THE RELATIVE IMPORTANCE OF CORPORATE TAX AND VALUE ADDED TAX (VAT) AND THEIR EFFECTS ON THE ECONOMIC GROWTH IN NIGERIA
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THE RELATIVE
IMPORTANCE OF CORPORATE TAX AND VALUE ADDED TAX (VAT) AND THEIR EFFECTS ON THE
ECONOMIC GROWTH IN NIGERIA
CHAPTER ONE
INTRODUCTION
1.1
Background to the Study
Governments
all over the world demand or impose one type of tax or the other. The main purpose of imposing any type of tax
has been for the government concerned to use the proceeds of the taxation to
run the government and to provide some essential services. It is being noted that the aims and
objectives of taxation differ from one country to the other.
A Tax is a
fee charged or levied by a government on a product, income, or activity. If it
is levied directly on personal or corporate income, it is called a direct tax.
If it is levied on the price of a good or service, then it is called an
indirect tax. The main reason for taxation is to finance government expenditure
and to redistribute wealth which translates to financing development of the
country (Ola, 2001, Jhingan, 2004, Musgrave and Musgrave, 2004, Bhartia, 2009).
Whether the taxes collected are enough to finance the development of the
country will depend on the needs of the country and, countries can seek
alternative sources of revenue to finance sustainable development (Unegbu and
Irefin, 2011). Tax revenue is the receipt from tax structures.
Revenues
accruing to an economy, such as Nigeria, can be divided into two main
categories, which are; Oil Revenue (includes revenue from royalties, Petroleum
Profit Tax (PPT), gas tax) and Non-Oil revenue (includes trade, loans, direct
and indirect taxes paid by other sectors of the economy, Aids, agriculture
etc). The importance of taxation in promoting economic growth and development
as well as the survival of many nations cannot be overemphasized. Through it,
government ensures that resources are channelled towards important projects in
the society.
According to
Emmanuel (2010), many developed and developing economies around the world had
experimented and proven that no nation can truly develop without developing its
tax system. Consequently, many countries have embarked on tax reforms and
restructuring with a view to developing a tax system that maximizes government
revenue without creating disincentiveness for investment.
According to
Kiabel and Nwokah (2009), within the last decade, the issue of domestic
resource mobilization has attracted considerable attention in many developing
countries due to unabating debt difficulties coupled with domestic and external
financial imbalances. It is not surprising that many developing nations have
been forced to adopt stabilization and adjustment policies which demand better
and more efficient methods of mobilizing domestic financial resources with a
view to achieving financial stability and promoting economic growth. A critical
challenge of tax administration in the 21st century is how to advance the
frontiers of professionalism, accountability and awareness of the general
public on the imperatives and benefits of taxation in our personal and business
lives which include: promoting economic activity; facilitating savings and
investment; and generating strategic competitive advantage (Kiabel and Nwokah,
2009). If tax administration does not for any reason meet the above challenges,
then there is a desperate need for reform.
The
importance of taxation in the activities of any government cannot be
overemphasized. The world over, taxes is one major source of government
revenue, however, not every national government have been able to effectively
exploit this great opportunity of revenue generation. This can be attributed to
a number reasons including the system of taxation; tax legislation; tax
administration and policy issues; over reliance on other sources of revenue (such
as foreign aid and grants); corrupt practices in the system – especially as it
relates to the system of tax collection and behaviour of citizens towards tax
payment; and ease of tax payment.
However, an
essential common feature of tax has been the dynamic nature in every system to
reflect the economic and policy needs of that nation. Another common feature of
tax is that it has always been a compulsory levy.
For
government to achieve her laudable objectives, it has been successively trying
all techniques in the pass which include grouping and segregating tax and those
who pay it and even varying methods and time of payment. It has been the view that the sole objectives
of these grouping, segregation and variations have been the same to enable
government generate enough revenue without really inconveniencing the tax
payers. It is this idea of trying to collect tax efficiently on the part of
government and pay tax conveniently on the part of the tax payer and together
with the fact that the existing monetary policy in Nigeria is not generating
the much needed revenue to meet up with government expenditures and the need to
review the entire Nigerian Tax System which is the major non-oil source of
revenue that has promoted the introduction of Value Added Tax (VAT) in Nigeria.
The effect
of corporate taxes on any economy vis-Ã -vis investment and entrepreneurship is
one of the central questions in both public finance and development. This
effect matters not only for the evaluation and design of tax policy, but also
for thinking about economic growth (see Barro 1991, DeLong and Summers 1991,
and Baumol, Litan, and Schramm 2007).
Company
income tax (CIT) was introduced in 1961. The original law (Company Income Tax)
has been amended many times and is currently codified as the Company Income Tax
Act 1990 (CITA). The Federal Board of Inland Revenue, whose operational arm is
the Federal Inland Revenue Services (FIRS), is empowered to administer the tax.
CITA policy regimes can be divided into two phases, namely, pre-1992 and
post-1992. The CIT policies in the pre-1992 era were narrowly based and
characterized with increasing tax rates and overburdening of the taxpayers,
which induced negative effects on savings and investment. Since 1992, however,
measures have been taken to address these structural problems. For instance,
excess profit tax was eliminated in 1991, and the capital transfer tax scrapped
in 1996. Tax rates on company profits, payable on trade profits and investment
income, fell from 45 per cent during 1970 to 1986 (when SAP was introduced) to
40 per cent between 1987 and 1991, further to 35 per cent for the period
1992-95 and to 30 per cent from 1996 to date. There is, however, a 20 per cent
tax concession for certain companies: i.e., those engaged in agricultural
production or mining of solid minerals with a maximum turnover of N 0.5 million
and those in manufacturing or the export promotion sector with a turnover not
exceeding N 1 million.6 The rates on capita allowances have been reduced
continually to reflect the economic reality of the country.
