CHAPTER TWO
LITERATURE REVIEW
2.1. Conceptual Review
2.2. Theoretical Review
2.3. Empirical Review
2.4. Gaps in the study
2.5. Researchers conceptual review
CHAPTER TWO
REVIEW OF LITERATURE
This chapter reviewed some related previous studies and provided a theoretical framework
for the study. The chapter also reviewed the concepts of independent variable, federal taxes and
its sub-variables: petroleum profit tax (PPT), company income tax (CIT), capital gains tax
(CGT), value added tax (VAT), custom and excise duties(CED) and stamp duties (SD); and also,
the dependent variable which is economic growth and its sub-variable gross domestic product
(GDP). The conceptual review provided the study a ground to understand the variables in the
research work while the theoretical framework provided the framework upon which this study is
based. The empirical literature permitted the researcher to identify the available gap(s) in
empirical investigations from previous studies so as to expand the boundary of knowledge while
adding to existing literature
2.1. Conceptual Review
2.1.1 Economic growth
Haller (2012) defined economic growth as, “the process of increasing the sizes of national
economies, the macro-economic indications, especially the Gross Domestic Product per capita,
in an ascendant but not necessarily linear direction, with positive effects on the economic-social
sector”. Gross Domestic Product (GDP) is the measure of the monetary value of final goods and
services produced within a country in a period of time, usually a year. The GDP of a country is
evaluated using nominal GDP or real GDP. According to Curtis, D. and Irvine, I. (2021) nominal
GDP is the market value of all final goods and services produced at a specific time, measured at
current prices while real GDP is the market value of all goods and services produced at a specific
time, measured at constant prices. Real GDP is adjusted for inflation.
2.1.2 Federal Taxes
According to Ifurueze and Ekezie (2014), tax is “a compulsory levy imposed on a person
or upon his property by the government to generate revenue for the provision of basic and social
amenities for the wellbeing and economic growth of the society. Tax is imposed on companies,
citizens or products by the government in a country. There are two forms of taxes: direct and
indirect taxes. Direct taxes are taxes imposed by the government on the income of individuals
and companies. Indirect taxes are taxes levied by the government on goods and services.
Federal taxes are taxes collected and remitted to the Federal Inland Revenue Service
Board (FIRS).FIRS was created in 1943. The FIRS Board is made up of the executive chairman,
representatives of six geo political zones and Corporate Affairs Commission, Revenue
Mobilization Allocation and Fiscal Commission, Nigerian National Petroleum Commission,
Ministry of Finance and Nigeria Customs.
The taxes collected by FIRS include: petroleum profit tax, company income tax, capital
gains tax, value added tax, customs and excise duty, stamp duty, personal income tax (PIT) for
non-residents, members of Armed Forces, Police and Officers of Nigerian Foreign Service,
withholding tax (WHT) and tertiary education Tax.
2.1.2.1 Reasons for taxation
I.
The main purpose of taxation is to provide revenue for the government in order to meet
government needs and provide social amenities like good roads, bridges, railway
transportation, hospitals, electricity, water and security.
II.
Taxation helps to redistribute income in the country. The VAT collected is shared to
each state in Nigeria using an allocation formula in order to reduce inequality.
III.
Taxation helps in providing job and employment opportunities for citizens in the
country.
IV.
Tax also helps to protect infants or young industries in the country from their
competitors abroad through custom and excise duty tax and to discourage the
consumption of goods which are socially unacceptable.
V.
Taxation provide fiscal tool for stimulating economic growth and development of the
country.
2.1.2.2 BRIEF HISTORY OF TAXATION IN NIGERIA
Taxation can be traced to 1904 year when late Lord Lugard introduced income tax in
Nigeria. It started as a community tax in form of individuals’ contributions to community
welfare which later resulted in the Native Revenue Ordinance in 1917. In 1918, an amended
ordinance extended the provisions of 1917 Ordinance to Southern Nigeria. The first ordinance
applied to Abeokuta in Ogun State and to Benin City in Edo State and in 1928, it was extended
to Eastern Nigeria. The Nigeria income taxation did not start until 1940 when the Native
Revenue Ordinances of 1917, 1918 and 1928 were incorporated in the direct taxation under
Ordinance No. 4 of 1940 cap. 54, 5 which repplaced the Native Revenue Ordinance, cap 74 in
the 1923 edition and the Native Direct Taxation (Colony) – Ordinance No. 41 of 1937. This
Ordinance was however discriminatory as it applied to natives in Nigeria elsewhere, that is, other
than in the township of Lagos. However, a more comprehensive Income Tax Ordinance No. 29
of 1943 which came into effect on 1 April 1943, governed the assessment of the income of nonAfricans resident outside Lagos as well as Africans and non-Africans resident in Lagos.
