IMPACT OF TAXATION ON BUSINESS DECISION
INTRODUCTION
Background to the study
Revenue accrues to the government through diverse sources which include grants, foreign aid, government’s direct investment in commercial ventures, and taxation. Taxation may not be the most important source of revenue to the government in terms of the magnitude of revenue derivable from it but it is the most important source given its consistency and certainty.
Taxation is, therefore, a compulsory levy by the government through its various agencies on the incomes, capital, or consumption of its subjects. These levies are made on personal income such as interests, dividends, business profits, commissions, and salaries (Anuebunwa 2010: 10). Taxation tends to influence the decision of businesses at all levels, it affects their financing decision, investment decision, and dividend decision.
High taxes can influence business decisions in several ways: they can reduce the number of business births by discouraging those who might otherwise form new businesses… (Scroll down for the link to get the Complete Chapter One to Five Project Material)
Statement of the problem
According to Roche 2015: 5), Corporate taxation is of great concern on investors’ decisions and hence in economic growth and employment. Depending on the nature of tax, taxation may have a positive or negative effect on business decisions.
A high marginal tax rate will be a disincentive for business while a lower one will be an incentive to work. Roche (2015: 5) further affirms this by noting that complex taxation deters foreign investors, curbs entrepreneurship, drives out local investors, and results in deadweight losses due to tax avoidance costs and tax compliance costs… (Scroll down for the link to get the Complete Chapter One to Five Project Material)
Research Objectives
The main aim of this study is to examine the impact of taxation on business decisions. To achieve this objective, the following are the specific objectives: 1.) To understand the role of taxation in business decision making… (Scroll down for the link to get the Complete Chapter One to Five Project Material)
Significance of the study
The study will be useful to financial managers in companies especially in formulating policies that will enhance efficiency in decision making for the organization and increase the profitability level of the organization. The study will also be useful to other manufacturing companies having taxation difficulties… (Scroll down for the link to get the Complete Chapter One to Five Project Material)
LITERATURE REVIEW
Introduction
This chapter gives an insight into various studies conducted by outstanding researchers, as well as explained terminologies with regards to the effects of taxation on business decisions. The chapter also gives a resume of the history and present status of the problem delineated by a concise review of previous studies into closely related problems.
Theoretical Framework
- Brown’s Theory of Taxation
Bowen’s theory has more operational significance since it demonstrates that when social goods are produced under conditions of increasing costs, the opportunity cost of private goods is foregone. For example, if there is one social good and two taxpayers (A and B), their demand for social goods is represented by a and b; therefore, a+b is the total demand for social goods.
The supply curve is shown by a+b, indicating that goods are produced under conditions of increasing cost. The production cost of social goods is the value of foregone private goods; this means that a+b is also the demand curve of private goods… (Scroll down for the link to get the Complete Chapter One to Five Project Material)
The Concept of Taxation
One of the simplest definitions of tax that I have come across is one offered by the New Webster Dictionary of the English Language. It describes ‘tax’ simply as a charge imposed by the governmental authority upon property, individuals, or transactions to raise money for public purposes.
Tax is a compulsory extraction of money by a public authority for public purposes and Taxation is a system of raising money for the purpose of governance by the means of contributions from individual persons or corporate bodies (Sayade & Kojola 2006). According to the Oxford Advanced Learners Dictionary (1995:224) tax is money that has to be paid to the government.
People pay tax according to their incomes and it is often paid on goods and services, while Black’s Law Dictionary (2010), defines it as “Monetary charge impose by the government on persons entities or property, levied to yield public revenue”… (Scroll down for the link to get the Complete Chapter One to Five Project Material)
History of Taxation In Nigeria
Taxation in Nigeria started with personal income tax in 1904 when Lord Lugard introduces income tax in the northern part of Nigeria. Community tax becomes operative through the revenue ordinance of 1904.
In 1917, after the amalgamation of the northern and southern protectorates, the 1904 Revenue Ordinance was replaced by the native Revenue Ordinance of 1917. Furthermore, the provision of the 1917 ordinance was amended in 1918 and extended to southern Nigeria particularly, the West and the Mid-West, and subsequently to Eastern Nigeria in 1928.
Under the Direct Taxation Ordinance of 1940, the assessment and collection of taxes were the primary responsibilities of the native administration/authorities throughout the country, and taxes so collected were their main sources of revenue… (Scroll down for the link to get the Complete Chapter One to Five Project Material)
Administration of Taxation In Nigeria
The administration of the companies’ income tax vested in the Federal Board of Inland Revenue (FBIR) it is thus responsible for its care and management. Federal Board of Inland Revenue also referred to as board the “Board” has an operational arm known as the Federal Inland Revenue Service (FIRS), which came into effect in 1993.
