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TAXATION AND NON-OIL SECTOR IN NIGERIA (AN ANALYTICAL STUDY)
This research was out to examine the relationship between taxation and non-oil sector in Nigeria. It specifically seeks to ascertain the effect of tax rate on non-oil foreign direct investment, non-oil export and non-oil revenue over the period 1960 to 2009. Data set from CBN statistical bulletin (2010) were sued. It employed the simple correlation and regression statistical tool to test the effect of taxation on the Nigeria’s non-oil sector. The findings show that there is significant relationship between taxation and the non-oil sector in Nigeria. Based on the findings, it was recommended that tax rate should be reviewed in favour of the non-oil sector as a deliberate policy measure to attract more investment and the consequent performance of the non-oil sector.
TABLE OF CONTENTS
Title Page i
Table of Contents vii
List of Tables viii
List of Appendices ix
CHAPTER ONE: INTRODUCTION
Overview of the study 1
Statement of the problem 3
Purpose of the study 4
Research questions 4
Significance hypotheses 6
Scope of the study 7
Definition of terms 7
Organization of the study 8
CHAPTER TWO: REVIEW OF RELATED LITERATURE
Meaning of taxation 10
History of taxation in Nigeria 11
Tax system in Nigeria 14
Challenges facing tax system in Nigeria 20
Types of tax 30
The corporate tax rates 36
Tax incentives 37
Non-oil sector 46
Foreign direct investment 50
Review of related empirical studies 54
Conceptual framework 57
CHAPTER THREE: METHODOLOGY
Research design 63
Population of the study 63
Method of data collection 64
Measurement of variables 64
Data analysis procedure 65
Model specification 67
CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS
Presentation of data 69
Research question one 70
Research question two 71
Research question three 71
Research question four 72
Research question five 73
Testing the hypothesis 74
Hypothesis one 74
Hypothesis two 76
Hypothesis three 78
Summary of findings 80
CHAPTER FIVE: DISCUSSION, CONCLUSION AND RECOMMENDATIONS
Discussion of findings 82
Suggestions for further research 87
LIST OF TABLES
1. descriptive statistics 69
2. FDI and CIT rate correlation result 70
3. NOX and CIT rate correlation result 71
4. FDI inflow and outflow correlation result 72
5. NOR and OIL revenue correlation result 74
6. FDI and CIT model result summary 75
7. FDI and CIT Coefficients 75
8. NOX and CIT model result summary 77
9. NOX and CIT coefficients 77
10. NOR and CIT model result summary 78
11. NOR and CIT coefficients 79
LIST OF APPENDICES
A. Data collected 89
B. Oil and Non-Oil revenue 90
C. Flow of Non-Oil foreign capital 92
D. Nigeria’s tax system; taxes and levies approved for
E. performance of Non-oil export 94
F. NOX before and after the introduction of export
Promotion zone (EPZ) in 1991 95
1.1 OVERVIEW OF THE STUDY
Nigeria’s quest for market access in the global market for her non-oil merchandise had led to the signing of trade preferential agreements with different countries and regions. Apart from signing bilateral agreements with Benin Republic, Bulgaria, Equatorial Guinea, Jamaica, Niger, Romania, Turkey, Uganda and Zimbabwe, investment promotion and protection treaties have also signed with France, Switzerland, the United Kingdom, The Netherlands, North Korea, China and Turkey. Nigeria is one of the founding members of the World Trade organization (WTO), the body that is charged with the responsibility of removing all barriers to trade between the nations of the world such that the whole world becomes “one big global market”. Despite these and the liberalization that resulted from the Structural Adjustment Programme (SAP) of the mid-1980s, the value of Nigeria’s non-oil exports has dwindled from an average of 7% of total export in 1970-1985 to 4% in 1986-1998. It is bewildering to find that the non-oil exports declined in the period of greatest openness (Okoh,2004). The need for expansion of Nigeria’s non-oil exports is predicated on the fact that crude oil, which is Nigeria’s main source of foreign exchange, is an exhaustible asset and cannot be relied on for sustainable development.
One of the tools designed to increase investment and growth of non-oil export in Nigeria in taxation. Taxation is a powerful tool of economic reform and a major player in every economy of the world. It is never static but dynamic and should reflect current realities prevailing in the economy. The tax system is an opportunity for government to collect additional revenue besides other sources of income, which is needed in discharging its pressing obligations. However, a good system of tax also offers itself as one of the most effective means of mobilizing a nation’s internal and external resources and it lends itself to creating enabling and conductive environment for investment resulting in the promotion of economic growth and development. Taxation represent potent instrument of fiscal policy used by government to manage the economic development of the state. It constitutes a major aspect of the macro-economy (Aneke, 2007).
The existing empirical literature on the relationship between taxes and investment has generally found that while other factors are also (and sometimes more) important determinants of investment, taxes have significance effects (Hassett and Hubbard, 2002; De Mooij and Ederveen, 2003). The choice of this topic was informed by the deep concern about the risk of overdependence on the oil sector and low contribution of other sectors to the growth of the economy.
Though, a number of empirical studies have been analyzed on trading relations in the non-oil sector (Olatundun, 2008; Okoh, 2004). There is a growing need for the information on the impact of taxation on non-oil production and export in Nigeria. Therefore, this study wants to cover this knowledge gap. In light of the above, the researcher examines the relationship between tax and non-oil sector in Nigeria.
