Project – The effect of taxation on business and investment decision

CHAPTER ONE

GENERAL INTRODUCTION

1.1 Background of the Study

The extent of social economic and political development of a country depends on the amount of revenue generated for the provision of infrastructure. Taxation had remained a veritable source of revenue available to Government and. All tires of Government raise taxes to finance public expenditure ranging from social security to national defense education and infrastructure, such as highways, airports e.t.c.  The question is what kind of taxes are raised and what sorts of effect they have in particular, the difference between income taxes and consumption taxes is important (Bumpei, 2011)

Taxation is an important part of fiscal policy which can be used effectively by government in developing economics. Taxation plays a vital role in development of a country, including resource mobilization, reduction in inequalities of income, improvement in social welfare, foreign exchange, regional development, control of inflation, e.t.c. apart from the objectives of raising public revenue, taxation can be used as an important tool in the following manner, optimum allocation and investments planning acceleration of economic growth, price stability and control mechanism. Since its introduction tax has been a pervasive tool for influencing the economic decisions or business entities. Government on its part employs taxation as a policy tool to steer business and investment decisions which positively impacts on the economy.

For most investors and small business owners, taxes play a role on how business and investment decisions are made. Taxes can also affect investment, by deliberately reducing the amount of cash a firm has available to invest.

This study used the most recent secondary data available and thus, provides an up to date finding on the effect of taxation on business and investment decision. The results indicate that firms reduce investment when they pay more taxes, especially when unfavourable capital market conditions create a greater dependence of investment on internal source of cash (Pandey, 2015).

1.2 Statement of the Research Problem:

Verdugo (2012) defined investment as the purchase of an asset or item with the hope that it will generate income or appreciate in the future and be sold out at a higher price. Investment decisions are concerned with the assets the company decides to invest in that will increase shareholders capital by delivering a positive return on investment. Alworth and Arachi (2017) defined corporate taxes as taxes levied on a corporation’s profit, this is because corporations are treated as legal entities, separate from their owners, and they are taxed as if they were persons, the corporation taxes can affect investment decisions of a company because it is the amount taken from the net profit of the company. The amount paid as taxes could be invested back into the business to generate more profit to the company thus increasing the shareholder’s value. Company business activities are surrounded by risks and uncertainties and such risk could lead to losses of money invested, losses materials in the sites and the causes of made a good decisions on how to invest.

Measuring of the inter asset distortion effect of the corporate income tax has received little attention despite the well documented differences in the taxation of different capital asset (Mackie – Mason, 2010). Asset substitution and the effect of tax incentives on the composition of new investment can be substantial and important for evaluating the efficiency and distributional effects of alternative tax policies. The research examined the effects of corporate income taxes on the allocation of new capital. Investment in the companies listed on the Nigerian Stock Exchange (NSE) the corporate tax code offers a wide range of tax instruments to encourage business investment. While a reduction in the statutory corporate tax rate applies uniformly to all investment types, accelerated depreciation allowances are targeted tax incentives (Graham, 2013).

From both the local and international empirical evidence, no studies have been done on the effect of corporate tax on investment decisions in the Nigerian companies listed at the NSE. Except the one that looked at the effect of corporate taxes on the allocation of new capital investment in the U.S Kipngetich (2011) looked at all taxes while this research will focus on corporate taxes. It is against these backgrounds that the study seeks to establish a response to the dominant question what are the effects of corporate taxes on investment decisions of the companies in Nigeria.

1.3 Objective of the Study:

The objective of this study is to establish the relationship between corporate tax and investment decision of companies in Nigeria, using Asaba Aluminium Company Limited as case study.

1.4 Research Questions:

Three research questions were formulated to guide study.

1. Does taxation have a significant impact on investment and business decisions?
2. Is inflation a militating factor against investment decision in the Nigerian economy?

• Does taxation discourage extravagant spending, capital formulation and economic development?

1.5 Research Hypothesis

Hypothesis One

Ho: Taxation does not have a significant impact on investment and business

Decisions.

Hi: Taxation has signcant impact or investment and business decision.

Hypothesis Two

Ho:    Inflation is not a militating factor against investment decision in the Nigeria economy.

Hi:    inflation is a militating factor against investment decision in the Nigeria economy.

Ho:    Taxation does not discourage extravagant spending, capital formulation and economic development.

Hi:    Taxation discourages extravagant spending capital formulation and economic development.

1.6 Significance of the Study:

Most business firms in Nigeria do not take i9nto consideration the effect of taxation on their portfolio selection. This has partly been responsible for the low investment level in such organization.

Under this democratic dispensation, the Nigeria economy is poised to witness increased investment opportunities through increased foreign investment and the privatization of public parastatals with privatization public non-taxable companies will bow become private taxable companies. This is to take advantage of these investment opportunities on investing company has to plan for tax. This research becomes very relevant and significant because investors need to know how tax rules affect their investment and business decision.

1.7 Scope of the Study:

The study is undertaker to investigate the effect of taxation on business and investment decision in the Nigeria economy using decision research method. The method is adopted owing to the use of questionnaires the researcher employed in the gathering of data for statistical analysis.

The time horizon is relatively short, therefore the research focused on Asaba Aluminum company Limited for easy analysis and the extent to which conclusion can be reached. The variable like taxation, inflation, business and investment behaviour are significantly analyzed.

1.8 Limitations of the Study:

1. Non-cooperation from some officials of the Asaba Aluminum Company Limited. Some of the personal contacted for interview did not cooperate, while some that did so reluctantly. The difficulty in getting access to official and up-to-date records and documents was also encountered.
2. Time was another great constraint as lecturers course work and examination preparation were alongside with the writing of this research work.
3. Another constraint that readily comes to mi9nd is cost of writing the research work.

 

1.9 Operational Definition of Terms:

The terminologies used in this study have the following meaning.

1. Taxation: Compulsory contribution imposed by a public authority irrespective of the exact amount of services rendered to the tax payer in return.
2. Investment Decision: The decision to allocate capital to a prospective project or asset or to reallocate capital to another project or asset when the existing project is no longer viable enough to justify the capital committed to it.

iii.     Business decision: Strategic and operational decision taker periodically by management in order to realize the organization overall objectives.

1. Tax Act: The law or legislation regulating the administration of taxes.

Project – The effect of taxation on business and investment decision