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CORPORATE
INCOME TAX AND PROFITABILITY IN THE NIGERIAN HOSPITALITY INDUSTRY
ABSTRACT
The study
examined the impact of corporate income tax on the profitability of firms in
hospitality industry in Lagos State. The study succinctly explored the effect
of corporate income tax on the net profit margin, profit after tax and cost of
operations of Eko Hotel and Suites, which was used as the sample for the study
between 2009 and 2016. Data were sourced from the financial statements of the
sampled firm within the period and analyzed via the regression analysis.
Results of the study revealed that corporate income tax has significant impact
on profit after tax (p<.05); net profit margin (p<.05) and cost of
operations (p<.05). Based on this, the study suggests that government should
device means of eliminating the incidence of double taxation, which tends to
weigh down the profitability of private firms in the industry.
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
Taxes are
considered a problem by everyone. Not surprisingly, taxation problems date back
to earliest recorded history. The basic principles of taxation are nearly as
old as human society—the history of taxes stretches thousands of years into the
past. The earliest trace of taxation in Nigeria was believed to have started
from Northern part of Nigeria and this was before the advent of British
administration. The emirs had organized forms of administration and their
Islamic relation made it possible for people to contribute towards charity
which laid a solid foundation for direct taxation in Northern Nigeria. Prior in
1900, some of the levies were “Zakkat (a tax on moral property meant for
charity),Jangali (tax on livestock),Gado (death tax),Jizjah (tax on slaves) etc
these were recognized in the Northern Nigeria, (Onwubiko,1998).
There were
also some form of taxes in Southern Nigeria (Yoruba parts) by way of tributes
(isakole), totls, levies, fees and presents given to Obas (Kings), Chief in
Benin, Oyo and some other Yoruba Kingdom of Western Nigeria. However in the
east this type of tax paying tradition was virtually non-existing but except
fine called “Iri-iwu”due, mainly to lack of organised central authority.In
which the eastern Nigerians are known for their Egalitarian society. These
forms of taxation come to a halt with the advent of colonial master’s. The
Oba’s and emirs where now used in imposing taxation on their subjects and
anyone found guilty was punished,(Onwubiko,1998).
Taxation in modern times is said to be an
economic development tool that provides the financial base for providing public
goods. It is a double-edged sword depending on what is the interest of the
government in power. Also it is a compulsory payment by individuals and
organizations to the relevant inland or internal revenue authorities at
Federal, State, or Local Government levels. Taxes perform fiscal or budgetary
functions, economic function and social or redistribute functions.
The
hospitality industry which is a broad
industry covering various hosting services including restaurants, hotels, bars,
cruise lines and many other related businesses. Globally it is a multi-billion
dollar industry with broad offerings, in Nigeria the best of hospitality
development is found in accommodations and restaurants. The hospitality market
is booming in Nigeria and with that boom comes new found diversification in a
new range of quality and classifications yet there is much more room for growth,
diversification and standardization,(Oruruo,2014).
In Nigeria,
the Corporate Income tax rate is a tax collected from companies. This amount is
based on the net income companies obtain while exercising their business
activity, normally during one business year.
Revenues from the Corporate Tax Rate are an important source of income
for the government of Nigeria It is also an assessment levied by a government
on the profits of a company. Hereby
causing extra reduction in the possible net profit of the company after normal
company expenses have being deducted before attaining the net profit it is the
further reduction in the net profit which is usually 30% of the net profit
assessed on a preceding year basis.
1.2
STATEMENT OF PROBLEM
However,
Players in the hospitality business in the country have said multiple taxation
is stifling the development in the sector. The operators insisted that the
current burden of taxes and levies are heavy on them, especially when situated
within the context of the high operating cost for business, maintaining that
these charges have pushed the sector to the brink.Some of the taxes and levies
identified by the operators included Registration of Hospitality Premises,
Stamp Duty, Nigerian Social Insurance Trust Fund(NSIT), Industrial Training
Fund(ITF), National Pension Commission(PENCOM), Nigerian Tourism Development
Corporation(NTDC). Others are Company Income Tax, Withholding Tax, Liquor
License, Food Handlers and Health Certificate, Visual Advert, Waste Disposal,
Bill Board, Sign Post, Operation Permit, Vehicle Emission Fee, Contravention
Charges, Business Premises, Administrative Charges for Environmental, Audit,
Copyright Society of Nigeria(COSON), water supply, electricity supply, copious
levies by the Local Government Councils as well as other fees charged by
regulatory agencies across the sectors at the state and federal levels
(http://nationalmirroronline.net/new/multiple-taxation-bane-of-hospitality-industry-in-nigeria/).
