Background to the study

Taxation is a compulsory levy imposed by the government on the incomes of taxpayers in a geographical territory in order to defray the expenses of governance. This implies that anybody that generates income must compulsorily pay taxes. There are different types of taxation. These include the personal income tax, companies income tax, petroleum profit tax, value added tax and the capital gains tax. Recently, the issue of taxation on capital gains in the Nigerian capital market has come to the fore (Makin, 2010). Government, from time to time, has the responsibility of reviewing the tax position as a component of the subsisting fiscal policy for the purpose of meeting given objectives considering the level of inflation in the country (Hummel, 2007). Taxation of capital gains means a tax on capital gains, the profit realized on the sale of a non-inventory asset that was purchased at a cost amount that was lower than the amount realized on the sale. The most common capital gains are realized from the sale of stocks, bonds, precious metals and property (Glahn, 1996). Not all countries implement taxation of capital gains and most have different rates of taxation for individuals and corporations. Regarding capital gains, an example of a popular and liquid asset, national and state legislation often has a large array of fiscal obligations that must be respected. Taxes are charged by the state over the transactions, dividends and capital gains on the stock market.

However, these fiscal obligations may vary from jurisdiction to jurisdiction. Although, taxation on capital gains are a tax on the profit obtained from a disposal or exchange of certain kinds of assets. In Nigeria, taxation on capital gain is 10% of the profits from the sale of the qualifying assets. It is recognized in law under the Capital Gains Tax Act. Generally, Tax is a financial issue and its payment is a civil duty. It is the imposition of a financial burden for the government on individual firm and companies. In general based, the word tax means any contribution imposed by the government upon individual and companies for the use of government to provide facilities or services as rendered by the state. It is not a voluntary payment or donation but an enforced contribution made on the pronouncement or directive of legislative authorities (Herderson, 1999). Taxation is also greatly influenced by inflation. Inflation is a sustained increase in the general price level of goods and services in an economy over a period of time (Barro, 1992). When the price level rises, each unit of currency buys fewer goods and services.

Consequently, inflation reflects a reduction in the purchasing power per unit of money – a loss of real value in the medium of exchange and unit of account within the economy. A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index, usually the consumer price index, over time. The opposite of inflation is deflation. Inflation affects economies in various positive and negative ways. The negative effects of inflation include an increase in the opportunity cost of holding money, uncertainty over future inflation which may discourage investment and savings, and if inflation were rapid enough, shortages of goods as consumers begin hoarding out of concern that prices will increase in the future (Barro, 1992). Positive effects include reducing the real burden of public and private debt, keeping nominal interest rates above zero so that central banks can adjust interest rates to stabilize the economy, and reducing unemployment due to nominal wage rigidity Inflation distorts all aspects of the taxation of personal income but is particularly harsh on the taxation of capital gains. When corporate stock or any other asset is sold, current law requires that a capital gains tax be paid on the entire difference between the selling price and the original cost even though much of that nominal gain only offsets a general rise in the prices of consumer goods and services.

Taxing nominal gains in this way very substantially increases the effective tax rate on real price-adjusted capital gains. Indeed, many individuals pay a substantial capital gains tax even though, when adjustment is made for the change in the price level, they actually receive less from their sale than they had originally paid. Statement of the problem Several research works has been described as arguments from a very narrow position based on the fact that it prays for government policy on tax to facilitate reduction in taxation on capital gains because of the inflation in some countries of the world including Nigeria. High or unpredictable inflation rates are regarded as harmful to an overall economy. They add inefficiencies in the market, and make it difficult for companies to budget or plan long-term. Inflation can act as a drag on productivity as companies are forced to shift resources away from products and services in order to focus on profit and losses from currency inflation. Uncertainty about the future purchasing power of money discourages investment and saving. Inflation can also impose hidden tax increases, for instance, an increase in the taxation of capital gain. It is therefore the purpose of this study to examine the various impacts of inflation on the taxation of capital gains with a view of proffering suggestions for appropriate policy initiatives.