IMPACT OF TAX REFORM ON INVESTMENT DECISION IN NIGERIA

Abstract

This study is informed by the quest to examine the investment implication of the series of tax reforms in Nigeria, particularly the tax reforms of 2003 and National tax policy of 2012. Annual time series data spanning the years (1999-2016) were utilized. The study examine whether the estimated model satisfies the OLS assumptions. The basic assumptions of the OLS were satisfied. The result of the estimated OLS model shows that tax reform as proxied by FDI and GDP, both positively and significantly stimulate investment in Nigeria. The study recommends that efforts should be made towards intensifying the tax reforms. Further, policies should be directed towards redressing multiple taxation and high company income tax as both have the tendency to adversely affect investment

CHAPTER ONE

INTRODUCTION

• Background of the study

Taxation constitutes a major source of revenue to both developed and developing countries. Tax generated revenues are used to finance public utilities, perform social responsibilities and grease the administrative wheel of the government. The Institute of Chartered Accountants of Nigeria (2006) and the Chartered Institute of Taxation of Nigeria (2002) define tax as an enforced contribution of money to government pursuant to a defined authorized legislation. The World Bank (2000) defines tax as a compulsory transfer of resources to the government from the rest of the economy. Tax is a compulsory levy imposed on individuals and corporate identities regardless of the status (Nightingale, 2002; Soyode & Kajola, 2006). In Nigeria, tax administration has been encumbered by several factors ranging from inadequate and unreliable data, paucity of administrative capacity, shortage of skilled manpower, corrupt tax officials, high incidence of tax avoidance and evasion, complex tax codes and the hydra – headed monster of multiple taxation (Odusola, 2006). Nigerian government has embarked on several tax reforms, since the year 1991. Prior to tax reforms, tax administration reflected inefficiencies, characterized by deficiencies in the tax administration and collection system, complex legislations and apathy on the part of those outside the tax nets (Ndekwu, 1991 cited in Ariyo, 1997). According to Odusola (2006), the need for tax policy reforms in Nigeria may be summarized as: (i) the compelling need to diversify the revenue portfolio for the country in order to safeguard against volatility of crude oil prices, and (ii) to promote fiscal sustainability and economic viability at the lower tiers of government. Multiplicity of taxation constitutes a major challenge to tax administration in Nigeria even in the post-tax reforms era. Companies are subjected to several tax levies at all the levels of government. This has the concomitant outcome of raising cost of production, making locally produced goods loose international competitiveness and prevent inter-state commerce (Chartered Institute of Taxation of Nigeria, 2002). In addition, we observe that the corporate income tax rate is so high that it creates investment disincentive effect, since it erodes private investment profit . In Nigeria, the investment rate has been so low with investment constituting less than ten percent of the GDP (UNCTAD, 2005). In this study, an attempt is made to examine the impact of tax reforms on investment in Nigeria, with special attention on the tax reforms of 2003 and the new national tax policy of 2012. The recent global crisis in the world has brought to the fore the need to note that this overdependence on oil creates unnecessary shocks and thus, the need for diversification of the nation’s resource base and long term growth path. The oil is an exhaustible and dwindling resource, while taxation is the only non-exhaustible veritable source of resource and revenue generation to the government both at the tiers of government.(Oloyede, 2010:1).

Nigeria is a monolithic economy with strong dependence on the oil sector; this over-dependence makes the economy to be more vulnerable to external manipulation and adversely affects the planning horizons in the country.

Taxation has rightly been identified as a major tool in the strengthening of domestic resource mobilization and consequently, the search for ways and means of expanding the tax base and also strengthening tax administration has been intensified. Taxation is considered a veritable source of revenue for financing developmental as well as people oriented programs in virtually all countries, irrespective of whether they are classified as developed or developing economies. That taxation has been one of the most important weapon available to government for marshalling financial resources is undisputable (Atta-Mills, 2002: Teidi, 2003 and Oloyede, 2010).

Nigeria is governed by a federal system; hence its fiscal operations also adhere to the same principle. This has serious implications on how the tax system is managed in the country. In Nigeria, the government’s fiscal power is based on three – tiered tax structure divided between the federal, state and local governments, each of which has different taxes jurisdiction. As of 2014, all three levels of government share about 50 different taxes and levies. It is needless to emphasize that the existence of well-defined tax laws alone cannot guarantee the success of tax collection effort. There must always exist an efficient and effective tax administration as a sine qua non to successful domestic resource mobilization.

In some developing countries, Governments impose many types of taxes, individuals pay income taxes when they earn money, consumption taxes when they spend it, property taxes when they own a home or land, and in some cases estate taxes when they die. In the United States, federal, state, and local governments all collect taxes. Taxes on people’s income play critical roles in the revenue systems of all developed countries.

