EFFECT OF TAXATION ON INVESTMENT DECISION

THE EFFECT OF TAXATION ON INVESTMENT DECISION: [A CASE STUDY OF SELECTED COMPANIES IN ANAMBRA STATE]

ABSTRACT

The choice of the topic “The Effect of Taxation on Investment Decision” comes from the fact that most management of business entities are yet to come to terms with the realities of the implication of taxes on the overall performance of their business. To many, corporate taxes is an uncontrollable business expense and as such, does not deserve any consideration whatsoever in business decisions. It is, therefore, the intention of the researcher to bring to the light the implications of this “oversight”, and also to expose managers and prospective investors to some tax saving techniques. In doing this, the researcher went through textbooks and journals to establish why corporate tax is essential, and its development within the context of the Nigerian economy; equally, questionnaires were issued to both the employees and top management of the selected companies in order to ascertain their views on corporate taxation as it relate to their companies. It must also be stated that this research work is designed to take cognizance of existing taxation laws with regards to tax reduction techniques.  Finally, it is the intention of the researcher to provide as concise as possible, a research work that would be of immense benefit to successive researcher on this topic and to managers and investors alike.

TABLE OF CONTENTS

Title Page           –        –        –        –        –        –        –        –        ii

Certification        –        –        –        –        –        –        –        –        iii

Approval Page   –        –        –        –        –        –        –        –        iv

Dedication          –        –        –        –        –        –        –        –        v

Acknowledgement       –        –        –        –        –        –        –        vi

Abstract     –        –        –        –        –        –        –        –        –        vii

Table of Contents        –        –        –        –        –        –        –        viii

CHAPTER ONE:            INTRODUCTION

1.1    Background of Study  –        –        –        –        –        –        1

1.2    Statement of Problem           –        –        –        –        –        3

1.3    The Purpose of the Study    –        –        –        –        –        4

1.4    Research Hypotheses                   –        –        –        –        –        4

1.5    Significance of the Study     –        –        –        –        –        5

1.6    Scope and Limitations of the Study       –        –        –        6

1.7    Organization of the Study    –        –        –        –        –        7

          References                  –        –        –        –        –        –        –        8

CHAPTER TWO:        LITERATURE REVIEW

2.1    Theory of Taxation      –        –        –        –        –        9

2.1.1 Canons of Taxation    –        –        –        –        –        10    

2.2    The Need for Company Taxation           –        –        14

2.3    Historical Background of Company Tax in Nigeria  15

2.4    Companies Income Tax Act [CITA] 1979                 –        18

2.4.1 Powers and Duties of the Board   –        –        –        19

2.4.2 Basis and Procedures for Assessment –        –        20

2.5    Financial Administration of Taxes          –        –        22

2.5.1 Organization and Staff for Tax Management of a

          Company  –        –        –        –        –        –        –        22

  • Tax Calendars, Records, Files and Source of

Information                   –        –        –        –        –        –        27

2.5.3 Tax Planning      –        –        –        –        –        –        28

2.6    Varying Degrees of Risk in investment with Tax

          Benefits     –        –        –        –        –        –        –        29

2.6.1 High Risk Investment with Tax Benefits          –        –        30

2.6.2 Medium Risk Investment with Tax Benefits   –        30

2.6.3 Low Risk Investment with Tax Benefits          –        –        31

2.7    Effects of Taxation on Investment Decision   –        31

2.8    Techniques of Tax Savings          –        –        –        32

2.8.1 Tax Avoidance   –        –        –        –        –        –        32

2.8.2 Choice of Depreciation Method   –        –        –        33

2.8.3 Choice of Accounting Method      –        –        –        34

2.9    Conclusion                   –        –        –        –        –        –        35

          References                  –        –        –        –        –        –        36

