CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Taxation is one of the most important instruments of fiscal policy used by modern governments. It refers to a compulsory payment imposed by the government on the income, profits or wealth of individuals, partnerships and corporate organisations. Such payments are made without any direct or immediate benefit in return to the taxpayer. The main purpose of taxation is to generate revenue for government expenditure and the administration of public affairs (Lawal, Igbekoyi, & Dagunduro, 2024). In Nigeria, the Federal Inland Revenue Service (FIRS) was primarily responsible for assessing, collecting and accounting for taxes payable to the Federal Government. The agency was established as an autonomous institution under the Federal Inland Revenue Service (Establishment) Act No. 13 of 2007 (FIRS, 2022).

The application of taxes to Nigerian companies and organisations requires a clear understanding of the relevant tax laws and how they affect different business transactions. Taxation is a continuously developing area because of changes in government policies, court decisions and legislative amendments. Under the Companies Income Tax Act (CITA) 2007, as amended, companies are assessed on their profits after relevant deductions and allowances, including capital allowances and investment allowances, have been considered. The applicable corporate income tax rate stated under Section 29 of CITA 2007 is 30% of the total profits of companies for each year of assessment. However, recent tax reform proposals contained in the 2024 Tax Reform Bill seek to reduce the corporate income tax rate from 30% to 25% by 2026 as part of the wider restructuring of Nigeria's tax system (Nigerian Tax System, 2024).

Companies that have remained inactive for at least six months after incorporation are required to pay certain charges for each year in which they apply for a tax clearance certificate. These charges are stated as ₦20,000 for the first year and ₦25,000 for each subsequent year before the certificate is issued. In addition, companies involved in manufacturing, agricultural production, solid mineral mining or wholly export trade, with a gross turnover below one million naira during their first four years of operation, are stated to qualify for a reduced tax rate of twenty kobo for every naira of their total profits.

Section 28A of CITA 2007 provides for the payment of minimum tax where a company's total assessable profit results in a loss or where the tax payable is below the prescribed minimum. Where a company's turnover is ₦500,000 or less and it has operated for the required number of calendar years, the minimum tax is calculated using the highest of the following amounts: 0.5% of gross profit, 0.5% of net assets, 0.25% of paid-up capital, or 0.25% of turnover. Where the company's turnover exceeds ₦500,000, an additional 0.125% is applied to the amount above that threshold. The stated provisions exclude companies engaged in agricultural trade or business, companies with at least 25% imported equity capital, and companies within their first four calendar years of business operations.

The collection of tax revenue is an essential stage of the taxation process because revenue can only support government activities when assessed tax liabilities are properly paid and accounted for. Following the assessment of their tax obligations, taxpayers are expected to pay the required amounts through designated collecting banks within their respective regions. Such payments are accompanied by assessment notices indicating the particular tax being paid. These taxes include Company Income Tax (CIT), Education Tax, Capital Gains Tax, Personal Income Tax payable by residents of the Federal Capital Territory, Abuja, and non-resident individuals, as well as Value Added Tax (VAT). The FIRS introduced digital platforms, including TaxProMax, to improve and modernise the tax collection process. The Finance Acts of 2020 and 2021 also provided support for the use of technology and third-party systems in automating tax assessment, collection and information gathering (Forvis Mazars, 2023).

After making payment, taxpayers receive electronically generated receipts from the collecting banks, commonly referred to as e-tickets. The collecting banks are expected to transfer the funds to the lead bank on the same day through the Interswitch network. The lead bank is then required to remit the funds to the Central Bank of Nigeria (CBN) within two days. Electronic receipts and online remittance schedules prepared by the lead banks are forwarded to the relevant FIRS offices for verification before official receipts are issued. According to the described collection arrangement, the FIRS operates with twenty-four collecting banks, four of which are designated as lead banks. Other relevant participants include Ministries, Departments and Agencies (MDAs) and the Nigeria Customs Service.

Proper accountability is also necessary to ensure that all revenue collected is accurately recorded and transferred to the appropriate government accounts. The accounting process involves generating records of revenue collected through platforms such as the web portal, PayDirect, JP Morgan statements of account and AutoSwift. It also includes compiling schedules of VAT collected on imports from the Nigeria Customs Service and reconciling payments received from collecting banks, the CBN and other relevant institutions. These activities help to ensure that collected revenue is properly accounted for.

