The Impact Of Company Income Tax Revenue On The Developing Economies; The Nigeria Experience

Project and Seminar Material for Economics

Project and Seminar Material for Economics


Abstract


The aim of this study was to examine the impact of company income tax on the developing economies using a case study of the Nigerian experience, while looking at the specific objectives which include: assess the impact of companies’ income tax on economic growth of Nigeria; ascertain the influence of Petroleum Profit Tax on economic growth of Nigeria; examine the impact of custom and excise duties on economic growth of Nigeria and determine the impact of VAT on the economic growth of Nigeria. Ex -post facto and survey research designs was adopted in the work to investigate reasons for consistent low tax contributions to GDP in Nigeria over a period of 35 years.

Secondary data were obtained from FIRS and Bureau of Statistics for the purpose of this research. Method of analysis include ordinary Least square regression model was estimated to examine the individual effects of tax revenue proxies of Value Added Tax (VAT), Petroleum Profit Tax (PPT), Customs and Excise Duties (CED), and Companies of Income tax (CIT) on Gross Domestic Product (GDP), Auto-regressive distributed lag (ARDL) model was adopted to determine the combined effect of tax revenue proxies on GDP of Nigeria.

The study revealed that the GDP is strongly impacted upon by VAT, PPT, CED, and CIT. In summary, the simple regression analysis shows that about 75% variations in GDP can be attributed to changes in PPT; also, Value Added Tax (VAT) was discovered to be responsible for about 95% changes in GDP. The average contribution of tax revenue to GDP for the thirty five year period was computed at mere 7.8%, which is still far below the acceptable global average of 20%. Although the simple regression showed that CIT and CED individually has positive effect on GDP, the multiple regression analysis through long run estimation indicated that in the long run, CIT and CED have negative effects on GDP and PPT and VAT have positive effects on GDP.

The study concluded that tax revenue combined have significant effect on the economic growth of Nigeria, although Companies Income Tax (CIT) and Custom Excise Duties (CED) have not contributed positively to economic growth of this nation over the period of study, hence government need to reposition the tax administrative system and sufficiently equip them to deal with complexities of technological advancement in global commerce, enforce compliance and track all taxable persons in order to generate sufficient revenue needed to foster economic growth in Nigeria.


Table Of Content


Preliminary Page(s)

  • Title page
  • Certification page
  • Dedication
  • Acknowledgement
  • Abstract
  • Table of content

Chapter One

1.0 Introduction

  • 1.1 Background Of The Study
  • 1.2 Statement Of Problem
  • 1.3 Objectives Of Study
  • 1.4 Scope Of The Study
  • 1.5 Significance Of Study
  • 1.6 Limitation Of Study
  • 1.7 Definition Of Terms

Chapter Two

2.0 Literature Review

  • 2.1 Conceptual Review
  • 2.1.1 Historical Background Of Taxation In Nigeria
  • 2.1.2 Taxation
  • 2.1.3 Nigerian Tax System
  • 2.1.4 Revenue Generation Of Nigerian Government
  • 2.1.5 Reasons For Insufficiencies Of Tax Revenue
  • 2.2 Theoretical Review
  • 2.2.1 Deterrence Theory
  • 2.2.2 Behavioural Economics
  • 2.3 Empirical Review

Chapter Three

3.0 Research Methodology

  • 3.1 Research Design
  • 3.2 Population
  • 3.3 Sample Size And Sampling Technique
  • 3.4 Sources Of Data
  • 3.5 Model Specification
  • 3.6 Method Of Data Analysis
  • 3.7 Model Estimation And Evaluation Technique

Chapter Four

4.0 Results And Discussion

  • 4.1 Results
  • 4.2 Discussion Of Findings

Chapter Five

5.0 Conclusion And Recommendations

  • 5.1 Conclusion
  • 5.2 Recommendations
  • References

Chapter One


Introduction

1.1 Background Of The Study

According to Black Law Dictionary, tax is a rateable portion of the produce of the property and labor of the individual citizens, taken by the nation, in the exercise of its sovereign rights, for the support of government, for the administration of the laws, and as the means for continuing in operation the various legitimate functions of the state. The Institute of Chartered Accountants of Nigeria (2006) and the Chartered Institute of Taxation of Nigeria (2002) view tax as an enforced contribution of money, enacted pursuant to legislative authority. If there is no valid statute by which it is imposed; a charge is not tax. Tax is assessed in accordance with some reasonable rule of apportionment on persons or property within tax jurisdiction. Sanni (2007:5) advocated tax an instrument of social engineering which can be used to stimulate general or special economic growth.

The Company Income Tax amongst countries of the world varies, especially in the developing countries. Gordon and Wei Li (2008) notes that to some extent, these differences may simply reflect differences in social preferences for public vs. private goods.  Countries differ substantially, for example, in the amount spent on the military, on infrastructure investments, on publicly provided education, or on social insurance.  Higher spending levels require higher revenue, leading to higher tax rates.

