This study examined the impact of Tax incentives on industrial development and economic growth in Nigeria from 1981 to 2015. Data for the study was sourced from CBN statistical bulletin of various issues. Industrial GDP and Nominal GDP were used as proxies for dependent variables while Tax Free Zone (TFZ) Tax Haven Policy (THP) and inflation rate were proxies for explanatory variables. Augmented Dickey Fuller approach was used to test the data for the presence of unit root. Ordinary least squares (OLS) were used for the regression analysis. The findings reveal that sufficient tax incentives enhance industrial and economic growth; with coefficient of determination values of 82.37% and 80.81% respectively for industrial and economic growth models respectively. This study recommends among others that, government should increase tax incentives granted to companies especially to small scale businesses to increase the micro economic growth which in aggregate totals the macro economic growth. This will foster economic growth and encourage new entrepreneurs both foreign and local who will in turn invest in the economy causing an increase in the per capita income and increase in government revenue as a result of more available businesses to be taxed. There should be clearly laid down criteria for tax incentive which should not be ambiguous or difficult to access. The processes and steps to qualify for this tax incentive should be made simple and stringent criteria should be reduced to facilitate and encourage companies taking advantage of this incentive to grow and develop their businesses.
- Background to the Study
Tax studies have become increasingly sophisticated especially during the past decade and have yielded conflicting results as regards the tax matter. Some studies focus on the cost and benefit of tax incentives while a few look at whether public funds could have been better spent or if tax incentives were economically justified. Tax studies offer little guidance to policy makers who are concerned about tax rates or tax offerings and the effectiveness of employing tax incentives as an economic and developmental tool.
The mode by which industrial development and economic growth can be effectively, efficiently, stimulated and developed is very demanding. As a result of this, the government charges less tax and gives tax holidays in order to encourage investments and economic activities in those areas which help to improve production capabilities, activate economic growth as well as the allocation of resources in a socially desirable manner. Investors often emphasize on the relative importance of a good tax system in investment decisions compared with other considerations such as political and economic stability, availability of social infrastructure, security of the life and property and also the general cost of doing business and so on. To the prospective investor, the general feature of a tax system (tax base rate) is more important than the tax incentives in many developing countries. The tax laws are not clearly written and may be subject to frequent review which makes long-term planning difficult for businesses and add to the perceived risks of undertaking major capital intensive projects.
Ezejelue and Ihendinihu, (2006) defined taxation as the demand made by the government of a country for a compulsory payment of money by the citizens of the country with the objectives of raising revenue to finance government expenditures, satisfy collective wants of the people and regulate economic and social policies. Black’s dictionary describes a tax as a ratable portion of the produce of the property and labour of the individual citizens taken by the nation in exercise of its sovereign right for the support of government, for the administration of the laws and as a means for continuing in operation, the various legitimate functions of the state.
Taxation is a civil responsibility which its assessment is in accordance with all established cannon; the principle of equity, convenience and productivity. The Nigeria tax system features a wide and mixed range of statutes by which various governments in the country seek to change and collect for public expenditure. Of these, the most widely used was based on income and are personal income tax and company’s income tax. Whilst, in Oil rich nations, petroleum profit tax is used as well (Ordu, 2015). Taxation is divided into two namely: – Direct and indirect taxes. Direct tax in Nigeria consists of personal income tax and company’s income tax. Indirect taxes are levied against goods and services e.g. stamp duties, entertainment, pool and casino taxes, industrial training funds, custom duties and exercise duties. Assessment and collection of direct taxes is by the State Board of internal Revenue on resident individuals while companies’ incomes tax is by Federal Board of Inland Revenue on corporate bodies.
According to the report by Adamu, (2014), tax as an instrument of fiscal policy is seen to be used by the government to encourage certain sectors or areas of the economy, which are construed to be essential for economic growth and development. The various ways through which these economic activities are stimulated are referred to as tax incentives. This involves a situation where government charges less or no tax in order to encourage investments and activities in those areas which help to improve the production capabilities, activate economic growth as well as allocation of resources in a more socially desirable manner. Tax incentive in a nutshell, is the use of government spending and tax policies to influence the level of national income. Taxation itself is the process or means by which communities or group are made to contribute part of their income for the purpose of administering the society. Tax incentives enhance the emergence of new enterprises or re-activation of existing ones, thereby reducing profit tax which will have being earned from them, but ultimately encouraging production to curb the menace of unemployment, youth restiveness and over-dependence on the government for a means of livelihood (Adamu, 2014).
