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This study evaluated taxation as a mechanism of revenue generation in Nigeria.
Relevant data were collected through primary and secondary sources. The secondary data covered period that span from 1970 to 2012 and were extracted from central bank of Nigeria statistical bulletins and publications of National bureau of statistics. While primary data was through the use of well structured questionnaire administered to state offices of federal inland revenue service in Ekiti and Oyo State in south west, Nigeria. Four hypotheses were formulated, questionnaire provide the data used for hypotheses one and three while the data used for hypotheses two and four were from secondary source. Tax Rev Model which is TR=f(PPT,CT,CUS,VAT)was formulated and were were tested using ordinary least square, unit root test, augmented dickey fuller test, johansen co-integration test, error correction mechanism, trend analysis, durbin waston test and descriptive statistics.
The study revealed that the overall contributions of taxation over the period has been impressive and not efficient but in a disintegrating form petroleum profit tax, value added tax and custom duties with the value of 1.56938, 24.1987 and 1.034712 per naira respectively showed a positive and significant relationship with total revenue in the short run while companies income tax with the value of (15.66128) showed a negative relationship. Whereas, in the long run petroleum profit tax and value added tax with the value of (0.446203) and( 63.4460) showed negative relationship and while companies’ income tax and custom duties showed positive relationship with the value of 25.67664 and 12.6852 respectively at f-test of 1057.809 and DW-test of 2.505856.
However, the study concluded that in Nigeria the contribution of taxation to government revenue has been impressive over the period but insignificant if compared to the revenue derived from petroleum which is regarded as oil revenue and other most advanced countries of the world which their economy is tax driven.



Taxation is one of the oldest economic phenomena by which the cost of providing essential services for the generality of a given set of people within a geographical area is funded. In some countries, taxation is as old as their history while in others taxation predates their existence.
In the early days of civilization, biblical and pre-biblical days, taxes were collected to maintain the kings/queens, provide security and fight wars. It could be direct surcharge on the citizens of the kingdom or empire, or tributes paid by “conquered” to show their unflinching loyalty to conquerors. The form of taxes did not necessarily depend on richness or the ability to pay concept. There was, of course no record of accountability except the archaeological findings about the Sumerian civilization of more than 500 years ago (Legislative Analyst, 2001).
Historically, it can be asserted that the Sumerian empire could be the first place where taxes were levied and accounts for the utilization made. The main objective of taxation is to provide revenue needed to finance the budget.
Nigeria three tiers of government characterized by yearly budget deficits and insufficient funds for economic growth and development as a result of dwindling revenue generation. Though Nigeria is richly blessed with oil and gas among other mineral resources, but the over dependence on oil revenue for the economic development of the country has left much to be deserved.
According to Ariyo (1997) Nigeria’s over dependence on oil revenue led to the total neglect of other revenue sources and which was encouraged by the oil boom of 1973/74. But his source of revenue is unsustainable due to the fluctuating oil market price which have in most cases plunged the nation into deficit budgets. This economic reasoning emphasized the revenue need of government and indicates that, apart from strengthening the existing sources of revenue, it is also necessary for government to diversify its revenue base in order to meet its constitutional responsibilities.
The financial capacity of any government depends among other things, on its revenue base, the fiscal resources available to it and the way these resources are generated and utilized (Myles, 2000). Based on this fact, the duty of government is to adequately utilized potential revenue across the country to prevent economic stagnation. This mobilization involves the adoption of economically and politically acceptable taxes that would ensure easy administration, accounting, verification, auditing and investigation based on the equality, neutrality and other attributes of a good tax.
Tax, according to the institute of Chartered Accountants of Nigeria (2006) and the characters institute of taxation of Nigeria (2002) is an enforced contribution of money to government pursuant to a defined authorized legislation. Without a valid statute no legitimate tax can be imposed, in other words, every tax must be based on a valid statute. Tax is also the nexus between the state and its citizens, and tax revenues are the lifeblood of the social contract. Income tax is levied on incomes such as salaries, business profits, interests, dividends, commissions, royalties and rent. It may be charged on capital gains and petroleum profits.
Taxation yields very substantial revenue to government therefore, it has a bearing on the Gross Domestic Product (GDP) which is the standard indicator for measuring the economic wellbeing of a nation. The nature and level of taxes vary according to the economic policies adopted by the government of the day (Okafor, 2012).
Taxation could have either positive or negative effect on both the individual and government. To the individual, low income tax rate represents an incentive to work or save, while high income tax rate represents a disincentive to work or save. To the government, high tax rates provides the most reliable, important and dominant source of government revenue, for promoting the economic development of the nation.
In Nigeria, the sources that makes up for the components of tax revenue are personal income tax, petroleum profit tax, companies income tax, education tax, withholding tax, value added tax, capital gains tax, excise and custom duties. As noted by TJN (2012), tax is the most important, the most sustainable source of finance for development. In Nigeria the contribution of tax revenue has not been encouraging and this has cut-short government expectation. The poor tax revenue contribution to the overall revenue of government is usually caused by corruption, evasion, avoidance and tax haven.
In the face of resource deficiency in financing long term development, Nigeria has heavily resorted to foreign capital, such as loans and aids as the primary means to achieve rapid economic growth. Government has expressed concern over these and has vowed to expand the tax revenue in order to meet its mandate. Kiabel and Nwokah (2009) argue that the increasing cost of running government coupled with the dwindling revenue has left all tiers of government in Nigeria with formulating strategies to improve the revenue base.
