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The Impact
Of Tax Incentives On Industrial Sector Development In Nigeria
ABSTRACT
This
research studied the impact of tax incentives on industrial sector development
in Nigeria from 1981 to 2009 using time series data. The Ordinary Least Square
(OLS) method was adopted using a Classical Linear Regression Model and the
E-View version 6.0 software. Two models were used to determine the impact of
subsidies, government expenditure and exports on both industrial output and
investment respectively. The result showed that subsidies and government
expenditure have significant impacts on industrial output and investment and
thus have a great potential to boost industrial output, promote investment, and
bring about industrial sector development in Nigeria. Overall, the result
suggests that tax incentives have a significant impact on industrial sector
development in Nigeria.
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
The
industrial sector remains a strong and vibrant sector of the economy and an
integral part of development, structural change and self sufficiency; playing a
vital role in the economic growth and development of any given nation. The
development of the industrial sector would therefore, also mean or translate
into the development of the economy. Thus, resources have been channeled into
this sector through heavy public sector investment, especially import –
substitution basic industries, through general financial incentives and tax
incentives in addition to a high level of protection for private investment.
According to Anyanwu (1993), the
industrial sector is made up of four sub-sectors viz: manufacturing,
processing, craft and mining sub sectors. The manufacturing sub-sector is
involved in the conversion of raw materials into finished consumer goods or
intermediate or producer goods. The processing sub-sector is involved in the
treatment of raw materials or food for preservation or conversion into
consumable commodities. The craft sector carries out activities involving a
special skill at making things, especially with the hands or simple tools. And
mining sub-sector carries out activities of mining, exploration of mineral or
natural resources like crude oil, etc.
The socio-economic environment of
Nigeria has been most devastating for the industrial sector, especially the
manufacturing sub-sector. As at last count, more than 850 manufacturing
companies have had to close shop in a short space of time due to problems in
the country’s operating environment. In 2009, 37 of such companies stopped
operations, undermining utilization and the contribution of the manufacturing
sector to the country’s GDP.
The problem
assailing the operation of the sector include chronic lack of infrastructure,
multiple and excessive taxation as the government continues with the relentless
drive to increase internally generated revenue; exorbitant costs of raw
materials, delay due to bureaucracy at the ports as goods are cleared, lack of
adequate security among others.
In Nigeria, taxation is used as a
major fiscal policy tool for the attainment of macroeconomic objectives and to
influence the working of the economic system in order to achieve specific
economic goals and the desired level of investment needed for economic growth
and development. It is also a primary source of government revenue in Nigeria
besides oil. However, taxation has posed a lot of problems to the development
of the industrial sector. When the government taxes earnings from investment,
it becomes a problem for firms to raise adequate resources in the capital
market. When retained profits are taxed, firms fail to depend on their internal
resources for expansion, but resort to borrowing if they can obtain such loans.
Thus, the total capacity to invest is likely to decrease.
In pursuit of the achievement of
economic goals set, government introduces a number of incentives in the annual
budget. These incentives are designed to encourage investments in certain
preferred sectors of the economy, and which are sometimes geared towards
attracting inflow of foreign exchange to complement domestic supplies for rapid
development. Tax concessions have therefore been given to pioneer or newly
established industries for a number of years, in the form of tax exemption,
reduction of tax rate, reduction of import duty on imported raw materials,
among others. All these measures have been adopted by the government to reduce
production costs (subsidize production) and encourage the establishment and
expansion of industries in Nigeria.
Justifiable concern has however been
often expressed by developing countries over the potential effect of their
incentive schemes. Some have openly acknowledged their inability to attract the
desired level or quality of investment, in spite of the generosity of their
incentive programmes. One basic fact is that industries are likely to produce a
limited response no matter how lavish they are, if the general investment
climate is not favourable. “No amount of
incentives would for instance, compensate for a small internal market, a
stagnant economy or political instability”. (Okafor, 1983).
