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| Chapters: 1-5
| Pages: 70
CHAPTER ONE
INTRODUCTION
1.1 Background To The Study
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 investment into the country and to expend existing ones in prior industries which is based on the .Tax incentives according to Kuewumi (1996) encompass all the measures adopted by government to motive tax payers to respond favorably to their tax obligations. It includes adjustments to tax policy aimed at lessening the effects of taxation on an industry, a group of persons or the provision of certain services. Such measures may subsume the adoption of benign low tax rate; the effective dissemination of fiscal information by tax authority; or the non-imposition of tax at all. Similarly, Phillips (1996) sees tax incentives as a deliberate reduction in tax liability granted by government in order to encourage particular economic units (e.g. corporate bodies to act in some desirable ways (e.g. invest more, produce more, employ more, export more, save more, conserve less, pollute less, and so on ). Any tax is amenable to being modified to create a tax incentive. The reduction in tax liability, which a tax incentive constitutes, can be achieved through a reduction in tax rate, reduction in tax base, and so on. Nigeria’s experience in the granting of tax incentives is traceable to the inception of British Administration in the territory, when all sorts of reliefs, allowances, and tax holidays were granted to British Companies and individuals as an attraction to establish trade links with the country. Specifically, tax incentives for industrial development came on stream in 1958 and included:
i. Pioneer companies relief, which exempted companies operating in pioneer industries for up to 5 year from paying company income tax;
ii. Companies Income Tax relief which gave capital allowances regarding investments in machinery, building, loss carry forward facility, etc.;
iii. Import duties relief which exempted selected pioneer companies from paying import duties on imported inputs; and
iv. Approved user scheme, under which import duties were refunded to approved enterprises, which imports in the export-tuned production. Generally, tax incentives have operated under the following sub-heads in Nigeria: ·
Tax holidays ·
Investment allowance ·
Rural investment allowance ·
Tax free interest ·
Deductible capital allowance
Research and development ·
Tax-free dividends ·
Tax treaties ·
Reliefs and allowances; and ·
Capital allowances The chairmen of Federal Inland Revenue in a paper presented on the Nigerian Investor Business Forum, Berne Switzerland November, 2009 highlights the essence of tax incentives by emphasizing that tax incentives are special arrangements in the tax laws to: attract, retain or increase investment in a particular sector, stimulate growth in specific areas, assist companies or individuals carrying on identified activities with the underlying basis of ensuring the overall growth of the Nigerian economy and even development of all sectors. Current policy of Nigerian Government is to ensure: incentives are sector based and not granted arbitrarily, the benefit to the Nigerian economy exceeds the cost of taxes foregone, and incentives are reviewed regularly to confirm if they are serving the expected purpose, while foreign investors enjoying incentives are expected to voluntarily plough back into the Nigerian economy. No doubt, that incentives are desirable elements in a tax system. However, the incessant changes occasioned by their applications create loopholes and complicates the tax system. Tax incentives tend to increase the required dosage of tax effort and, and therefore, to place an extra cost on tax administration. For instance, tax allowances; deductions and credits do inflict loopholes on the tax system, which clever tax payers may exploit. It may cost tax administration some extra funding to detect and investigate such practices; without additional finance tax administration gathers the dust of inefficiency and ineffectiveness. Tax incentives can therefore widen the scope for corrupting the tax system (Kuewumi, 1996). 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, it can further be argued that tax incentives now play a significant role in attracting investment decision than in the past years. This is made possible due to the advent of trade linearization, greater capital flow, decline in trade barriers, technological improvement, improvement in transportation and communication, substantial growth in common markets and tax reforms with flexible tax system. This will no doubt incite investment in the current global world than in the past. Thus, the benefits out-weight its cost. However, the effective use of tax incentive to encourage investment decision is hindered by some factors which may be political or economical. For instance, a country characterized by social insecurity and dysfunctional legal system may respond poorly to the effective use of tax incentive to facilitate investment decision. Another factor that affects the effective use of tax incentive to encourage business decision is corruption. Corruption is a common feature of the developing economies and it manifest in several forms. This factor could be responsible for the less competitiveness of tax incentives in developing economies. This means that the effective use of tax incentive to stimulate economic growth is tied to sound social-economical and political factors. 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. Ghana appears to have a relatively well-administered incentives scheme. Incentives are quite clearly defined in law and require parliamentary approval (Kusi, 1998).
