(PDF) The Pioneer Income Tax Relief as an Investment Incentive in Nigeria

THE PIONEER INCOME TAX RELIEF AS AN INVESTMENT INCENTIVE IN NIGERIA

CHAPTER ONE

INTRODUCTION

BACKGROUND OF STUDY

Modern taxation and its application as a fiscal policy may be dated back to 1926, a year of economic downturn in the United Kingdom. During this time, Britain saw an unparalleled fall in general economic activity, resulting in lower total profits, a lack of money in the private sector, and lower income per capital, with an accompanying low standard of life (Adesola 1986). The impact of the Great Depression was felt not only in the United Kingdom, but practically elsewhere in the world. Governments at the period were attempting to resurrect, rehabilitate, and mobilize sufficient capital to cover economic and social expenditures while also raising the standard of living for their citizens. Various fiscal policies, including taxes, were developed as a result of this. According to Aguolu (1999): 1), taxation is a mandatory levy levied by the government through its agencies on the income, consumption, and capital of its subjects. Personal income, such as salary, company earnings, interest, dividends, discounts, and royalties, are subject to these charges. They are employed to offer security, social amenities, and to establish circumstances for society’s economic well-being. According to Olatunji, Olaleye, and Adesina (2001), the major objective of taxes is to collect revenue to cover the government’s budget as well as to redistribute wealth and control the economy. A tax incentive, on the other hand, is an exemption or relief offered to an individual or a firm in order to decrease the effect of taxation and so stimulate savings and investment (Aguolu 1999). These benefits are given to people or businesses whose income or profit is earned, derived, brought into, or received in Nigeria. They are as follows: I Personal Allowance (ii) Investment Allowance (iii) Allowance for Capital (iv) Compensation for Loss (v) Relief from Rolling Over (vi) Pioneer Assistance (vii) Incentives for exploration These incentives, however, are supported by several pieces of government law. They are awarded to promote the growth and development of industries, as well as to economically empower individuals and corporate taxpayers (Ariwodola J. Adebisi 2000). The Pioneer Tax Incentive (“PTI”), on the other hand, is one of the various tax breaks in Nigeria targeted at luring investment into important areas of the Nigerian economy. It was established to reward eligible firms under the Nigerian Industrial Development (Income Tax Relief) Act (“IDA”). The PTI provides entities that satisfy the conditions with an income tax “holiday” of up to five years (three years initially and renewable for an additional two years). In addition, pioneer firms may be eligible for additional benefits, such as an exemption from withholding tax on dividends received from corporate earnings. After recognizing the relevance of Pioneer Tax Relief, this paper focuses on a critical examination of PTI’s efficacy as an investment incentive in Nigeria.

1.2 STATEMENT OF THE PROBLEM

There are several incentives which are available in Nigeria to encourage the inflow of foreign direct investment and the development of the economy. One of such investment incentives available to industries in Nigeria is that under the Industrial Development (Income Tax Relief) Act, which grants tax holidays to companies in the industries that meet the conditions of being designated Pioneer industries. Despite the existence of these several incentives, many of the industrialists, entrepreneurs and investors are not benefiting from these incentives hence facing financial instabilities. What may be the reason for this and how can this problem be solved? One glaring reason which accounts for this, is the lack of awareness of the existence of these incentives, the procedures to follow so as for one to benefit from the incentives and ineffectiveness and poor implementation of these incentives in Nigeria.

OBJECTIVES OF THE STUDY

The objective of this study is to evaluate the relevance of the Pioneer Income Tax Relief as an investment incentive to companies in Nigeria. Hence, below are the specified aims of the study:

RESEARCH HYPOTHESIS

The following hypotheses have been developed to aid in the achievement of the study’s goal.

Ho1: Pioneer tax incentives as an investment relief have no effect on the performance of pioneer firms in Nigeria.

Ho2: Pioneer tax incentives are not effectively and efficiently administered to Pioneer firms in Nigeria.

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 pioneer companies and thus providing a framework and foundation for reviewing the various tax policies. The study’s results will add to the increasing body of research in this field and help explain the Pioneer Income tax relief as an investment incentive in Nigeria. Furthermore, this 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.

SCOPE OF THE STUDY

The study was limited to assessing Pioneer Income tax relief as an investment incentive in Nigeria, examining the various investment incentives available to industrialists, entrepreneurs, and investors in Nigeria, determining whether Pioneer tax incentives as an investment relief have an effect on the performance of pioneer firms in Nigeria, and determining whether Pioneer tax incentives are effectively and efficiently implemented.Hence, this study is delimited to selected indigenous companies in Aba, Abia State, Nigeria.

LIMITATION OF THE STUDY

The major limitations to the study are insufficient funding to involve many respondents to this research and carry out other logistics required in this study. Also, the time factor was another constraint where the researcher had to share available time with academic work and conducting of this research within the given time frame.

Inadequate materials needed for the success of this study was another factor that limited this study. The sources of literature and conducting of interviews in order to validate this research posed a barrier to the researcher.

DEFINITION OF TERMS

Pioneer Status Incentive: The Pioneer Status Incentive was established by the Industrial Development (Income Tax Relief) Act, No 22 of 1971 and is a tax holiday which grants qualifying industries and products relief from payment of corporate income tax for an initial period of three years, extendable for one or two additional years.

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.