CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Taxation constitutes one of the most fundamental instruments of fiscal policy in any modern nation-state. A tax is broadly defined as a compulsory levy imposed by a government authority on the income, profits, or wealth of individuals, partnerships, and corporate organisations, without any direct and immediate quid pro quo, for the purpose of financing public expenditure and governance (Lawal, Igbekoyi, & Dagunduro, 2024). In Nigeria, the responsibility for the assessment, collection, and accounting of taxes accruing to the Federal Government rests primarily with the Federal Inland Revenue Service (FIRS), an autonomous body established under the FIRS (Establishment) Act No. 13 of 2007 (FIRS, 2022).

Every tax imposed on Nigerian companies or organisations requires continual interpretation of its specific application and effect on various transactions of the organisation. The field of taxation evolves constantly in response to new court rulings, legislative amendments, and changes in government policy. Under the Companies Income Tax Act (CITA) 2007 as amended, tax is assessed on the profit of a company after all relevant deductions and allowances, including capital allowances and investment allowances. The applicable rate of tax levied for each year of assessment in respect of the total profits of every company is thirty kobo for every naira (30%), as prescribed under Section 29 of CITA 2007. However, recent reform proposals under the 2024 Tax Reform Bill seek to reduce the corporate income tax rate from 30% to 25% by 2026, reflecting a broader restructuring of the Nigerian fiscal framework (Nigerian Tax System, 2024).

Companies that are yet to commence business operations after at least six months of incorporation are required, for each year they seek a tax clearance certificate, to pay a levy of: (a) ₦20,000 for the first year, and (b) ₦25,000 for every subsequent year, prior to the issuance of a tax clearance certificate. Furthermore, Nigerian companies engaged in manufacturing or agricultural production, mining of solid minerals, or wholly export trade that earn a total gross turnover of below one million naira within the first four years of commencement are liable to a reduced tax rate of twenty kobo on every naira of total profits.

Section 28A of CITA 2007 provides for minimum tax where the ascertainment of total assessable profits results in a loss or where the tax payable falls below a prescribed minimum. Where the company’s turnover is ₦500,000 or below and the company has been in business for at least a few calendar years, the minimum tax is the higher of: (i) 0.5% of gross profit; (ii) 0.5% of net assets; (iii) 0.25% of paid-up capital; or (iv) 0.25% of turnover. Where the turnover exceeds ₦500,000, an additional 0.125% is applied to the excess amount. These provisions do not apply to companies engaged in agricultural trade or business, companies with at least 25% imported equity capital, or companies within the first four calendar years of commencement of business.

Revenue collection is a basic necessity following the assessment of tax liabilities. Upon assessment, taxpayers are required to remit assessed tax liabilities to any of the designated collecting banks within their region, accompanied by assessment notices indicating the type of tax being paid. These tax types include Company Income Tax (CIT), Education Tax, Capital Gains Tax, Personal Income Tax for residents of the Federal Capital Territory (Abuja) and non-resident individuals, as well as Value Added Tax (VAT). The FIRS, through the introduction of digital tools such as the TaxProMax platform, has significantly modernised the collection process. The Finance Acts of 2020 and 2021 empowered FIRS to deploy technology and third-party systems to automate tax assessment, collection, and information gathering (Forvis Mazars, 2023).

After payment, taxpayers are issued an electronically generated receipt from the bank (e-ticket). The collecting bank is expected to remit the funds on the same day to the lead bank via the Interswitch network. The lead bank then remits to the Central Bank of Nigeria (CBN) within two days. Electronic receipts and online schedules of remittance by lead banks are forwarded to the FIRS office for verification before receipts are formally issued. The FIRS utilises twenty-four (24) collecting banks, with four (4) designated as lead banks, alongside Ministry Departments and Agencies (MDAs) and the Nigerian Customs Service.

Accountability for revenue collected is mandatory. The accounting procedure involves: (i) the generation of all revenues collected through the web portal/PayDirect, JP Morgan statements of account, and AutoSwift; (ii) the collation of schedules of VAT on imports from the Nigerian Customs Service; and (iii) reconciliation of remittances with collecting banks, CBN, and other relevant stakeholders to ensure proper accountability of revenues. Monitoring mechanisms in place include online monitoring via PEACT, daily monitoring of remittances to CBN, online viewing of foreign payments, AutoSwift for online viewing of FIRS transactions in the CBN, a taxpayer enumeration database, the introduction of Tax Identification Numbers (TINs), and monitoring of businesses to ensure remittance of taxes deducted from customers and staff.

Despite these structures, challenges persist within the collection system. Delayed remittance by collecting banks remains a significant problem, wherein banks deliberately delay posting payments or fail to remit collections to the FIRS. In instances of delayed posting, the Integrated Tax Office (ITO) imposes a penalty of 1% on the principal amount delayed, with interest computed at the Nigerian Interbank Offered Rate (NIBOR) plus 3% for delays below 30 days, and a flat 1% penalty for delays exceeding 30 days. Outright non-remittance, where collected funds are diverted by banks, represents a more severe infraction that calls for robust detection strategies, including taxpayer engagement, verification of web portal postings, and bank reconciliation.

