ABSTRACT
This study examines the impact of tax on manufacturing sector performance in Nigeria. For this study, ex post facto research design is adopted. The time series properties of data series employed in the estimation equation is tested for stationarity using Augmented-Dick-Fuller (ADF) unit root test. The study covers the impact of taxation as it relates to manufacturing sector in Nigeria for a period of 35 years (1981 to 2015). The findings of the study therefore revealed that tax rate has significant impact on manufacturing sector performance in Nigeria during the chosen period of observation and company income tax has significant impact on manufacturing sector performance in Nigeria. In addition, the R2 stood at 96 percent total variation on manufacturing sector performance in Nigeria affected by the influence of the increase in Capital Customs and Excise Duties charged, Company Income Tax and Petroleum Profit Tax. The study therefore recommends that the federal board of Inland Revenue should try to device a formula to ensure smooth payment of these taxes, they should make payment as cheap as possible so that tax payers will not see payment as a burden and therefore should pay tax voluntarily without any grant of dissatisfaction. In addition, for the PPT policy to have a more significant impact on the revenue and economic development of Nigeria, Government should minimize or find ways of eliminating totally the widespread corruption and leakages in the petroleum profit tax administration. Conclusively, it is suggested that government should pay attention to the factors that influence the willingness of citizens to pay tax and improve on them, thereby improving peoples‟ willingness to pay tax, government revenue and economic growth and development of the nation generally, lending credence to the Lindahl and Bowen models showing relationship between tax revenue and economic growth and development.
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
Nigeria is Africa‘s most populous country and Africa’s largest economy ahead of South Africa. By virtue of its size, improved economic management and strong economic growth in Nigeria would generate substantial prospects for growth and spillovers for the whole West African region (Pitigala and Hoppe, 2011). But the challenges facing the country has hindered it from harnessing its vast potentials, formidable among this challenges is an efficient tax system and tax behavior in Nigeria.
As described by Dike (2014) tax is a monetary charge imposed by the Government on persons, entities, transactions and properties to yield revenue and also It can be used to steer private sector activity in the directions desired by governments(Avi-Yonah, 2006). Tax is one of the major instruments of fiscal policy for regulating the economy of any nation, Nigerian inclusive. At various times, successive governments in Nigeria have employed the instrument of tax policy to encourage industrial and corporate growth in the private sector (Nwaobia, 2014).The objective of tax policy in Nigeria are to address the myriad of problems bedeviling the Nigerian tax system. It is aimed at creating a tax system that will contribute to the well-being of all Nigerians and taxes which are collected by Government, should directly Impact on the lives of the citizens (Dike, 2014) by way of promoting economic growth and development, ensure fiscal discipline and accountability, address the issue of inequality and correcting market failures.
Over the years, it has been observed that the Nigerian tax system has inherent problems in its structure in this regardOdusola (2006) opined that the Nigerian tax system is concentrated on Petroleum Profit Tax (PPT) and Company Income Tax (CIT) while broad-based indirect taxes like the Value-Added Tax (VAT) and Custom and Excise Duty (CEXD) are neglected. Thus, the tax system lacks the potential of diversifying the revenue portfolio for the country to safeguard against the volatility of crude oil prices and to promote fiscal sustainability and economic viability at lower tiers of government (Azaiki and Shagari, 2007).
