ABSTRACT
Manufacturing in Nigeria has been on the decline for a considerable period of time with its contribution to Gross Domestic Product stagnating at 10 % from 1960’s. According to the Government of Nigeria, the manufacturing sector has high, yet untapped potential to contribute to employment and Gross Domestic Product growth. Generally, the manufacturing sectors’ average growth percentage has continued to stagnate at three to four percent over the years. The performance of manufacturing sector is affected by several factors key of them being high costs of doing business. Excessive taxation in the form of high tax rate, double and multiple taxation are some of the challenges facing manufacturing industries. To mitigate this challenge, the government had advanced various taxation to the manufacturing sector. However, despite the various taxation being made towards these firms, their effect on their performance had not been investigated. Hence, this study sought to fill this gap. Therefore, the main aim of the study was to assess taxation and their effect on the performance of selected manufacturing firms in Nigeria. Specifically, the study sought to; examine the effect of corporate income tax capital allowance tax, custom duty tax and Excise tax on performance of selected manufacturing firms in Nigeria. The study adopted a descriptive research design. The study population was all the 725 manufacturing firms in all the categories under the Nigeria Association of Manufacturers directory as at 2016. The study used a sample of 90 companies which was obtained using simple random sampling. The study used panel data that was gathered using a secondary data collection template. A pooled panel regression model was used to test the significance of the effect of the independent variables on the dependent variable. STATA was used in conducting the analysis. The statistics that were generated included descriptive statistics and inferential statistics. The study period was 2017 and data was collected from 2011 to 2016. The study findings revealed that corporate income tax received by the firms had the highest positive and significant effect on the performance of these firms. The findings also showed that the effect of capital allowance tax on the performance of these manufacturing firms was positive and significant. It was found that custom duty tax had a positive and significant effect on the performance of the firms even though their effect on performance was the least. The effect of Excise tax on the performance of the firms was also found to be positive and significant. The study findings recommended that the government needed to expand some of the taxation particularly capital allowances, Excise tax and custom duty tax whose effect was yet to be fully felt within these firms compared to corporate income tax. The study noted the need for greater diversification in the incentives granted and also greater sustainability. The study recommended the need for taxation among the firms so as to ensure the survival of a greater number of firms. The study also recommended the need for the government to conduct cost benefit analyses in order to ensure that the goals of granting such incentives are achieved. The study further recommends that policy makers should adopt strategic incentive plans or targeted incentive scheme that targets specific industry or a strategic tax incentive that add value or contribute positively to the economy through expansion of various sectors by cutting down on imports and in that way promoting the growth of demand for domestic products in the country.
CHAPTER ONE
INTRODUCTION
1.1 Background of The Study
The purpose of taxation is to propel a country’s progress. Without it, the economy may come to a standstill. It is a mandated payment demanded of people and businesses earning money, a portion of which is supposed to be remitted to the government for development reasons (Chude & Chude, 2015).
Hence, revenue accruing from these taxable sources is expected to accelerate growth and development. The outcome is far from being the case in many economies. Moreover, many firms are facing hard times with the increasing cost of doing business in recent times. This accounts for the demand for taxation in favour of firms, especially those operating in the manufacturing sector.
Since the early 2000s, there has been increasing interest in the prospect of influencing not only the development of enterprises’ investment, but also the accomplishment of deserving particular national policy objectives through the issuance of taxation under income and profit taxes in Nigeria.
The provision of taxation to private enterprises has long been an essential part of industrial strategy; Nigeria is not alone in this approach. Many other countries, both developed and developing, have taken the same stance. During World War II, successive governments in the United Kingdom, for example, used initial investment allowance to influence investment decisions in private enterprises (Bird, R.M. and Krugman, P, 2004).
It can thus be seen that the extension and proliferation of tax incentive measures in many countries is evidence of increasing concern with rates of economic growth and restructuring to stimulate particular cases of economic activity deemed desirable in the national interest.
According to Adedotun (2001), incentives are the reduction in the effective tax burden on the preferred activity as opposed to that currently imposed in the hope that the reduction in government revenue due to tax foregone will be compensated by an expected expansion of the national economy and, ultimately, an increase in total revenue from such broaden economic basis.
According to Auerbach and Hines (1988), taxation might take the form of a tax holiday, capital allowance, tax payers right of election, re-investment allowance, investment tax credit proportionate to the amount of capital investment, accelerated depreciation or an interest subsidy, export processing zone, and so on. in whatever form they are granted, they are supposed to generate more current investment, hence, higher future production, and one has to look at the relative merits and demerits based on equity and efficiency.