1.2 Impact of Tax Incentives on Revenue Productivity The most important argument central to the influence of tax incentives on the economy is the issue of revenue productivity. It has been contented that the revenue sacrifice through tax incentives will be compensated for in the long run through growth in the tax capacity of the favoured tax base. This is so because tax cuts 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 nontaxation of dividends and interest on deposits and loans, can spur people to capital formation, thus encouraging the growth of the tax base. Information on the responsiveness of tax revenue to economic growth is a crucial ingredient in economic planning, especially when we realize that inflationary problems are generated when budgetary deficits are financed through monetary expansion. The example of the tax history of the United States according to Kuewumi (1996) 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. On the other hand, tax incentives exhibit the capacity to erode the statutory tax base. This situation according to Kuewumi (1996) 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. In an attempt to uplift its popularity, governments or public office seeking individuals could propose tax cuts to attract the support of the electorate. Ronald Reagan while attempting to implement his vote attracting political campaign promises in 1981 started the implementation of his Economic Recovery Tax Act (ERTA), which proposed massive tax cuts across the for both personal and corporate taxpayers. Reagan’s initiatives regarding tax incentives could not assist America’s recurring budget deficits nor aided the economy to be more productive. In fact, it cost the US about N800 billion in tax revenues. Another politically motivated introduction of tax incentives is Mr. Jacques Chirac who promised to cut taxes during his campaign to become the President of France. On assumption of office, he realized that his vote seeking and investment attracting tax cuts was a mirage and that the problem of France was not a dearth of tax incentives but the prevalence of huge tax evasion which ranged from 175 billion Francs to 235 billion Francs annually (Tax News, 1996: 14). Tax incentives make tax laws more complicated and difficult to interpret with the end product of constraining appropriate monitoring of the response of the investment initially intended to be boosted through tax incentives. Thus, the use of the tax system for special tax preferences should be carefully evaluated. Using the system to provide tax incentives (tax expenditures) usually causes a serious drain on the national treasury by conferring windfall gains on existing activities or by shifting resources to tax-preferred activities ( Kusi, 1998). Another factor that plays out is the contentious issue of equity and efficiency in tax system
1.2 Statement of the Problem
Revenue adequacy is the basic elementary standard that a tax system ought to achieve. The existing budget deficits in many developing countries suggest that the tax systems are not revenue productive. Some may overlook this and attribute the cause of deficits to excessive spending, or temporary adverse economic conditions (Osoro, 1993). The importance of taxation as a veritable tool of economic growth and development depends on a proper tax system which has the capacity to generate revenue through tax. This implies that the tax system must be efficient and effective. This can be achieved through various tax incentives. Tax incentives have the potentials of attracting both local and foreign investment if properly harnessed. It is however regrettable that most developing countries have not been able to exploit the potent of tax incentives because of the need, perhaps, to meet the desires of the electorates and the poor management of tax system. However, to consider tax incentives as an influence to revenue generation implies that incentives may not be available to all citizens but rather must be tailored to crucial sector of the economy. This would emphasize to a large extent why in most developing country, where tax incentives are especially common, are targeted at attracting foreign direct investment and rarely to domestic investors.
1.3 Objectives of the Study
To proffer an Evaluation of tax incentives and internal revenue generation in Rivers State
1.4 Research Questions
What is Tax Incentives?
What is the impact of tax incentives on internal revenue generation in Rivers State
1.5 Significance of the Study
The study proffers Evaluation of tax incentives and internal revenue generation in Rivers State
1.6 Research Hypothesis
Ho The impact of tax incentives on internal revenue generation in Rivers State is low
Hi The impact of tax incentives on internal revenue generation in Rivers State is high
1.7 Scope of the Study
The study focuses on the evaluation of tax incentives on internal revenue generation in Rivers State
1.8 Limitations of the Study
The study was confronted by some constraint including logistics and geographical factor.