In recent times, some manufacturing industries in Nigeria have been characterized by declining productivity rate, by extension employment generation, which is caused largely by inadequate electricity supply, smuggling of foreign products into the country, trade liberalization, globalization, high exchange rate, and low government expenditure. Therefore, the slow performance of manufacturing sector in Nigeria is mainly due to massive importation of finished goods, inadequate financial support and other exogenous variables which has resulted in the reduction in capacity utilization and output of the manufacturing sector of the economy (Tomola, Adebisi and Olawale, 2012). The contribution of manufacturing to GDP has been declining instead of increasing. The share of manufacturing subsector output in GDP which was 76.6% in 1975 reduced to 38.3 % in 1985 and 32.4% in 1998 and by 2010 this figure had dropped to 22.03%, in 2013 20.58% and this declined continued up to 2015 with industrial contribution to economic growth dropping to 19.30% and 17.82% in 2016 (CBN, 2016). Also at the same period, the overall manufacturing capacity utilization grew from 40.3% in 1990 to 58.92% in 2010 36% in 2014 (CBN, 2016)
1.2 Statement of the Problem
Being a major instruments of fiscal policy for regulating the economy of any nation, Nigeria inclusive, successive governments in Nigeria have employed the instrument of tax policy to encourage industrial and corporate growth in the private sector (Nwaobia, 2014). On the opposing side, taxation and tax policies in Nigeria do equally act as disincentive to manufacturing firms to create value for stakeholders and enhance the value of the firmsNwaobia, Kwarbai and Ogundajo (2016). This implies that tax’s policy helps in regulating business activities and economic growth of an economy.
Evidently has noted by Gatsi, Gadzo and Kportorgbi (2013) taxation, can be used to protect infant industries, encourage investment and particularly company income tax observably, plays a role in the misfortunes of the manufacturing sector because tax policies, apart from generating revenue for the state, serve several other purposes.
As added by Ihendinihu (2009) noted that unfriendly tax policies is one of the many reasons for the growth of the underground economy, where law-abiding individuals and corporate citizens seek refuge from wrongs inflicted on them by government. The major challenge of corporate entities, and in particular manufacturing firms, come in a midst of high corporate tax rates and multiples of other taxes that lead to high effective tax rates far above the statutory company income tax rate (Omesi, Teerah and Nzor, 2014). With the introduction of the Information Technology tax, there are about forty different taxes levied on companies and individuals (Bammeke, 2012).
Many of these taxes from the different levels of government overlap and are forcefully extracted from corporate organizations. The effect of these exactions of course is high cost structure for firms (Nwaobia, 2014). One will not fail to agree with Nnadi and Akpomi (2008) that a tax policy defines the cost structure of firms as it is factored into pricing. In addition, tax costs and eventual payout deplete the disposable income of individuals as well as the distributable profits of corporate organizations. These taxes in fact, do translate to a substantial cost to organizations and if not properly planned and managed can have adverse impact on the bottom line, cash flow and capacity to investNwaobiaet al (2016).
As such it becomes necessary to investigate the impact of tax on manufacturing sector in Nigeria, so as to provide the manufacturing sector with tools for effective tax plans in order to remain competitive.
1.3 Research Questions
From the above problem statement, the following research questions are raised;
- What is the impact of tax on manufacturing sector performance in Nigeria?
- What is the impact of company income tax on manufacturing sector performance in Nigeria?
- What is impact of value added tax on manufacturing sector performance in Nigeria?
1.4 Objectives of the Study
The broad objective of this study is to examine the impact of tax on manufacturing sector performance in Nigeria, specifically the study will aim at;
- Investigating the impact of company income tax on manufacturing sector performance in Nigeria
- Determine the impact of value added tax on economic growth in Nigeria.
1.5 Hypothesis of theStudy
The hypothesis will guides this study includes;
- H0: Tax rate has no significant impact on manufacturing sector performance in Nigeria
H1: Tax rate has a significant impact on manufacturing sector performance in Nigeria
- H0: Company income tax has no significant impact on manufacturing sector performance in Nigeria.
H1: Company income tax has a significant impact on manufacturing sector performance in Nigeria
- Significance of the Study
This study will be of significance to the governmentpolicy makers and tax institutions as a tool to evaluate the impact of their tax policy over the years and provide them with tool for decision making. Also the companies which comprises the Nigerian manufacturing sector will benefit from this study as it will provide them with tools for planning and decision making and further expansion.
Furthermore, it will be of significance to students and researchers as a point of reference and an addition to already existing study. It will further serve as a bedrock for further study.
1.7 Scope and Limitation of the Study
The study covers the impact of taxation as it relates to manufacturing sector in Nigeria for a period of 35 years (1981 to 2015). The generalization from this study is limited to the manufacturing sector and companies which comprises and classified as manufacturing companies in Nigeria.
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