ASSESSING THE IMPACT OF COMPANY INCOME TAX ON REVENUE GENERATION IN NIGERIA (A CASE STUDY OF FEDERAL INLAND REVENUE SERVICE (FIRS), ABUJA)

CHAPTER ONE

INTRODUCTION

1.1   BACKGROUND TO THE STUDY

The need for the government to provide social amenities, engage in developmental projects is a compulsory one for the improvement of the standard of living of the citizenry. But the government has often lamented of lack of fund to embark on these projects, hence the necessity for urgent intensified revenue generation effort by the government through taxation. Tax can be defined as compulsory levies impose by the government on the income, profit and properties of both individuals and corporate bodies for the sole administration of that government which has no compensatory benefits whereas taxation is a gamut of activity which result in payment of taxes. Obviously, there are two major types of taxes, that is the direct and indirect taxes. Examples of direct taxes include personal income tax, company’s income tax, petroleum profit tax, capital gains tax, education tax etc. The focus of this study is on company income taxes as a means of income generation in Nigeria. In Nigeria base on the three tier system, there are three major relevant tax authorities that is, Federal Inland Revenue Service which collects taxes on behalf of the federal government, State Inland Revenue Service which collect taxes on behalf of the state government and the Local Government Revenue Committee which collect taxes on behalf of the local government. (Rotimi, Udu & Abdul-Azeez, 2013, Aransiola, 2013, Madugba, Laeyira & Ebere, 2013) Corporations in Nigeria pay tax to federal Inland Revenue Service irrespective of their residence (Okpe, 2015, Ani & Ugbor, 2010, Kiabel & Nkikpasi, 2009, Ojo, 2008).  The increasing cost of running government coupled with dwindle revenue has led various state government in Nigeria with formulating strategies to improve the revenue base more so, the near collapse of the national economy has create serious financial stress for all tier of government. Despite the numerous source of revenue available to the various tier of government as specified in the Nigeria 1999 constitution, since the 1970s till now, over 80% of the annual revenue of the three tiers of government came from petroleum. However, the serious decline in the price of oil in recent years has led to a decrease in the funds available for distribution to the states. The need for state and the local government to generate adequate revenue from internal sources has therefore, become a matter of extreme urgency and importance. This need underscores the eagerness on the part of states. The need for state and local government to generate adequate revenue from internal sources has become aggressive and innovative in the mode of collecting revenue from existing sources. Development is a sine qua non for modern civilization in order to carry out development at all nooks and crannies of the society, it is responsibility of the Adamawa state government to provide direct development to people to a certain level. Development is associated with funds and much revenue is needed to plan, execute and maintain infrastructures at the state level. The need revenue generated for such developmental projects, like construction of accessible roads, building in public schools, health care centres, construction of bridges are generated from taxes, royalties, haulages fines, and grants from the states, national and international governments. These funds could either be obtained internally or externally. Thus, the government cannot embark, execute and possibly carryout the maintenance of these projects without adequate revenue generation. Company income tax is a structure among the various tax structures in Nigerian economy. By virtue of section 8 (1) of the Companies Income Tax Act (CITA) 1990, taxes are payable as specified upon profits of any company accruing in, derived from, brought into, or received in Nigeria in respect of amongst others, any trade or business for whatever period of time the trade or business may have been carried out. The current rate of companies’ income tax is 30% of assessable income. According to Akpotoboro (2009) deemed tax is primarily payable on profits at the companies income tax rate of 30%. However, as foreign companies liable to such tax do not ordinarily operate in Nigeria, and thus account to the Federal Board of Inland Revenue (FBIR) with full accounts, the law permits FBIR to deem a position of the foreign company’s turnover or gross income as profit. Therefore the deemed income of the company will be 20% of the turnover. Such deemed income so assessed will itself be liable to tax at the current companies tax rate of 30%, which final assessment will amount to 6% of total income. Effectively, the company will be assessed for income tax at 1% of its turnover, as 5% would have been withheld. Section 57 CITA 1990 mandates companies operating in the Nigerian Stock Exchange to file monthly returns with the Federal Board of Inland Revenue not later than 7 days after the end of each calendar month. Tax revenue mobilization as a source for financing development activities in Nigeria has been a difficult issue primarily because of various forms of resistance, such as evasion, avoidance corrupt practices attending to it. These activities are considered as sabotaging the economy and are readily presented as reasons for the underdevelopment of the country. Corporate tax is a tax paid by corporations based on the amount of profit generated (Arusiola, 2013). Tax is assessed on total profits in pursuance to audited accounts which are subjected to adjustments. This study sets to identify the means corporate taxes have been utilized to promote fiscal redistribution of income, point out challenges if any that hinders the use of corporate taxation as revenue generation in Nigeria.

