Taxation is one of the major fiscal policy instruments used by government in regulating the economy, boosting investments and regulating inflation. Many developing nations formulate tax policies aimed at stimulating rapid economic growth. One of such policies in Nigeria is the Pioneer Income Tax Relief with the main goal of enhancing investment.
The measurement of growth and developmental level of any economy depends on the amount of revenue generated and channeled towards the development of the country, and one of the prominent ways of generating such revenue is via tax. The purpose of government asides provision of basic amenities and protection of lives and property of the citizens is to also create an enabling environment for individual and corporate organization to strive by ensuring tax incentives is provided to aid business growth.
Taxation is very fundamental to sustainable development and the growth of emerging economies especially where natural resources are relatively scarce. Tax incentives are basically designed to attract new foreign direct investment into the country and to expand existing ones which is based on the country development plan capable of stimulating economy growth. The broadening of a country’s taxable capacity is often linked in economic literature to the generous incentives prevalent in tax system.
Tax Incentives in Nigeria
The Federal Government of Nigeria has over the years allowed tax incentives and reliefs. These incentives are granted to individuals or companies whose income or profit is accruing in, derived from, brought into or received in Nigeria. These include but not limited to:
- Pioneer Companies’ Tax Holiday subject to a maximum of 5 years is granted to companies with pioneer status on the basis of newness and relevance of the products by the companies. This will be fully discussed later in this study.
- Export free zone exempt profit from tax at a rate of hundred percent (100%). Exemption for profits obtained from export free zone for 3 consecutive assessment years.
- Solid minerals mining for a new company going into the mining of solid minerals for the first 3 years of its operation.
- Hotel income exempt from tax: Twenty-five percent (25%) of income is put in a reserved fund to be utilized within 5 years for the building expansion of new hotels, conference centres and new facilities for tourism development.
- Spare parts fabrication: For a company engaged wholly in the fabrication of spare parts, tools and equipment for local consumption and export; twenty five percent (25%) investment tax credit is allowed on qualifying capital expenditure, S. 28 F 9 (1) of CITA.
- Locally manufactured plant: A fifteen percent (15%) investment tax credit is allowed for a company which produces totally manufactured plant, machinery or equipment.
- Replacement of Obsolete plant: A fifteen percent (15%) investment tax credit for a company which has incurred expenditure for replacement of all obsolete plant and machinery.
- Investment Tax Relief: Relief is granted for 3 years to companies located at least 20km away from essential infrastructure such as electricity, water, tarred roads and telephone services, when expenditures are incurred on such infrastructure.
- Investment allowance: A ten percent (10%) tax relief for companies in the first year of purchase of plant and machinery used for agricultural and manufacturing companies. This is in addition to the normal initial and annual allowances.
- Rural investment allowance: This is granted to companies established in rural areas lacking infrastructural facilities.
These tax incentives amongst others are however backed by various Government legislations. They are granted to enhance the growth and development of industries as well as empowering individuals and corporate taxpayers economically.
The most important argument central to the influence of tax incentives on the economy is the issue of revenue productivity. This is so because tax cuts is said to have capacity to induce tax payers to be more tax compliant through reduced tax rates which make tax evasion and tax avoidance unattractive. Also, incentives such as capital allowance reliefs and low tax rates or the non-taxation of dividends and interest on deposits and loans, can spur people to capital formation, thus encouraging the growth of the tax base. In addition, the implementation of tax incentives has been viewed as a veritable means of inciting or encouraging corporate bodies to expand and improve on their level of productivity by reducing or totally eliminating tax liability.
The example of the tax history of the United States illustrates the effects of incentives on tax revenue. Under President Hoover, the US slashed tax rates five times in the 1920s. Rather than contract government revenue, the measure raised the number of effective tax-payers and tripled tax receipts. Similarly, President F. Kennedy’s tax cuts, which started in 1962, contributed so much to enhancing the level of industrial and commercial activities that Federal tax revenues rose by about 50% from the pre-tax-cut base (Kuewumi, 1996).
On the contrary, he further espoused that tax incentives exhibit the capacity to erode the statutory tax base. This situation poses a danger to compliance, especially when incentives are seen as subsidies. By carrying with them the disadvantages of tax expenditure, tax incentives can be identified as a source of inefficiency and non-productivity of enterprises. Most tax incentives are either politically motivated or frost with elements of personal interests. For example, most incentives initiated in the oil sector in Nigeria are either influenced by top military officers, traditional rulers or top government officials with substantial investment interests in the sector.
Factors Militating Ineffective Tax Incentive Implementation
Unarguably, the effective use of tax incentive to encourage investment decision and all other benefits that comes with it is hindered by some factors which are highlighted below:
Political/Economic Factor: Nigeria as a country battling with social insecurity and dysfunctional legal system has responded to the effective use of tax incentive to facilitate investment decision which will foresee revenue generation for the government. This must be critically looked into to ensure effective implementation of tax incentive.
