The Impact Of Tax Incentives On Economic And Industrial Development

THE IMPACT OF TAX INCENTIVES ON ECONOMIC AND INDUSTRIAL DEVELOPMENT (A CASE STUDY OF BOARD OF INTERNAL REVENUE ENUGU STATE

Many financial analyst, accountants economist and academicians have talked about the attention to the various type s of tax incentives scheme, attention are usually based on the comparison of the various standard for qualifying one for the benefit of the  incentives.

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In Nigeria, for benefit of the incentives development income tax relief Act 1971 granted a period up to five years relief period concession is to attract and support the establishment of headed industries.  Again import duties concession typically have significant effect in their mission of duties and construction materials machinery and equipment reduce  the fixed cost of a new business and places the enterprise on a more competitive basis.  To consider the chances of the scheme, there is usually an assessment of the adequacy of legislation and also suitability of the administration.  The cost of these incentive are determined by analyzing the opportunity cost of the foregone alternative.

2.2     CRITICISM OF THE TAX INCENTIVES SCHEME

          The use of tax incentives to increase investment in developing countries for industrial and economic development has caused also of criticism among her tax experts consultants and economic analyst in spite of the fact that government of the developing countries saw the policy as useful. To consider some areas of disagreement.

Falile (1998:19)  On contributing why the state government generates (ess revenue said that “exemption of low paid workers from tax deplete states government purse” on the inducement effect of tax incentives Taylor (1997:68) argued that “Investment respond to a multiplicity of factor which tax incentives only pay a less marginal significant”  they also argued that removing the hindrance that heater investment rather than including investment through tax concession’s policy is the best option.

Also Read: The Influence Of Job Incentives In Organizations Operation

Maduka (1998:21) said a serious businessmen no matter the incentive you offer him, is not ready to do business where the environment is snot orderly:” (IBIB) further said that there are certain problem of serious proportions treatment to be given to different types within an industry; particularly between new and growing firms.  The variation among firms in this respect tends to be a problem, if the exemption privilege is not granted to all firms in an industry.

Some companies will be placed at a competitive disadvantage.  On the otherhand, if tax concession are extended to all firms there is the tendency for the program to degenerate into a general instead of a method of encouragement new investment.

It is recognized that tax incentives have a legitimate place in an overall development programme for the purpose of inducing, resources into more desire areas.  There is jurisdiction to use purpose of helping particular firm to become established and grow.

Young (1967:105) in a survey of fifty-five Jamaican firms, concluded  that there was no economic justification for having granted tax concessions for most of the firms under the pioneer industrial low the Jamaica.  Only two of the fifty-five industries interviewed mentioned tax incentives as an important factor of influencing investment in Jamaic.

Chelliah (1975:196), on his part cautioned that tax concession is a costly device and most be used with absolute care and diligence.  Government of developing countries may be indirectly acknowledging their inability to collect tax effectively, given the high evasion rate through generous use of tax incentives for private, domestic and foreign investment.  It is also important to note that tax incentive scheme provides a kind of atmosphere in which so many developing countries complete among themselves to attract foreign investors in their country.  The more a country I sable to offer the more potential investors it can attract.

2.3     ARGUMENT FOR TAX INCENTIVE

Most tax experts agree that tax incentives  are necessary in, so many circumstances despite the criticism above using tax incentives to stimulate for economic and industrial development.

Falile (1998:19) on exemption of low paid workers from tax deplete purse gusted, the federal government lad in 1998 budget exempted workers earnings between N30,000 and below from deductions in sits enhancing purchasing power of the working class.

Alande (1998:15) on agricultural rural development received boost budget 97 promised with effect from efficient and efficient mechanisms to that would provide subsidy and incentives to fairness.  Okele (1987:16) contribution in a seminar organized by the institute of chartered accountants of Nigeria in Benin titled ICAN current issued of “Taxation” contented that the  nations economy can be healthy through generous tax incentives to corporate the payers to invest scare resources into valuable protects, the profitability of which many not likely to materialized until about three to five years time in his 1988 budget, review Okeke (ibib) noted also that tax incentive will not only generate employment but will motivate self employed person to incorporate limited  liability companies.  Below are the considerations given to the relevant legislation which provides these incentives to companies, corporation and individuals.

