TAX INCENTIVES AND THE FINANCIAL PERFORMANCE OF MANUFACTURING COMPANIES IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1  BACKGROUND OF THE STUDY

The purpose of taxation is to propel a country's progress. Without it, the economy may come to a standstill. It is a mandated payment demanded of people and businesses earning money, a portion of which is supposed to be remitted to the government for development reasons (Chude & Chude, 2015).

Hence, revenue accruing from these taxable sources is expected to accelerate growth and development. The outcome is far from being the case in many economies. Moreover, many firms are facing hard times with the increasing cost of doing business in recent times. This accounts for the demand for tax incentives in favour of firms, especially those operating in the manufacturing sector.

Since the early 2000s, there has been increasing interest in the prospect of influencing not only the development of enterprises' investment, but also the accomplishment of deserving particular national policy objectives through the issuance of tax incentives under income and profit taxes in Nigeria.

The provision of tax incentives to private enterprises has long been an essential part of industrial strategy; Nigeria is not alone in this approach. Many other countries, both developed and developing, have taken the same stance. During World War II, successive governments in the United Kingdom, for example, used initial investment allowance to influence investment decisions in private enterprises (Bird, R.M. and Krugman, P, 2004).

It can thus be seen that the extension and proliferation of tax incentive measures in many countries is evidence of increasing concern with rates of economic growth and restructuring to stimulate particular cases of economic activity deemed desirable in the national interest.

According to Adedotun (2001), incentives are the reduction in the effective tax burden on the preferred activity as opposed to that currently imposed in the hope that the reduction in government revenue due to tax foregone will be compensated by an expected expansion of the national economy and, ultimately, an increase in total revenue from such broaden economic basis.

According to Auerbach and Hines (1988), tax incentives might take the form of a tax holiday, capital allowance, tax payers right of election, re-investment allowance, investment tax credit proportionate to the amount of capital investment, accelerated depreciation or an interest subsidy, export processing zone, and so on. in whatever form they are granted, they are supposed to generate more current investment, hence, higher future production, and one has to look at the relative merits and demerits based on equity and efficiency.

Tax incentives encourage investments in repositioning enterprises and eventually, improving their financial fortunes in the face of severe global competition. In emerging countries (including Nigeria), difficulties such as decreasing markets pose a serious threat to business productivity and profitability. Over the years, the Nigerian manufacturing sector, in particular, has borne a fair portion of the bad outcomes that have resulted from insufficient export incentives, a lack of access to financial credit, technical backwardness, and a lack of inflow of foreign investment into the manufacturing sector (Ohaka, J., & Ironkwe, U. (2014); Oburota & Ifere, 2017). As a result, several stakeholders have severe questions about the effectiveness of tax breaks. While certain interest groups seem to be unaware of the tax breaks provided by the appropriate tax authorities, others investors who are aware are befuddled by the uncertainties linked with the impacted tax breaks (Uwaoma & Ordu, 2016). Against this context, the purpose of this research is to investigate the impact of tax breaks on the financial performance of Nigerian manufacturing firms.

1.2     STATEMENT OF THE PROBLEM

Despite the use of various policy instruments throughout the industrialization period, the use of investment subsidies has been the dominant industrial policy (both grants and tax based incentives). The existence of market failures in the financial market justifies the use of investment subsidies. Due to market failures, some firms would not have sufficient access to credit to undertake investment projects.

Moreover, the risk and uncertainty involved in investment projects may hinder some firms from realizing their projects, especially during periods of economic instability. In addition to failure of information, public goods, incomplete markets, externalities, failure of competition and macroeconomic disturbances can cause market failure and may provide the rationale for government intervention for the realization of investment projects (Zee et at 2002).

The public sector's plethora of taxes imposed on the private sector has strained the investment climate. Most of the time, in addition to the prescribed taxes instituted by the Federal Republic of Nigeria's constitution, there are instances of double taxation; excessive arrogation of power by local government authorities that violates the normal course of justice. A review of the literature suggests that the Tax Incentives package had no significant impact on the investment and production decisions of Nigerian businesses. According to Philips (2004), the list of existing incentives may appear vast, but there is likely no proof of their vital relevance in commercial organizations' investment and output decisions in Nigeria. Nonetheless, some writers believe that tax breaks are an albatross around the neck. For example, Aluk (2001) argues that the current trend in development planning is to prohibit too many tax breaks since they send the incorrect signals to investors, who become distrustful of the host country's true intentions.

Despite the incentive scheme, many manufacturing firms in Nigeria are still undergoing financial bankruptcy and some are merged or acquired by others, declaring losses at the end of the accounting period; (Klemm (2004). What then is the significance of tax incentives? As a result, the purpose of this study is to determine the impact of incentives on the financial performance of Nigerian manufacturing sector firms.

1.3  OBJECTIVES OF THE STUDY

This study primarily aims at evaluating the tax incentives and their effect on the financial performance of manufacturing companies in Nigeria. Therefore, the specific objectives are:

1. To examine the extent to which tax incentives affect the return on investment of quote manufacturing companies in Nigeria

2. To determine the extent to which tax incentives impact on profit after tax of manufacturing companies.

3. Identify the different tax incentives available for manufacturing companies in Nigeria.

1.4 RESEARCH HYPOTHESES

Ho1: Tax incentives has no significant effect on return in investment of manufacturing companies

Ho2: Tax incentives has no significant impact on the profit after tax of manufacturing companies in Nigeria.

1.5  SIGNIFICANCE OF THE STUDY

The study findings would be of great value to the government through various agencies by serving as a foundation for assessing the effectiveness of various tax incentives provided by the government in promoting the performance of manufacturing companies, especially beverage companies, and thus providing a framework and foundation for reviewing the various tax policies based on the cost-benefit analysis provided which will enable the government to choose which incentives to give a priority or eliminate.

The study's results would also educate corporate tax payers and investors about how to profit from current tax incentives, as well as serve as a guideline for making informed decisions on which tax incentives are more advantageous to leverage.

The study's results will add to the increasing body of research in this field and help explain the tax incentives and their effect on the financial performance of manufacturing companies. The study will serve as a resource for other scholars who wish to conduct additional research in this field, and it may spark new lines of inquiry.

1.6  SCOPE OF THE STUDY

This study examines the effect of tax incentives on the financial performance of manufacturing companies in Nigeria. As a result, the study is focused on determining the extent to which tax incentives affect the return on investment of quoted manufacturing companies in Nigeria, as well as the extent to which tax incentives affect manufacturing companies' profit after tax.And identifying the different tax incentives available for manufacturing companies in Nigeria. Thus this study is delimited to selected manufacturing firms in Kano State.

1.7 LIMITATION OF THE STUDY

In the course of carrying out this study, the researcher experienced some constrains which include time constrain, financial constrain, language barriers, and attitude of the respondents.

1.8 DEFINITION OF TERMS

Tax: a compulsory contribution to federal and state revenue, levied by the government on workers' income and business profits, or added to the cost of some goods, services, and transactions.

Tax Incentives: A tax incentive is an aspect of a country's tax code designed to incentivize or encourage a particular economic activity by reducing tax payments for a company in the said country.

Financial Performance: This is a complete evaluation of a company’s overall standing in categories such as assets, liabilities, equity, expenses, revenue, and overall profitability.

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