Accounting Project Topics

An Appraisal of the Pay-As-You-Earn System of Taxation in Nigeria

An Appraisal of the Pay-As-You-Earn System of Taxation in Nigeria

An Appraisal of the Pay-As-You-Earn System of Taxation in Nigeria

Chapter One


The purpose of the study can be broken down as follows:

  1. To ascertain the impact of the Pay-As-You-Earn system’s effectiveness on personal income tax revenue over ten years.
  2. To find out if there is any relationship between the truthfulness of information provided by tax payers in their tax returns and their age.
  3. To find out how the employers perceive the PAYE system and the likely improvement that they would recommend.

On the basis of my findings, suggestion and recommendation will be made which I hope would be benefit to the local government it is also hope that future researcher in the area of the public finance would find the work a valuable source of literature.




Nigeria is governed by a federal system hence its fiscal operations also adhere to the same principle. This has serious implications on how the tax system is managed in the country. In Nigeria, the government’s fiscal power is based on a three-tiered tax structure divided between the federal, state and local governments, each of which has different tax jurisdictions. As of 2002, about 40 different taxes and levies are shared by all three levels of government.


The Nigerian tax system is lopsided, and dominated by oil revenue. The most veritable tax handles are under the control of the federal government while the lower tiers are responsible for the less buoyant ones the federal government taxes corporate bodies while state and local governments tax individuals. While the federal government on average accounts for 90 per cent of the overall revenue annually, it only accounts for about 70 per cent of total government expenditure. In 1995, the breakdown of total tax and levy collection of the three tiers was 96.4 per cent for the federal government, 3.2 per cent for the state and 0.4 per cent for the local government (Phillips 1997: 40). A major element contributing to this development was the prolonged military rule that had ignored constitutional provision.

Over the past four decades, the country’s revenues were largely derived from primary products. Between 1960 and the early 1970s, revenue from agricultural products dominated, while revenue from other sources was considered as residual. Since the oil boom of 1973/4 to date, however, oil has dominated Nigeria’s revenue structure, and its share in federally collected revenue rose from 26.3 per cent in 1970 to 81.8, 72.6 and 76.3 in 1979, 1989 and 1999, respectively. Over the past two decades oil has accounted for at least 70 per cent of the revenue, thus indicating that traditional tax revenue has never assumed a strong role in the country’s management of fiscal policy. Instead of transforming or diversifying the existing revenue base, fiscal management has merely transited from one primary product-based revenue to another, making the economy susceptible to fluctuations of the international oil market.

The need to address this problem led to several tax policy reforms. The tax policy reviews of 1991 and 2003, as well as the yearly amendments given in the annual budget, were geared towards addressing this issue. But not much has been achieved. Perhaps to understand the importance of tax policy reforms, one needs to appreciate the urgency for such reforms. Why the need for tax policy reforms in Nigeria? First, there is a compelling need to diversify the revenue portfolio for the country in order to safeguard against the volatility of crude oil prices and to promote fiscal sustainability and economic viability at lower tiers of government. Second, Nigeria operates on a cash budget system, where proposals for expenditure are always anchored to revenue projections. This facilitates determining the optimal tax rate for a given level of expenditure. Thus accuracy in revenue projection is vital for devising an appropriate framework for sustainable fiscal management, and this can be realized only if reforms are undertaken on existing tax policies in order to achieve some improvement.

Third, Nigerian tax system is concentrated on petroleum and trade taxes while direct and broad-based indirect taxes like the value-added (VAT) are neglected. This is a structural problem for the country’s tax system. Although direct taxes and VAT have the potential for expansion, their impact is limited because of the dominance of the informal sector in the country. Furthermore, the limited formal sector is supported with strong unions that act as pressure groups to deter any appreciable tax increment from gross income. Fourth, the widening fiscal deficit that over the years has threatened macroeconomic stability and prospects for economic growth makes the prospect of tax reform very appealing. The ratio of deficit to GDP averaged 9.98 and 5.0 per cent for the periods 1990-94 and 1999-2001; in 1993 it was 15.5 per cent. Fifth, the study groups on the review of the Nigerian tax system in 1991 and 2003 highlighted the need to increase tax revenue and reduce expenditure as the major fiscal issues to be addressed. As such, the primary objective of the committees was to optimize revenue from various sources within the country. Finally, the necessity to improve the tax notification procedure was underscored in order to facilitate effective evaluation of the performance of the Nigerian tax system and to promote adequate planning and implementation. The quality of management associated with regular and result-oriented tax reforms has a significant bearing on the overall macroeconomic performance and the distribution of resources between public and private sectors as well as within the public sector. In spite of the importance of a result-oriented tax policy review for the country, attempts have not been made to assess development over the years. The primary objective of this