1. Petroleum profit tax act 1959
2. Capital gains tax decree 1967
3. Industrial development (Income tax relief) act 1971
4. Companies income tax 1979

2.4    PETROLEUM PROFIT ACT 1959

          This act is applicable only to any company engaged n petroleum operation and affects chargeable oil. Petroleum as defined in the act means any mineral oil or relative hydrocarbon and natural gas, existing in its natural condition in Nigeria, but does not include liquefied gas, natural gals coal, sales or other stratified deposit from which oil can be extracted by destructive distillation petroleum operations means the running and transportation of petroleum or chargeable oil in Nigeria by or on behalf of a company for its own account by drillings mining, extraction or other like operation not including refining at a refinery in the course of a business carried on by the company engaged in such bank, or companies manufacturing goods for export.  This incentive came into effect from 1^st April 1980 from the current budget package, all mass transport firms with a fleet of not less than three buses are to benefit from an additional five percent (5%) initial capital allowance, firms in Agro-Allied industries have been given investment allowance of 10% on qualified expenditure on agricultural plants and machinery.  Personal Relief: The following relief art available to tax payers and operation and all operations incidental thereto are any sale.  Of any disposal of chargeable oil by or on behalf of the company. These are so many tax incentives granted to companies engaging in petroleum operation.  These incentives provided to a large extent, the basis for stimulating industrial and economic development. These incentives are as follows.

1. Loss relief’s
2. Tax offsets
3. Investment tax credit
4. Annual allowance

Exploration Incentives:  All expenditure which exclusively necessary and reasonably incurred for the purpose of petroleum operations are dimmable as refection from some of that period.

Drilling cost are those of the first two appraised well whether successful or not are to be explained intangible drilling cost means in the act all expenditure and minerals (not being supplied and minerals for well cement ceasing and other well fixtures) which are for or incidental to drilling clearing completing wells the preparation of the incurred in respect of:

1. Exploration: Determining geological and geophysical studies are carried out to identify areas that may contain petroleum reserve.
2. Evasion of rigs and tankage assembling and installation of pipeline and other plants and equipment required in the preparation of drilling well producing petroleum.

Investment tax credit:  it is similar to an initial allowance in the sense that it is granted only once during the life of an asset.  Under this provision, all capitalized expenditure made on or after the effective data (1^st April 1977) was given sits incentives on capital investment tax credit in this year of expenditure.  Such expenditure are as follows.

Qualifying expenditure in respect of on shore operations

Off shore operations

Prior to the 1999 tax year it was called investment tax credit.  It is granted ins the year the relevant asset was first put to use.  It is available as follows

1. Operation ins territorial waters and continental shelf areas up to and including 100 meters of water depth 70%
2. Operation in territorial waters and continental shelf area in water depth between 100 meters and 200 meters 15%
3. Operations in territorial water and continental shelf area beyond 200 meters of water depth 20%.

But the investment tax credit that of the 1959 act a tax off set has now been changed to petroleum investment allowance and no longer a tax  offset but as addition to annual allowance

A new investment tax credit has now been introduced with a new section 20 which affect companies operating producing sharing contracts (PSC) with either the Nigeria National petroleum company (NNPC) or the federal Government of Nigeria.

The investment tax credit rate applicable to the contract areas shall be fifty percent flat rate of chargeable profits for the duration of the production sharing contract.

Petroleum companies that entered into such producing share contract with the federal Government or NNPC are permitted to claim investment tax credit allowance as a tax offset.

CAPITAL GAINS TAX ACT 1962

For the first time in Nigeria Decree No 44 of 1967 known as the capital gains tax decree introduced he taxation of capital gains in the    country.

The law applied only the Federal territory of Lagos and had a retrospective effective in that provisions were deemed  to have come into operations as from 1^st April 1967 so that gins accruing to any person on or after 1^st April 1967 on a disposal of assets become chargeable to capital gain tax as from 1967/68 years of assessment.

By the amendment contained in the finance (Miscellaneous Taxation provisions) degree 15 of 1976 with retrospective effect from 1^st April 1995 the capital gain tax became applicable throughout Nigeria and to non-residents persons liable capital gain tax on chargeable gains accruing to him in a year of assessment during which he is resident (staying for a total period of  183 days or more or domicile) (stay in all the year round).