INTRODUCTION
1.1 Background To The Study
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 investment into the country and to expend existing ones in prior industries which is based on the .Tax incentives according to Kuewumi (1996) encompass all the measures adopted by government to motive tax payers to respond favorably to their tax obligations. It includes adjustments to tax policy aimed at lessening the effects of taxation on an industry, a group of persons or the provision of certain services. Such measures may subsume the adoption of benign low tax rate; the effective dissemination of fiscal information by tax authority; or the non-imposition of tax at all. Similarly, Phillips (1996) sees tax incentives as a deliberate reduction in tax liability granted by government in order to encourage particular economic units (e.g. corporate bodies to act in some desirable ways (e.g. invest more, produce more, employ more, export more, save more, conserve less, pollute less, and so on ). Any tax is amenable to being modified to create a tax incentive. The reduction in tax liability, which a tax incentive constitutes, can be achieved through a reduction in tax rate, reduction in tax base, and so on. Nigeria’s experience in the granting of tax incentives is traceable to the inception of British Administration in the territory, when all sorts of reliefs, allowances, and tax holidays were granted to British Companies and individuals as an attraction to establish trade links with the country. Specifically, tax incentives for industrial development came on stream in 1958 and included:
i. Pioneer companies relief, which exempted companies operating in pioneer industries for up to 5 year from paying company income tax;
ii. Companies Income Tax relief which gave capital allowances regarding investments in machinery, building, loss carry forward facility, etc.;
iii. Import duties relief which exempted selected pioneer companies from paying import duties on imported inputs; and
iv. Approved user scheme, under which import duties were refunded to approved enterprises, which imports in the export-tuned production. Generally, tax incentives have operated under the following sub-heads in Nigeria: ·
Tax holidays ·
Investment allowance ·
Rural investment allowance ·
Tax free interest ·
Deductible capital allowance
Research and development ·
Tax-free dividends ·
Tax treaties ·
Reliefs and allowances; and ·
Capital allowances The chairmen of Federal Inland Revenue in a paper presented on the Nigerian Investor Business Forum, Berne Switzerland November, 2009 highlights the essence of tax incentives by emphasizing that tax incentives are special arrangements in the tax laws to: attract, retain or increase investment in a particular sector, stimulate growth in specific areas, assist companies or individuals carrying on identified activities with the underlying basis of ensuring the overall growth of the Nigerian economy and even development of all sectors. Current policy of Nigerian Government is to ensure: incentives are sector based and not granted arbitrarily, the benefit to the Nigerian economy exceeds the cost of taxes foregone, and incentives are reviewed regularly to confirm if they are serving the expected purpose, while foreign investors enjoying incentives are expected to voluntarily plough back into the Nigerian economy. No doubt, that incentives are desirable elements in a tax system. However, the incessant changes occasioned by their applications create loopholes and complicates the tax system. Tax incentives tend to increase the required dosage of tax effort and, and therefore, to place an extra cost on tax administration. For instance, tax allowances; deductions and credits do inflict loopholes on the tax system, which clever tax payers may exploit. It may cost tax administration some extra funding to detect and investigate such practices; without additional finance tax administration gathers the dust of inefficiency and ineffectiveness. Tax incentives can therefore widen the scope for corrupting the tax system (Kuewumi, 1996). 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, it can further be argued that tax incentives now play a significant role in attracting investment decision than in the past years. This is made possible due to the advent of trade linearization, greater capital flow, decline in trade barriers, technological improvement, improvement in transportation and communication, substantial growth in common markets and tax reforms with flexible tax system. This will no doubt incite investment in the current global world than in the past. Thus, the benefits out-weight its cost. However, the effective use of tax incentive to encourage investment decision is hindered by some factors which may be political or economical. For instance, a country characterized by social insecurity and dysfunctional legal system may respond poorly to the effective use of tax incentive to facilitate investment decision. Another factor that affects the effective use of tax incentive to encourage business decision is corruption. Corruption is a common feature of the developing economies and it manifest in several forms. This factor could be responsible for the less competitiveness of tax incentives in developing economies. This means that the effective use of tax incentive to stimulate economic growth is tied to sound social-economical and political factors. 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. Ghana appears to have a relatively well-administered incentives scheme. Incentives are quite clearly defined in law and require parliamentary approval (Kusi, 1998).
