THE EFFECT OF TAXATION ON BUSINESS AND INVESTMENT DECISIONS (A CASE STUDY OF SOME SELECTED BUSINESSES IN EDO STATE)


Content

Abstract

This study examines the effect of taxation on business and investment decision, it is undertaken to investigate the effect of company income tax on business and investment decision of companies in Nigeria. The main objective of this study is to bring into focus the importance of effective and efficient tax planning. The researcher employed descriptive statistics method and percentage in the analysis of data. The study revealed that there exist statistical significance relationship between taxation and business and investment decision. The study concludes that taxation is indispensable in all modern business organizations. Therefore, the study recommends that optimum rate of tax that will be beneficial to the government on one hand and the firms on the other hand should be charged in order to bridge the negative effects of taxation.

 

 

 

 

 


TABLE OF CONTENTS

Title Page                                                                                i

Certification                                                                            ii

Dedication                                                                    iii

Acknowledgements                                                                iv

Abstract                                                                                  v

Table of Contents                                                                   vi

Chapter One: Introduction                                               1

1.1       Background to the Study                                                      1

1.2       Statement of Problem                                                            3

1.3       Research Questions                                                              4

1.4       Objective of the Study                                                            4

1.5       Statement of Hypotheses                                                       5

1.6       Significance of The Study                                                      6

1.7    Scope of the Study                                                                 8

1.8    Limitations of the Study                                                         8

1.9    Definition of Terms                                                                 9

Chapter Two: Review of Related Literature                11

2.1    Introduction                                                                           11

2.2    Main Objectives of Tax                                                          11

2.3     The Administration of Personal Income Tax in Nigeria            12

2.4    Definition of Income                                                               17

2.5    Effect of the Personal Income Tax and Company Tax

on the Economy                                                                     20

2.6       Taxation on Business And Investment Decisions                22

2.7       Implication of Taxation on the Economy                              27

2.8    The Objective or Motive of Taxation                                     30


Chapter Three: Research Method and Design             34

3.1    Introduction                                                                           34

3.2    Research Design                                                                    35

3.3    Description of Population of the Study                                 35

3.4    Sample Size                                                                            35

3.5    Sampling Technique                                                              35

3.6    Sources of Data Collection                                                   36

3.7    Method of Data Presentation                                                 37

3.8    Method of Data Analysis                                                        37

Chapter Four: Data Presentation, Analysis and Hypothesis Testing                                                    39

4.1    Introduction                                                                           39

4.2    Presentation of Data                                                              39

4.3    Data Analysis                                                                         40

4.4    Hypotheses Testing                                                                42

Chapter Five: Summary of Findings, Conclusion and Recommendations                                                                     47

5.1    Introduction                                                                           47

5.2    Summary of Findings                                                  48

5.3    Conclusion                                                                             48

5.4    Recommendations                                                                 49

References                                                                    51

Appendix I                                                                              53

Appendix II                                                                             54

                       


CHAPTER ONE

INTRODUCTION

1.1   Background to the Study

Public expenditure is one of the fundamental functions or roles of every responsible government. Therefore, in meeting this financial obligation, the need to explore various sources of revenue to the government becomes imperative. To this end, one of the oldest and till modern days known source of revenue to the government is tax beside others. Taxation therefore in this context can be defined as a “non punitive yet compulsory levy imposed by government on the properties and income of individuals, incorporated and unincorporated business entities (Ola, 2011).

Taxation serves as a major source of revenue to government for financing its expenditures. Despite the fact that its be seen as a process of transferring income from the private sector to the public sector for the provision of public goods. It also serves as a major fiscal policy tool through which government manage and control the economy in the area of balance of payment, income distribution, protection of infant industries and discouragement of the consumption of harmful goods in the economy.

It is the responsibility of the government through its appropriate authority to impose tax on the properties, individual and organisation in order to generate revenue. Due to the various mixed effects of taxation, every tax imposed on organization or tax payer is continuously interpreted in terms of its special applicability and effect on the various transaction of the organization. The dynamic nature of the field of taxation occasioned by new court rulings and amendments has been a determining influence on the outcome of the various economics decisions undertaken by business entities. On the part of government, there have been tougher measures instituted to control the adverse economic trend in the economy. These measures are designed to generate revenue, stabilize prices and achieve other economic goals. Undoubtedly, these rules have significant impact on business and investment decision. Every rational decision of the organization undertakes should be based on the profit after tax consideration. Once an investor decides on the type of investment he intends to commit his financial resources into, the tax impact of such choice should be one of the basic criteria. Where the tax is negligible the organization should afford to make decision without regards to income taxes but with the current high corporation tax rate at 30%, it becomes absolutely necessary that tax implication of every business decisions be understood before implementation. This is because they “Double Taxation” (Tax on profit and dividend) on corporation have a reducing effect on the residual profit made by the corporation.

