EFFECT OF COMPANY INCOME TAX ON PERFORMANCE OF MANUFACTURING FIRMS IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1   BACKGROUND TO THE STUDY

The requirement for survival; to meet required fund for development and economic growth mandates nations of the world to increase drive through taxation and other means. The role tax plays in any society cannot be undermined. The formation of accountability and effective states has been closely linked with the emergence of taxation systems (Moore, 2007).

Taxes generally are compulsory payments levied on all income, wealth, and properties of individuals, partnerships trustees, executorships and companies by the government. A tax is a compulsory payment by individuals and organizations to the relevant tax authorities at Federal, State, or Local Government levels.

Taxes exercise fiscal and or budgetary functions, economic and social or redistribute functions. Hornby (1988) posited that tax is money that has to be paid to the government compulsorily. Corporate tax is the most productive revenue source of income to the government than taxes from other sources.

In the olden days, government imposed taxes to generate enough revenue solely to cover the cost of administration and defense. In modern economies taxes are the important source of government revenue.

They are compulsory levies that are regularly imposed and as a rule, not designated for a special purpose, they are regarded as a contribution to the general revenue pool from which most government expenditures are financed (Ogbonna & Appah, 2012)

As corporate organizations looks to maximize shareholders value, it will seek to maximize its profitability in the process. Profitability is a determinant of how sound and company is. The level of profit of a company at any point in time has consequences attributed to it.

A high profit making organization will have better motivated staffs, improved product quality and increased shareholders value while a low profit making organization will have vice-versa effect.

Thus, high corporate tax rate would lead to low or declining profits which has adverse effects on the company and lead to low investment or disinvestment. Olaleye, Memba and Riro (2015) taxes are seen as one of the major source of cash outflow to business organizations experience.

Businesses are faced with the option of managing their tax liabilities in such a way that their tax burden is reduced. With the exception of industries which enjoy tax holiday possibly because of their location and age to enable them compete effectively or to meet certain economic objectives, other business are mandated by the laws of the federal republic of Nigeria to pay their corporate taxes, as at when due.

It is known that under the present economic situation of economic stress and hardship, coupled with stinging effect of inflation, unemployment, price instability dwindling standard of living, it is only organizations that can turn those threats and challenges into opportunities that can survive the scourge.

More so, investment decision of corporate organizations is to a large extent being affected by corporate taxes. Companies expect a high return on their investment. A high corporate tax rate would lead to low profits thus resulting in low investment.

Similarly foreign investors will quickly re-balance off their investments and flee to other countries with a better tax haven. There is therefore, the need to maintain adequate balance between the goals of maximum resource development and tax benefits to ensure equitable and sustained growth.

No doubt that tax has greatly contributes to socio-economic growth and development of all economies. It is however imperative to take cognizance of its effect on the effectiveness and efficiency of corporate organization operations.

The impact of the Nigerian tax on businesses has been a matter of increasing interest and concern to many persons. Businesses are confronted with the management of managing tax liabilities in such a way that tax burden is reduced. It has becomes extremely difficult for emerging firms to effectively fulfill other corporate objectives Nigeria.

Where multiple a high tax rates becomes the other of the day. Companies provide funds for three principal activities of payment of dividend to shareholders, investment in operating assets and repayment of loan capital.

Multiple taxes and perceived high tax rate remain teething problems to businesses operating in Nigeria. To mitigate their tax liabilities; they indulge in declaring inaccurate financial figures as profits.

This reduces the tax accruable to the government because of these practices. As such, the study evaluates the effect of company income taxes on performance indexes of manufacturing firms in Nigeria; as a useful to ascertain the degree at which multiple corporate tax impede operational effectiveness of business concerns in Nigeria.

1.2 STATEMENT OF THE PROBLEM

High tax rates imposed on the manufacturing firms have dwindled the performance of manufacturing firms in Nigeria and consequently reduced their global competitiveness (Koranteng, 2014).

Furthermore, Boateng (2014) asserted that there are worries that Nigeria’s manufacturing industry could become uncompetitive internationally, and stop attracting direly needed new investment into the sector.

Manufacturing firms in Nigeria have been riddled with heavy losses over the years and this is partly attributable to the high taxes paid as well as the countries unstable economic conditions. Over years, manufacturing firms in Nigeria has made over $600 million dollars in losses with record losses almost every year.

