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TAXATION AND
NON-OIL SECTOR IN NIGERIA (AN ANALYTICAL STUDY)
ABSTRACT
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
PAGE
Title Page i
Declaration ii
Certification iii
Dedication iv
Abstract v
Acknowledgements vi
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
Conclusions 85
Recommendations 85
Suggestions for further research 87
References 88
Appendices 89
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
collection
93
E. performance
of Non-oil export 94
F. NOX
before and after the introduction of export
Promotion zone (EPZ)
in 1991 95
CHAPTER
ONE
INTRODUCTION
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.
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