The idea of
introducing VAT in Nigeria came from the Report of the study group set up by
the Federal Government in 1991 to review the entire tax system. VAT was proposed and a committee was set up
to carry out feasibility studies on the implementation. In January 1993, government agreed to
introduce VAT by the middle of the year.
It was later shifted to 1st September 93 by which time the relevant
legislation would have been made and proper groundwork done. VAT is a replacement of the existing sales
tax, which has been in operation under Federal Government Legislated Decree N0.
7 of 1986 but is operated on the basis of residence. Since VAT is based on the
general consumption behaviour of the people, the expected high yield from it
will boost the formers of the state government with minimum resistance from the
payers of the tax.
VAT by its
nature is a consumption tax that has been embraced by many countries
worldwide. Because it is a consumption
tax, it is relatively easy to administer and difficult to evade.
The yield
from VAT is a fairly accurate measurement of the growth of an economy since
purchasing power (which determines yield) increases with economic growth. Vat is a self-assessment tax that is paid
when returns are being rendered. In
built in the new tax is the refund or credit mechanism which eliminates the
cascading effect that is a feature of the retail sales tax. The input-output mechanism in VAT also makes
it self-policing because of the need to obtain receipts at each stage of the
transaction.
1.2
Statement of the Problem
In Nigeria
the contribution of tax revenue has not been encouraging, thus
expectations
of government are being cut short. Corruption, evasion, avoidance and tax haven
indicators are strongly associated with low revenue (Attila, Chambas, and
Combes, 2008) and indeed, corruption functions like a tax itself. According to
Adegbie and Fakile, 2011), the more citizens lack knowledge or education about
taxation in the country, the greater the desire and the opportunities for tax
evasion, avoidance and non-compliance with relevant tax laws. In this respect,
the country will be more adversely affected because of absence of tax
conscience on the part of individuals and the companies and the failure of tax
administration to recognize the importance of communication and dialogue
between the government and the citizens in matters relating to taxation.
In the face
of resource deficiency in financing long term development, Nigeria has heavily
resorted to foreign capital, such loans and aid as the primary means to achieve
rapid economic growth. Thereby accumulate huge external debt in relation to
gross domestic product and serious debt servicing problems in terms of foreign
exchange flow and, as such majority of the populace live in abject poverty.
Government has expressed concern over these and has vowed to expand the tax
revenue in order to meeting its mandate. Kiabel and Nwokah (2009) argue that
the increasing cost of running government coupled with the dwindling revenue
has left all tiers of government in Nigeria with formulating strategies to
improve the revenue base. Also, Ndekwu (1991) noted that, more than ever
before, there is now a great demand for the optimization of revenue from
various tax sources in Nigeria.
Nigerian tax
system is concentrated on petroleum and trade taxes while direct and
broad-based indirect taxes like the value-added (VAT) are neglected. This is a
structural problem for the country’s tax system. Although direct taxes and VAT
have the potential for expansion, their impact is limited because of the
dominance of the informal sector in the country.
1.3
Objectives of the Study
The main
objective of the study is to analyze the relative importance of corporate tax
and value added tax (VAT) and their effects on Nigerian economic growth.
The specific
objectives are as follows:
To assess
the relative importance of corporate tax in the Nigerian economy.
To assess
the relative importance of value added tax (VAT) in the Nigerian economy.
To determine
the effect of corporate tax on Nigerian economic growth.
To determine
the effect of value added tax (VAT) on Nigerian economic growth.
1.4 Research
Questions
In the light
of the objectives of the study stated above, the researcher raised the
following questions, which the study seeks to answer:
Has
corporate tax any relative importance in the Nigerian economy?
Has value
added (VAT) tax any relative importance in the Nigerian economy?
What is the
effect of corporate tax on Nigerian economic growth?
What is the
effect of value added tax (VAT) on Nigerian economic growth?
1.5 Research
hypotheses
The research
work is guided by the following hypotheses:
H01: There
is no significant effect of corporate tax on Nigerian economic growth.
H02: There
is no significant effect of value added tax (VAT) on Nigerian economic growth.
1.6
Significance of the Study
The general
relevance of the study lies in its attempt towards the understanding of the
relative importance of corporate and value added tax (VAT) and their effects on
Nigerian economic growth and so is particularly relevant in the followings
areas:
The findings
of the study will enable us understand the relative importance of corporate tax
and VAT in the Nigerian economy.
Again, the
findings of the study will enable us ascertain the effects of corporate tax and
VAT on Nigerian economic growth.
The findings
of the study will also help us to assess the effectiveness of the Nigerian tax
administration system.
Finally, the
findings of the study will add to existing literature on the subject of
corporate tax, value added tax and Nigerian economic growth.
1.7 Scope
and Limitation of the Study
The study is
empirical in nature and covers the relative importance of corporate tax and
value added tax (VAT) and their effects on Nigerian economic growth. The study
covers a period of thirteen years (2000-2012). The study is however limited to
corporate tax, value added tax, Nigerian economic growth, the data used and the
findings of the study.
1.8 Definition
of Terms
Economic
growth: This measured in terms of gross domestic product (GDP) and refers to
the money value of the goods and services produced in an economy within a year.
Corporate
tax: This is the tax levied on the income of companies after the deduction of
operating costs, interest, capital allowances and tax relief.
Tax: This is
compulsory levies on private individuals and organizations made by government
to raise revenue to finance expenditure on public goods and services, and to
control the volume of private expenditure in the economy.
Tax
administration: This is the process of implementing tax policies and collection
of revenue from tax in a country.
Tax yield:
This refers to the revenue collected by government from taxation.
VAT: Value
added tax. Conceptually this is a tax based on the value added in a country.
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