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TAX INCENTIVES CATALYST FOR
INDUSTRIAL DEVELOPMENT AND ECONOMIC GROWTH.
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Tax studies
have become increasingly sophisticated especially during
the past
decade and have yielded conflicting results as regards the tax matter. Some
studies focus on the cost and benefit of tax incentives while a few look at
whether public funds could have been better spent or if tax incentives were
economically justified. Tax studies offer little guidance to policy makers who
are concerned about tax rates or tax offerings and the effectiveness of
employing tax incentives as an economic and developmental tool.
The mode by
which industrial development and economic growth can be effectively,
efficiently, stimulated and developed is very demanding. As a result of this,
the government charges less tax and gives tax holidays in order to encourage
investments and economic activities in those areas which help to improve
production capabilities, activate economic growth as well as the allocation of
resources in a socially desirable manner.
Investors
often emphasize on the relative importance of a good tax system in investment
decisions compared with other considerations such as political and economic
stability, availability of social infrastructure, security
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of the life
and property and also the general cost of doing business and so on. To the
prospective investor, the general feature of a tax system (tax base rate) is
more important than the tax incentives in many developing countries. The tax
laws are not clearly written and may be subject to frequent review which makes
long-term planning difficult for businesses and add to the perceived risks of
undertaking major capital intensive projects.
Taxation is
a process or means through which communities or groups are made to contribute a
part of their income for the sole purpose of societal administration while tax,
is a compulsory levy levied on the people at a given place for the sole purpose
of government revenue for government expenditure.
Tax
incentive itself, is the use of government spending and tax policies to
influence the level of national income. This measure encourages the springing
up and gradual growth of new enterprises by the reduction of profit tax, which
in turn encourages production, influences the production level and curbs
unemployment. So, the government should provide such tax incentives in order to
boost development which will bring about an increase in employment
opportunities and also cause an improvement in the economy.
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Amadiegwu
(2008:74), a tax expert wrote that the objective of tax incentive is that by
borrowing rather than taxing, the government has a better chance of expanding
investment spending which is essential in enlarging production possibilities
and attaining a sustainable improvement in the standard of living of the
people.
Dotun and
Sanni (2009:265), in their Nigerian companies taxation stated that these
incentives can be targeted on the low income earners, local and developing
industries, farmers, which will increase their savings and is necessary for
higher investment. Tax incentives create employment opportunities for the
people, helps to fight economic depression and inflation thereby increasing the
equitable distribution of income and wealth.
A good
economic development policy should contain the following elements.
a. GOALS AND OBJECTIVES
Goals and
objectives create a context for accountability as regards the use of economic
and developmental incentives. Common goals used in economic development include
targeted economic sector growth, business retention and/or recruitment,
geographic focus, job creation, light mitigation, improving on distressed areas
and environmental improvements.
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b. FINANCIAL INCENTIVES TOOLS AND LIMITATIONS
An economic
development policy should define the type of incentives
and the
extent to which the government will use them. For example, the government may
decide to grant an entitlement to any firm that meets the minimum required
qualification or may choose to provide incentives based on the assessment of
individual firms. Government may also establish maximum funding for a
particular process.
c. EVALUATION PROCESS
A clearly
defined evaluation process should be outlined in an economic development policy
for the purpose of consultancy and transparency which include.
How the
purpose of the tax incentive measures up to establish development criteria.
A cost
benefit analysis
An
evaluation of a tax based impact both in terms of increase in taxable value.
Economic and
industrial development incentives Act (2008) both financial and non-financial
include a broad range of tools ranging from expected planning processes to
direct or indirect funding. Government often
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use these
incentives to pursue specific economic goals such as tax base diversification,
job creation, business retention, and expansion that are usually set by the
government which consists of both the federal, state and local practice. The
use of financial incentives to benefit private parties introduces risk factors
which are not generally present in other public financial management areas. For
this reason, economic incentives must be based on a policy that establishes
parameters for their appropriation in relation to the economic developmental
goals of the government.
1.2 STATEMENT OF PROBLEM
Empirical
studies have shown different views on tax incentives as a
catalyst for
economic growth and industrial development. A school of thought believes that a
tax incentive encourages economic growth and industrial development while
another believes that it reduces revenue accruable to the government. As a
result of this, it does not stimulate the economy. The poverty alleviation
programme aimed at reducing the rate of poverty among the masses, was
introduced. This programmecovered the provision of jobs for able and unemployed youths, provision of loans for
small and medium scale enterprises at a minimum lending rate. With all these
measures and policies taken so far, the economy has not shown any
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appreciable
progress and Nigeria still remains one of the developing nations of the world.
Given this gap, this study seeks to examine the nature of tax incentives that are
extended to deserving companies and the interaction that exists between the tax
incentives and the company.