The Federal Inland Revenue Service (FIRS) also known as the “Service” is saddled with the responsibility of income tax assignment, collecting accounting and administration.
Before a company is registered or started a tax office is expected to be visited and the proper file should be upon for all future transactions. The tax officer is expected to furnish the necessary information concerning the business/ company. Registration documents from (CAC) and VAT Registration will have to be submitted. The essence is to enable:
- Guidance to be given (from Day1) on how to meet the company’s tax obligation without incurring penalty and sanctions which are usually an additional cost to the business for those that fail to register
- The company gets its first tax clearance certificate without paying any tax and to renew it in a painless manner thereafter… (Scroll down for the link to get the Complete Chapter One to Five Project Material)
Effect of Taxation on Investment Decisions of a Business
The effects of taxation on business investment have long been a focus of research in economics and finance. In the long run, the taxation of income from the capital can provide the revenues needed to fund the government, but may depress capital formation, output, and consumption.
The optimal long-run level of capital income taxation remains the subject of vigorous debate in both the theoretical economics literature and in public political discourse. In the short run, policymakers frequently use tax policy in attempts to stimulate business investment.
Recent examples include the “bonus depreciation” provisions in place in the U.S. from 2002 to 2004 and 2008 to 2009 and the allowance for full expensing of equipment investment in 2011. At the time of this writing, further efforts towards reforming the corporate income tax to encourage investment appear likely… (Scroll down for the link to get the Complete Chapter One to Five Project Material)
Effect of Taxation on Dividend Decision of a Business
On the tax effects of debt, Miller (1977) argues that common stock is priced as if it is tax-free, but the personal tax rate built into the pricing of corporate interest payments is the corporation tax rate.
Here, the debt tax shield at the corporate level is offset by taxes on interest at the personal level, and debt does not affect firm value. Miller and Scholes (1978) consider a situation in which investors avoid personal taxes on all returns on investment, and all corporate securities are priced as if they are tax-free.
Modigliani and Miller (1963) argue that corporate debt tax shield will increase firm value by the market value of the corporate tax savings on expected interest payments… (Scroll down for the link to get the Complete Chapter One to Five Project Material)
METHODOLOGY
Introduction
This segment of the study or research has to do with the method employed to undertake the study which includes the research design, population of the study, the sample size and method of data collection, sampling technique, and the method of data analysis. All these sub-points are considered as follows.
The Research Design
The research design employ in this study includes exploratory, survey and descriptive researches. These designs form the full basis upon which the data which shall be analyzed and then generalized in an attempt to make inferences. This research will be analyzed using the published financial statements of Albabebello Trading Co Ltd, Zaria, from 2013-2017 (A period of 5 years)
Method of Data Collection/Sources
The data employed for this study is secondary data. These data are generated from the Central Bank of Nigeria statistical bulletin which can readily be obtained from the shelf in the library room and from the annual financial reports of the Albabebello Trading Co Ltd, Zaria that is the case study of this study.
The secondary data is for the period 2013–2017 on times series basis… (Scroll down for the link to get the Complete Chapter One to Five Project Material)
RESEARCH FINDINGS AND DISCUSSION
Introduction
This section of the study is basically concerned with the empirical data analyses and interpretation of the regression result. The relationship between taxation and business decisions is critically examined using some key variables such as profit after tax, company income tax, value-added tax, personal income tax, and deferred tax.