paper is to prepare a case study on tax policy reforms in Nigeria, with the specific objectives of:

  1. i) Examining the main tax reforms in the country;
  2. ii) Highlighting tax revenue profile and composition;
  3. Analysing possible distributional impacts on the poor;
  4. Discussing major problems that could prevent effective tax implementation in the country; and
  5.  Offering possible suggestions for reforms.


Nigeria’s fiscal policy measures have been largely driven by the need to promote such macroeconomic objectives as promoting rapid growth of the economy, generating employment, maintaining price levels and improving the balance-of-payment conditions of the country. Although policy measures change frequently, these objectives have remained relatively constant. Until the mid 1980s, tax policies, for instance, were geared to achieving such specific objectives as:




Research design

The researcher used descriptive research survey design in building up this project work the choice of this research design was considered appropriate because of its advantages of identifying attributes of a large population from a group of individuals as the study sought to examine the appraisal of pay-as-you-earn system of taxation with Nssuka local government area as our case study.

Sources of data collection

Data were collected from two main sources namely:

  • Primary source and
  • Secondary source

Primary source:

These are materials of statistical investigation which were collected by the research for a particular purpose. They can be obtained through a survey, observation questionnaire or as experiment; the researcher has adopted the questionnaire method for this study.

Secondary source:

These are data from textbook Journal handset etc. they arise as byproducts of the same other purposes. Example administration, various other unpublished works and write ups were also used.

Population of the study

Population of a study is a group of persons or aggregate items, things the researcher is interested in getting information for an appraisal of pay-as-you-earn system of taxation. 200 staffs were selected randomly by the researcher as the population of the study.




Efforts will be made at this stage to present, analyze and interpret the data collected during the field survey.  This presentation will be based on the responses from the completed questionnaires. The result of this exercise will be summarized in tabular forms for easy references and analysis. It will also show answers to questions relating to the research questions for this research study. The researcher employed simple percentage in the analysis.




It is important to ascertain that the objective of this study was to examine the appraisal of pay-as-you-earn system of taxation.

In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing the challenges of teachers perception on the internal control system as a factor appraisal of pay-as-you-earn system of taxation.


This study was undertaken to examine the appraisal of pay-as-you-earn system of taxation. The study opened with chapter one where the statement of the problem was clearly defined. The study objectives and research hypotheses were defined and formulated respectively. The study reviewed related and relevant literatures. The chapter two gave the conceptual framework, empirical and theoretical studies. The third chapter described the methodology employed by the researcher in collecting both the primary and the secondary data. The research method employed here is the descriptive survey method. The study analyzed and presented the data collected in tables and the hypotheses were tested using the chi square to test hypothesis. While the fifth chapter gives the study summary and conclusion.

Conclusion and Recommendations

In this project we studied the appraisal of pay-as-you-earn system of taxation. Tax payers may follow laws they know or trust to produce good results. Government and tax administration’s strategy aimed at creating confidence in their credibility and their capacity is rewarded with higher tax morale. The subject of taxation has received considerable intellectual and theoretical attention in the literature. Taxation is one of the most volatile subjects in governance both in the developing and developed nations. Tax refers to a “compulsory levy by a public authority for which nothing is received directly in return” (James and Nobes, 1992). According to Nightingale (2001), “a tax is compulsory contribution, imposed by government, and while taxpayers may receive nothing identifiable in return for their contribution, they nevertheless have the benefit of living in a relatively educated, healthy and safe society”. She further explains that taxation is part of the price to be paid for an organized society and identified six reasons for taxation: provision of public goods, redistribution of income and wealth, promotion of social and economic welfare, economic stability and harmonization and regulation.


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