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Taxation has been nailed as one of the areas which generate revenue for the government apart from oil. Tax is a compulsory payment levied on all the incomes, goods, services, and properties of individuals, companies, partnerships, trustee and organization by the government. Taxation is therefore, one among other means of revenue generation of any government to meet the need of the citizens.

According to Public Finance General Directorate (2009) the purpose of taxation as enshrined for the maintenance of public force and administrative expenses. Miller and Oats (2006) uphold that taxation is required to finance public expenditure. A good tax should have the qualities of Equitability, Efficiency, Neutrality, flexibility, and simple. These principles still holds today and even act as a guide for policy formulation (James and Nobes (2009). They noted further that the inability of tax policy to meet up with efficiency and equity criteria against which it is being judged. The central objective of the Nigerian tax system is to contribute to the wellbeing of all Nigerians directly through improved policy formulation and indirectly though appropriate utilization of tax revenue generated for the benefit of the people. In generating revenue to achieve this goal, the tax system is expected to minimize distortion in the economy (Presidential Committee on National tax policy 2008). One of the components of tax which can generate revenues is capital gain tax. Capital gains are taxed only when the gains are realized by sale or exchange of assets, and gains on assets transferred at death are never taxed.

Capital gains tax (CGT) refers to a tax on capital gains, the profit realized on the sale of a non-inventory asset that was purchased at a cost amount that was lower than the amount realized on the sale (Wikipedia, 2016). The most common capital gains are realized from the sale of stocks, bonds, precious metals and property. According to Thomas (2010), capital gains are taxed as they are realized (that is, when the capital asset is sold or exchanged). Capital assets are property, but there are exceptions such as business inventory, accounts receivable acquired in the ordinary course of business, copyrights, and literary compositions. Capital gains are calculated by subtracting the asset’s basis from the sales price. An asset’s basis is the original purchase price adjusted for certain additions and deductions; it is not adjusted for inflation. If the basis is greater than the sales price then it is a capital loss. Taxes are charged by the state over the transactions, dividends and capital gains on the stock market. However, these fiscal obligations may vary from jurisdiction to jurisdiction (Wikipedia, 2016).

A capital gains tax is also a tax levied on capital gains incurred by individuals and corporations. Capital gains are the profits that an investor realizes when he or she sells the capital asset for a price that is higher than the purchase price. Capital gains taxes are only triggered when an asset is realized, not while it is held by an investor. An investor can own shares that appreciate every year, but the investor does not incur a capital gains tax on the shares until they are sold (Investopedia 2016). Capital Gains Tax is a tax on the profit obtained from a disposal or exchange of certain kinds of assets. In Nigeria, Capital Gains tax is 10% of the profits from the sale of the qualifying assets. It is recognized in law under the Capital Gains Tax Act while CGT is chargeable at 10 per cent on capital gains from the sale of capital assets (Nairametrics 2013).

Victor, T. (1996) and Gerald, A. & Carroll, R.(1999) state three effects that inflation may have on real tax liability and requires understandings for an adjustment are (1) erosion of amounts expressed in national currency, (2) erosion of the value of tax obligations, and (3) other effects on the measurement of the tax base. The techniques for compensating for each of these effects are different. All, some, or none of these may apply to a particular tax. An ad valorem excise tax is said to be an example which implies no consideration for or not affected from above three affects because of immediate collection. Therefore it requires no adjustment for inflation. On contrary, income tax is noticeably complicated for the effects of inflation in terms of all three effects are present.

In 2000, Samimia, A.J. so focused on two-way relationship of inflation and fiscal deficit in Iran and concluded that the country which is financing its fiscal deficit with money creation causes increase in inflation. However, Dornbusch, R. et al (1990) had argued the same phenomenon for developing countries that the budget deficit becomes a principal determinant of money growth & inflation, if only way to finance budget deficit is money creation. Tanzi, V. (1977) has noted, in terms of revenue adjustment, two critical parameters that influence the rapidity of adjustment of tax revenue to inflation are; the responsiveness of tax and the collection period & the time when tax liability accrues. Personal income tax is said as highly elastic, subject to its progressiveness. The corporation tax response is based on the growth of corporate sector in relation to other sectors of the economy for which collection lag extending to 18 months in many developing countries. The rapidity of indirect tax adjustment to inflation will be influenced significantly by the nature of taxes (ad valorem or specific) and the accounting system in manufacturing and wholesale developments.

