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JOURNAL OF RESEARCH IN NATIONAL DEVELOPMENT VOLUME 7 NO 2, DECEMBER, 2009

TAX INCENTIVE AS A CATALYST FOR ECONOMIC DEVELOPMENT IN NIGERIA

Jayeola Olabisi
Department of Financial Studies, Redeemer’s University, Mowe, Nigeria
 E-mail: jayeolaolabisi @yahoo.com

Abstract
   An empirical study using a well structured questionnaire survey, the work assesses the relationship that exists between tax incentive and economic development in Nigeria. This study was undertaken primarily to evaluate the effectiveness of tax incentive in developing the Nigerian economy. One hundred and twenty questionnaires were administered on members of staff of twelve different incorporated companies in Lagos and hypotheses formulated were tested with the use of chi-square method.  It was found that tax incentive would enhance economic growth and development in Nigeria, if such incentives are well focused and extended to all deserving companies in the country. Suggestions were made as to variables moderating the tax incentive and economic development.

Keywords: Tax; incentive; development; Nigeria.


Introduction
Investors often emphasize the relative importance of the tax system in investment decision if compared with other considerations such as political and economic stability, availability of social infrastructure, security of life and property and the general cost of doing business and so on (Sanni, 2002). To the prospective investors, the general feature of tax system (tax base rate etc) is more important than tax incentives. In many developing countries, the tax laws are not clearly written and may be subject to frequent review. This makes long time planning difficult for business and adds to the perceived risks of undertaking major capital intensive projects (Dotun,1996).

Taxation has been used to encourage savings, investment and re-distribute income. Also priority sectors like Export Processing Zone (EPZ), solid minerals; oil and gas have been encouraged. The manufacturing sectors have received the right doses of tax incentives. Government also uses taxation to stimulate the economy by using tax policy to influence purchasing power and production costs (Ariwodola, 2001). Countries have introduced investment incentives for varying reasons; in some case, the incentives may be seen as a counter weight to the investment disincentives inherent in the general tax system(Holland and Vann, 1996).

Statement of the problem
Empirical studies like those of (Sanni, 2002) and (Dotun1996) have reported different views on tax incentives as a catalyst for economic growth and development. A school of thought believes that tax incentive encourages economic growth and development while another believes that it reduces revenue to the government. As a result of this, it does not stimulate economic growth and development. It must be noted that some of the measures taken so far by the government to improve the economy have not produced good results. The naira exchange rate has not been able to stimulate the economy. The poverty alleviation programme aimed at reducing the rate of poverty among Nigerians was introduced. This programme covered provision of jobs for able and unemployed youths, provision of loans to small and medium scale enterprises at a minimum lending rate.

With all these measures and policies taken so far, Nigerian economy has not shown any appreciable progress. Nigeria still remains one of the developing nations. Given this gap, the study seeks to examine the nature of tax incentives that are extended to deserving companies and the interactions that exists between tax incentives and the economy.

Objectives of the study

The study is undertaken to

(i)         To assess the economic implications of tax incentives
(ii)        To examine the criteria for deserving tax incentives
(iii)       To assess the various incentives available to companies.

Research questions
(i)  What relationship exists between tax incentives and economic growth?
(ii)  What are the economic implications of tax incentives?
(iii)  What are the criteria for deserving tax incentives?
(iv) What are the various incentives available to companies?
           
Literature review
Incentive is something that encourages you to do something. Hence, tax incentive is a generic term for all the measures adopted by the government to deliberately manipulate the tax system to the advantage of a potential tax-payer (Dotun, 1996). Tax incentive is a deliberate reduction in or total elimination of  tax liability granted by the government in order to encourage a particular economic unit (e.g. corporate body) to act in some desirable ways. The desirable ways may be to invest more, produce more, employ more, export more, sell more, consume less, import less, and pollute less.

Holland and Vana (1996) maintained that many developing and transitional countries in the world offer incentives for investment. The incentives are often not for direct investors. This relates to real investment in productive activities rather than investment in financial assets and often directed to foreign investors on the ground that there is in sufficient domestic capital for desired level of economic development and that international investment brings with it modern technology and management techniques.         Kwewuni (1996) argued that tax incentives by their nature represent revenue costs to the government and may be drains on the revenue of the government if not well focused. This is because government would have deprived itself of the revenue that would have been generated. With the above as the background, the government of Nigeria has introduced a low tax regime, which would help to develop priority sectors of the economy like agriculture, pioneer

companies, export processing zone, petroleum industries, hoteliers, and solid minerals (Ojo, 2001).

Methodology
The population for this study consisted of twelve selected companies in Lagos State. The sample however, consisted of 120 management and middle management staff and the selection of those companies was through a purposive sampling method, having considered the types of incentives being offered them by the government. The selection of the samples was independent of sex. The demographic characteristics of the subjects are - :

Age range: 30-50
Academic qualifications:
B.Sc/HND               80
M.Sc                        13
MBA                          7
Professional qualifications            17

Instrument
The instrument consisted of a 15 –term survey questionnaire with 4 Likert scale response options- Strongly Agree (SA), Agree (A), Disagree (D), and Strongly Disagree (SD). The validation of the questionnaire was through the use of experts in psychometrics; and test- re- test reliability determination yielded stability co-efficient of 0.89. The working experience, job status and educational attainments of the respondents were considered when the questionnaires were being administered on the respondents. Chi-square method was used to assess the hypotheses of the study, using the responses from questions 4 and 11 of the questionnaire administered.

