THE IMPACT OF TAX INCENTIVES ON SERVICE SECTOR DEVELOPMENT
ABSTRACT
Obviously, in all ramification tax incentives are designed to boost performance. This research work was undertaken principally to determine the impact of tax incentive on economic and industrial development using Abia State as study area. The objectives of this study were mainly to ascertain whether tax incentives really exist in Abia State. To establish the kind of relationship that exists between tax incentives and economic development. To ascertain whether existing incentives are sufficient to elicit economic and industrial development in the state. in a bid to achieve the said objective, questionnaire’s were distributed to respondent in the state, the population of the study included all the workers, management staff, middle management staff, supervisors, junior staff and others, all together, 385 questionnaires were distributed and 350 were returned. Also oral interviews were also granted where questionnaires could not perfectly clarify. Tables and percentage were used to analyze response from respondents while, the chi-square statistic (X2) was used to test the hypothesis. Based on the research, it was discovered that tax incentives really exist in Abia State. Also, that there is a positive relationship between tax incentive and economic development. Consequent upon the findings, the researcher recommends that government should review existing tax incentive packages to tally with the economic realities of the time. Secondly, government should set up an agency to monitor and ensure that benefiting industries apply the incentives appropriately. Finally, government should adjust the system of tax administration. The tax administrators should be adequately educated and more tax enlightenment programs be extended to the public to create enough awareness about the tax existence and objectives of the tax incentives scheme.
CHAPTER ONE
1.0 INTRODUCTION
1.1 BACKGROUND OF THE STUDY
The year 1926 was a year of depression-slack in overall economic activities in Britain which led to decline of the total earnings of the economies, shortage of fund in the private sector and reduction in income per capita in Britain. It was at this juncture that the economic world formulated various fiscal policies. The main and prime objective of these policies was to revive, rehabilitate and mobilize enough capital to provide for economic and social expenses and to raise the crunched standard of living of citizens. It was this period that the term, Fiscal Policy called TAXATION came into existence. The direct taxation in its reformed pattern was introduced in Nigeria in 1904 by Lord Lugard, the then British High commissioner for Northern Nigeria with the issue of the land revenue proclamation for Northern Nigeria. In other words, income tax was introduced into Nigeria in 1904 and that was when community tax became very operative in Northern Nigeria. It is important to realize that the present tax laws in Nigeria were developed or formulated from the Raisman’s commission of enquiry of 1957. Before now, there were the income tax ordinances for colonies and which was rather common in all the colonies and the provisions were similar. Raisman’s recommendation was the basis for providing in section 70; subsection 1 of the Nigerian constitution Order in council of 1960 which conferred an exclusive power on parliament to make for Nigeria or any part thereof with respect to personal income tax.
In exercise of these powers, the Federal Government enacted the Income Tax management Act, 1961 (ITMA) on April 1. But before ITMA, Lagos territory was being administered as a region and the personal income tax (Lagos) Act, 1961 was enacted for it separately. But when ITMA ’61 came into operation, all the other regional laws on taxation were amended to bring them into conformity with federal law. As previously mentioned, the earliest trace of any form of direct taxation in Nigeria according to Ezejelue (1981:33) even before the British administration “was in Northern Nigeria” it was relatively easy to introduce the reformed system in the North because the tax-paying tradition had already been established there. Unlike the South, the North had a form of organized central administration under the Emirs. The spirit of Mohammedanism which made it possible for people to contribute towards charity, afforded a religious foundation for direct taxation in the North. This tradition of direct taxation found expression in a number levies and forms of taxes existing in the North long before 1914. These included in Zakat, Kurdin Kassa, Shukka Shukka, Jangeli and Kharat which according to Mrs. Iheduru were grain tax, agricultural tax, plantation tax, livestock, and community tax respectively. According to Okigbo (1955:80) they were so varied, perplexing and complex that in the 1880’s the problem as seen by the Royal Niger Company (RNC) was not how to introduce new tax forms but how to simplify the existing forms. All this time, southern Nigeria was separately administered until 1914 when North and South were amalgamated. It was not easy to impose direct taxation on the south. They resisted it until after some experiments, the native Revenue Ordinance of 1917 was grudgingly accepted in the western providences of the South in 1918.Discussions were held in 1924 and 1925 to find ways and means of modifying the ordinances I its application in the Igbo taste. Since there were no traditional natural rulers like in the North and some areas in the West that could be used in revenue matters. Suspicions and oppositions wee evoked over the issue of nominating warrant chiefs by the government.In Aba, Calabar, and Owerri, there was riot that were in attempt to resist taxation.