Tax
incentives as a catalyst for industrial development and economic growth in
Nigeria using selected industries and firms in Portharcourt, Rivers state is
that on which the basis are formed although, many advantages to tax incentives
are that they are used for industrial development and economic growth. But,
most tax experts, consultants, Individuals and economic analysts ignored or
criticized the incentive for the following reasons:
1. That the impacts of the incentives
are not effective in the economy.
2. That the exemption privilege not
granted to al firms places some companies at a competitive advantage over
others.
3. That the incentive granted are not
adequate for developmental and industrial growth.
4. Most management of firms, companies
and industries lack the awareness of the incentive.
5. The unwillingness of some companies
and individuals to claim the incentive because they do not understand the role
of such.
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1.3 PURPOSE OF THE STUDY
Tax
incentive is a strong fiscal measure or policy which can stimulate investment
and savings leading to capital formation thereby enhancing industrial growth
and economic development. This capital acquisition can be used positively in
economic and industrial development of companies and could be of individual
effective usage in self development. In deciding if these incentives can
stimulate the companies and individuals to invest in the economy, one basic
fact to be checked is if the company or industry concerned decided to go into
business because of the incentive offered.
For this
purpose, the researcher intends to examine the criteria for deserving tax
incentives, unfold how the industries and firms have been responding to the
provision of the incentives scheme, assess the implication of the tax
incentives, ascertain how these incentives have been stimulating and motivating
these bodies to establish industries and firms which will in turn create
employment opportunities thereby stimulating industrial development and
economic growth.
Furthermore,
the researcher intends to examine how this scheme has helped existing
industries and firms in expanding their areas of operation in Portharcourt,
Rivers State.
RESEARCH
QUESTIONS
1. Can these tax incentives attract
foreign investors to Nigeria?
2. Are the existing tax incentives
adequate for industrial development and economic growth?
3. Are these incentives claimable by
companies?
4. Do these incentives stimulate
individuals to establish new enterprises which will boost industrial
development and economic growth?
5. Do these tax incentives induce the
existing industries to pursue vigorous expansionary policies?
1.4 SIGNIFICANCE OF THE STUDY
Tax
incentive scheme is an economic policy which exists among other competing
alternatives. The scheme may be an inducement towards rightful investment and
securing a proposal on private investors. This means that if the scheme
achieves its aim of implementation, then, the benefits expected from these
incentives should be able to justify the cost with the following
results/benefits:
a. As a result of the creation of more
industries and with the expansion of the existing ones, the standard of living
of the populace will be positively affected.
8
b. Tax incentives will help the small
scale industries to spring up and aid in the expansion of existing ones thereby
improving the standard of living of the populace and its surrounding environs.
c. The tax incentive scheme leading to
economic diversification will also result in increasing urban and rural
development.
It is the
intention of the researcher to look into ways and the extent to which the
existing tax incentives are being used by the entrepreneurs, in setting up
industries and establishments which aids industrial development and economic
growth.
1.5 SCOPE OF THE STUDY
This study
covers the tax incentives as a catalyst for industrial development and economic
growth. The research study will be limited to the use of questionnaires and
oral interviews when appropriate and to a review of related literature (review
of relevant books and journals) that could provide an insight into the impact
of tax incentives on industrial development and economic growth. Data
collection will be restricted to four industries and firms in Port Harcourt,
Rivers State which are Nest Oil Ltd, Abuloma, Paboard Breweries Nigeria Ltd,
Rumumasi, Amsale Engineering
9
Ltd,
Trans-Amadi, and Hallmark Mills Ltd Rumu-Kwurushi all in Portharcourt,
Rivers
State.
1.6 LIMITATION OF THE STUDY
The
constraints of this study may be attributed to:
1. Inherent limitations of the analytical
method of gathering information such as the un-cooperative attitude of the
respondents.
2. Irrelevant or unreliable information
obtained from oral interviews. This is based on the degree of the respondent’s
truthfulness in answering the question’sraisedduring oral interviews. Some of
the respondents thought that the research work is meant to expose their company
and thus, were not ready to give relevant information.
3. The writer was also faced with time
constraint which involved appropriating her time between writing the project
work and performing her academic function as well as meeting her social needs.
4. Also encountered was the problem of
getting an exact from the school authorities for the purpose of the research
work.
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1.7 HYPOTHESIS FORMULATED
Three
hypothesis were formulated as shown below:
HYPOTHESIS
ONE
Ho:
Industries that benefit from tax incentives do not develop better than
industries that do not benefit from tax incentives.
Hi:
Industries that benefit from tax incentives develop better than industries that
do not benefit from tax incentives.
HYPOTHESIS
TWO
Ho: The tax
incentives granted by the government to industries and firms is not considered
as an economic booster.
Hi: The tax
incentives granted by the government to industries and firms is considered as
an economic booster.
HYPOTHESIS
THREE
Ho: Tax
incentives cannot be used to off-set other disadvantage that investors may
face.
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