Taxation encourage investments in repositioning enterprises and eventually, improving their financial fortunes in the face of severe global competition. In emerging countries (including Nigeria), difficulties such as decreasing markets pose a serious threat to business productivity and profitability. Over the years, the Nigerian manufacturing sector, in particular, has borne a fair portion of the bad outcomes that have resulted from insufficient export incentives, a lack of access to financial credit, technical backwardness, and a lack of inflow of foreign investment into the manufacturing sector (Ohaka, J., & Ironkwe, U. (2014); Oburota & Ifere, 2017). As a result, several stakeholders have severe questions about the effectiveness of tax breaks. While certain interest groups seem to be unaware of the tax breaks provided by the appropriate tax authorities, others investors who are aware are befuddled by the uncertainties linked with the impacted tax breaks (Uwaoma & Ordu, 2016). Against this context, the purpose of this research is to investigate the impact of tax breaks on the financial performance of Nigerian manufacturing firms.
1.2 Statement of The Problem
Despite the use of various policy instruments throughout the industrialization period, the use of investment subsidies has been the dominant industrial policy (both grants and tax based incentives). The existence of market failures in the financial market justifies the use of investment subsidies. Due to market failures, some firms would not have sufficient access to credit to undertake investment projects.
Moreover, the risk and uncertainty involved in investment projects may hinder some firms from realizing their projects, especially during periods of economic instability. In addition to failure of information, public goods, incomplete markets, externalities, failure of competition and macroeconomic disturbances can cause market failure and may provide the rationale for government intervention for the realization of investment projects (Zee et at 2002).
The public sector’s plethora of taxes imposed on the private sector has strained the investment climate. Most of the time, in addition to the prescribed taxes instituted by the Federal Republic of Nigeria’s constitution, there are instances of double taxation; excessive arrogation of power by local government authorities that violates the normal course of justice. A review of the literature suggests that the Taxation package had no significant impact on the investment and production decisions of Nigerian businesses. According to Philips (2004), the list of existing incentives may appear vast, but there is likely no proof of their vital relevance in commercial organizations’ investment and output decisions in Nigeria. Nonetheless, some writers believe that tax breaks are an albatross around the neck. For example, Aluk (2001) argues that the current trend in development planning is to prohibit too many tax breaks since they send the incorrect signals to investors, who become distrustful of the host country’s true intentions.
Despite the incentive scheme, many manufacturing firms in Nigeria are still undergoing financial bankruptcy and some are merged or acquired by others, declaring losses at the end of the accounting period; (Klemm (2004). What then is the significance of taxation? As a result, the purpose of this study is to determine the impact of incentives on the financial performance of Nigerian manufacturing sector firms.
1.3 Objectives of The Study
This study primarily aims at evaluating the taxation and their effect on the financial performance of manufacturing companies in Nigeria. Therefore, the specific objectives are:
1. To examine the extent to which taxation affect the return on investment of quote manufacturing companies in Nigeria
2. To determine the extent to which taxation impact on profit after tax of manufacturing companies.
3. Identify the different taxation available for manufacturing companies in Nigeria.
1.4 Research Hypotheses
H01: Corporate income tax do not have a significant effect on performance in selected manufacturing firms in Nigeria.
H02: Capital allowance tax do not have a significant effect on performance in manufacturing firms in Nigeria.
H03: Custom duty tax do not have a significant effect on performance in selected manufacturing firms in Nigeria.
H04: Excise tax do not have a significant effect on performance in selected manufacturing firms in Nigeria.
1.5 Significance of The Study
The study findings would be of great value to the government through various agencies by serving as a foundation for assessing the effectiveness of various taxation provided by the government in promoting the performance of manufacturing companies, especially beverage companies, and thus providing a framework and foundation for reviewing the various tax policies based on the cost-benefit analysis provided which will enable the government to choose which incentives to give a priority or eliminate.
The study’s results would also educate corporate tax payers and investors about how to profit from current taxation, as well as serve as a guideline for making informed decisions on which taxation are more advantageous to leverage.
The study’s results will add to the increasing body of research in this field and help explain the taxation and their effect on the financial performance of manufacturing companies. The study will serve as a resource for other scholars who wish to conduct additional research in this field, and it may spark new lines of inquiry.
1.6 Scope of The Study
This study examines the effect of taxation on the financial performance of manufacturing companies in Nigeria. As a result, the study is focused on determining the extent to which taxation affect the return on investment of quoted manufacturing companies in Nigeria, as well as the extent to which taxation affect manufacturing companies’ profit after tax. And identifying the different taxation available for manufacturing companies in Nigeria. Thus this study is delimited to selected manufacturing firms in Kano State.
1.7 Limitation of The Study
In the course of carrying out this study, the researcher experienced some constrains which include time constrain, financial constrain, language barriers, and attitude of the respondents.
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