Particularly in Aba in the then Eastern Region the women’s riot was of such a dimension that a probe was instituted to look into the causes, though government finally succeeded in extending the Native Revenue Ordinances in amended form to Eastern providences in 1928.
Taxation is divided into two (2) viz:
Direct taxation and
Indirect taxation
i. Direct taxation
This is based on the ascertainment of income and assessment of income either on individual, a group of individuals, corporate bodies and institutions. This is a tax paid to the state for the maintenance of government as well as its services and not just for a specific service rendered to the payers. Again the direct taxation is further divided into two viz:
Personal income tax and
Companies income tax
i.The personal income tax is assessed and collected by the state from those individuals resident in the state. While the companies income tax is charged on corporate bodies and it is the responsibility of Federal Board of Inland Revenue (FBIR).
ii. Indirect tax can come in the following types:
With the clear understanding of what taxation is all about, we can now go ahead to mention the tax incentives enjoyed by companies and individuals whose profit or income is accruing in, derived from, brought into or received in Nigeria.
The incentives are:
Personal Allowance
Investment Allowance
Capital Allowance
Loss Relief
Roll over Relief
Pioneer Relief
Exploration Incentives.
Tax incentives policy is guide by the following legislation enacted in Nigeria:
Industrial Development Income tax relief Act 1971.
Income Tax Management Act 1961 as amended.
Capital gains Tax Act 1979.
Companies Income Tax 1979 as amended
Capital Transfer Act 1979.
Petroleum Profit Tax Act 1959 as amended.
It is pertinent to point out that individuals, corporate bodies engage in tax evasions and tax avoidance. This is an attempt to pay less or avoid tax completely.
Ezejelue (1981:19) asserted that in view of the compulsory nature of, and strong aversion to tax payment, efforts must be constantly made to make any tax system as attractive and as convenient as possible.
1.2 STATEMENT OF PROBLEM
“THE IMPACT OF TAX INCENTIVES ON SERVICE SECTOR DEVELOPMENT NIGERIA” clearly attempts to determine the level or extent the tax incentives (as a fiscal policy measure) will be used to re-direct the investment pattern of individual and corporate bodies and how this has contributed to growth and industrial development of Small and Medium Scale Organisations. According to Crowningshield and Gorman (1982:72) “taxes being cash disbursement are capable of playing an important role in investment decision by influencing the quantum and the timing of cash flow”. In view of this, presence of tax incentives is assumed to be a motivator, expense relieving-syndrome and also a kind of encouragement to the investors, and corporate bodies, to boost their investment scope. So the problem for this research work is to ascertain if the available tax incentives in Nigeria, particularly as regards to small and medium scale have achieved its objectives.
1.3 OBJECTIVE OF THE STUDY
Investment is a function of savings that is:
I= f (S? G, etc)
Where:
I = Investment
S = Savings
G = Government expenditure
William (1990:15) affirmed that taxes have drastic reduction effect on profit, wealth, disposal income, capital budgeting, in fact, the over ally investment decision. So the exemption leads to rise in the investment level and stimulates capital formation.
Therefore, the objectives of the study are as follows:
To ascertain if the available tax incentives given to industries enhances and motivate their investment.
To ascertain the relationship that exist between tax incentives and investment.
To evaluate the impact of the tax incentives with the quality of products produced by industries.
To determine how these incentives schemes motivate companies to establish industries which will create employment opportunities.
To show how these incentives schemes are helping the existing industries and companies in expanding their areas of operations.
To ascertain the adequacy of the available incentives to industrial growth.
To offer some solutions to any problem discovered in the above objectives.