After the Income Tax Ordinance of 1943, there was no significant change in the tax
system until 1956. The determinant of the taxable income or, better still, the original Inland
Revenue Departments was the Resident, who was the officer appointed by the Governor to be in
charge of the province, together with any other administrative officer authorized by the resident
to perform any duties imposed upon the Resident under the Ordinance; the Chief elders and other
persons of influence in each district; any native authority which by native Law and Custom was
recognized as the tax-collector. However, the Northern Region did not pass its own personal
income tax law until 1962.
All the regional tax laws later formed the basis of personal income taxation in all the
States that were created out of the Regions. In the Federal Territory of Lagos, the Income Tax
Ordinance, 1943, remained in force until the Personal Income Tax (Lagos) Act 1961 enacted by
the Federal Government. It was the 1961 enactment that gave birth to separate laws on income
and profit of both individuals and companies namely Income Tax Management Act (ITMA); and
Companies Income Tax Act (CITA). CITA was passed in 1961. The Petroleum Profit Ordinance
was passed in 1959 but took effect from 1 January 1958. So many laws have been passed to date
on taxation in Nigeria.
2.1.2.3 THE NIGERIA TAX SYSTEM
The tax system of Nigeria involves a three aspect, namely the tax policy, the tax laws,
and the tax administration.
I.
Tax Policy: The tax policies are general statements which guide the thinking and the
action of people in the realization of the set goals. Low tax regime has been introduced
with the aim of reducing individual tax burden and thereby encourages savings and
investment. Self-assessment scheme has also been introduced to encourage taxpayers’
participation in the assessment process.
II.
Tax Laws: The tax laws include tax legislations in Nigeria. They include:
a. Personal Income Tax Act Cap. C21, LFN 2004(as amended;
b. Companies Income Tax Act Cap C21 LFN 2004 (as amended);
c. Petroleum Profits Tax Act Cap P13 LFN 2004(as amended);
d. Capital Gains Tax Act Cap C1 LFN 2004(as amended);
e. Value Added Tax Act Cap V1 LFN 2004(as amended);
f. Tertiary Education Tax Act Cap E4 LFN 2004;
g. And Stamp Duties Act Cap S8 LFN 2004.
III.
Tax Administration: It involves the practical interpretations and application of the tax
laws. The bodies charged with the administration of tax in Nigeria are the Federal, the
State and Local governments. The tax authorities of these tiers of government derive their
formation from the Federal laws which include:
a. The Federal Inland Revenue Service Board, sections 1, 2, and 3 of the Companies
Income Tax Act (CITA) Cap C21 LFN 2004;
b. The Board of Internal Revenue (SBIR), sections 85A, B and C of Personal Income
Tax Act as amended;
c. And The Local Government Revenue Committee, sections 85D and E of Personal
Income Tax as amended.
2.1.2.4 Classification of Taxes
Taxes are classified in different ways depending on the perspective of tax.
I.
Classification of tax according to tax subject: Taxes can be classified into
direct and indirect tax.
a. Direct tax: This is the type of tax levied directly on the taxpayer’s income.
Examples of this tax type include: companies income tax, personal income
tax, capital gains tax.
b. Indirect tax: This is the tax levied on goods and services. Examples of
indirect taxes include customs and excise duties tax, value added tax.
II.
Classification of tax according to tax base: This is the classification according
to what is being taxed.
a. Capital: This is the capital gains tax.
b. Income: This is based on personal and company income tax.
c. Consumption: This is based on value added tax and custom and excise duties.
III.
Classification of tax according to the distribution of tax burden: Taxes are
classified according to the distribution of tax burden
a. Proportional Tax: The taxpayer pays the same percentage of income as tax.
Examples are capital gains tax and companies income tax.
b. Progressive Tax: The more the taxpayer earns, the more he pays, an example
of this type of tax is personal income tax personal income tax.
c. Regressive Tax: In this case, the taxpayer with smaller income pays a greater
percentage of the income as tax compared with a person with higher income.
An example is Value Added Tax (VAT)
2.1.2.5 Principles of Taxation
Adam Smith (1776) in his book, “Wealth of nations” wrote about the principles of
taxation.
Certainty: Tax payers should be certain and clear about the time and manner of payment, and
amount to be paid, the basis of taxation, rate of tax applicable and the relevant tax authority to
pay to.
Equity: Tax payment should be seen to be equal in order to gain the acceptability of tax payers
and the ability to pay. People in the same level of income should pay the same tax rate, while
does in different income level should pay different tax rate
Convenience: The tax should be convenient to pay by the tax payers. It should not be seen as a
burden.
Efficiency: Tax payment and administration should be efficient so as not to cause economic
distortion. Tax should be collected in a cost-effective manner.
2.1.2.6 Sources of Nigerian Tax laws
Tax laws originate from:
I.
The various income tax laws. The state and federal laws including the federal
government laws court judgements, department and official circulars;
II.
the opinion of income tax authors and experts;
III.
court judgments until overruled;
IV.
departmental and official circulars;
V.
practices of the revenue department;
VI.