The FIRS has continued to evolve institutionally. In 2022, the Service recorded a historic milestone by generating ₦10.04 trillion in revenue, crossing the ₦10 trillion mark for the first time, largely driven by improved contributions from Company Income Tax, VAT, and stamp duties (Mondaq, 2025). By 2023, this grew further to ₦12.3 trillion, and in 2024, the FIRS surpassed its target of ₦19.4 trillion by collecting ₦21.6 trillion a 76% increase over the prior year (FIRS, 2025). In 2025, the Service was rebranded as the Nigeria Revenue Service (NRS) under the Nigeria Revenue Service (Establishment) Act, 2025, as part of a broader tax reform agenda to centralise and strengthen revenue administration in Nigeria (KPMG, 2025).

1.2 Statement of the Problem

Despite the institutional mandate of the Federal Inland Revenue Service (FIRS) to assess, collect, and account for all federal taxes in Nigeria, the revenue collection system has continued to grapple with deep-seated structural, administrative, and regulatory challenges that undermine its effectiveness and efficiency. Nigeria’s tax-to-GDP ratio stood at only 7.9% in 2022, far below the African average of 16.0% and the OECD average of 34.1%, indicating that a substantial portion of taxable economic activity remains outside the formal tax net (OECD/ATAF/AUC, 2024). This persistent gap between revenue potential and actual collection raises serious concerns about the adequacy and integrity of the existing tax collection framework.

A critical challenge confronting the FIRS collection system is the widespread problem of tax non-compliance and evasion. Nigeria faces significant obstacles in tax administration, including rampant tax evasion, a large untaxed informal sector, corruption, and overly complex tax legislation (Lawal et al., 2024). The informal sector, which accounts for approximately 50% to 65% of Nigeria’s GDP well above the Sub-Saharan average of 34% contributes disproportionately to the national tax gap, as transactions within this sector are predominantly conducted in cash with minimal accounting records (Mondaq, 2024). The inability to effectively capture and tax this sector severely limits the revenue-generating capacity of the FIRS.

Compounding this problem is the persistent issue of delayed and non-remittance of taxes by designated collecting agents. It has been observed that some collecting banks deliberately delay the posting and remittance of taxes paid to the FIRS, and in some cases, collected funds are wholly diverted. Such practices constitute a direct breach of the agency’s mandate and create systemic inefficiencies in public financial management. Administrative deficits within the collection system also reduce enforcement capacity, enabling widespread tax evasion and non-compliance, especially among high-net-worth individuals and corporations capable of exploiting legal loopholes (Bari, Khan, & Ullah, 2022, as cited in Aguguom et al., 2023).

Fraud and corruption represent yet another dimension of the problem. In Nigeria, the government loses over ₦3 trillion annually to tax-related crimes, which severely constrains public sector financing (Adetiloye et al., as cited in IJRIAS, 2025). Tax fraud involving the deliberate falsification of financial records undermines public services and economic growth (Okoye & Akenbor, 2022). Despite the regulatory frameworks maintained by the FIRS, tax fraud continues to persist, highlighting the need for more effective anti-fraud mechanisms such as forensic accounting and digital monitoring (Ijeoma & Aronu, 2023). The situation is further compounded by corrupt practices among both FIRS staff and some collecting agents, including bribery and the manipulation of tax records.

Transparency and accountability gaps further weaken public confidence in the tax system. Research has confirmed that corruption, lack of transparency, and tax system complexity all have a substantial impact on tax avoidance and evasion in Nigeria (Wukari Study, DOAJ, 2021). When taxpayers perceive that taxes are collected but not judiciously utilised for public goods and services, they develop apathy toward voluntary compliance, further eroding the tax base. The lack of proper accountability for amounts collected by various agents reinforces this cycle of distrust, ultimately discouraging compliance among both individual and corporate taxpayers.

Furthermore, there are concerns about the adequacy of regulatory oversight, the sufficiency of penalties for erring collecting agents, and the availability of functional equipment and technology to detect and deter fraud within the collection chain. While the FIRS has made significant strides through digital transformation initiatives such as TaxProMax and the Integrated Tax Administration System (ITAS), the benefits of these systems have not been uniformly realised (Forvis Mazars, 2023; Desi et al., 2023). Studies suggest that TaxProMax adoption alone cannot sufficiently enhance tax remittance accountability without complementary institutional reforms (Desi et al., 2023). It is against this backdrop that this study seeks to appraise the federal inland revenue collection system, identify systemic weaknesses, and propose evidence-based recommendations for reform.

1.3 Aims and Objectives

The aim of this research is to appraise the system of tax collection generally, with special emphasis on the Federal Inland Revenue Service (FIRS), and to explore avenues for improving its overall efficiency and effectiveness. Specifically, the study seeks to:

1. Investigate whether all subjects within every state or community pay taxes to support the legitimate authority, in accordance with the requirements of the social contract.

2. Examine whether the taxes to be paid are certain in relation to the amount, the authority empowered to collect them, and the time or period of collection.