This has caused some concerns especially with the increases of tax rates levied on manufacturing companies over the year and its accompanying insinuations that these losses are partly due to the hefty tax rates imposed on them.

Taking a look at the issue of corporation tax, it can be said that there are many problems associated with tax and tax collection including the administrative, compliance, corruption, bad governance, human capacity building challenge among others.

Thus, the corporate tax as currently applied is not a tax on pure profits or economic rents. It is believed, however, that tax reliefs and rebates will influence investment decisions, growth and ultimately the performance of the companies.

However, many studies on taxation and financial performance reveal that taxes have significant effect on the performance of companies (negative) and few others reveal mixed results that are inconclusive (Teraoui and Kaddour, 2012; Gatsi, Gadzo and Kportorgbi, 2013; Onuorah and Chigbu, 2013; Mucai, Kinya, Noor & James, 2014; Neghina, n.d.)

1.3 AIMS OF THE STUDY

The major purpose of this study is to examine effect of company tax on performance of manufacturing firms in Nigeria. Other general objectives of the study are:

1. 1. To examine the impact of firm age on the performance of manufacturing firms in Nigeria

1. 1. To examine the impact of firm size on the performance of manufacturing firms in Nigeria

1. 1. To examine the effect of company income taxation on the performance of manufacturing firms in Nigeria.

1. 1. To examine the effect of corporate tax on investment decision in manufacturing firms in Nigeria.

1. 1. To examine the relationship between company income tax and Performance of manufacturing firms in Nigeria.

1. 1. To examine the challenges of determining the level of company tax indicators in Nigeria

1.4 RESEARCH QUESTIONS

1. 1. What is the impact of firm age on the performance of manufacturing firms in Nigeria?

1. 1. What is the impact of firm size on the performance of manufacturing firms in Nigeria?

1. 1. What is the effect of company income taxation on the performance of manufacturing firms in Nigeria?

1. 1. What is the effect of corporate tax on investment decision in manufacturing firms in Nigeria?

1. 1. What is the relationship between company income tax and Performance of manufacturing firms in Nigeria?

1. 1. What are the challenges of determining the level of company tax indicators in Nigeria?

1.5 RESEARCH HYPOTHESES

Hypothesis 1

H0: There is no significant effect of company income taxation on the performance of manufacturing firms in Nigeria

H1: There is a significant effect of company income taxation on the performance of manufacturing firms in Nigeria.

Hypothesis 2

H0: There is no significant relationship between company income tax and Performance of manufacturing firms in Nigeria

H1: There is a significant relationship between company income tax and Performance of manufacturing firms in Nigeria

1.6 SIGNIFICANCE OF THE STUDY

This work will be very useful to the government. It will enable the government to know the extent manufacturing industries have been responding to the available tax incentives. Government, through this research could evaluate the performance of the manufacturing firms that is whether the revenue in other words,

it will enable government to know whether tax investment patterns of individuals and corporate bodies towards the development of manufacturing industries. This study will also enable government to compare the identify those that are profitable to the Nigerian economy at large.

This study will go a long way to sensitize companies and individuals on the existing company income tax act available to the manufacturing industry and their companies to make qualitative investment and tax decision modelled to elevate the organization’s growth patterns.

Tax collectors will find this study useful as some of the problems being faced are solved; in addition, accounting and management students will be adequately informed on the impact of company income tax on performance of manufacturing firms in Nigeria.

Hence, this work will specifically explain in detail the impact of not only company income tax but also taxation in general. Finally, the study shall encourage future researcher to carry out more studies in the same area.

1.7    SCOPE OF THE STUDY 

The study is based on assessing the effect of company tax on performance of manufacturing firms in Nigeria, a case study of listed firms in Nigeria.

1.8 LIMITATION OF STUDY

Financial constraint– Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

Time constraint– The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

1.8 DEFINITION OF TERMS

Tax: Refers to a compulsory payment of money or occasionally of goods and services from private individuals, institutions or groups to the government, it may be levied upon wealth or income or a surcharge on price.

Income Tax: An income is a levy on the financial income of personnel or corporation or other legal entities.

Company: Is a form of organizing a business with a legal personality distinct from the individual taking part in it.

Corporate Tax: Refers to a direct tax levied by various jurisdictions on the profit made by companies or associations which often includes the capital gain of a company.

Generation: This is the process of sourcing revenue for the local government in carryout their aim and objectives.