Data analysis 
The scoring scale for the items are positive statements, with response options SA, A, D, and SD weighted as 4,3,2, and 1point respectively; the reverse was used for  negative items. The mean score of each item was computed, and the decision rule based on the mean scores of the 15 –items as -:

        1. (SD)

1.50---1.99      (D)
2.00---2.49      (A)
2.5----2.99      (SA)

The items in the questionnaire were administered on the respondents to observe the extent to which the objectives have been achieved.

Table 1


S/N

Items

X

NT

Mean

Decision

1

All incomes generated by your company are assessable to tax?

195

120

1.62

D

2

Is the level of income considered before imposing tax?

276

120

2.3

A

3

Tax has a negative impact on my company’s investment decisions?

288

120

2.4

A

4

 High tax regime has negative effect on my company’s working capital? 

324

120

2.7

SA

5

Taxation has to be considered when making capital investment decisions

348

120

2.9

SA

6

Tax incentives are more relevant to existing companies than the potential ones?

196

120

1.6

D

7

Foreign investors can be discouraged with high tax regime?

340

120

2.8

SA

8

There are other means by which government can raise funds aside from tax?

268

120

2.2

A

10

Tax incentives allows local companies to compete favourably well with foreign companies?

286

120

2.4

A

11

Is tax incentive leads to reduction of revenue to the government?

324

120

2.7

SA

12

Is imposition of tax effective in meeting the set fiscal, social and economic objectives?

288

120

2.4

A

13

Tax incentive can be used to off-set other disadvantages that investors may face?

276

120

2.3

A

14

The tax revenue derived is justified with the level of infrastructure provided?

172

120

1.4

SD

15

Has your company received adequate dose of tax incentives?

192

120

1.6

D

Source: Questionnaire administered
Testing of hypotheses
The hypotheses formulated will be tested with the aid of chi-square distribution at 0.05 level of
significance. This is computed using the formulae       
                   χ2=  ( o-e)2
                           e
Hypothesis 1
Ho: there is no significant relationship between high tax regime and company’s working capital.
Hi: there is significant relationship between high tax regime and company’s working capital.
Table 2


Response

0

e

0-e

(0-e)2

(0-e)2
   e

SA
A
D
SD

58
52
 8
 2

30
30
30
30

28
22
-22
-28

784
484
484
784

26.13
16.13
16.13
26.13

Total

120

 

   0

2536

84.52

Source: Question 4 of questionnaire administered


         Decision:  Since the computed value, χcal, 84.52 is greater than the table value, χtab, 3.841 at 0.05 level of significance, we reject the null hypothesis and accept the alternative hypothesis that there is a significant relationship between high tax

 

regime and the company’s working capital.

Hypothesis 2
Ho: tax incentive does not lead to reduction of government’s revenue
Hi: tax incentive leads to reduction of government’ revenue

Table 2


Response

0

e

0-e

(0-e)2

(0-e)2
    e

SA
A
D
SD

53
37
20
10

30
30
30
30

27
 -7
-10
-20

729
 49
100
400

24.3
1.63
3.33
13.33

total

120

 

0

1400

42.59

 Source: Question 11 of questionnaire administered

 Decision:   Since the computed value 42.59 is greater than the table value, 3.841 at 0.05 level of significance, we reject the null hypothesis and accept the alternative hypothesis that tax incentive leads to reduction of revenue to the government.   

Findings
The study aimed at ascertaining the effects of tax incentive on the economic growth and development of Nigeria. The research questions and hypotheses played vital roles in modeling the focus of the study.
With the above as background, the following findings and conclusion were arrived at-:

  1. Tax incentive has a positive impact on investment decision; and tax incentive coupled with political stability stimulate the economic growth.
  2. Tax incentive should be considered along the with tax infrastructural facilities when considering  economic development.
  3. Tax incentive usually leads to reduction in government revenue but the reduction is compensated with economic development brought about by the emergent and successful companies.
  4. To bring about sustainable working capital for companies the tax regime must not be outrageous.
  5. For the economy to develop by using tax to achieve the desired effect, a natural tax policy must consider the implications of any form of changes in tax policies on the populace and industrial sectors of the economy at large. A policy which does not consider these issues may end up being retrogressive, thus negatively impacting on society.
     
    Conclusion
     With Nigeria’s quest for investment both from local and foreign investors, the tax regime must not be an obstacle, bearing in mind that the quest for global capital is highly competitive.  The tax incentives would off-set other disadvantages that investors may face such as lack of infrastructure, complicated and antiquated laws, bureaucratic complexities and weak administration in the tax area. The appropriate solution is to reform the existing laws that create the problems, and build the necessary administrative capacities and infrastructure to provide enabling environment for investors.
              

References
Abiola, S. (2002) “Tax incentive and reforms in Nigeria”. A paper     presented at a Mandatory Professional Training Programme (MPTP) of the Chartered Institute of Taxation of Nigeria.

Adesola, S.M. (1995): Income tax law and administration in Nigeria, Ile-Ife, Nigeria:
            University of Ife press Ltd.

Ariwodola, J.A. (2001): Personal taxation in Nigeria. Nigeria:Taa Nigeria
            Limited.

Dotun, P.  (1996): “Corporate tax incentives and economic growth in
            Nigeria”. Tax News, No. 1 Vol. 2

Holland &  Vann (1996): “Income tax incentives  for Investment” Tax
            design and drafting, Vol. 2, pg. 986

Kuewuni, M. (1996): “A Critique of tax incentives in Nigeria” Tax
            News vol. 2 No. 1 pg. 4-8
Ola, C.S. (2001): Income tax law and practice in Nigeria. Ibadan: Heinemann           Educational Books (Nigeria) Plc


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