3. Ascertain whether the tax system is simple to understand and administer for both taxpayers and tax officials.

4. Determine whether the tax system is sufficiently flexible to accommodate changes of government in a federal and democratic polity.

5. Evaluate whether the request for payment of taxes is made at the most convenient time for taxpayers, in accordance with the canon of convenience.

1.4 Research Questions

Based on the objectives stated above, the following research questions are posed:

6. Does every subject of every state or community pay taxes to support the legitimate authority within the requirements of the social contract?

7. Is the tax to be paid certain in relation to the amount payable, the authority to collect it, and the time or period of collection?

8. Is the tax system simple to understand and administer?

9. Is the tax system flexible enough to accommodate the realities of a federal and democratic system of government?

10. Is the request for payment of taxes made at a convenient time for the taxpayer?

1.5 Research Hypotheses

In line with the problem

statement and objectives of the study, the following hypotheses are formulated:

H₁: Every subject

of every state or community pays taxes to support the legitimate authority within the requirements of the social contract.

H₂: The tax to be

paid is certain in relation to the amount payable, the authority to collect it, and the time or period of collection.

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

H₄: The tax system is flexible enough to accommodate changes of government in a federal and democratic country.

H₅: The request for payment of taxes is made at a convenient time for the taxpayer.

1.6 Significance of the Study

The efficient and effective administration of tax collection is central to the fiscal sustainability of any government. In Nigeria, where oil revenues have historically dominated the national revenue profile but are increasingly volatile and unsustainable, non-oil tax revenue has become more critical than ever. The FIRS generated ₦10.04 trillion in 2022, ₦12.3 trillion in 2023, and ₦21.6 trillion in 2024 milestones that underscore the growing strategic importance of effective tax collection systems (FIRS, 2025; Mondaq, 2025). However, given Nigeria’s persistently low tax-to-GDP ratio relative to African peers, significant revenue mobilisation gaps remain (OECD/ATAF/AUC, 2024).

This study is significant for several reasons. First, it offers a systematic appraisal of the current revenue collection structures within the FIRS, enabling policymakers and administrators to identify specific gaps and dysfunctions within the system. Second, by interrogating the adequacy of human and material resources deployed in the collection process, the study contributes to informed decision-making regarding resource allocation and institutional reform. Third, the findings of this study will be of value to academic researchers, tax practitioners, and government agencies seeking to understand and address the institutional challenges facing the FIRS collection system. Finally, the study contributes to the growing body of literature on tax administration in developing economies, particularly in the context of Nigeria’s ongoing fiscal reforms under the 2025 Tax Reform Act.

1.7 Scope of the Study

This study focuses specifically on the tax revenue collection system of the Federal Inland Revenue Service (FIRS), with particular attention to the processes, structures, and challenges associated with the collection of federal taxes in Nigeria. While various states have adopted different approaches to tax collection, this research is primarily concerned with operations at the federal level, encompassing all major tax types administered by the FIRS, including Company Income Tax, Value Added Tax, Education Tax, Capital Gains Tax, and Personal Income Tax for residents of the Federal Capital Territory and non-resident individuals.

1.8 Limitations of the Study

The conduct of this research is subject to certain limitations. The limited availability of primary data from the FIRS, owing to institutional confidentiality concerns, may constrain the depth of empirical analysis. Additionally, the rapidly evolving legislative landscape particularly in light of the sweeping changes introduced by the Nigeria Revenue Service (Establishment) Act, 2025 means that some statutory provisions may be subject to further amendment during the course of the study. Nevertheless, every effort has been made to draw on the most current and credible sources of data, including peer-reviewed academic literature, official FIRS publications, and reports from credible organisations such as the OECD, World Bank, and KPMG.

1.9 Definition of Terms

Balancing Allowance: An allowance due to a company in any accounting period during which it disposes of an asset in respect of which qualifying capital expenditure was wholly and exclusively incurred for the purposes of its operations. This arises where the residue of the qualifying expenditure exceeds the value of the asset at the time of disposal.

Best of Judgement Assessment: An assessment raised by the FIRS on a company where the company fails to submit returns, or where submitted returns and audited accounts are not accepted by the Board. In such cases, the Board determines, to the best of its judgement, the total profits of the company and raises an assessment accordingly.

Demand Note: A notice issued to a taxpayer demanding payment of assessed taxes after the computation of applicable interest and penalties.

Designated Bank: A branch of a selected commercial bank zoned to a particular geographical area for the collection and remittance of taxes on behalf of the FIRS.

FIRS: Federal Inland Revenue Service – the principal federal tax authority in Nigeria, responsible for the assessment, collection, and accounting of federal taxes and revenues.

TaxProMax: An in-house electronic service solution introduced by the FIRS to allow taxpayers to register, file tax returns, make payments, and carry out other tax obligations seamlessly online.

Tax Identification Number (TIN): A unique identification number assigned to every taxpayer, whether individual or corporate, for the purpose of tracking tax records and ensuring compliance.

Minimum Tax: A baseline tax liability prescribed under Section 28A of CITA 2007 that a company is required to pay even where its total assessable profit results in a loss or negligible tax payable, subject to stipulated exemptions.

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