Also, Ndekwu (1991) noted that, more than ever before, there is now a great demand for the optimization of revenue from various sources in Nigeria. This probably influenced the decision of the Federal Government Nigeria (FGN), which in 1991 set up a study group on the review of the Nigerian tax system and administration. Also, that an accurate estimation of the optimal level of expenditure requires knowledge of the productivity of the tax system and that it will assist in identifying a sustainable revenue profile for the country. As noted by IMF (cited in TJN, 2012):
“Developing countries must be able to raise the revenue required to finance the services demanded by their citizens and the infrastructure (physical and social) that will enable them to move out of poverty. Taxation will play the key role in this revenue mobilization…”
As a means of meeting their expenditure requirements many developing countries undertook tax reforms in the 1980s. However, most of these reforms focused on tax structure rather than on tax administration geared towards generating more revenue from existing tax sources (Osoro, 1991).
In Nigeria, taxation is one of the instruments government uses to generate revenue before and after independence and also it is a fact that Nigeria tax system is froth with the problem of inefficiency caused by corruption, evasion, avoidance and tax haven which have directly aided the poor tax revenue contribution to the overall government revenue since independence.
In recent times, Nigeria have experience dwindling revenue generation which is caused by government overdependence on oil revenue, which is undependable due to persistent fluctuation in oil market price and as a result of this, plunged the nation into yearly budget deficient and insufficient funds for economic growth and development.
Also, questions have been raised on which of the various taxes administered by the Federal Government of Nigeria contribute to the overall government revenue.
Furthermore, there are arguments at different fora that the use of tax auditors, tax consultant and adequate motivation of tax administrations will increase the revenue derived from taxation. How can these be used in Nigeria to reduce the problem of staff collusion, tax evasion and avoidance that the contribution of tax revenue will be enhanced. This was argued by Osoro (1991) that most of the tax reform focused on the tax structure rather than on tax administration geared towards generating more revenue from existing tax sources.
The following research questions were formulated to pilot this research work.
Has taxation been used effectively and efficiently as a mechanism of revenue generation in Nigeria?
What are the effects of various taxes administered in Nigeria on government revenue?
How can the contributions of taxation to Nigeria’s government revenue be enhanced?
Is there any relationship between tax revenue and the total revenue generation in Nigeria?
The general objective of this research work is to evaluate taxation as a mechanism of revenue generation in Nigeria.
However, the specific objectives are;
– To determine whether taxation is been used effectively and efficiently as a mechanism of revenue generation in Nigeria.
– To examine the effect of various taxes administered in Nigeria on the overall government revenue.
– To determine how the contributions of tax revenue can be enhanced.
– To examine the relationship between tax revenue and the total revenue generation in Nigeria.
These research hypotheses were tested:
Ho: Taxation is not used effectively and efficiently as a mechanism of revenue generation in Nigeria.
Hi: Taxation is used effectively and efficiently as a mechanism of revenue generation in Nigeria.
Ho: Taxes administered in Nigeria have no significant effect on the overall government revenue.
Hi: Taxes administered in Nigeria have significant effect on the overall government revenue.
Ho: The contribution of taxation to government revenue cannot be enhanced.
Hi: The contribution of taxation to government revenue can be enhanced.
Ho: Tax revenue has no significant relationship with revenue generation in Nigeria.
Hi: Tax revenue has significant relationship with revenue generation in Nigeria.
The importance of this research work in contributing and enhancing awareness for effective and efficient taxation cannot be overemphasized.
Specifically however, the following are some of its unlimited importance.
The study would reawaken the consciousness of Nigerian government and citizens on the effective use of taxation as a developmental tool and as an effective tool for revenue generation which would reduce the country’s over dependence on oil revenue and aids from developing partners to the bearest minimum, because with a population of over 150 million people, Nigeria has tremendous tax potentials that can guarantee reliable and uninterrupted revenue to government.
The study would contribute to the existing and scanty literature on taxation by updating it.
The solution proffer for ineffective and inefficient tax administrative system in Nigeria would reduce the fluctuating tax revenue in Nigeria to the bearest minimum.
The study would enhance citizen knowledge in order to encourage voluntary compliance to their individual tax obligation.
This study is designed in such a way that only the aspect of taxation as revenue generating source is considered bearing in mind that other sources exist.
There are various tax revenue sources that are available to the three tiers of government (local, state and federal) in Nigeria. This research work is restricted to federal collectable taxes from 1970 to 2012.
The period was selected in other to examine the contribution of taxation to government revenue over the period of 43 years and two state offices of FIRS in south west, Nigeria.
Capital Gains Tax
This is a tax payable when a person sells assets that are chargeable under CGT Act. It is charged on the positive difference between the sales proceed and the cost of acquisition.
Companies Income Tax
This is the tax that is payable on the profits of limited companies. It is usually assessed on proceeding year basis at a rate of 30%.
Excise Duties
These are single stage tax levied on manufacturer of a locally produced goods and services. They are paid in addition to VAT.
Federal Board of Inland Revenue (FBIR)
This is the agency responsible for the administration and collection of taxes (except customs/excise duties at the federal level up to April 2007).
Federal Inland Revenue Service (FIRS)
This is the agency that replaced FIRS and is saddled with the responsibility of collecting taxes at the federal level.
Tax Avoidance
This refers to the process of exploiting the loopholes in both tax laws and tax administration to reduce legitimate tax payable.
Tax Evasion
This is an illegal act of intentionally reducing actual taxes or completing skipping the payment of such taxes by under reporting income and overstating expenditure.
Value Added Tax
This is the tax levied on the value a business output less the value of its input.

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