Corruption Factor: This factor could be responsible for the less competiveness of tax incentives in developing economies. Transparency and proper accountability on the part of tax administrators and tax payers, flexible and effective tax system, less restriction on the conditionality attached to tax incentives making it more competitive, comprehensive and stable tax policy, and fighting corruption in the system through strong political will, will go a long way to solve the defects associated with the tax incentives and revenue productivity in the tax system.
Administrative Constraints: Nigeria as a developing nation face the dual challenge of a lack of modern infrastructure, such as IT systems and property registers, and weak capacity in tax authorities due to shortage of skilled staff. Training and capacity building for new and existing staff coupled with resources to make investments in modern infrastructure should help ensure proper tax records and invariably increase the compliance level.
Wrong Business Target: Giving incentives to companies that sell their goods locally, such as retailers, will tend to harm other businesses in the community and undermine the program’s potential economic benefits because sales and jobs at the new firm will come at the expense of existing companies. In contrast, incentives given to exporters businesses such as manufacturers that primarily sell their products outside the state or community are more likely to deliver local economic benefits because those firms bring in new dollars and jobs. Some companies may do both, selling a portion of their goods locally and exporting the rest. Evaluations should carefully consider how incentives given to one company will affect other local employers.
Inconsistency in Policy implementation: Issues such as Policy inconsistencies and reversal construed to meet the desires of the political class in power, who also double as importers, exporters and manufacturers as well as minimization of tax evasion and tax avoidance, appropriate policing of exports and imports and the need to realize the importance of placing the nation’s interest first and before that of the individual should be addressed to ensure effective revenue generation.
Tax Incentives as a Resuscitating Tool for Revenue Generation
Tax incentives are meant to encourage and stimulate the economic activities of enterprises and investments (Donald, 1980:72). They are fiscal policies designed by the Government to revive, rehabilitate and stabilize individuals and corporate bodies. The tax incentives are also used by the Government to channel some specific economic activities towards the vital sectors of the economy where they are not felt or non-existed. Philips (1969:10) observed that tax incentives will not only generate employment but will motivate the self-employed to incorporate into limited liability companies. All things being equal, if Nigerian Government stands by this upon review and consideration of some factors that may hinder its purpose, more investments and savings by both the citizens and foreigners will be implemented and thereby boosting the economy via revenue generation
Conclusion and Recommendation
Conclusively, this article has revealed that well-articulated tax incentives will not only promote increase economic activity in the country but also stimulate foreign investors into the economy thereby improving revenue productivity and tax base of Nigeria’s tax system.
Thus, the whole essence of tax incentive aimed at reducing tax payment on corporate organization is to ensure tax compliance which invariably resuscitates revenue generation that will be used to promulgate the welfare of the citizen and also enhance economy regulation. Likewise, the policy makers should endeavour to be consistent in exercising their functions as regards the implementation and this should be equally treated among all so that the objectives of tax incentives can be achieved and enjoyed by all investors and Nigerians.
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Prof. Godwin is a young but experienced multidisciplinary scholar-practitioner of good repute with over 25 years’ experience and over 27 Professional qualifications, from both Nigeria and international professional bodies. He is the co-founder and the Chief Technical Consultant at OGE Professional Services Ltd, President at OGE Business School, Principal Partner at Oyedokun Godwin Emmanuel & Co (Chareterd Accountants), Principal Partner at OGE Professional Services (Certified National Accountant and Tax Consultants). Godwin is a Professor of Forensic Accounting & Finance at Charisma University, Turks & Caicos Island, West Indies, UK. An Adjunct Professor at the Department of Accounting, Igbinedion University, Okada, Nigeria, an Adjunct Professor in the Department of Management & Accounting of Lead City University Ibadan Nigeria, a Visiting Professor at the Department of Management Science of Coal City University, Enugu and a Senior Lecturer in the Department of Accounting at Nasarawa State University Keffi, and he was a one-time adjunct lecturer at Babcock University, a part-time Lecturer at South-Western University and McPherson University, all in Nigeria to mention few.
Godwin is currently a Faculty member for the supervision of Postgraduate Students at the University of South Africa (UNISA). He is also an External Examiner for undergraduate programme of the Accountancy Department, Faculty of Business Administration, Abia State University, Uturu Nigeria.
He worked with Ibraheem Jimoh & Co Chartered Accountants as a Partner, Audit and Forensic Services, and as the Director- Tax, Forensic & Regulatory Services at Saffron Professional Services. He was the Head of Education, Research & Technical and the Head – Finance & ICT Departments of the Chartered Institute of Taxation of Nigeria (CITN). He was the Senior Analyst- Enterprise Risk Management & Control at XL Management Services Ltd and the Accounts Manager (Head) at Bond Group of Companies.
HND (Acct.), BSc. (Acct. Ed), BSc (Acct. & Fin.), MBA (Acct. & Fin.), MSc. (Acct.), MSc. (Bus & Econs), MSc (Tax), MTP (SA), PhD (Acct), PhD (Fin), PhD (FA), FCA, FCTI, ACIB, ACS, MNIM, CNA, FCFIP, FCE, FERP, CICA, CFA, CFE, CIPFA, CPFA, ACAMS, ABR, CertIFR, IPA, IFA, FFAR
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