THE EFFECT OF COMPANY INCOME TAX ON NIGERIAN ECONOMY (1981 – 2017)

ABSTRACT

This study investigated the impact of company income tax revenue on economic growth in Nigeria.

This study used secondary data which was subjected to econometric analysis. The study made use of the judgmental sampling technique. The Central Bank of Nigeria (CBN) and Federal Inland Revenue Service (FIRS) have been chosen for the purpose of this study. The study employs the Ordinary Least Square Regression Technique in the analysis of the secondary data obtained from the Central Bank of Nigeria statistical Bulletin Using Eviews.

            The result of the regression analysis reveals company income tax was statistically significant at 5% level of significance using F-statistics and other statistical parameter.

The study concludes that company income tax has significant impact on economic growth and living standard in Nigeria. The study hereby recommended tat; There should be stringent penalty imposed on any corporate body who indulge in any form of tax malpractices irrespective of states; Efforts should be intensified by the government towards increased collection of tax revenue; This can be done through blocking all loopholes in our tax laws as well as bringing more prospective tax payers into the tax net (especially the informal sector); Government through Federal Inland Revenue Service should create an effective and reliable data base for every corporate entity to minimize (if not eliminate) the incidence of tax evasion and there should be constant training and re-training of CIT administrators through seminars, conference to keep them abreast with the modern trend in tax administration.

CHAPTER ONE

INTRODUCTION

1.1  BACKGROUND OF THE STUDY

History shows that man has been paying tax, in the olden days to the chieftains and later on to form of organized government. Before the oil boom in Nigeria, income from taxation was the major source of revenue to all level of governments (Abiola & Asiweh 2012).. Therefore, no system can be more effective if it enjoys some degree of financial independence (Enahoro & Olabisi 2012). This financial independence can be achieved by direct taxations, collection of levies, fines and fees, among others (Worlu & Emeka 2012).

Taxation is one of the oldest means by which the cost of providing essential services for the generality of persons living in a given geographical area is funded. Globally, governments are saddled with the responsibility of providing some basic infrastructures for their citizens. Functions or obligations the government may owe her citizens include but are not restricted to: stabilization of the economy, redistribution of income and provision of services in the form of public goods (Abiola & Asiweh, 2012). Taxation is a major source of government revenue all over the world and governments use tax proceeds to render their traditional functions, such as: the provision of roads, maintenance of law and order, defence against external aggression, regulation of trade and business to ensure social and economic maintenance (Appah & Eze, 2013). The primary function of a tax system is to raise enough revenue to finance essential expenditures on the goods and services provided by government; and tax remains one of the best instruments to boost the potential for public sector performance and repayment of public debt as enunciated by (Okoye & Raymond, 2014).

Empirical studies have shown that the quantum of revenue available to any government needed to meet the social and capital expenditure in a country depends on its ability to harness funds from internal and external sources and channel it towards national development and economic prosperity. Appah (2010), in his findings, stated that revenue from taxation forms the bedrock of the revenue base of most governments all over the world. The extent to which a government can provide social, economic and infrastructural development is a function of the amount of funds at its disposal.

It has been observed that in Nigeria, the quantum of income generated from non-oil tax over the years by the federal government is grossly insufficient in relation to the ever increasing social, political and infrastructural developmental needs of the country. As noted by Odusola (2006), Nigeria economy has thrived largely on oil revenue in the past three decades. In essence, Nigeria runs a monolithic economy which is subject to international oil price mechanism far beyond the control of the government, thereby exposing the economy to global market fluctuations, distorting budgetary projections, and renders meaningful developments improbable. The current budget of borrowing in Nigeria is a fall out of the dwindling oil revenue that has sank into abysmal low prices in the international market and has thrown the Nigeria budget for 2016 into serious crisis.

Appah (2010) further stated that the economic growth and development of any nation depends on the amount of revenue generated by the government for the provision of infrastructural facilities. The highway of economic growth of most developed nations of the world is paved with revenues derived from efficient taxation system as implied by Enahoro and Olabisi, (2012).The provision of public services such as power, roads, efficient transportation system, healthcare facilities, schools, security of lives and properties and defence against internal and external aggression, are the exclusive responsibility of governments all over the world. According to Worlu and Emeka (2012), to meet these responsibilities, governments need to harness all sources of revenue available to it nationally and internationally. Reliance on external sources of revenue for developmental purposes has proved unproductive for many countries over the years, and those countries which experienced rapid social and infrastructural development around the world were found to have leveraged on revenue from efficient tax system. The Board of Inland Revenue administers the federally collected taxes through the Federal Inland Revenue Service (FIRS), while the board of state internal revenue service administers the taxes collectible by the state government and the revenue committee administers taxes and levies collectible by the Local governments (James and Moses, 2012). A good tax administrative system should have efficiency and effectiveness as its watch word. According to Kiabel and Nwoka (2009), the administration of tax is the responsibility of various tax authorities as established by relevant tax laws. However in Nigeria, the inefficiencies of tax administration as highlighted above have led to various tax issues. Abiola and Asiweh (2012) observed that those working in the informal sector of Nigerian economy do not see the need to pay tax whereas they dominate the economy leading to tax evasion and tax avoidance. From the above purview, this study sets out to critically examine the impact of tax administration and revenue on the economic development of Nigeria.

