CHAPTER ONE 

INTRODUCTION

1.1  Background to the Study 

Nigeria as a nation has the vision of becoming one among the world’s 20 largest economies, this obviously is the brain behind the priority attention the present administration is directing at infrastructural development which is essential for economic growth. A developed economy is one with the ingredient to stimulate investment and create wealth, this by implication offers an atmosphere that is business friendly and has the potentials for the actualization of the vision (Ivan, 2019).

The desired outcome requires a lot of money to put the economy in a position that stimulates investment, therefore, tax policies need to attract potential investors, and the revenue from tax should be sufficient enough to meet the infrastructural expenditures of the government. Apere (2013) notes that taxation is a microeconomic and fiscal policy instrument; it involves the transfer of resources from the private to the public sector for the accomplishment of economic and social goals. It is an instrument the government uses to measure, access and control the informal sector that dominate developing economies of the world (Wambai & Hanga, 2013).

It has been observed over the years that income tax revenue has been grossly understated due to improper tax administration arising from under assessment and inefficient machinery for collection (Adegbie and Fakile, 2011). According to Naiyeju (1996) the success or failure of any tax system depends on the extent to which it is properly managed; the extent to which the tax law is properly interpreted and implemented.

Taxation is the central part of modern economic development. Its significance arises only not from the fact that it is by far most important of all revenues but also because of the gravity of the problems created by the present day heavy tax burden (Green, 2011). The main objectives of taxation are raising revenue. A high level of taxation is necessary in a state to fulfil its obligations. Tax imposition and its collection, mostly depends upon a country’s economic structure, its developmental phase, growth of its service sector, extent to which the country has been industrialized, and its employment level (Qamruz, Okasha, & Muhammad, 2012).

The need for tax payments has been a phenomenon of global significance as it affects every economy irrespective of national differences (Oboh & Isa, 2012). Taxation is an age long event. The need for its payment was emphasized by Jesus in “Mathew 22 vs 17-21” when the Pharisees asked Him whether it was lawful to pay taxes or not. His reply therefore, render unto Caesar the things which are Caesar’s and to God the things that are to God’s‟ suggests that tax payments should be compulsory, non-negotiable, binding and obligatory on all citizens of a country regardless of religion and social status. As regard to this, Tax, in general, is the imposition of financial charges upon an individual or a company by the Government of Nigeria or their respective state or similar other functional equivalents in a state. The computation and imposition of the varied taxes prevalent in the country are carried on by the Ministry of Finance’s Department of revenue (Mohammed, 2019).

Direct taxes are those taxes which are paid directly to the government by the taxpayer. These taxes are imposed on the people and organizations directly by the government. The deniable features of direct tax according to Kethron (2013) is that tax liability has to be paid by the taxpayer in question and cannot be transferred to any other entity for payment. direct taxes reduces the desire to work and save. The rate of direct taxes is usually high. Many business ventures are not undertaken on the ground that a large part of the income earned will have to be given to the government in the form of taxes. Thus, direct taxes reduce incentives to work hard and save.

Tosun and Abizadeh (2005) say taxes are used as proxy for fiscal policy. They outlined five possible mechanisms by which taxes can affect economic growth. First, taxes can inhibit investment rate through such taxes as corporate and personal income, capital gain taxes. Second, taxes can slow down growth in labour supply by disposing labour leisure choice in favour of leisure. Third, tax policy can affect productivity growth through its discouraging effect on research and development expenditures. Fourth, taxes can lead to a flow of resources to other sectors that may have lower productivity. Finally, high taxes on labour supply can distort the efficient use of human capital high tax burdens even though they have high social productivity.

Through taxation, government ensures that resources are channeled towards important projects in the society. Emmanuel (2010) opined that many economies around the world had implemented and established that no nation can effectively develop without the tax system being developed. Most economy depends on revenue from taxation for it growth and development. Besides the uses as source of raising revenue for government, taxation can also be used as the means of regulating the economy, redistributing wealth and inducing preferred modes of behaviour, particularly consumption patterns and investment choices (Oyebode, 2010).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.

1.2  Statement of the problem 

The role of taxation in promoting economic growth in Nigeria is not fully felt, and optimal tax is not being realized that can engine economic growth primarily because of its poor administration. In Nigeria the incidence of tax evasion and avoidance by tax payers is high, leading to low level of government revenue which further reduces the level of government expenditure, culminating into a reduction in the income savings and expenditure of households and firms, leading to low level of economic activities and economic growth. The behaviour of Nigerians with regards to taxation is terrible as many Nigerians prefer not to pay tax if the opportunity arises. The economy continues to lose huge amount of revenue through the unwholesome practice of tax avoidance and tax evasion, these loss of revenue can change the fortune of many economy particularly, developing countries like Nigeria. This problem has been lingering for so long which urgent attention and solution is overdue. The cost of collecting tax in Nigeria (both social and economic cost) is too high to the extent that, if left unchecked, the cost may soon outweigh the benefit or value derived from such operation and that will not be appropriate for the system. The above problems affecting Nigerian tax system on its economy, made it pertinent to examine the effect of direct taxation on economic growth of Nigeria, from 1990 to 2020.

1.3  Objectives of the Study 

The broad objective of the study was to examine the effect of Direct taxation on economic growth of Nigeria. Specifically, the study aims to achieve the following objectives:#

1.     To evaluate the effect of company income tax on gross domestic product of Nigeria.

2.     To examine the effect of capital gain tax on gross domestic product of Nigeria.

3.     To examine the effect of personal income tax on gross domestic product of Nigeria.

1.4     Research Questions 

1.     To what extent does company income tax affect gross domestic product of Nigeria? 

2.     To what extent does capital gain tax affect gross domestic product of Nigeria? 

3.     To what extent does personal income tax affect gross domestic product of Nigeria?

1.5      Research Hypotheses

1.     H0: company income tax does not have significant effect on gross domestic product of Nigeria.

2.     H0: capital gain tax does not have significant effect on gross domestic product of Nigeria.

3.     H0: personal income tax does not have significant effect on gross domestic product of Nigeria.

      1.6      Significance of the study 

This research work will bring to the knowledge of the government of how important the internally generated revenue like the Company income tax can be on the Nigeria economy other than depending solely on the revenue accruing from petroleum.

The tax authority in charge of collection of the company income tax will be kept abreast through this study of the loopholes in the administration and bring up better ways to make the administration effective and efficient. Companies will understand the usefulness of the tax they pay and also learn of the penalty involved when they falsify their books of account or evade tax.

Also, the findings of this study serve as bedrock to the general public in order to discourage tax evasion as it provides empirical evidence of the percentage contribution of tax revenue to GDP below the normal threshold of 20%. This study educates tax payers on the benefit of remitting tax especially in the area of economic benefit of tax revenue, not failing to advice on the negative effect of evading tax on both the tax payer and on the economy in general.