1.2      Statement of Problem

It is believed that there is a relationship between the performance of organization’s investment and imposition of tax on the organisation. Therefore, the imposition of company income tax said to impact on business and investment decision in various ways. However, the direction of the effects of taxation for instance whether positive or negative on business and investment decision is not clearly defined. In view of this, the research seeks to investigate the validity of this theoretical underpinning of the effects of taxation on business and investment decisions in Nigeria economy.

1.3      Research Questions

The following are the research questions underlying the study:

i.            Does taxation have a significant impact on investment and business decisions?

ii.          Is inflation a militating factor against investment decision in the Nigerian economy?

iii.        Does taxation discourages extravagant spending, capital formulation and economic development?

1.4      Objective of the Study

This research is undertaking to investigate the extent to which company income tax imposition has affected certain management decisions. The researcher explores all relevant sources available in obtaining vital information in order to provide insight into the economic activities of investor. Based on the outcome of the research, the study is also intended to offer recommendation as to how the problem identified in the problem statement would be solved, thereby bringing into focus the importance of effective and efficient tax planning. According to Golf (1981: 13) “The investor who fails to appreciate the relevant fundamentals of this vast increasingly complicated and dynamic subject of tax will be poorer for his omission”.

Also, this work is designed to examine the degree of the effect the Nigeria tax system has militated against investment decision in organization with particular reference to the economy of Seven-Up Bottling Company and Mouka Foam in Benin City.

1.5      Statement of Hypotheses

Tentatively, to provide answers to the question raised in the study, the researcher formulate a set of hypothesis to determine the degree to which the problem of taxation and inflation had influenced the investment and business decision making of companies.


The hypotheses are thus outlined below:

Hypothesis One

Ho: Taxation does not have a significant impact on investment and business decision.

H1:   Taxation has significant impact on investment and business decision.

Hypothesis Two

Ho: Inflation is not a militating factor against investment decision in the Nigerian Economy.

H1:   Inflation is a militating factor against investment decision in the Nigerian Economy.

Hypothesis Three

Ho: Taxation does not discourage extravagant spending, capital formulation and economic development.

H1: Taxation discourages extravagant spending, capital formulation and economic development.

1.6      Significance of The Study

Most business firms in Nigeria do not take into consideration the effect of taxation on their portfolio selection. This has partly been responsible for the low investment level in such organization.

Under this democratic dispensation, the Nigeria economy is poised to witness increased investment opportunities through increased foreign investment and the privatization of Public Parastatals. With privatization, public non-taxable companies will now become private taxable companies. This is to take advantage of these investment opportunities on investing company has to plan for tax. This research study becomes very relevant and significant because investors need to know how tax rules affect their investment and business decisions.

It is important to recognize that even when a firm is not currently paying a large tax, its potential income tax expense from future investment may be enormous. Therefore it is needful for the management of business organization to know how future decisions and income will be affected by tax. Moreover since money has a “time value’ it will be of much benefits to the organization if its management defers the money and payment of tax where such opportunities exist.

Efficient management requires that the transaction of an organization be planning in a manner that minimizes the amount of tax paid when submitting the financial report for tax purpose. The management of firms should therefore employ those planning methods that will enable them reduce their tax liability.

1.7   Scope of the Study

The study is undertaking to investigate the effects of taxation on business and investment decisions in the Nigeria economy using descriptive research method. The method is adopted owing to the use of questionnaires the researcher employed in the gathering of data for statistical analysis.

The time horizon is relatively short, therefore, the research’ focused on selected companies in Edo state for easy analysis and the extent to which conclusion can be reached. The variables like taxation, inflation, business and investment behaviour are significantly analyzed.

1.8   Limitations of the Study

Any social research is inherently hindered and this is more so when such research is outside experimental studies. In the course of undertaking this research work, the researcher encounters a number of constraints.

First was the problem of non-cooperation from some officials of the Seven-Up Bottling Company and Mouka Foam in Benin City. Some of the personnel contacted for interview did not co-operate while some that did, did so reluctantly. The difficulty in getting access to official and up-to date records and documents was also encountered.

Time was another great constraint as lecturers, course work and examination preparation were along side with the writing of this research work.

Another constraint that readily comes to mind is cost of writing the research work.

1.9   Definition of Terms

The terminologies used in this study are defined as follows:

Taxation: The demand made by the government of a country for a compulsory payment of money by the citizens of the country. It can also be defined as a compulsory contribution imposed by a public authority irrespective of the exact amount of services rendered to the taxpayer in return.

Investment Decision: These involve the decision to allocate capital to a prospective project or asset or to reallocate capital to another project or asset when the existing project is no longer viable enough to justify the capital committed to it.

Business Decision: Strategic and operational decision taken periodically by management in order to realize the organization overall objectives.

Tax Liabilities: The portion of a firm’s residual income that government required to achieve the countries economic objectives.

Tax Act: The law of legislation regulating the administration of taxes.

Chi Square: It is a statistical technique used to test hypothesis concerning the difference between a set of observed frequency and a corresponding set of expected frequency.

Degree of Freedom: This is the relevant range within which the hypothesis testing will be done.

Confidence Level: The level or limit within which we may be confident that the true population average lies.


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