1.2  STATEMENT OF THE PROBLEM

The major source of government revenue in Nigeria today is the proceeds

from the sale of crude oil and gas in both local and international markets. As a matter of fact, this has been the situations in Nigeria for a long time. Unfortunately, the incomes generated by the federal government from other sources have not been in any way comparable to the oil revenue. This development has impacted negatively on the ability of the government to perform it constitutional, social and economic responsibilities. The dependence on the oil revenue is so much that other sources of revenue, like agriculture, manufacturing, exports and others have been neglected. At various times in the life of the country, there have been calls on the government to diversify the revenue base of the economy by exploiting other sources of revenue in order to promote economic development and reduce dependence on oil.

        The inability of the Federal Inland Revenue Service Board to ensure total compliance to tax rules by companies and bring all operational companies into the tax net has significantly limited the contribution of tax revenue to economic growth. According to James and Moses (2012), the prevalence of tax evasion in the Nigeria tax system, has curtailed the amount of revenue collected from tax income, this in no doubt has effect on the government expenditure and inflation in the economy. Moreover, the revenue generation capacity of the nation’s present tax administrative system is hampered by challenges such as paucity of data, inefficient monitoring and enforcement system, and corrupt practices, as noted by, (Leyira, Chukwuma, and Asian 2012).

        In most countries, tax system is seen as an embodiment of contention and controversy whether in its policy formulation, legislation or administration as observed by (Bariyama & Gladson 2009). For example Nigeria government is contemplating to raise Value Added Tax rate, while the organised private sector is resisting that attempt and would rather have government bring more companies and individuals into the tax net as noted by (Alli, 2009). According to Enahoro and Olabisi (2012) there is a huge scale of corrupt practices prevalent in Nigeria tax administrative system, this tells to a reasonable extent that the economy is at a disadvantage position.

        The problems associated with the major tax reforms in Nigeria can be attributed to its inability to achieve its set objectives towards which it was focused. Ogbonna and Ebimobowei (2012) identified some of the problems to include the increasing cost of tax administration by the Federal Government of Nigeria in relation to the tax revenue collections as evidenced by scholars, which is a major indication of high level of inefficiency in the tax operations of the country contrary to the canons of taxation enunciated by Adam Smith. Furthermore, the prevailing distortions in the tax system have jeopardized some of the purpose of the Nigerian tax reform agenda resulting in an ineffective tax system.

Companies Income Tax administration in Nigeria does not measure up to appropriate standards. If good old test of equity, certainty, convenience and administrative efficiency are applied, Nigeria will score low as a result of tax evasion and inadequate monitoring. Non-compliance with tax laws and regulations by tax payers is deep in the system because of weak control, poor tax administration, poor tax education, inconsistent government policies, lack of adequate statistical data and corruption among tax officials (Azubuike 2009).

1.3  OBJECTIVE OF THE STUDY

The main objective of the study is to assess the impact of Company income tax on Nigerian economy. The specific objectives  are;

  1.     i.        To examine the effect of company income tax on economic growth in Nigeria.
  2.    ii.        To evaluate  the trend of company income tax on economic growth in Nigeria

1.4  RESEARCH QUESTIONS

The questions of interest in the study are:

  1.     i.        To what extent has Company income tax affect economic growth in Nigeria
  2.    ii.        What is the trend of company income tax and economic growth in Nigeria

1.5  RESEARCH HYPOTHESES

Based on the objectives, the following hypotheses were developed in order to make valid conclusion on the subject matter. The hypotheses are as follows;

H0:   Company income tax has no significant effect

economic growth in Nigeria

H1:   Company income tax has significant effect on economic growth in Nigeria.

1.6     JUSTIFICATION OF STUDY

Companies income tax has significant impact on the economy of any nation because it serves as a stimulus to economic growth in the areas of fiscal and monetary policies. But the Nigerian case is difference because the revenue derived from company income tax has been grossly understated as a result of several challenges. The factors responsible for the poor performance of company income tax revenue in Nigeria include: high rate of tax evasion and avoidance by companies, poor tax administration, poor taxpayers education, inconsistent government policies, and lack of adequate statistical data, inadequate manpower and corruption among tax officials.

The study will make a tabular and chart trend analysis of values of; company income tax and gross domestic product to ascertain the relationship between these variables year on year for the period under review.