1.4 RESEARCH QUESTIONS
What are the effects of tax incentives in the productive assets, investment patterns and capital formation of small and medium scale industries?
What are the impacts of tax incentives on the employment and investment levels of small scale industries?
1.6 SCOPE OF STUDY
The Nigerian tax regulations are too wide and vary according to the analyst area of interest. No study of this nature can afford to test all the tax laws. For this reason, only Company Income Tax Act (CITA) 1979 as amended will be analyzed.
However, mention will be made of other tax laws where necessary. Also, since the field of investment and development is too vast. This study will focus on growth and development of small and medium scale manufacturing industries in Nigeria.
1.7 SIGNIFICANCE OF THE STUDY
Tax incentive scheme is a strong fiscal measure as well as industrial and economic policy for which there exist so many competing alternatives.
On this note, the completion of this research work shall prove useful to the following:
Government
Business organizations
Academics
Researcher
a. Government: This research work will help government to know the impact of incentives grant to individuals and corporate bodies. That is, since tax incentives constitute an opportunity cost, the research work will help the government to know the best alternative and its corresponding benefits.
b. Business Organizations: This work will help these organizations or investors to know the available incentives thus encourage them in their investment pattern.
c. Academics: This study will help academics in understanding the effects of tax incentives and the effectiveness of its administration . It will also go a long way to serving as a basis for further research.
d. Researcher: This is a course requirement, a study in partial fulfillment for the award of Master’s Business Administration (MBA) in Accountancy.
1.8 LIMITATION OF THE STUDY
Sidney (1991:12) in his study observed that people tend to be unnecessarily fast, tricky and at times crafty when it comes to the area of paying tax. Taxation is a sensitive issue; it is not easy to get some vital information. Most industries are tax averters. Some pay tax but they do not reveal accurate profit; some do not reveal/present their actual profit in their annual financial statement. So their responses to questions are biased.
The core of all the limitations is:
Difficulty in getting at the companies audited financial statements.
1.9 DEFINITION OF TERMS
Income: The earnings, profits, and gains arising from the productive investments or use of the property constituting the principal or estate of fund.
Disposable Income: This refers to the income after tax has been deducted and which is available for the tax payer.
Corporate Bodies: This relates to companies incorporated in Nigeria under the companies decree No.55 of 1968. 10
Capital Allowance: This includes initial, annual investment and the balancing allowance granted in respect to all qualified capital expenditure. The aim is to amortize the cost of the asset over its useful life.
Alimony: This refers to the allowance granted for the support of a wife while the marriage relationship discontinues to exist.
Tax Avoidance: This refers to the manipulations within the law to reduce liabilities for tax. It refers to the tax payers’ efforts to avoid paying tax by finding a legal loophole in the law that is an unclearly stated rule of law.
Fiscal Policy: These are measures employed by the government to influence economic activities specifically by manipulating levels of taxes and government expenditure.
Tax Evasion: This includes manipulation outside the law to reduce liabilities for tax; it is an illegal attempt not to pay tax, that is by not declaring all of one’s earnings.
Transfer Inter-VIVOS: These are transfers made during the life time of the transferee. Example of such transfer is a gift.
Transfer on Death: Property passing either immediately on the death or after.
“Received In”: This applies or refers to the emoluments collected by the employees for doing his job.
“Accruing In”: This applies where you have income producing activities.
“Derived From”: This refers to the income producing activity. An income shall be deemed to be derived from Nigeria if;
The duties of employment are fully or partly performed in Nigeria and if the employer is a Nigerian.
“Brought Into”: This refers to remittances brought into Nigeria.
REFERENCES
Crowingshield A. and Gorman K.A. (1982), Tax Revenue and Expenditure, Adershort, Gower Publishing Company.
Ezejelue A.C. (1981), Criteria for Improving the System of Direct Taxation in Nigeria. The Nigerian Accountant.
Okigbo P.C. (1955), The Nigerian Public Finance, London, Longmans Press.
Sidney J. (1991), Tax Avoidance in Nigerian Perspective, Ibadan, C.K. Printing Press Ltd.
THE IMPACT OF TAX INCENTIVES ON SERVICE SECTOR DEVELOPMENT