To some extent, these differences may also reflect differences in the political support for redistribution.  More redistribution naturally requires higher tax rates on the rich in order to finance lower tax rates or transfers to the poor.  Governments with a stronger preference for redistribution would rely more on progressive personal income taxes, whereas other governments may choose less progressive personal taxes and make more use of proportional taxes such as a value-added tax or a payroll tax.

Other differences, though, are more puzzling based on conventional models of optimal tax structure.  Regardless of a country’s tastes for public vs. private goods or for more or less redistribution, Diamond and Mirrlees [2001] forecast that the optimal tax structure will preserve production efficiency under plausible assumptions. (Coelho, Isaias, and Graham, 2001).  This rule out tariffs in any country that lacks market power in international markets.  It rules out differential taxes on goods produced domestically in one industry vs. another.  Atkinson and Stiglitz (1996) go further and argue that as long as a country can flexibly choose the rate structure under the personal income tax, then it has no reason to choose differential tax rates on the consumption of different goods. Not only does this rule out differential excise tax rates by good but it also rules out taxes on income from savings, which implicitly impose higher tax rates on goods consumed further into the future.

Regarding possible revenue from seignorage, Friedman (1999) argued that a country would optimally choose a deflation rate sufficient to generate a nominal interest rate close to zero, so as to avoid any real costs of liquidity. While these forecasts of no tariffs, no taxes on capital income, uniform taxes on consumption, and deflation, are not consistent with any existing tax structures, they are not sharply inconsistent with observed tax policies among the most developed countries.  With GATT and now the WTO, tariffs are indeed very low among developed countries.

At this point, nominal interest rates are very low among most developed countries, even if deflation is rare.  While capital income is still subject to tax in various ways, Gordon, Kalambokidis, and Slemrod [2004] report evidence that the U.S. collects little or no net revenue from taxes on capital income, and imposes relatively low distortions on investment and savings.  While even the richest countries maintain some important excise taxes, e.g. on gasoline, cigarettes, and liquor, an argument can easily be made that these specific taxes help internalize various consumption externalities.

Tax policies in developing countries are much more puzzling, however, in light of these forecasts from the optimal tax models.   These differences are laid out in more detail in section I. The corporate income tax is a much more important source of tax revenue among developing vs. developed countries, as are tariffs and seignorage.  Poorer countries collect much less revenue from personal income taxes, yet it seems puzzling that distributional preferences should systematically be so much weaker among poorer countries (Bird, 1999). On net, poorer countries collect on average only two-thirds or less of the amount of tax revenue that richer countries do, as a fraction of GDP.  Yet, given the severe needs for investments in say infrastructure and education in these countries, is it plausible that the lack of revenue simply represents differing tastes for public vs. private goods in poor vs. rich countries?

One natural response to these differences between forecasted policies and those observed in developing countries is to conclude that the policies in developing countries should be changed.  Newbery and Stern [1987], for example, set out the standard forecasts from optimal tax models as an ideal tax structure that developing countries should emulate.  This is also the basis for recommendations, e.g. from the World Bank and IMF, that developing countries should reduce their tariff and inflation rates, and rely more on value-added taxes with a uniform rate across industries, rather than on excise taxes or corporate income taxes (Campillo, Marta and Jeffrey, 1997).

In this study, we explore whether the inconsistency between the forecasts from optimal tax models and the data reflects instead a problem with the models.  The starting point for our approach is the observation of greater tax enforcement problems in poorer countries.  According to the estimates reported in Schneider and Enste [2002], for example, the informal economy on average is only about 15% of GDP among OECD countries, and thus small enough that it should not be a driving factor in the choice of tax structure.  However, among developing countries, the median size of the informal economy they report is 37% of GDP, ranging from 13% in Hong Kong and Singapore to 71% in Thailand and 76% in Nigeria.

With such a large informal sector, any effects of the tax structure or of government policies more generally, on the size of the informal sector can be of first-order importance in the choice of these policies.  Yet at this point, we know relatively little about how policies affect the size of the informal sector, or why the informal sector is so much larger in developing than in developed economies (Diamond, Peter and James Mirrlees, 2001). It is in this respect that this present study shall examine the impact of company income tax revenue on developing economies using Nigeria as a reference point.


1.2 Statement Of Problem

Poorer countries have indeed shifted towards more use of the value-added tax in recent years, in part based on the advice and assistance of international organizations.  But otherwise the puzzling differences remain. This leaves unanswered why poorer countries so systematically choose the wrong policies, and why these wrong policies have remained so stable over time.  Perhaps political economy problems are more severe among developing countries, and some important domestic constituency gains from the policies that standard models find perverse.  Yet these puzzling policies are found under many different types of governments, drawing their support from many different constituencies. (Coelho, Isaias, and Harris, 2001).

Perhaps poorer countries lack the best enforcement methods, e.g. based on modern information technology.  Certainly computer technology helps pool information from different sources.  Bird (1999) argues, however, that the key problem is acquiring reliable information, not processing it. In considering problems associated with income tax of developing economies, problems statements like the following arises:

  1. Does government policy on company income tax affect the revenue of corporations in developing countries?
  2. Of what relevance is tax regulation on the development of companies’ in developing economies?
  3. Does effective income tax helps in the building strong economies?