Inflation can alter the characteristics of tax and contribution systems in numerous ways; Immervoll, H. in 2000, showed in his research that if the tax values are computed in a nominal fractional change, inflation will lead to increasing effective tax rates. Capital gains tax is an important example of this. A tax base is not affected by inflation if the tax is a fraction of a transaction’s value at the time of the transaction.



Collection of capital gains tax involves some challenges. Adebayo (2017) stated that lack of data or record keeping in order for the tax authorities to be aware of when a capital gain has been made and liable to pay this tax is problem.

The situation discourages investment since the tax is charged on the profits realized from the sale of capital assets and the burden is to be borne by the buyer as a result of high prices of property cited by the seller to cover up for the tax. Marotta (2017) stated that there are many ways of avoiding paying capital gains tax. Marotta (2017) explained that investors can realize losses to offset and cancel their gains for a particular year. Kenyan Academia (2017) pointed out that it is difficult to levy tax on non-resident persons in one country who own property in another country since there is no system of withholding tax that would oblige the buyer to remit the tax from the proceeds of the sale of such property.

Simons conceded that most capital gains are largely fictitious once inflation is taken into account. In principle, he said, tax law should adjust gains and losses for changes in the price level. “Considerations of justice demand that changes in monetary conditions be taken into account in the measurement of gain and loss,” (Henry, 1938).



This study sought to know the impact of inflation on the taxation of capital gain. Specifically, the study sought to;

  1. examine the effect of inflation on taxation in Nigeria.
  2. assess the relationship between inflation and taxation.
  3. assess the relationship between inflation and taxation of capital gain.



  1. What is the effect of inflation on taxation in Nigeria?
  2. What is the relationship between inflation and taxation?
  3. What is the relationship between inflation and taxation of capital gain?



Ho1: There is no relationship between inflation and taxation.

Ho2: There is no relationship between inflation and taxation of capital gain.

1.6       Significance of the Study

This study will be of immense benefit to other researchers who intend to know more on this study and can also be used by non-researchers to build more on their research work. This study contributes to knowledge and could serve as a guide for other study.

1.7       Scope/Limitations of the Study

This study is on the impact of inflation on the taxation of capital gain.

Limitations of study

Financial constraint: Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

Time constraint: The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.


1.8       Definition of Terms

Inflation: Inflation is a sustained increase in the general price level of goods and services in an economy over a period of time.

Taxation: Taxation is a term for when a taxing authority, usually a government, levies or imposes a tax.

Capital Gain: Capital gains are generally included in taxable income, but in most cases, are taxed at a lower rate. A capital gain is realized when a capital asset is sold or exchanged at a price higher than its basis.



Dornbusch, R. Sturzenegger, F. & Wolf.H. (1990). Extreme inflation: Dynamics and Stabilization. Brooking Paper on Economic Activity. 2. 1-84

Gerald, A. & Carroll, R.(1999), Effect of Income Taxes on Household Incomes, Review of Economics and Statistics, 81 Issue 4 (November 1999): 681-93.

Henry C. Simons, Personal Income Taxation (Chicago: University of Chicago Press, 1938), p. 155.

Immervoll, H. (2000). “The impact of inflation on income tax and social insurance contributions in Europe,” EUROMOD Working Papers EM2/00, EUROMOD at the Institute for Social and Economic Research.

James, S. and Nobes, C. (2009) Economics for Taxation. 9th ed. Birmingham, Fiscal publications.

Presidential Committee on National Tax Policy (2008) “Draft Document on the National Tax Policy”.

Public Finance General Directorate (2009) the French Tax System.

Tanzi, V. (1977). Inflation, Lags in Collection and the Real Value of Tax Review. IMF Staff Papers. Vol. 24, pp. 154-167.

Thomas L. H. (2010). The Economic Effects of Capital Gains Taxation. CRS Report for Congress Prepared for Members and Committees of Congress Congressional Research Service 7- 5700.

Victor, T. (1996) Tax Law Design and Drafting, International Monetary Fund: 1996; Chapter 13, Adjusting Taxes for Inflation.

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