 Consequently, it becomes imperative to examine the effect of company income tax revenue on economic growth of Nigeria.

1.7     SIGNIFICANCE OF THE STUDY

The need to reduce the country’s over dependence on the oil and gas revenue and the need to diversify the federal government revenue generation have made this research study unique. The relevance of this study therefore, stems from the fact that it is directed towards providing solutions to the problems identified earlier.

The study will enables the federal government to know the present trend of revenue generated from companies’ income tax into the Federation Account, and how such performance can further be improved upon to enhance both economic and social growth. It will also pinpoint the aspect of the Companies’ Income Tax Act that needs amendment and how to formulate the necessary policies towards creating conducive environment for our limited liability companies in Nigeria. It shall further determine how the pursuits of government monetary and fiscal policies affect the companies’ performance whether positively or negatively.

The study also provides a holistic approach to tax administration in the country; therefore assisting the tax administrators by shedding light on existing loopholes that tax evaders explore. In addition, researchers and academic community would also draw inspiration from the in-depth analysis and articulation of the research work.

1.8     SCOPE OF THE STUDY

The study seeks to analyze the effect of company income tax on economic growth in Nigeria. In order to fully capture its effect on the economy, a thorough empirical investigation will be conducted with data covering a period of 37 years i.e. 1981-2017.

The analysis that will be made in this study shall be based on time series data. The data for this study would be obtained mainly from secondary sources; particularly from Central Bank of Nigeria (CBN) publications such as the CBN Statistical Bulletin, CBN Annual Reports and Statements of Accounts, CBN Economic and Financial Review Bullion and National Bureau of Statistics publications.

1.9  LIMITATION OF STUDY

The major limitation of the study is the lack of access to adequate and sufficient data from the documentations of institutions with the duty of tax administration in Nigeria. However, available data obtained from the CBN statistical bulletin and quarterly reports of FIRS for the thirty-seven years period (1981-2017) were used to analyse the relationship between the dependent and independent variables. The results is expected to be adjudged good enough to give a reasonable insight on effect of company income tax revenue on economic growth in Nigeria.

Other limitation of this study is time constraint. The time allotted for the completion of this research is not adequate based on recent and contemporary happening with respect to the impact of public debt on economic growth in Nigeria.

Finance is one of the elements that assist a good research. Financial constraint caused difficulties in the process of this research work, however, it did not hinder the research. 

1.10 OPERATIONALIZATION OF VARIABLES

 Due to the linearity nature of the model formulation, Ordinary Least Square (OLS) estimation method would be employed in obtaining the numerical estimates of the coefficients in the model using Eviews. Gross domestic product would be used to capture economic growth, while per capita gross domestic product will be used to capture living standard in Nigerian economy.

A regression model shall be used in the estimation. The model shall seek to investigate the effect of company income tax on economic growth(using gross domestic product as a parameter to capture economic growth) in Nigeria. This is a follow up on the objectives and hypotheses stated earlier.

1.11 DEFINITION OF TERMS

The following words are operationally defined as they would be

  1. Economic Growth: The rate of expansion in the volume of production of goods and services in an economy. It is the rate at which the Gross National Product (GNP) increases.
  2. Company Income Tax: This is an assessment levied by a government on the profits of a company.
  3. Nigeria Tax Authorities: This refers to the revenue collection agencies of the Federal Government of Nigeria represented by the Federal Inland Revenue Service (FIRS), State Internal Revenue Service (SIRS) and Local Government Revenue Committee.
  4. Joint Tax Board (JTB): This is the supervisory and regulatory body that defines the scope of operation and administrative system between the various tiers of tax authorities.
  5. Revenue: Implies resources or pool of funds available to the Federal Government of Nigeria from internal and external sources.
  6. Tax: Obligatory transfer of financial resources from the private organisation to the public sector for common pool
  7. Tax Administration: Refers to tax management process and procedures for the effective and efficient transfer of financial resources from the private organisation to the public pool.
  8. Tax Justice: This refers to the tax administration transparency issues in Nigeria.
  9. Tax Reform Policies: These are policies established by the Federal Government in Nigeria on tax administration and implementation.
  10. Tax Consultants: These are firms employed by the Federal Government of Nigeria charged with the duties of tax administration and collection.
  11. Tax Evasion: This refers to the deliberate failure to pay taxes usually by making false reports. It is using illegal means to avoid paying taxes. Typically, tax evasion schemes involve an individual or corporation misrepresenting their income to the Inland Revenue Service.
  12. Tax Avoidance: This refers to the minimization of tax liability by tax payers through lawful methods. This is the legal usage of the tax regime to one's own advantage to reduce the amount of tax that is payable by means that are within the law.
  13. Thin Capitalization: This is a situation where firms are heavily financed through debt with the aim to pay less tax since interest on debt is an allowable expense under tax laws.

 

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