Several monitoring arrangements are also used to support accountability within the collection system. These include online monitoring through PEACT, daily monitoring of remittances to the CBN, online monitoring of foreign payments, and the use of AutoSwift to view FIRS transactions processed through the CBN. Other measures include maintaining a taxpayer enumeration database, introducing Tax Identification Numbers (TINs), and monitoring business activities to ensure that taxes deducted from customers and employees are properly remitted.

Despite the existence of these procedures, the tax collection system continues to experience several challenges. One major problem is the delay in remitting tax payments by designated collecting banks. Some banks may delay the posting of payments or fail to transfer collected revenue to the FIRS within the required period. Where payments are delayed, the Integrated Tax Office (ITO) is stated to impose a penalty of 1% on the principal amount involved. Interest may also be calculated at the Nigerian Interbank Offered Rate (NIBOR) plus 3% for delays below 30 days, while a flat penalty of 1% is applied to delays exceeding 30 days. A more serious problem occurs when collecting banks fail to remit the funds collected and divert them for other purposes. Addressing such cases requires effective monitoring and detection measures, including communication with taxpayers, verification of online payment records and reconciliation of bank transactions.

The FIRS has also undergone considerable institutional and operational development over the years. In 2022, the Service achieved a major revenue milestone by collecting ₦10.04 trillion, becoming the first time its annual revenue collection exceeded ₦10 trillion. This performance was largely supported by increased contributions from Company Income Tax, Value Added Tax and stamp duties (Mondaq, 2025). Revenue collection increased to ₦12.3 trillion in 2023. In 2024, the Service exceeded its revenue target of ₦19.4 trillion by collecting ₦21.6 trillion, representing a 76% increase compared with the previous year (FIRS, 2025). In 2025, the agency was restructured and renamed the Nigeria Revenue Service (NRS) following the Nigeria Revenue Service (Establishment) Act, 2025. This change formed part of the wider tax reform programme intended to strengthen and improve revenue administration in Nigeria (KPMG, 2025).

1.2 Statement of the Problem

Despite the responsibility assigned to the Federal Inland Revenue Service (FIRS) to assess, collect and account for federal tax revenue in Nigeria, the tax collection system continues to face serious administrative, structural and regulatory challenges. These problems affect the efficiency and effectiveness of revenue collection and limit the ability of the government to generate sufficient funds for public expenditure. In 2022, Nigeria's tax-to-GDP ratio was estimated at 7.9%, which was considerably below the African average of 16.0% and the OECD average of 34.1%. This difference suggests that a significant proportion of taxable economic activities in Nigeria is not adequately captured by the existing tax system (OECD/ATAF/AUC, 2024). The gap between the country's potential tax revenue and the amount actually collected therefore raises questions about the effectiveness and reliability of the existing collection framework.

One of the major problems affecting the FIRS collection system is the high level of tax non-compliance and evasion. Tax administration in Nigeria is affected by several difficulties, including deliberate tax evasion, the large informal sector, corruption and complicated tax laws (Lawal et al., 2024). The informal sector is estimated to contribute between 50% and 65% of Nigeria's GDP, which is considerably higher than the Sub-Saharan African average of 34%. However, many businesses operating within this sector do not maintain adequate financial records, while a large number of their transactions are carried out in cash. This makes it difficult for tax authorities to identify taxable activities and collect the appropriate revenue (Mondaq, 2024). The inability to effectively bring these businesses into the tax system reduces the revenue-generating capacity of the FIRS.

Another major concern is the delay or failure of designated collecting agents to remit taxes collected on behalf of the government. Some collecting banks reportedly delay the posting and transfer of tax payments to the FIRS, while other cases involve the diversion of collected funds. These practices undermine the responsibility of the tax authority and create problems for the proper management of public revenue. Weaknesses in the administrative structure of the collection system also reduce the ability of tax authorities to enforce compliance. Consequently, some individuals and corporate organisations, particularly those with substantial financial resources, may exploit legal loopholes and administrative weaknesses to avoid their tax obligations (Bari, Khan, & Ullah, 2022, as cited in Aguguom et al., 2023).