Taking a look at all the fees, levies and forms of taxes the companies in the
hospitality industry have to pay, not to mention of the corporate income tax
they have to pay after ascertaining their net profit, all pose a threat to
companies in this sector which is a viable and very profitable industry to
venture into. All these pose a threat to these companies because looking at the
actual profit and the later deductions there is a wide gap between what they
pay as taxes on their profit and the profit they take home.
1.3 OBJECTIVES OF STUDY
The aim of
this study is to determine the relationship between corporate income tax and
the profitability of the hospitality industry in Nigeria . However, the key
objectives include;
to examine the relationship between company
income tax and cost of operation
to ascertain corperate income tax influence
on PAT
to compare the corporate income tax
influence on NPM of accommodation and restaurants
1.4 RESEARCH
QUESTIONS
In relation
to attaining the set objectives the study must be able to adequately answer the
following questions
To what extent does corporate income tax
influence the cost of operations of major sectors in the hospitality industry?
Does corporate income tax influence PAT?
is there any significant difference in
corporate income tax influence and NPM of accommodation and restaurants?
1.5 RESEARCH
HYPOTHESES
In order to
ascertain or accomplish the objectives of this research and provide answers to
the research questions, there is need to establish testable hypotheses.
Hypothesis
One
H0: Company
income tax does not significantly influence the cost of operations in the
hospitality industry
Hypothesis
Two
H0:
Corporate income tax does not significantly influence the PAT of accommodation
and restaurants
Hypothesis
Three
H0: There is
no significant difference between corporate income tax influence and NPM of
accommodation and restaurants
1.6
SIGNIFICANCE OF STUDY
The
hospitality business in Nigeria is now peaking at N562 billion as at last year.
This was disclosed by SlimTrader, West Africa Vocation Education(WAVE), a
technology/e-commerce solution provider,in a chat with Vanguard Femi Akinde,
Managing Director, SlimTrader, said:
“The Hospitality industry in Nigeria is worth approximately N562 billion ($3billion) in 2014 and still
growing, (Ekwujuru, 2015) This study therefore will be carried out to know the
extent to which taxation affects stakeholders is the hospitality industry.
1.7 SCOPE OF
STUDY
These study
covers company income tax and profitability of the accommodation and restaurant
sub sectors of the hospitality industry over a period of 5 years.
1.8 OPERATIONAL DEFINITION TERMS
Companies
Income Tax(CIT):
Corporate
Income tax rate is a tax collected from companies. Its amount is based on the
net income companies obtain while exercising their business activity, normally
during one business year
Assessment
Authority:
This is the
body appointed by the board for the purpose of assessing tax payable.
Company:
A company is defined by section 3(1) of the act as “any co-operation(other
than a corporation sole) established by or under any law in force in Nigeria
orelsewhere”. The relevant tax authority in respect of company income tax is
the Federal Board of inland revenue.
Federal
Inland Revenue Sevice (FIRS):-
This is the
body set up by section 5.1 of ITA (1979) and charged with the overall
administration of companies income tax act.
Income:
There
is no statement that defines the word `` income`` in taxation status. However,
for the purpose of this study reference is made to section 5.4 (2) (6) of
income tax management act (ITMA)1961, which recognizes income as including any
amount deemed to be income under the act.
Tax
Arrers
These are assessment of tax during the preceding period whose payment
are received at the current assessment period.
Profit After
Tax:
The net
amount earned by a business after all taxation related expenses have been
deducted. The profit after tax is often a better assessment of what a business
is really earning and hence can use in its operations than its total revenues.
Net Profit
Margin:
Net profit
margin is the percentage of revenue left after all expenses have been deducted
from sales.
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