1.3 Objectives Of Study

The main purpose of this study is to:

  1. To examine whether government’s policies on income tax affect the revenue of corporations.
  2. To examine the relevance of tax regulation on the development of companies’ in developing economies and
  3. To ascertain the impact of the company income tax revenue on the development of  the Nigeria economy

1.4 Scope Of Study

This study is to effectively make an in-depth study on the impact of company income tax revenue on developing economies using Nigerian economy as reference point. This study will reveal the impact of taxation on revenue of organizations and as well focus on taxation policies and variances that occur among selected developing countries. The duration for this study will cover a five year period 2004 – 2008


1.5 Significance Of Study

In this project work, efforts will be made to examine companies income tax, and organization’s efforts at fulfilling their financial obligations. This analysis will throw more light on the adequacy of revenue generation of companies and taxes imposed on such income generation.

However, this study will be of great significance to shareholders, investors and management of companies as it reveals the openness of standards of financial reporting practices. It as well enable companies capitalizes on their gains while focusing on areas of comparative advantage.

Also, major beneficiaries of this study are auditors and accountants, as well as financial analysts, government personnel and the revenue taxation board will benefit from this study.


1.6 Limitation Of Study

In the process of writing this project, the researcher encountered some limitations. First, the researcher was constrained by time, the insufficiency of finance made the researcher almost tired of the project work. This went further to compound the researcher’s problem, since they were using the limited resources available for them to also work on the project.

Another constraint encountered by the researcher was scarcity of information. The relevant information from the CBN and other relevant bodies in most cases are not up to date. This also contributes to the delay of information been required to enhance the research.


1.7 Definition Of Terms

Taxes:

This is the money imposed on Individuals, groups or organizations who are engaged in business or gainful economic activities that is geared towards profit making.

Company Income Tax:

This Tax is payable for each year of assessment of the profits of any company at a rate of 30%. These include profits accruing in, derived form brought into or received from a trade, business or investment.

Policy:

Can be referred to as prudent conduct, sagacity or general plan of action to be adopted by an organization.

Taxation Policy:

Therefore, is the general plan of action on the pattern of arriving at a taxable amount that is considerable both to the management and shareholders or investors of the companies.

Financial Obligation:

It is the expected activities pertaining to the monetary accumulation, earnings and transactions records of companies. Paying taxes to government is one of such obligations.


Chapter Five


5.0 Conclusion And Recommendations

5.1 Conclusion

This study has examined the impact of company income tax on the developing economies using a case study of the Nigerian experience. All the independent variables (Companies Income Tax, Petroleum Profit Tax, Valued Added Tax, Customs and Excise Duties) have statistical significance on the dependent variable (Gross Domestic Product). A graphical representation of the movement and variations in the values of Companies Income Tax, Petroleum Profit Tax, Valued Added Tax, Customs and Excise Duties for the 35 year period was captured to depict the movement of values and also to compare the influence of each of the independent variables on the dependent variable.

Findings of this study therefore provide insight into the effect of tax administration and federal government tax generation on government revenue. It further provided an insight as to the extent to which each of the independent variables affects the dependent variable through the graphical corroboration and also provides an affirmation of the extent to which the variations in the dependent variable are caused by the independent variables covered in the models as depicted by the R-square and adjusted R-square.

The study concludes that tax revenue combined have significant effect on the economic growth of Nigeria, although Companies Income Tax (CIT) and Custom Excise Duties (CED) have not contributed positively to economic growth of this nation over the period of study.


5.2 Recommendations

Based on the findings and conclusions of this study, the following recommendations are made:

  1. Efforts should be intensified by the government towards increased collection of tax revenue this is due to the low contribution of tax revenue to GDP over the period of study. 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).
  2. There should be stringent penalty imposed on any individual or corporate body who indulge in any form of tax malpractices irrespective of states, if the positive correlation between tax revenue and economic growth should be maintained.
  3. Government through Federal Inland Revenue Service should create an effective and reliable data base for every vatable persons to minimize (if not eliminate) the incidence of tax evasion and there should be constant training and re-training of VAT administrators through seminars, conference to keep them abreast with the modern trend in tax administration. This is because as shown in the result, in the long run VAT has a positive effect on GDP.
  4. Government should also be able to use taxpayers’ monies in the provision of infrastructural facilities. This will in no doubt boost the morale of the citizenry to pay more. Staff that work with the Tax Authorities should be adequately motivated in order to enhance revenue generation and improve the percentage of tax revenue to GDP.
  5. There should be constant review of existing tax laws just as it is obtained in the United State of America and other advanced economics, so as to keep the act in pace with the economic reality. As result shown that in the long run, Companies Income Tax (CIT) and Custom Excise Duties (CED) do not contributed positively to economic growth of this nation.

The Impact Of Company Income Tax Revenue On The Developing Economies; The Nigeria Experience


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