Tax studies offer little guidance to policy makers who are concerned about tax rates or tax offerings and the effectiveness of employing tax incentives as an economic and developmental tool and some studies focus on the cost and benefit of tax incentives (Amadiegwu 2008) while a few look at whether public funds could have been better spent or if tax incentives were economically justified (Dotun & Sanni 2009).
Taxation is a process or means through which communities or groups are made to contribute a part of their income for the sole purpose of societal administration while tax, is a compulsory levy on the people at a given place for the sole purpose of government revenue for government expenditure (Amadiegwu 2008). Tax incentive itself, is the use of government spending and tax policies to influence the level of national income. This measure encourages the establishment or emergence and gradual growth of new enterprises by the reduction of profit tax, which in turn encourages production, influences the production level and curbs unemployment. So, the government should provide such tax incentives in order to boost development which will bring about an increase in employment opportunities and also cause an improvement in the economy.
Tax incentive generates employment opportunities for the people, which help to fight depression, recession, inflation and economic melt-down, thereby increasing distribution of income and wealth. Tax incentive is a convenient tool to attract industries that will help to solve unemployment problem as it is considered neutral between capital incentive and labour incentive types of businesses especially in a country with surplus labour like Nigeria. There are different views on the multiplier-effect of tax incentive; some schools of thought believe that tax incentive encourages economic growth and development while others believes that it reduces revenue that would have accrued to the government and that it does not stimulate economic growth and development. It must be noted that some of the measures taken so far by the Nigerian government to improve the economy, have not produce satisfactory results, despite the prevalence of incentives available in the Nigerian tax system (Adamu, 2014). Dotun and Sanni, (2009), in their Nigerian companies’ taxation stated that these incentives can be targeted on the low income earners, local and developing industries, farmers, which will increase their savings and is necessary for higher investment. Tax incentives create employment opportunities for the people, helps to fight economic depression and inflation thereby increasing the equitable distribution of income and wealth.
Taxation is a worldwide phenomenon that cuts across every organization and individual. The history of taxation in Nigeria began in 1914 after the amalgamation of southern and Northern Nigeria. The North has a very effective system of taxation because of their system of government. In the south. It’s a different story especially with the Igbos who even rioted in protestation that they should not be taxed. With the famous crises that took place in the 1930s, many countries’ government, Nigeria inclusive were more aware of why taxes should be collected for the purpose of increasing their revenue (Ohaka and Agundu, 2012).
According to the report of Uwaoma and Ordu. (2016), the administration and payment of tax by taxable adults in Nigeria dates back to pre-colonial era. Both the administration and collection of taxes were carried out by the Emirs, Chiefs, and their appointed agents. The system as it was though functional for that time was extremely croaked and arbitrary. It is important to note that tax collection developed from the Northern states of the country and gradually percolated to the Southern states. On the advent of the British in about 1900, the administration of tax effected through several ordinances (now acts and decrees), which principally entrusted the responsibility of collection of taxes on local authorities. In 1940, the direct taxation ordinances were introduced to Nigeria through the administration and collection of taxes was still shared between the British administration and the local authorities. When Nigeria became a federation in 1952, the regional governments (Northern, Western, and Eastern regions and the Federal Territory of Lagos) took full responsibility for assessment and collection of taxes in their regions. Thus each of the regions including the federal territory of Lagos made their respective personal income law.
However, Income Tax Management Act 1961 failed to unify the rates of taxes, relief and allowance through the country. The defects of ITMA 1961 were rectified by (income tax management Uniform Taxation Provision Act,1957). Subsequent amendment took place before the enactment of personal income Tax Decree No.104 of 1993, which was later amended (Uwaoma and Ordu, 2016).
Fiscal tax incentives in Nigeria have been in existence since 1949, and they are still very much in existence in the modern day governance (Fowowe, 2013). This is evident from the fact that from 2005 to date, there have been different technical institutions formed by the finance ministry to oversee and access the tax incentives/ structure in the country and make recommendation that will attract investments and promote development and growth in the country. These tax incentives are anticipated to bring about investments which would eventually bring about higher future production in the economy. The former Kwara State Governor, Abdulfatah Ahmed during his visit to Ilorin in September 2013, on a delegation by the Manufacturing Association of Nigeria (MAN) suggested the granting of tax holidays to the manufacturing sector as part of strategies to reactivate the nation’s ailing industries. According to the ex-governor, “granting tax holidays to genuine manufacturers would not only bring ailing industries back to life but also, provide employment tp millions of idle hands which have become devil’s workshop (Uwuigbe et al., 2016).