The industrial sector still faces a
lot of difficulties which hamper its development. Firms are not encouraged to
invest and are not interested in investing in projects with long gestation
periods, and the level of tax evasion, avoidance and capital flight is still on
the rise. It is against this background that the research is undertaken, to
study the impact of tax incentives on industrial sector development in Nigeria.
1.2 STATEMENT OF RESEARCH PROBLEM
Nigeria in
its quest to develop the industrial sector encounters some bottlenecks or
factors that militate against such attempts. For the purpose of this research,
it is necessary to study such problems and proffer solution to such problems.
A major problem facing the industrial
sector thereby impeding its development is the problem of excessive taxation in
the form of high tax rate, double and multiple taxation. Although taxation
forms one of the major sources of revenue to government apart from oil, it
affects firms negatively. Thus higher tax rates serve as disincentive to firms
for investment and expansion as it leaves firms with less money to reinvest
thereby discouraging productivity and investment and a decrease in the level of
output by the industrial sector.
Another problem that hampers the
growth and development of the industrial sector in Nigeria is the problem of
low price elasticity of exports and lack of comparative advantage. This means
that Nigeria’s foreign market share cannot appreciate despite the incentives
granted the industrial sector.
Non-availability of data was a major
research problem as there is currently no data on tax incentives in Nigeria.
Thus, the researcher used subsidy as a proxy for tax incentives in carrying out
the research. Industrial output and investment (gross capital formation) are
used to measure industrial sector growth and development.
The table
below gives a highlight of the level of industrial output and investment with
their corresponding growth (or decline) from 1981 to 1990.
TABLE 1:
INDUSTRIAL OUTPUT AND INVESTMENT IN NIGERIA
YEAR
INDUSTRIAL
OUTPUT
INDUSTRIAL
OUTPUT GROWTH
INVESTMENT
INVESTMENT
GROWTH
1981
15802.6
18220.6
1982
14424.7
-1377.9
17145.8
-1074.8
1983
13596.8
-827.9
13335.3
-3820.5
1984
14470.8
874
9149.8
-4185.5
1985
18226.4
3755.6
8799.5
-350.3
1986
16392.9
-1833.5
11351.5
2552
1987
34477.3
18084.4
15228.6
3877.1
1988
41200.3
6723
17562.2
2273.6
1989
89596.7
48396.4
26825.5
2333.6
1990
115591.4
25994.7
40121.3
13295.8
SOURCE: CBN
Statistical Bulletin 2009
From the
above table, it can be observed that the level of investment declined between
1981 and industrial output also recorded negative values (decline). But from
1985 and 1986 industrial output and investment respectively began to record
positive growth.
From the
foregoing, the following questions are relevant to guide the research:
i. What are the impacts of tax incentives
on industrial output in Nigeria?
ii. What are the impacts of tax incentives on
investment in Nigeria?
1.3 OBJECTIVES OF THE STUDY
For the
purpose of this study, industrial output and investment are adopted as measures
of industrial sector growth. The broad objective is to determine the impact of
tax incentives on industrial sector development in Nigeria.
The specific
objectives are:
i. To determine the impact of tax incentives on industrial output in Nigeria.
ii. To determine the impact of tax incentives on investment in Nigeria.
1.4 RESEARCH HYPOTHESIS
The research
is guided by the following hypotheses:
H0: Tax incentives have no significant impact
on industrial output in Nigeria.
H0: Tax incentives have no significant impact
on investment in Nigeria.
1.5
SIGNIFICANCE OF THE STUDY
The research
will be of benefit to the government – policy makers and tax revenue
authorities. It will provide a framework for the critical evaluation of tax
policies, provides a basis for the modification of tax incentive design and
identify loopholes in the present tax system that serves as disincentive to
investment.
It will also
benefit other researchers, forming a basis for further research on the subject
in future.
1.6 SCOPE AND LIMITATION OF THE STUDY
The research
covers a period of 29 years from 1981 to 2009
The
limitation of the study includes non-availability of related or necessary data
for the research.
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