ABSTRACT
The importance of Small and Medium Scale Enterprise cannot be understated in helping to build the weak part of the economy in the country. Excessive CIT rate would eventually be discouraging to investment which is one of the best ways in which SMEs can grow in the economy. Overcoming the major investment decision challenges is one of the problems. This challenge poses as a treat to SMEs in Nigeria, many SMEs are struggling because of a lack of investors and this is due to the percentage of tax paid by the company on the profit which is made to the Federation Inland Revenue Service (FIRS). This study examines the impact of CIT tax reforms, CIT tax policies and CIT tax incentives have on investment decision of SMEs in Nigeria. The study adopted survey research design. Simple random sampling technique was adopted. Questionnaire was used in collecting data which was administered using the online platform. The data collected was analyzed using descriptive statistics of simple percentage, frequency and mean. the hypothesis of the study was tested using regression analysis. The result of the analysis revealed that company income tax reforms, company income tax policy and company income tax incentive has positive and significant impact on investment decision of SMEs. The study recommends among others that more tax incentives be given to manufacturing companies. however, they both concluded that tax affects the operational performance of a business in Nigeria and government should come up with uniform tax policies that will favor the development of SMEs in Nigeria and the government should put into consideration the size of SMEs when formulating tax policies.
CHAPTER ONE
INTRODUCTION
1.1 Background to the study
Governments in every country need tax to create revenue for the development of the economy. Taxes charged on business enterprises in Nigeria include; company income tax, value-added tax(VAT), presumption tax and exercise duty. The main objective of taxation in Nigeria has always been to mobilize resources needed to meet the aspiration of government.
The role tax plays in any society cannot be undermined. The formulation of accountability and affective states has been closely linked with the emergence of the tax system (Moore, 2007) Furthermore, taxes are involuntary fees levied on individuals or corporations and enforced by a government entity, whether local, regional or national in order to finance government activities. In economics, taxes fall on whoever pays the burden of the tax, whether this is the entity being taxed, like a business, or the end consumers of the business’s goods. Taxes are assessed in accordance with some reasonable rule of apportionment on persons or property within the tax jurisdiction.
The administration of tax in Nigeria is vested on the three tiers of government. Taxes payable to the federal government are administered by the Federal Inland Revenue Service (FIRS), while those payable to the state government are administered by the State Boards of Internal Revenue (SBIRs) of the thirty-six states of the federation. Local governments also administer rates and levies collectible by them through their various councils. Therefore, tax administration is the regulation, management, conduct, direction and supervision of the execution and application of a government, country or state tax law, tax legislation and their related statute.
The company Income Tax is one of the most productive revenue sources of income to the government. Taxation of companies was retained as a federal matter (1954 ordinance), direct taxation, a regional matter (1943 ordinance). Companies are taxed under the Companies Income Tax Act introduced in 1961 with modification in 2007. The administration of the Companies Income Tax in Nigeria is vested on the Federal Inland Revenue Service. The tax is payable by all companies at the rate defined by the Companies Income Tax Act (CITA). However, the company income tax has become a major source of revenue in many developed countries (Ajakaiye, 2000). Companies Income Tax is charged on the profit or gain of any company accruing in, derived from, bought into, earned in or received in Nigeria. The company income tax rate has been 30% and it is applied to total profit or chargeable profit of the company (Adegbie & Fakile, 2011). Company income tax is a tax chargeable on all companies other than companies engaged in petroleum operations registered in Nigeria. It is an annual tax on the profit of registered companies, which profit must accrue in, be derived from, brought into, or received in Nigeria.
Tax policies in developing countries are much more puzzling compared to developed countries. Tax policy is the choice by a government as to what taxes to levy, in what amounts, and on whom. It has both microeconomic and macroeconomic aspects. The company income tax is a much more important source of tax revenue among developing and developed countries. According to Shahrodi (2010), the impact of the tax system on the growth of entrepreneurs found that the tax policy of the government on SMEs has not in any form favor the growth of SMEs.
Tax reform is the reduction in the income tax rate as well as measures to broaden the tax base which includes, reduction in the use of expenditure or other items that narrow the base. Some of the tax reforms that have been embarked upon by the Nigerian government since the inauguration of the Nigerian tax system according to Ogbonna and Ebimobowei (2011) are the introduction of income tax in Nigeria between 1904 and 1926, granting of autonomy of Nigeria inland revenue in 1945, the Raisman Fiscal Commission of 1957, formation of inland revenue service board in 1958, the promulgation of petroleum profit tax ordinance No.15 of 1959, the promulgation of income tax management Act of 1961, the promulgation of the company income tax Act of 1979 and the Tax Policy and Administration Reforms Amendment 2001 and 2004.
The importance of taxation as a veritable tool of economic growth and development depends on a proper tax system that has the capacity to generate revenue through tax incentives. Tax incentives have the potential of attracting both local and foreign investment if properly harnessed. It is however regrettable that most developing countries have not been able to exploit the potent of tax incentive because of the need, perhaps to meet the desires of the electorates and the poor management of the tax system.