CHAPTER THREE:  HISTORICAL BACKGROUND OF CASE

      STUDY COMPANIES

3.1    Introduction         –        –        –        –        –        –        37

3.2    The Nigerian Bottling Company Ltd. [NBC]    –        37

3.3    HYCO Chemical and Industries Ltd. Ogidi Anambra

          State          –        –        –        –        –        –        –        38

  • Anambra Motor Manufacturing Company [ANAMCO] 39

CHAPTER FOUR:    RESEARCH METHODOLOGY

4.1    Introduction         –        –        –        –        –        –        40

4.2    Research Design                  –        –        –        –        –        40

4.3    Sample Design  –        –        –        –        –        –        42

4.4    Methods of Data Analysis    –        –        –        –        44    

CHAPTER FIVE:   DATA PRESENTATION AND ANALYSIS

5.1    Introduction         –        –        –        –        –        –        48

5.2    Presentation of Data   –        –        –        –        –        48

5.3    Regression of Total Corporate Tax [Y] on Profit before Tax [X] of Nigeria Bottling Company PLC       –        59

5.4    Testing of Hypothesis          –        –        –        –        63

5.5    Conclusion                   –        –        –        –        –        –        68

CHAPTER SIX:   SUMMARY, RECOMMENDATIONS AND

CONCLUSION

6.1    Summary of Findings  –        –        –        –        –        69

6.2    Implication of Findings                   –        –        –        –        71

6.3    Recommendations      –        –        –        –        –        72

6.4    Conclusion                   –        –        –        –        –        –        73

          Appendix 1                   –        –        –        –        –        –        75

          Questionnaires            –        –        –        –        –        76

          Bibliography       –        –        –        –        –        –        81

CHAPTER ONE

INTRODUCTION

  1. BACKGROUND OF STUDY

Revenue accrues to the government through diverse sources which include the following: foreign aid and Humanitarian Grants. Income from Government’s direct investments in commercial ventures, Bilateral and International trade and Taxation.

 Taxation may not be the most important source of revenue to the government in terms of the magnitude of revenue derivable from it. However, it is the most important source of revenue to the government, from the point of view of certainty and consistency. Taxation therefore, is the compulsory levy by the Government through its various agencies on the incomes, capital or consumption of its subjects. These levies are made on personal income such as salaries, business profits, interests, dividends, commissions, royalties or rent. It may also be levied on capital gains and petroleum profits.

          Every tax imposed on an organization needs continual interpretation of its specific applicability and effect on the various transactions of the organization. The fields of taxation changes everyday as new court rulings are announced, and as laws are made. Every business organization must therefore, be alert to such changes.

          Since its inception, taxation of corporate income has been a pervasive force tending to influence the economic decisions of business entities. On the part of the government, there have been tougher economic measures in order to control the adverse economic condition of the country. Among such measures are tax rules which are designed to increase revenues and accomplish other economic goals, but invariably; these rules having a significant impact on business and investment decisions. In other words, any rational decision should be on after tax consideration.

          However, income tax rules and regulations are such that informed investors can reduce the amount of their tax liability through various proper and timely actions. It is therefore, the researcher’s aspiration to find out ways of breaking through these constraints facing business organizations in order that they may realize their objectives.

  1. STATEMENT OF PROBLEM

Depending on the nature of tax, taxation may have either a negative or positive effect on the individual and the organization at large. With a high marginal rate of tax, in excess of 50%, tax will be a deceptive to work; while a low marginal rate of tax will be an incentive to work. The value added tax is an incentive to save, while tax levied on interest earned on bank deposits is a deceptive to save.

Taxation may lead to a distortion in the consumption pattern of the society especially if it is indirect tax. For instance, high import duty imposed on certain classes of goods will lead to a shift away from the consumption of such goods to other goods with low import duty.

Also as a tool for government economic policy, it may be used to achieve the following objectives: the redistribution of wealth, to effect changes in the country’s balance of payments with other countries, to effect the mobilization of economic resources, to influence the level of economic activities and to combat inflation. The problem now is that many organizations do not know the effects of taxation and as such do not consider the effects on their investment decisions. More so, are there commensurate services for the tax paid.

1.3    THE PURPOSE OF THE STUDY

          The purpose of this research includes the following:

[i]       To find out how tax rules affect certain specified and important management decisions.

[ii]      To explore all relevant sources available for tapping usable information.

[iii]     To provide some knowledge into the operations of investors in Anambra state for the sole purpose of making effective investment decisions as to lessen the burden of taxation within the confines of the law.

  1. RESEARCH HYPOTHESES

In order to find answers to the questions raised in the statement of problem, the following hypotheses are necessary:

Hypothesis 1:

Ho1: Tax consideration does not have significant effect on investment decisions.

H11:  Tax consideration has significant effect on investment decisions.

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