1.2 STATEMENT OF THE PROBLEM

Company income tax is one of the taxes that are imposed by government in Nigeria. There are various views for and against the imposition of company income tax in the opinion of (Omolehinwa 1990). Companies’ income tax contributes insignificantly to the government general revenue profiles and therefore should be abolished. In line with the above the Research observed that the disclosure of chargeable/taxable profit of companies are not honest with consequently leads to lower tax derivable from this sources. More to this, where disclosure is made, separate accounts are prepared by companies in order to avoid paying the correct tax this is as a result of Nigerians corrupt tendencies i.e. tax evasion and or avoidance. It is against this back drop that the researcher felt the need to critically examine these mitigating factors in the tax system in Nigeria in relation to the contribution of companies’ income tax to the general revenue profile of government. Therefore, this project is aimed at examining the growing trend in the assessment and contribution of company income tax on government revenue.

1.3 AIMS OF THE STUDY

The major purpose of this study is to examine        assessing the impact of company income tax on revenue generation in Nigeria. Other general objectives of the study are:

1. To examine the contributions of the companies income tax to the economic development of Nigeria
2. To examine the trend of revenue generated via the companies income tax in Nigeria
3. To examine the impact of company income tax on revenue generation in Nigeria.
4. To examine the factors that militates against the administration and the collection of company income tax in Nigeria.
5. To examine the relationship between company income tax and revenue generation in Nigeria.
6. To examine the administration of the companies income tax and recommend improvement in its structure

1.4 RESEARCH QUESTIONS

1. What are the contributions of the company income tax to the economic development of Nigeria?
2. What are the trends of revenue generated via the company income tax in Nigeria?
3. What is the impact of company income tax on revenue generation in Nigeria?
4. What are the factors that militate against the administration and the collection of company income tax in Nigeria?
5. What is the relationship between company income tax and revenue generation in Nigeria?
6. How is the administration of the company income tax and recommendations for improvement in its structure?

1.5 RESEARCH HYPOTHESES

Hypothesis 1

H0: Company income Tax does not have significant impact on revenue generation in Nigeria

H1: Company income Tax has a significant impact on revenue generation in Nigeria.

Hypothesis 2

H0: There is no significant relationship between company income tax and revenue generation in Nigeria

H1: There is a significant relationship between company income tax and revenue generation in Nigeria

1.6 SIGNIFICANCE OF THE STUDY

The need to reduce the country’s over dependence on the oil and gas revenue and the need to diversify the federal government revenue generation have made this research study unique. The relevance of this study therefore, stems from the fact that it is directed towards providing solutions to the problems identified earlier thus: The study will enables the federal government to know the present trend of revenue generated from companies’ income tax into the Federation Account, and how such performance can further be improved upon to enhance both economic and social growth. It will also pinpoint the aspect of the Companies’ Income Tax Act that needs amendment and how to formulate the necessary policies towards creating conducive environment for our limited liability companies in Nigeria. It shall further determine how the pursuits of government monetary and fiscal policies affect the companies’ performance whether positively or negatively. The study will in no doubt be a working document to the Federal Inland Revenue Service in identifying the various loopholes and ways of improving the assessment, collection and effective administration of the various taxes collected from registered companies. It shall also enable the registered companies to appreciate their roles in the country’s economic development through their prompt and efficient remittance of their taxes to the government. This study will serve as an enlightened to the general public on the importance of tax payment particularly company income tax. 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 an economy like 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 impact of company income tax on revenue generation in Nigeria, a case study of Federal Inland Revenue Service, Abuja.

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.

Government Revenue: This refers to all monies accruing to government which increase the funds over which the treasury has control without a comparable increase in debt obligation.

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.