In Nigeria, most of the businesses operate in the form of Small and Medium scale enterprises (SMEs). SMEs play a significant role in the economic development and poverty reduction of many nations. SMEs are found in a wide array of business activities. These ranges from the single artisan producing agricultural implements for the village market, the coffee shop at the corner, the internet café in a small town to a sophisticated engineering or software firm selling in overseas market and a medium-sized automotive part manufacturer selling to multinational automakers in the domestic and foreign markets (OECD 2014). The increase in attention in SMEs has become more important since the economic impact of the 2007/2008 financial crisis on economics globally (Igwe, 2016; Igwe, Onjewu and Nwibo,2018). With globalization, developing countries are becoming increasingly interdependent for an international exchange of goods and services, labor, innovation, and technology. This phenomenon demands that all economics become proactive, identify opportunities that offer comparative advantages and take innovative steps to economic growth, job creation, and prosperity.
According to the Nigeria Bureau of Statistics, SMEs in Nigeria have contributed about 48% of the national GDP in the last five years. With a total number of about 17.4 million, they account for about 50% of industrial jobs and nearly 90% of the manufacturing sector, in terms of the number of enterprises. In order for the SMEs’ sector to grow, the level of taxation set must be friendly and not stifle the running of the business.
However, investment decision of SMEs has to a large extent been affected by company income taxes. Investment is an asset or an item acquired with the goal of generating income or appreciation. In an economic sense, an investment is the purchase of goods that are not consumed today but are used in the future to create wealth. However, in finance, an investment is a monetary asset purchased with the idea that the asset will provide income in the future or will later be sold at a higher price for a profit. The benefit of an investment is called a return. The return may consist of gain or loss realized from the sale of property or an investment, unrealized capital appreciation or depreciation, or investment income such as dividend, interest, rental income, etc. or a combination of capital gain and income.
In this study, the focus will be on the Impact of Company Income Tax on the Investments Decision in SMEs in Nigeria.
1.2 Statement of the Study Problem
In Nigeria, a lot of investors would like to invest their money in big corporations where they can actualize the yield of their investment. The importance of Small and Medium Scale Enterprise cannot be understated in helping to build the weak part of the economy in the country. Excessive CIT rate would eventually be discouraging to investment which is one of the best ways in which SMEs can grow in the economy. overcoming the major investment decision challenges is one of the problems. This challenge poses as a treat to SMEs in Nigeria, many SMEs are struggling because of a lack of investors and this is due to the percentage of tax paid by the company on the profit which is made to the Federation Inland Revenue Service (FIRS). Meaningful efforts have been made by the government to promote investment in SMEs, but, this cannot be achieved because tax reforms remain feasible and require better coordination of tax policies and regulations.
It seems empirically arguable that CIT on investment is more pronounced with significant impact. The CIT may affect investment to the extent that the expected return will be less than the cost of capital (Chennels; 1996; Shreiber, Spengerand & Lammersen, 2002). This study therefore wishes to investigate the impact which CIT tax reforms, CIT tax policies and CIT tax incentives have on investment decision of SMEs in Nigeria.
1.3 Research Questions
This study aims to provide answers to the following questions:
- Does CIT tax reforms significantly impact on the investment decision in SMEs in Nigeria?
- What impact does CIT tax policies have on the investment decision in SMEs in Nigeria?
- How does CIT tax incentives influence investment decision in SMEs in Nigeria?
1.4 Research Objectives
The main objectives of this study are to:
- To examine the significance of CIT tax reforms on the investment decision in SMEs in Nigeria
- To determine the impact of CIT tax policies on the investment decision in SMEs in Nigeria
- To ascertain how CIT tax incentives influence investment decision in SMEs in Nigeria
1.5 Research Hypothesis
The research hypothesis for the study are formulated as follows:
Hypothesis One
H0: CIT tax reforms do not significantly impact on the investment decision in SMEs in Nigeria.
H1: CIT tax reforms significantly impact on the investment decision in SMEs in Nigeria.
Hypothesis Two
H0: CIT tax policies do not have an impact on the investment decision in SMEs in Nigeria.
H1: CIT tax policies have an impact on the investment decision in SMEs in Nigeria.
Hypothesis Three
H0: CIT tax incentives does not influence the investment decision in SMEs in Nigeria.
H1: CIT tax incentives influence the investment decision in SMEs in Nigeria.
1.6 Significance and Justification for the study
In this study, effort would be made to examine company income tax administration and investment decisions in SMEs in Nigeria. This analysis will throw more light on the adequacy of investments in SMEs and the taxes imposed on them.
However, this study will be of great significance to shareholders, investors, and management of the company. Also, the major beneficiaries of this study are auditors and accountants, as well as financial analysts, government personnel.
In addition, this research is justified on the ground that it provides recommendations for further studies on the impact of some other types of tax on the investment of SMEs in Nigeria as there is no research that is exhaustive enough to cover the problem to be studied.
1.7 Scope and limitation of the Study
This study is to effectively make an in-depth research on the impact of company income tax on the investment decision in SMEs in Nigeria. The study will be conducted by sampling the opinion of respondents through an online based method all over Nigeria. The primary research method will be used and questionnaires will be sent via online to get the data for this study. The research will consider factors like CIT tax reforms, CIT tax policies and CIT tax incentives on investment decisions in SMEs in Nigeria. Though there are other taxes that affect the investment decisions in SMEs like capital gain tax, withholding tax, value-added tax and multiple taxations but for this study, the focus would be only on the company income tax.
This work was limited by time and resources available to the researcher, also, the questionnaires were distributed via online because of the Covid-19 pandemic around the world.