1.2 STATEMENT OF PROBLEM
As indicated above, despite opinions and theories on tax and incentives and its impact on various variables, there is relatively little empirical evidence of its impact on non-oil sector, especially in Nigeria.
Additionally, frequent changes in the corporate tax rate and various other tax incentives; have occurred during the post-independence period in Nigeria. Among the most significant changes were the introduction of investment tax credit in 1996; reduction in the company tax rate in 1979, 1987, 1993, and 1996; the introduction of accelerated capital allowance in 1961 with revisions in 1975; increased capital allowance in 1985, 1987, and 1996 and the establishment of Export Processing Zone in 1991. These frequent manipulations suggest that policy makers believe tax policy to be an effective tool for altering the level and the composition of investment and economic growth.
Despite all the policy changes, however, there is little or no empirical evidence that this view is accurate in Nigeria. At the aggregate level, it is difficult to discern any systematic link between tax policy and corporate investment behaviour. This study therefore, seeks to scrutinize the relationship between tax and non-oil sector in Nigeria, with the view to understanding the impact tax has on the non-oil sector in Nigeria.
1.3 PURPOSE OF THE STDUY
This study considers it quite timely and apt to analytically substantiate the impact and relationship of tax and non-oil export sector in Nigeria. The specific research targets are to:
1. Determine whether company income tax (CIT) rate have any impact on non-oil sector in Nigeria.
2. Examine the relationship between tax rates and non-oil sector in Nigeria.
3. Explore the other determinants of Nigeria’s non-oil sector growth and development.
4. Scrutinize the relationship between revenues derived from the oil and non-oil sector in Nigeria.
5. Make suggestions as to ways of enhancing non-oil sector growth in Nigeria.
1.4 RESEARCH QUESTIONS
The following research questions will guide the study:
1. What nature of relationship does a corporate income tax (CIT) rate have with the flow of Foreign Direct Investment (FDI) in non-oil sector in Nigeria?
2. What is the relationship between company income tax (CIT) rates and Non- oil export earnings in Nigeria?
3. Is there a relationship between foreign direct investment (FDI) inflow and outflow into the non-oil sector in Nigeria?
4. Is there any difference between non-oil export before and after the introduction of the export processing zone (EPZ) in 1991?
5. What is the relationship between non-oil revenue and oil revenue in Nigeria?
1.5 RESEARCH HYPOTHESES
The following hypotheses are formulated for the study:
H01: There is no significant relationship between company income tax (CIT) rate and Foreign Direct Investment (FDI) in non-oil sector in Nigeria.
H02: There is no significant relationship between the company income tax (CIT) rate and non-oil export rearnings in Nigeria.
H03: There is no significant relationship between company income tax (CIT) rates and non-oil revenue in Nigeria.
1.6 SIGNIFICANCE OF THE STUDY
The outcome of this work will help policy makers know the impact tax policies are making on non-oil sector, especially as it has to do with attracting Foreign Direct Investment (FDI) in the non-oil manufacturing sector in Nigeria. When the use of taxation as a means of economic development and revitalization is missed, the country loses a lot in terms of the stimulation that could be generated within the various aspects of the economy, opportunities for economic advancement through fiscal activities are lost, and the focus is entirely on milking the populace instead of fattening the productive sectors(Adekanola, 2007). In terms of the uses of taxation, he opines that the use of taxation as a tool for encouraging the production, importation/exportation and consumption of some goods and services would equally be missed. The government as well as the governed is impoverished in such circumstances. In view of the foregoing therefore, the policy makers at Federal level should show in-depth understanding of the various fiscal instruments. That is, the Federal Ministry of Finance and Central Bank of Nigeria should demonstrate understanding of the need to stimulate or control certain aspects of economy through fiscal policies and activities that will achieve their practical objectives. this is why this research is significant.
Moreover, it will also contribute to existing literature for those who want to further study is this area, thereby adding to the debate on tax and tax incentives.
1.7 SCOPE AND LIMITATION OF THE STUDY
This work intends to examine the relationship and impact of tax rate on non-oil sector in Nigeria. The scope will cover the period beginning from when CIT rate was introduced in Nigeria in 1960 to 2009, although this will depend on the availability of relevant data.
1.8 DEFINITION OF TERMS
The understanding of certain key words is relevant to the overall appreciation of this work. Key words such as tax, taxation, foreign direct investment (FDI), Non-oil sector etc will require some technical meaning as applied here differently from it ordinary meaning. These explanations are left for chapter two when we undertake review of literature.
1.9 ORGANIZATION OF THE STUDY
The study is organized into five chapters. Chapter one is the introduction, where we have discussed issues like overview of the study, statement of problem, purpose of the study, research questions, hypotheses, scope of the study etc. following the introductory chapter is the literature review. Chapter three discusses the methodology, while results presentation and analysis is undertaken in chapter four. Chapter four was concerned with the empirical dimension of the study. In it, the detailed presentation of the relevant data analyses and interpretation of the data were shown. Discussion of findings, which emerged from the analyses of data in chapter four and concluding remarks, are addressed in the concluding chapter.