Fraud and corruption are also important problems affecting tax revenue collection in Nigeria. The government is reported to lose more than ₦3 trillion annually through tax-related offences, thereby reducing the resources available for public expenditure (Adetiloye et al., as cited in IJRIAS, 2025). Tax fraud often involves the deliberate alteration or falsification of financial records to reduce tax liabilities or avoid payment. Such activities negatively affect the provision of public services and the overall development of the economy (Okoye & Akenbor, 2022). Although the FIRS operates within an established regulatory framework, fraudulent tax practices remain a concern. This situation creates the need for stronger fraud detection and prevention measures, including forensic accounting procedures and improved digital monitoring systems (Ijeoma & Aronu, 2023). Corrupt practices involving some tax officials and collecting agents, such as bribery and the manipulation of tax records, further worsen the problem.

The absence of adequate transparency and accountability also affects public confidence in the tax system. Previous research indicates that corruption, limited transparency and the complexity of tax regulations contribute significantly to tax avoidance and evasion in Nigeria (Wukari Study, DOAJ, 2021). When taxpayers believe that the revenue collected by the government is not properly used to provide public goods and services, they may become unwilling to meet their tax obligations voluntarily. This attitude can weaken the tax base and reduce government revenue. Similarly, inadequate accountability for funds collected by different agents may increase public distrust and discourage both individual and corporate taxpayers from complying with tax regulations.

There are also concerns about the effectiveness of regulatory supervision, the adequacy of penalties imposed on collecting agents who fail to perform their duties, and the availability of appropriate equipment and technology for detecting fraudulent activities within the collection process. Although the FIRS has introduced digital initiatives such as TaxProMax and the Integrated Tax Administration System (ITAS) to improve tax administration, the advantages of these platforms have not been fully achieved across all areas of the system (Forvis Mazars, 2023; Desi et al., 2023). Existing studies suggest that the adoption of TaxProMax alone may not be sufficient to improve accountability in tax remittance without additional institutional and administrative reforms (Desi et al., 2023). In view of these challenges, this study seeks to examine the federal inland revenue collection system, identify the weaknesses affecting its operations and recommend practical measures for improving its efficiency and effectiveness.

1.3 Aims and Objectives

The main aim of this study is to examine the general system of tax collection, with particular attention to the operations of the Federal Inland Revenue Service (FIRS), and identify possible ways of improving its efficiency and effectiveness.

The specific objectives are to:

1. Investigate whether all individuals within different states and communities contribute through taxation to support the legitimate authority, in accordance with the principles of the social contract.

2. Examine whether tax obligations are clearly defined in terms of the amount payable, the authority responsible for collection and the period within which payment should be made.

3. Determine whether the tax system is easy for both taxpayers and tax officials to understand and administer.

4. Examine whether the tax system is flexible enough to accommodate changes in government within a federal and democratic system.

5. Assess whether taxpayers are required to make tax payments at convenient times, in line with the canon of convenience.

1.4 Research Questions

Based on the objectives of the study, the following research questions are formulated:

1. Do individuals in every state and community pay taxes to support the legitimate authority in accordance with the principles of the social contract?

2. Are tax obligations clearly defined in terms of the amount payable, the authority responsible for collecting the tax and the period within which payment is required?

3. Is the tax system simple enough for taxpayers and tax officials to understand and administer?

4. Is the tax system sufficiently flexible to accommodate the requirements of a federal and democratic system of government?

5. Are taxpayers required to make their tax payments at a time that is convenient for them?

1.5 Research Hypotheses

In accordance with the research problem and the objectives of the study, the following hypotheses are proposed:

H₁: Every individual in each state or community pays taxes to support the legitimate authority in accordance with the principles of the social contract.

H₂: Tax obligations are clearly defined in terms of the amount payable, the authority responsible for collection and the period of payment.

H₃: The tax system is simple to understand and administer.

H₄: The tax system is sufficiently flexible to accommodate changes in government within a federal and democratic system.

H₅: Tax payments are requested at a time that is convenient for taxpayers.

1.6 Significance of the Study

An effective and efficient tax collection system is essential for the financial stability and sustainability of any government. In Nigeria, government revenue has traditionally depended heavily on the oil sector. However, fluctuations in oil revenue and concerns about its long-term sustainability have increased the importance of non-oil tax revenue. This makes an effective tax collection system necessary for improving government revenue and financing public services.