4.2 Data Presentation
| Model | Unstandardized Coefficients | Standardized Coefficients | t | Sig. | ||
| B | Std. Error | Beta | ||||
| (Constant) | -3384671.638 | 1.897E7 | -.178 | .863 | ||
| CIT | .029 | .014 | .543 | 2.054 | .074 | |
| VAT | -9.015E-6 | .002 | -.001 | -.006 | .995 | |
| PIT | -.151 | .126 | -.298 | -1.195 | .266 | |
| deftax | .754 | .931 | .219 | .810 | .441 | |
Elucidating
| Model Summaryb | ||||||||||||||||
| Model | R | R Square | Adjusted R Square | Std. Error of the Estimate | Change Statistics | Durbin-Watson | ||||||||||
| R Square Change | F Change | df1 | df2 | Sig. F Change | ||||||||||||
| 1 | .742 | .551 | .326 | 1.289E7 | .551 | 2.451 | 4 | 8 | .131 | 1.079 | ||||||
| ANOVAb | ||||||||||||||||
| Model | Sum of Squares | df | Mean Square | F | Sig. | |||||||||||
| Regression | 1.630E15 | 4 | 4.074E14 | 2.451 | .131a | |||||||||||
| Residual | 1.330E15 | 8 | 1.663E14 | |||||||||||||
| Total | 2.960E15 | 12 | ||||||||||||||
a. Predictors: (Constant), deftax, PIT, VAT, CIT
b. Dependent Variable: PAT
Sources: SPSS 20.0
Regression Analyses
PAT= -3384671 + 0.029cit – 9.015vat – 0.151pit + 0.754deftax
(-0.178) (2.054) (-0.006) (-1.195) (0.810)
R2 = 0.551
Adjusted R2 = 0.326
SEE = 1.289
F = 2.451
DW = 1.079
Interpretation/Discussion of Regression Result
A careful analysis of the variations in the dependent variables being profit after tax as above shows that a positive relationship exists between it and some of the exogenous variables such as company income tax, value-added tax, and deferred tax. The importance of these various taxes serving as independent variables is that they affect the decision making power of a business organization.
For instance, CIT was observed to partly enhance business decisions towards the growth of the organization by a value of 0.029, deferred tax with a value of 0.754 respectively in the period under consideration. The other variables (independent variables) observed to negatively affect the business decisions in the organization encompass value-added tax, with a value of -9.015, personal income tax with a value of -0.151 respectively.
This implies that the payment of these taxes by Albabebello Trading Co Ltd, Zaria will affect the business decision making of the company… (Scroll down for the link to get the Complete Chapter One to Five Project Material)
SUMMARY OF FINDINGS, CONCLUSION, AND RECOMMENDATIONS
Summary of Findings
- Company income tax was found to have a positive effect on the business decisions in Albabebello Trading Co Ltd, Zaria.
- The value-added tax was observed to contribute negatively to the business decision in Albabebello Trading Co Ltd, Zaria… (Scroll down for the link to get the Complete Chapter One to Five Project Material)
Conclusion
The increasing number of taxes levied on firms in Nigeria by the government from time to time, no doubt has a positive effect on economic development. While it increases the economic growth, the impact of such taxes is yet to be empirically established in Nigeria. Hence, this study was undertaken to empirically examine the effect of e taxation on the business decisions in Albabebello Trading Co Ltd, Zaria.
The various taxes used for the study in a view to knowing their effect shows that taxes like company income tax and value add tax positively to the business decision in Albabebello Trading Co Ltd, Zaria.
Recommendations
Based on the findings obtained thus far, the following points are suggested with a view to reducing the negative effect of taxations on the business decisions in companies in Nigeria and all over the world.
- The Government should cut down on the tax rates levied on firms to be paid. This will reduce the cost of production, increase employment and the overall stability of the Nigeria Economy… (Scroll down for the link to get the Complete Chapter One to Five Project Material)
REFERENCES
Akinnifesi, E.O (1984): “An Economic Study of Fixed Capital and Investment Behavior in Nigerian Manufacturing Industries”, Nigerian Journal of Economics and Social Studies, Vol 26, No 2, pp. 271-272.
Black’s Law Dictionary (2010), 5th edition. Mc Row Inc, Ltd Birmingham
Burgess, S. (2003). “Optimal Taxation and Public Production,” American Economic Review 61, pp. 8-27.
Boadway, A.S (1982) “On Selective Indirect Tax Reform in Developing Countries,” Journal of Public Economics 89, pp. 599-623.
Sayade, H. & Kojola, F(2006), Nigeria Tax company Lagos published by Hositosaf Ltd.
Federal Inland Revenue Service Report (2006)Data on Taxation. FIRS Fact sheets. April, 12, 2006
Bartik, N.O (1994). Tax Reform in Developing Countries. Durham: Duke University Press.
Gordon, Roger and Wei Li. 2005. “Puzzling Tax Structures in Developing Countries: A Comparison of Two Alternative Explanations,” N.B.E.R. Working Paper No. 11661.
Gemmell, M. and Morrissery, M. (2003) “Explaining the Low Taxable Income of Foreign-Controlled Companies in the United States.” In Studies in International Taxation, edited by Alberto Giovannini, R. Glenn Hubbard, and Joel Slemrod. Chicago: University of Chicago Press, pp. 237-270.
ICAN study packs (2006): taxation for professionals. Examination I, Lagos, UI publishing limited
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