Taxation as a major non-oil revenue has been the mainstay of most developed countries, in contrast to developing countries that still depend on primary products. Also, indirect taxes appear to be in vogue in developed countries, due to higher return, lower administration cost and higher compliance rate, however, most developing countries still rely on direct taxes with lower compliance rate (Oloyele, 2010: 3).

it is increasingly apparent, however, that tax administration must receive far greater attention if the goals of tax reforms and policies are to be achieved in the face of ever growing economy. Much of tax policy is being directed to obtaining increased revenues to enable governments and their agencies or parastatals to carry out their economic planning. Yet it is true in Nigeria that effective administration of some of the existing taxes would provide a considerable and reasonable part of the needed revenue.

The Nigerian tax system has undergone several reforms geared towards enhancing tax collection and administration with minimal enforcement cost. The recent reforms include: the introduction of TIN (Tax Payers Identification Number), which became effective since February, 2008. Automated Tax System (ATS) that facilitates tracking of tax positions and issues by individual tax payer, E-Payment System (EPS) which enhances smooth payment procedure and reduces the incidence of tax touts, Enforcement scheme (special purpose tax officers), all these have led to an improvement in the tax administration in the country.

• STATEMENT OF THE PROBLEM

The Nigeria tax system could be traced back to the eighteenth century when traditional rulers and local law enforcement agents collected money from their citizens, in order to finance development programmes in their communities. However, the history of modern taxation traced back to the year 1904, when personal income tax was introduced in Nigeria as community tax. The emergence of oil as a major tax revenue is one of the means a country‘s government devises in solving the economic problems of the country and to enhance government expenditure which is expected to be beneficial to the citizens of such country through the provision of social and economic infrastructures (Adereti et al 2011). In Nigeria, this has not been the case because despite the tax revenue and expenditure reported year in year out by the government, the physical state of the nation in terms of infrastructure and social amenities is backward. This is evident in the lack of electricity supply, portable drinking water, basic health care delivery, bad roads, just to mention but a few. The gap in terms of the period covered is also a contributory factor to the disparity in the outcomes of relationship between tax revenue and an economy. The advent of the oil boom encouraged some laxity in the management of non-oil revenue sources like the company income tax and custom and excise duties. It is in view of the above that the researcher decide to investigate the impact of tax reforms on investment decision.

• OBJECTIVE OF THE STUDY

The main objective of the study is to investigate the impact of tax reform on investment decision in Nigeria; to aid the completion of the study, the researcher intends to achieve the following specific objective;

1. To investigate the impact of tax reform on foreign direct investment (FDI) in Nigeria
2. To investigate the relationship between FDI and GDP as a result of tax reform

• To examine the role of tax reform in improving revenue generation

1. To investigate the efficacy of tax reform in influencing investment decision in Nigeria
   • RESEARCH QUESTION

To aid the completion of the study, the following research questions were formulated by the researcher;

1. Does tax reform has any impact on foreign direct investment?
2. Is there any relationship between foreign direct investment and gross domestic product

• Does tax reform play any role in improving revenue generation?

1. Does tax reform influences investment decisions in Nigeria
   • RESEARCH HYPOTHESES

To aid the successful completion of the study, the following research hypotheses were formulated by the researcher;

H₀: tax reform does not have any impact of foreign direct investment in Nigeria

H₁: tax reform does not have an impact of foreign direct investment in Nigeria

H₀²: there is no significant relationship between FDI and GDP in Nigeria as a result of her reform in tax administration

H₂: there is a significant relationship between FDI and GDP in Nigeria as a result of her reform in tax administration

1.6 SIGNIFICANCE OF THE STUDY

Taxes pay teachers, Taxes train nurses, Taxes maintain roads, deliver medicine, provide clean water. This is as true in the developing world as it is in the developed world. Tax is the most important, sustainable and predictable source of public finance for almost all countries. Succinctly, there cannot be a better time to work on the critical problems of tax administration in the 21st century than now especially with the growing tax consciousness among the various tiers of governments in Nigeria. This study is contemporaneous, that is, timely, because of the urgent need for ethnic groups, policy makers and implementers to understand the nature, scope and dynamics of the current agitation for resource control and practice qf true federalism.

• SCOPE AND LIMITATION OF THE STUDY

The scope of the study covers the impact of tax reform on investment decision in Nigeria, in the cause of the study, there were some factors which limited the scope of the study;

(a) Availability of research material: The research material available to the researcher is insufficient, thereby limiting the study.

(b) Time: The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.

(c) Finance: The finance available for the research work does not allow for wider coverage as resources are very limited as the researcher has other academic bills to cover

1.8 ORGANIZATION OF THE STUDY

This research work is organized in five chapters, for easy understanding, as follows

Chapter one is concern with the introduction, which consist of the (overview, of the study), historical background, statement of problem, objectives of the study, research hypotheses, significance of the study, scope and limitation of the study, definition of terms and historical background of the study. Chapter two highlights the theoretical framework on which the study is based, thus the review of related literature. Chapter three deals on the research design and methodology adopted in the study. Chapter four concentrate on the data collection and analysis and presentation of finding.  Chapter five gives summary, conclusion, and recommendations made of the study

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