study was collected from primary and secondary sources. The primary source of

data collected was mainly the use of a structured questionnaire which was designed to elicit

information on electronic tax system, tax compliance and revenue collection efficiency. The

secondary source of data collections were textbooks, journals and scholarly materials.

3.6 Validity of Instrument

The instrument of this study was subjected to face validation. Face validation tests the

appropriateness of the questionnaire items. This is because face validation is often used to

indicate whether an instrument on the face of it appears to measures what it contains. Face

validations therefore aims at determining the extent to which the questionnaire is relevant to the
objectives of the study. In subjecting the instrument for face validation, copies of the initial draft

of the questionnaire will be validated by supervisor. The supervisor is expected to critically

examine the items of the instrument with specific objectives of the study and make useful

suggestions to improve the quality of the instrument. Based on his recommendations the

instrument will be adjusted and re-adjusted before being administered for the study.

3.7 Reliability of Instrument

The coefficient of 0.81 was considered a reliability coefficient because according to Etuk (1990),

a test-retest coefficient of 0.5 will be enough to justify the use of a research instrument.

3.8 Method of Data Collection

This study is based on the two possible sources of data which are the primary and secondary

source.

a. Primary Source of Data: The primary data for this study consist of raw data

generated from responses to questionnaires and interview by the respondents.

b. Secondary Source of Data: The secondary data includes information obtained through

the review of literature that is journals, monographs, textbooks and other periodicals.

3.9 Method of Data Analysis

Data collected will be analyzed using frequency table, percentage and mean score analysis while

the nonparametric statistical test (Chi- square) was used to test the formulated hypothesis using

SPSS (statistical package for social sciences). Haven gathered the data through the

administration of questionnaire, the collected data will be coded, tabulated and analyzed using

SPSS statistical software according to the research question and hypothesis. In order to
effectively analyze the data collected for easy management and accuracy, the chi square method

will be used for test of independence. Chi square is given as

X2 = ∑ (o-e)2

Where X2 = chi square

o = observed frequency

e = expected frequency

Level of confidence / degree of freedom

When employing the chi – square test, a certain level of confidence or margin of error has to be

assumed. More also, the degree of freedom in the table has to be determined in simple variable,

row and column distribution, degree of freedom is: df = (r-1) (c-1)

Where; df = degree of freedom

r = number of rows

c = number of columns.

In determining the critical chi _ square value, the value of confidence is assumed to be at 95% or

0.95. a margin of 5% or 0.05 is allowed for judgment error.