CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
Tax revenue is a veritable source of
government revenue. However, it is still debatable in the literature what
should be the optimal tax revenue to be imposed to enhance development without
unjustly inflicting welfare cost. Economic theories of taxation approach the
question of how to minimize the loss of economic welfare through taxation and
also discuss how a nation can perform redistribution of wealth in the most
efficient manner. Taxation according to Emekekwue (2009) is the collection of a
share of individual and organization income and wealth by the government under
the authority of the law. The Nigerian tax System has undergone significant
changes in recent times. The Tax Laws are being reviewed with the aim of
repelling obsolete provisions and simplifying the main ones. Under current
Nigerian law, tax revenue is enforced by the 3 tiers of Government, which are
Federal, State, and Local Government with each having its sphere clearly spelt
out in the Taxes and Levies Act, 1998.
The whole essence of tax revenue is to generate revenue to advance the
welfare of the people of a nation with focus on promoting economic growth and
development of a country through the provision of basic amenities for improved
public services via proper administrative system, and structures (Aboyade,
2010). Taxation is one of the major sources for revenue generation in Nigeria
of which petroleum carries the highest percentage of revenue generated in
Nigeria. Petroleum taxation policy is both employed as a fiscal policy and as
well as income generating tool is widely employed by both developing and
developed countries. Since petroleum has been discovered in Nigeria it has been
the bedrock of economy and is responsible for about 90% of revenue which is the
highest revenue generated by government from taxation. As of 2000, oil and gas
export accounted for more than 98% of export earnings and about 83% of federal government revenue, as well as
generating more than 14% of its GDP as it provides 95% of foreign exchange
earnings, and about 65% of budgetary revenues(central bank of Nigeria; 2015). The role of oil sector towards the process of
national development can be seen in the aspect of; employment generation,
foreign exchange earnings, income generation, industrialization, and
improvement in other economic variables. While the major investors in the
petroleum industry are the multinational oil
companies, the government regulate the petroleum operations in Nigeria
through the petroleum profit tax act (PPTA) of 2007 amended, with its main
fiscal instrument as the petroleum profit tax (PPT), through which petroleum
revenue accrue to the government. Odusola (2006) notes that the petroleum
profit tax is applicable to upstream operation in the oil industry, and its
main focus relates to prospecting and exploration lease, royalties, rents,
margins and profit sharing elements associated with oil mining. The fundamental
objectives of petroleum taxation are to ensure a fair share of accruing from
the extraction of the petroleum resource, while also providing sufficient
incentives to encourage investment and optimal economic recovery of the
hydrocarbon resources. Nwete (2004) opines that the objectives of petroleum
taxation includes; achieving government’s objectives of exercising right and
control over the public asset, as well as regulating the number of participants
in the industry and discouraging its rapid depletion in order to conserve some
of it for future generation. Also some economist considers taxation an
important tool for maintaining the stability of a country economy.
Tax
revenue plays a crucial role in promoting economic activity growth and
development. Through tax revenue government ensures that resources are
channeled towards important projects in the society, while giving succor to the
weak. The role of tax revenue in promoting economic activity and growth may not
be felt if poorly administered. This calls for a need for proper examination of
the relationship between revenue generated from taxes and the economy, to
enable proper policy formulation and strategy towards its efficiency. Adedeji
and Oboh, (2012) are of view that the Nigerian economy has remained in a deep
slumber with macroeconomic indicators reflecting an economy in dire need of
rejuvenation, revival and indeed radical reform. Also in the view of Aguolu,
(2008), tax administration needs to be revamped and refunds of taxes as well as
duty drawbacks administration are inefficient.
A critical challenge before tax
administration in the 21st century Nigeria is to advance the
frontiers of professionalism, accountability and awareness of the general
public on the imperatives and benefits of tax revenue in our personal and
business lives which include: promoting
economic activity; facilitating savings and investment; and generating
strategic competitive advantage. If tax administration does not for any reason
meet the above challenges, then there is a desperate need for reform in the
area of the regime, and in the administration of taxes.
1.2 Statement of the Problem
The impact of the Nigerian tax system on
businesses has been a matter of increasing interest and concern to many
persons. Tax policies and the structure of taxation in Nigeria is resulting to
multiple taxation on businesses, forcing most businesses to run into losses or
collapse. Businesses make numerous decisions daily. Their inability to make the
right decisions can result in their failure. Since taxation is a liability
businesses have to incur, businesses are faced with the option of managing
their tax liabilities in such a way their tax burden is reduced. Their
inability to effectively manage taxation brings about negative effects on the
financing, investment and dividend decisions of the business.