The revenue performance of the FIRS demonstrates the increasing importance of tax collection to the Nigerian economy. The Service generated ₦10.04 trillion in 2022, ₦12.3 trillion in 2023 and ₦21.6 trillion in 2024. These figures highlight the growing contribution of tax revenue to government financing (FIRS, 2025; Mondaq, 2025). Nevertheless, Nigeria's relatively low tax-to-GDP ratio compared with other African countries suggests that considerable opportunities for improving revenue collection still exist (OECD/ATAF/AUC, 2024).

This study is important for several reasons. First, it provides an examination of the existing revenue collection arrangements within the FIRS and helps to identify weaknesses that may affect the proper collection and management of tax revenue. The findings may assist policymakers and tax administrators in understanding the areas that require improvement.

Second, the study examines the adequacy of the human and material resources used in the tax collection process. This may provide useful information for making decisions about resource allocation, staff development, technological investment and institutional restructuring.

Third, the findings may benefit academic researchers, tax practitioners and government institutions interested in understanding the challenges affecting tax administration in Nigeria. It may also serve as a useful reference for future studies on tax collection, revenue mobilisation and public financial management.

Finally, the study contributes to existing knowledge on tax administration in developing economies, particularly Nigeria. It is also relevant to the country's ongoing efforts to reform its tax system and strengthen the administration of public revenue under the Nigeria Revenue Service (Establishment) Act, 2025.

1.7 Scope of the Study

This study examines the tax revenue collection system of the Federal Inland Revenue Service (FIRS), with particular emphasis on the procedures, institutional arrangements and challenges associated with collecting federal taxes in Nigeria. Although different state governments operate their own tax collection systems, the study is limited mainly to tax collection at the federal level.

The study covers major categories of taxes administered by the FIRS, including Company Income Tax, Value Added Tax, Education Tax and Capital Gains Tax. It also considers Personal Income Tax relating to residents of the Federal Capital Territory and non-resident individuals, as described within the scope of the federal tax administration system.

1.8 Limitations of the Study

This research may encounter certain limitations during its conduct. One major limitation is the possible difficulty of obtaining primary information directly from the FIRS because some institutional records and operational information may be treated as confidential. This could affect the extent of empirical information available for the study.

Another limitation relates to the continuous changes in Nigeria's tax laws and administrative arrangements. In particular, the introduction of the Nigeria Revenue Service (Establishment) Act, 2025, has brought significant institutional changes that may result in further amendments to existing tax regulations and procedures while the research is being conducted.

Despite these possible challenges, efforts have been made to rely on relevant and credible information from academic publications, official tax authority documents and reports issued by recognised organisations. These include publications from the OECD, World Bank and KPMG, among other relevant sources.

1.9 Definition of Terms

Balancing Allowance: This refers to an allowance available to a company in an accounting period when it disposes of an asset for which qualifying capital expenditure was incurred wholly and exclusively for business purposes. It arises where the remaining qualifying expenditure is greater than the value of the asset at the time of disposal.

Best of Judgement Assessment: This refers to an assessment made by the FIRS against a company that fails to submit its tax returns or whose submitted returns and audited financial statements are not accepted by the tax authority. In such circumstances, the Board estimates the company's total profits based on the information available and raises an assessment accordingly.

Demand Note: A demand note is an official notice sent to a taxpayer requesting payment of an assessed tax liability, including any applicable interest and penalties.

Designated Bank: This refers to a branch of a selected commercial bank assigned to a particular geographical area to receive tax payments and transfer the collected revenue on behalf of the tax authority.

FIRS: The Federal Inland Revenue Service was the principal federal tax administration agency in Nigeria, responsible for assessing, collecting and accounting for federal taxes and other revenues. Following the 2025 institutional reform, the agency was renamed the Nigeria Revenue Service (NRS).

TaxProMax: This is an electronic tax administration platform introduced by the FIRS to enable taxpayers to register, submit tax returns, make payments and perform other tax-related activities online.

Tax Identification Number (TIN): A Tax Identification Number is a unique identification number assigned to an individual or corporate taxpayer to support the identification of taxpayers, the maintenance of tax records and the monitoring of compliance with tax obligations.

Minimum Tax: Minimum tax refers to the basic tax liability prescribed under Section 28A of CITA 2007, which a company may be required to pay where its assessable profits result in a loss or where the tax payable is below the prescribed minimum, subject to applicable exemptions.

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