1.2 Impact of Tax Incentives on Revenue Productivity The most important argument central to the influence of tax incentives on the economy is the issue of revenue productivity. It has been contented that the revenue sacrifice through tax incentives will be compensated for in the long run through growth in the tax capacity of the favoured tax base. This is so because tax cuts 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 nontaxation of dividends and interest on deposits and loans, can spur people to capital formation, thus encouraging the growth of the tax base. Information on the responsiveness of tax revenue to economic growth is a crucial ingredient in economic planning, especially when we realize that inflationary problems are generated when budgetary deficits are financed through monetary expansion. The example of the tax history of the United States according to Kuewumi (1996) 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. On the other hand, tax incentives exhibit the capacity to erode the statutory tax base. This situation according to Kuewumi (1996) 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. In an attempt to uplift its popularity, governments or public office seeking individuals could propose tax cuts to attract the support of the electorate. Ronald Reagan while attempting to implement his vote attracting political campaign promises in 1981 started the implementation of his Economic Recovery Tax Act (ERTA), which proposed massive tax cuts across the for both personal and corporate taxpayers. Reagan’s initiatives regarding tax incentives could not assist America’s recurring budget deficits nor aided the economy to be more productive. In fact, it cost the US about N800 billion in tax revenues. Another politically motivated introduction of tax incentives is Mr. Jacques Chirac who promised to cut taxes during his campaign to become the President of France. On assumption of office, he realized that his vote seeking and investment attracting tax cuts was a mirage and that the problem of France was not a dearth of tax incentives but the prevalence of huge tax evasion which ranged from 175 billion Francs to 235 billion Francs annually (Tax News, 1996: 14). Tax incentives make tax laws more complicated and difficult to interpret with the end product of constraining appropriate monitoring of the response of the investment initially intended to be boosted through tax incentives. Thus, the use of the tax system for special tax preferences should be carefully evaluated. Using the system to provide tax incentives (tax expenditures) usually causes a serious drain on the national treasury by conferring windfall gains on existing activities or by shifting resources to tax-preferred activities ( Kusi, 1998). Another factor that plays out is the contentious issue of equity and efficiency in tax system
1.2 Statement of the Problem
Revenue adequacy is the basic elementary standard that a tax system ought to achieve. The existing budget deficits in many developing countries suggest that the tax systems are not revenue productive. Some may overlook this and attribute the cause of deficits to excessive spending, or temporary adverse economic conditions (Osoro, 1993). The importance of taxation as a veritable tool of economic growth and development depends on a proper tax system which has the capacity to generate revenue through tax. This implies that the tax system must be efficient and effective. This can be achieved through various tax incentives. Tax incentives have the potentials of attracting both local and foreign investment if properly harnessed. It is however regrettable that most developing countries have not been able to exploit the potent of tax incentives because of the need, perhaps, to meet the desires of the electorates and the poor management of tax system. However, to consider tax incentives as an influence to revenue generation implies that incentives may not be available to all citizens but rather must be tailored to crucial sector of the economy. This would emphasize to a large extent why in most developing country, where tax incentives are especially common, are targeted at attracting foreign direct investment and rarely to domestic investors.
1.3 Objectives of the Study
To proffer an Evaluation of tax incentives and internal revenue generation in Rivers State
1.4 Research Questions
What is Tax Incentives?
What is the impact of tax incentives on internal revenue generation in Rivers State
1.5 Significance of the Study
The study proffers Evaluation of tax incentives and internal revenue generation in Rivers State
1.6 Research Hypothesis
Ho The impact of tax incentives on internal revenue generation in Rivers State is low
Hi The impact of tax incentives on internal revenue generation in Rivers State is high
1.7 Scope of the Study
The study focuses on the evaluation of tax incentives on internal revenue generation in Rivers State
1.8 Limitations of the Study
The study was confronted by some constraint including logistics and geographical factor.
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