- Statement of the Problem
Empirical studies have shown different views on tax incentives as a catalyst for economic growth and industrial development. A school of thought believes that a tax incentive encourages economic growth and industrial development while another believes that it reduces revenue accruable to the government. As a result of this, it does not stimulate the economy. The poverty alleviation programme aimed at reducing the rate of poverty among the masses, was introduced. This programme covered the provision of jobs for able and unemployed youths, provision of loans for small and medium scale enterprises at a minimum lending rate. With all these measures and policies taken so far, the economy has not shown any appreciable progress and Nigeria still remains one of the developing nations of the world. Given this gap, this study seeks to examine the nature of tax incentives that are extended to deserving companies and the interaction that exists between the tax incentives and the company.
Tax incentives serves as a catalyst for industrial development and economic growth in Nigeria. Many advantages of tax incentives are that they are used for industrial development and economic growth. But, most tax experts, consultants, individuals and economic analysts ignored or criticized the incentive for the following reasons:
- That the impact of the incentives are not effective in the economy.
- That the exemption privilege not granted to all firms places some companies at a competitive advantage over others.
- That the incentive granted are not adequate for developmental and industrial growth.
- Most management of firms, companies and industries lack the awareness of the incentive.
- The unwillingness of some companies and individuals to claim the incentive because they do not understand the role of such.
According to Uwuigbe et al., (2016) some of the problems faced by manufacturing industries include difficult and unfavourable operating environment due to infrastructural deficiency and high cost of fund to finance capital project like expansion. Another major problem facing manufacturing industries thereby impeding, its development in the problem of excessive taxation in the form of high tax rate, double and multiple taxation. Although, taxation forms of the major sources of revenue to government apart from oil, it may affect manufacturing firms negatively if not if not properly applied and administered. Thus, higher tax rates serve as disincentives to firms for investments and expansion as, it leaves firms with less money to reinvest. This eventually discourages productivity, investment and also, the level of output by the manufacturing industry.
- Research Questions
- What is the impact of Tax free zone on economic growth in Nigeria within the study period?
- What is the impact of tax haven on economic growth in Nigeria within the study period?
- What is the impact of tax incentive on industrial growth in Nigeria within the study period?
- Objectives of the Study
The main objective of this study therefore, is to analyze the impact of tax incentive on economic growth in Nigeria.
Specifically, the work seeks:
- To examine whether Tax free zone has any impact on economic growth in Nigeria within the study period..
- To determine the impact of tax haven on economic growth in Nigeria within the study period.
- To determine the impact of tax incentive on industrial growth in Nigeria within the study period.
- Hypotheses of the Study
In order to examine the impact of tax incentives on economic growth, the researcher has formulated the following hypothesis:
H0: Tax free zone has no significant impact on economic growth in Nigeria within the study period.
H1: Tax free zone has significant impact on economic growth in Nigeria within the study period.
H0: Tax haven has no significant impact on economic growth in Nigeria within the study period.
H1: Tax haven has significant impact on economic growth in Nigeria within the study period.
H0: Tax incentive does not have any significant effect on industrial growth in Nigeria within the study period
H1: Tax incentive have significant effect on industrial growth in Nigeria within the study period.
- Significance of The Study
The study of tax incentive as a catalyst for industrial development and economic growth in Nigeria will be very relevant, useful and serve as a reference paper to various categories of audience;
First, for economic policy initiative: this work when consulted will go a long way in contributing to solutions needed in addressing the challenges facing revenue generation strategy in the country. This will be done through the well stated recommendations of this study.
Secondly the tax authorities will find this material useful towards formulating lasting policies that will guide taxation in Nigeria.
Further researchers will not be left out in the relevance of this study; they will find this work useful for reference purposes as well as lecture material.
- Scope and Limitation of the Study
The study on tax incentive as a catalyst for industrial development and economic growth was carried out in Nigeria covering the period of 35 years (1981 – 2015). In the course of this study, some limitations were encountered. Such limitations include time frame: this posed a limitation to the researcher because specific time frame was required within which this work must be completed. Sources of material for this work posed another challenge for the researcher because there was near scanty literature materials for this topic.