Full Project – Effect of taxation on the manufacturing sector output in Nigeria

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CHAPTER ONE

INTRODUCTION

1.1   Background to the Study

One of the objectives of policy makers in Nigeria has been the maintenance of economic stability and sustenance of economic growth. There has been growing concern on the role of fiscal policy on the output and input of manufacturing industry in Nigeria even as government embarked on several policies aimed at improving the growth of Nigerian economy. Government as an economic institution plays a vital role in the determination of the output performance and capacity utilization of manufacturing industry in Nigeria. It also plays crucial roles in stimulating and influencing the market forces of demand and supply through its policy instruments through which it influences the developmental roles of the manufacturing sector.

The most controversial component of fiscal policy is the tax policy. Tax policy remains a major fiscal policy instrument of the government for generating revenue to meet up with the infrastructural challenges affecting the production function of the manufacturing sector of the economy. Taxation is the sum total of the assessment of tax, the imposition of compulsory sum of money by the government or its agencies on individuals and firms, the collection of and the accounting for the levied amounts and the keeping and auditing of tax records (Anyanwuocha, 1993).

The activities of manufacturing firms have significant impact on the developmental process of any economy as they account for a substantial proportion of total economic activities. Loto (2012) has defined manufacturing sector as an avenue for increasing productivity in relation to import replacement and export expansion, creating foreign exchange earning capacity, raising employment and per capita income which causes unrepeatable consumption pattern. Thus manufacturing industries is key variable in an economy. The changes in the manufacturing share of the GDP and capacity utilization shows that firms that are efficient can contribute to job creation, technology promotion as well as ensure equitable distribution of economic opportunities and the macroeconomic stability of the country.

Improving crumbling infrastructure and poor services in Nigeria is one of the top priorities of Nigerian government. But with debt repayments reaching nearly two-third of revenues, it has struggled to find the money to tackle the problems and is ramping up efforts to boost tax collection. The Federal Inland Revenue Service has said it loses $15 billion annually to tax evasion and that it has roughly doubled the tax base since 2015, when President Muhammadu Buhari was first elected. The government raised the value added tax rate from 5% to 7.5% in 2020 as part of a finance bill that aims to boost revenue collection.

In recent times the manufacturing industries in Nigeria have been characterized by declining productivity rate. According to World Bank national account data, the value for manufacturing, value added (annual % growth) in Nigeria was 2.09 in 2018. Over the past 36 years, where it reached a maximum value of 21.80 in 2013 and a minimum value of -29.03 in 1983. While it is true that Nigeria has the third highest Manufacturing value-added (MVA) in Africa owing to her huge economic size, the trend from 1981 till date shows that very little success has been recorded over the years.  Ogbuagu & Ewubare (2017) observed that poor implementation of budget by the government and hindrance in assessing raw materials will continuously lead to the poor performance or turn-over in the manufacturing sector.

Thus this research seeks to study the effect of taxation on the manufacturing sector output in Nigeria this is because a proper understanding of this impacts will be useful in the settings of taxation policy.

• Statement of the problem

In recent times, some manufacturing industries in Nigeria have been characterised by declining productivity rate, which is caused largely by taxation policy, inadequate electricity supply, high exchange rate and low government expenditure.  Ogbuagu & Ewubare (2017) noted that poor implementation of budget by the government and hindrance in assessing raw materials will continuously lead to the poor performance or turn-over in the manufacturing sector.

Inadequate financial support and lack of proper harmonization and coordination of tax policy has led to multiplicity of taxes. As at 2002, 40 different taxes and levies are shared by all three levels of government (Adeoye, 2006) and the number increased to 47 in 2013 as reported by World Bank. More so, taxation system in Nigeria had not been fully tapped and maximized and its role in promoting social economic activities is not felt because of its poor administration, irregularities and leakages in the tax system.

From evidence available to us;

The incidence of multiple taxes, which have crippled operations of many listed firms in Nigeria has spawned fresh criticisms as capital market experts urged the government to abolish such investment obstacles. (Helen, 2019; The Guardian)

Added to the above is the problem knowing precisely, which measure of taxation policy is most effective in addressing manufacturing sector fluctuation in Nigeria. Most previous studies seemed to be divided on this issue. Thus this study seeks to empirically examine the effect of taxation on the manufacturing sector output in Nigeria (1981-2019).

• Research Questions

This study will be based on the following Research Questions:

1. What is the impact of taxation on manufacturing sector output in Nigeria?
2. What is the impact of value added tax on manufacturing sector output in Nigeria?

• What is the impact of corporate tax on manufacturing sector output in Nigeria?

1.4. Objectives of the Study

The general objective of this study was to determine the extent to which taxation has affected the level of manufacturing sector output in Nigeria. To achieve this general objective, the following specific objectives will be examined.

1. To examine the impact of taxation on manufacturing sector output in Nigeria.
2. To examine the impact of value added tax on manufacturing sector output in Nigeria.

• To examine the impact of corporate tax on manufacturing sector output in Nigeria.

1.5      Research Hypotheses

1. H₀: Taxation has no significant impact on manufacturing sector output in Nigeria.
2. H₀: Value added tax has no significant impact on manufacturing sector output in Nigeria.

• H₀: Corporate tax has no significant impact on manufacturing sector output in Nigeria.

1.6 Significance of the Study

This study will be of utmost importance to investors, government and the researchers because it will provide policy recommendations to the various Nigeria stakeholders taking adequate measures in the economy for rapid growth and industrialization.  It will contribute to existing literature on the subject matter by investigating empirically the role, which taxation plays in manufacturing sector growth and development of the country. This study will be of benefit to;

The Academia: members of the academia will find the study relevant as it will also form basis for further research and a reference tool for academic works.

Government: this study will reveal to the government happenings in the manufacturing sector. Formulation and implementation of policies based on this findings would ensure growth in the sector.

Investors: this study shall also be valuable to the investors especially those who may have research interest as it shall guide their private investment decisions.

1.7 Scope of the Study

This research work aims to examine the effect of taxation on manufacturing sector output in Nigeria. The study covered the period of 1981-2019. This is due to the Structural Adjustment Period of 1985/86 where the country went through a major structural changes and economic data could be recorded from that period.

1.8 Organization of the Study

This study is divided into five chapters. Chapter one is introduction which consists of the background to the study, statement of problem, research questions, research  hypotheses,  objectives  of  the study, the  significance  of  the  study,   the scope  and  limitations  of  the  study  and  finally the  organization of the study. Chapter two deals with the literature review which consists of the conceptual literature, theoretical literature, empirical literature, theoretical framework, gaps in literature. Chapter three gives the methodology including techniques of analysis of data, types and sources of data, method of estimation and model specification. Chapter four is presentation and analysis of results which contains the presentation of results, interpretation of results and summary of major findings. Finally, Chapter five gives the summary, conclusion and recommendations.

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Full Project – Effect of taxation on the manufacturing sector output in Nigeria