Multiple taxation and high tax rates are
challenges facing businesses in Nigeria today. Tax liabilities pose two issues
for a business. First each and every tax required of a business is just another
business expense. An increase in tax has the same effect as would raise in cost
of goods. Ministries, departments, and agencies
(MDAs) suffer from limitations in manpower, money, tools, and machineries to
meet the ever increasing needs of individual taxpayers. As a matter of fact,
the negative attitude of most tax collectors can be linked to poor remuneration
and motivation. Also, it has been noted that that staff are not provided with
regular training to keep them ahead of developments in tax related matters.
This makes the administration of taxes in terms of coverage and assessment very
weak. This necessitates the essence of the study on the effect of
taxation on economic growth of Nigeria.
1.3 Objectives
of the Study
The broad objective of this study is to examine the effect of taxation
on economic growth of Nigeria. The specific objectives are as follows:
1. To
evaluate the effect of petroleum profit tax on the real gross domestic product
of Nigeria.
2. To
examine the impact of company income tax on the real gross domestic product of
Nigeria.
3. To
determine the impact of custom and excise duty on the real gross domestic
product of Nigeria.
1.4 Research
questions
1. What is the effect of Petroleum profit tax
on the real gross domestic product of Nigeria?
2. What is the impact of company income tax
to the real gross domestic product of Nigeria?
3. What is the impact of custom and excise
duty to the real gross domestic product of Nigeria?
1.5 Research
Hypotheses
Hypothesis One
HO: Petroleum profit tax does not have significant effect on the
real gross domestic product of Nigeria.
HI: Petroleum profit tax has significant effect on the real gross
domestic product of Nigeria.
Hypothesis Two
HO: Company income tax does not have significant effect to the real
gross domestic product of Nigeria.
HI: Company income tax has significant effect to the real gross
domestic product of Nigeria.
Hypothesis Three
HO: Custom and excise duty does not have significant effect to the
real gross domestic product of Nigeria.
HI: Custom and excise duty has significant effect to the real
gross domestic product of Nigeria.
1.6 Significance
of the study
This research will at a wide range be of benefit to key players engaged in the shaping of the
economy. Some of these key players include;
1. Tax Authorities: This research will
enable tax authorities give attention to contentious areas in taxation that
will enable them to understand how these areas affect the standing of the
Nigerian economy.
2. Petroleum
Companies: It helps petroleum companies know how they play a vital role in
shaping the destiny of the government expenditure of Nigeria’s economy and
understand how remitting their taxes can be of great importance to the economy
of the nation at large.
3. Students:
It gives students a better understanding about petroleum profit tax, company
income tax and custom and excise duties, and how it affects the government
expenditure of the economy.
4. Researchers:
The research work can serve as a foundation or basis for other researchers who
are willing to research along the same line. Future researchers can continue
from where this research work stops
5. General
Public: It helps the society know the role taxation in Shaping of
government expenditure in the economy. It also affects their thoughts towards
government about the utilization of revenue gotten from petroleum profit tax,
company income tax and custom and excise duties.
1.7 Scope
of the study
This study on taxation as a tool for economic growth in Nigeria covers
the period from 2007 to 2016. The variables included in the study are Petroleum
Profit Tax, Company Income Tax and Custom and Excise Duty and gross domestic
product. Annual frequency data are used.
1.8 Limitation
of the Study
In the process of this research, there are factors as constraints that
follow this research work, some of them are: time, and lack of materials.
Time constraint: as a wide topic, it is supposed to cover a number of
taxes, company income tax and custom and excise duties but time constraint has been a great
hindrance which made researcher to bases this research on petroleum profit
taxation. And it has been a difficult task combining lectures, reading and
other essential non- academic work, limit the time to carry out this research.
Lack of materials: it is a challenge to the
researcher to gather some materials that will be used for the progress of the
work, such as articles and journals this is because the researcher was unable
to get a well detailed journals base on the research topic from nearby library,
therefore leading the researcher to go to many library and online for
materials.
Consequently this study is limiting its
attention to petroleum profit tax, company income tax and custom and excised
duties only within the period 2007-2016.
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