1. A person who is resident but not domiciled in Nigeria is liable to capital gain tax on gains accruing from the disposal of assets situated outside Nigeria if and to the extent that such gain are remitted to Nigeria.

• Where a person is domiciled abroad and remitted a capital gain on or after April 1967, that gain is to be assessed to capital gains tax in the year it is remitted.

1. A person who is not resident in Nigeria is chargeable to capital gains tax in the year it is remitted.
2. A person who is not resident in Nigeria is chargeable to capital in tax on gain accruing to him in that year if:
3. He is carrying on a trade in Nigeria through branch or agency which is classified as a permanent establishment and
4. The commissioner of stamp duties shell demand tax clearance

certificates before accepting such documents for stamping and the state Board of internal revenue (SBIR) administer the tax.  Tax due from companies and non-resident individual is collected by the FBIR while the SBIR collects from resident individuals  personal representatives trustees and partners in a partnership.  By the  provision of sectors partnership.  By the provision of sectors 6 & 7 of the principal Act liability to capital gains tax arises when there is a disposal of asset. i.e. disposal in the ordinary sense e.g. a sale or gift are to be treated as such.  The receipt of any capital sum derived from an asset constitute deemed disposal even if no asset is acquired by the payer and the time of such disposals is the time when the capital sum is received.  Sections 6 refers specifically to the following capital sum received by way of compensation for any loss of office or employment etc

CAPTIAL GAINS TAX ACT 1977 this act exempts some assets and they are:

1. The private residence of an individual provided on income accrues from there it is on section 36 of the Act.
2. Section 39 exempts chattes (Removable properties in the house) disposed off for not more than N1,000
3. Motor car that are suitable for private use are exempted, unless it

is used for commercial purposes.  This is on section 38 of the Act.

Presently capital Grain tax act of 1990 chapter 42 Laws to the federation of Nigeria.  By the amendment  contained in the finance (Miscellaneous taxation provisions) Decree 15 of 1976 with retrospective effect from 1995 the capital gins tax became applicable throughout Nigeria and to non-residents. T he rate of capital gain tax was twenty percent (20%) up to the 1995 tax year. From the 1996 tax year it was reduced to tax percent (10%) This tax applies to the total amount of chargeable gain arising from acquisition and disposals of all forms acquisition and disposals of all forms of property whether situated in Nigeria or not and accruing to any person in a year of assessment after making all the allowable deductions.

RATE OF TAX AND PERSONS LIABLE TO THE TAX

Any person (other than a company) who engage in petroleum  operations wither on his own account or jointly with any other person in partnership with any other person with a view to sharing the profits arising from those operations.  The decree as amended provision in section 17 of the act that the rate of capital gain tax shall be ten percent of the capital gains accruing within Nigeria.  The rate of take of ten percent already mentioned shall apply to the capital gain accruing to any person in a year of assessment.  The decree is more helpful and provides that

1. Individuals within Nigeria
2. All companies throughout the federal where all dealt with by the federal board of inland revenue and are deemed to be resident in the federal territory of Abuja irrespective of their location are liable to pay the tax.

CAPITAL ALLOWANCE:

Capital allowances are therefore allowance claimable by tax payers and business organization in respect of capital asset which they use in the business trade, profession or vacation in earning their income and which have suffered diminution in values during an accounting period, it has been described as repayment of the cost of assets by the government to the traders in order to encourage automation in industries with a resultant decrease in the taxes paid by these asset owners.  The higher the rates of capital allowance the lower the tax and etc.  capital allowance s  as allowable grant by the act on business when a qualifying expenditure is business expense for tax purpose. The reasons are not farfetched.

One the calculation of deprecations subjective companies may arbitrarily choose one of the many methods for calculating depreciation.

Each method will affect the ultimate taxable profit.  Two companies ones their own may fix the useful lives of their  assets to their own advantage for these reasons and others the tax act specifically add back depreciation to the net profit as per the accounting profit for the purpose of deriving the adjusted profit in the place of depreciation capital allowance is granted. T he act specifically set out the qualifying capital allowance thus reducing the subjective nature of depreciation.

TYPES OF CAPITAL ALLOWANCE

1. Initial allowance
2. Annual allowance
3. Investment allowance

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