Accepted recommendations of commissions of inquiry;
VII.
the constitution of the federal republic of Nigeria;
VIII.
customary laws.
start
2.1.2.7 Petroleum Profit Tax
Petroleum Profits Tax is governed by the Petroleum Profits Tax Act, Cap P13, LFN 2004
(as amended). The act was enacted in 1958 but became effective in 1959. It was enacted to
regulate the taxation of companies engaged in production and exporting of crude oil and natural
gas. It is imposed on income of companies in petroleum operations. The rate of the tax for joint
venture and sole risk companies in their first five years of operation is 65.75% of chargeable
profit and 85% for companies in operation for more than five years. For a company under
production sharing contract, the rate of the tax is 50% of chargeable profit.
2.1.2.6 Company Income Tax
Company income tax is governed by Companies Income Tax Act (CITA), Cap C21, LFN
2004 (as amended). The act was enacted in 1961. It is a tax imposed on profit of a company from
all sources. The rate of is 30% of total profit of a company. The due date for filing returns is
within eighteen (18) months from date of incorporation for new companies and within six (6)
months after the end of the accounting year for an existing company.
2.1.2.7 Capital Gains Tax
Capital gains tax is governed by Capital Gains Tax Act, Cap C1, LFN 2004 (as
amended). The law was derived from capital gains tax act 1965 of the United Kingdom. This is a
tax derived from the sale or disposal of a non-current asset. It is charged at a flat rate of 10% of
chargeable gains.
2.1.2.8 Value Added Tax
VAT is a form of indirect tax paid when goods are purchased and when services are
rendered. It is a tax borne by the final consumers. VAT is charged at the rate of 7.5%All goods
and services produced in or imported into the country are taxable except from the one exempted
like educational and medical goods. All taxable persons are required to file VAT monthly returns
not later than 21st day following the month of transaction. It is governed by Value Added Tax
Act, Cap V1, LFN 2004.
2.1.2.9 Customs and Excise Duty
Customs and excise duty is an indirect tax imposed on goods and services imported and
exported. It is a tax to prevent the importation of banned and harmful goods and ensure the
regulations of goods imported into the country as well as those exported. It is governed by
Customs and Excise Management Act of 1958.
2.1.2.10 Stamp Duty
Stamp duty tax is a tax imposed on written documents executed by a company, group or
individual. A commissioner of stamp duties dictates the amount payable on instrument. Stamp
duties are paid before documents can be executed. It is governed by Stamp Duties Act, CAP S8,
LFN 2004 (as amended)
2.2
Theoretical Review
In this study, this section provides the basic theoretical assumptions and foundation for the study.
These theoretical foundations proposed for this study include: Shareholders’ theory and Value at
risk theory. The theoretical framework of this study is based on both theories as shareholders
theory is related to dependent variable (Shareholders’ wealth maximization) while the second
theory of value at risk theory is related to the independent variable (Risk management) depicting
the risk element on the study. Other relevant theories include agency theory, stakeholder theory
and stewardship theory
2.5 Theoretical framework
Appah (2010) said that tax revenue is enforced by the three tiers of government, that is Federal,
State, and Local Government with each having its sphere clearly spelt out in the Taxes and
Levies (approved list for Co1llection) Decree, 1998.
According to Unegbu and Irefin, (2011), the Nigerian tax system has undergone several reforms
towards enhancing tax administration with minimal enforcement cost. The recent reforms
include the introduction of Taxpayer Identification Number (TIN), which became effective in
February 2008, Automated Tax System that facilities tracking of tax positions, E-payment
system which enhances smooth payment procedure and reduces the incidence of tax touts,
enforcement scheme which engages special tax officers in collaboration with other security
agencies to ensure strict tax compliance payment.
Value Added Tax (VAT)
The concept Value-Added Tax has been given different definitions by different authors and
writers. According to Abata (2014) "Value-Added Tax is described as a consumption tax
whereby the consumers bear the tax burden. He explained that tax burden is passed from the
manufacturer to wholesaler to retailer and finally to the consumer who ultimately bear the
burden. Ittherefore means that VAT can only be avoided by not buying and consuming the vat
able goods or services. Similarly, a vatable person is one who trades in vat able goods and
services for considerations. Olurofimi (2013) asserted that indirect tax imposed on every sale
begins at the production and distribution cycle and culminates in sales to the consumers. He went
further to create an impression that, consumers absorb VAT as part of sales prices, meaning that
VAT is essentially a consumption tax collected, throughout the production chain. VAT is
broadly based tax on consumption with few exceptions, levied on goods and services at the rate
that varies from one country to another. Okoye and Gbegi (2013) added that Value Added Tax is
a multistage tax imposed on the value added to goods and services as they proceed through
various stages of production and distribution process and to services as they are rendered with
itsburden eventually borne by the final consumer and collected at each stage of production and
distribution chain.
Petroleum Profit Tax (PPT)
Petroleum Profit Tax Act 1959 as amended described petroleum profit tax as a liabilitywhere a
company disposes off chargeable oil and gas. Disposal include delivery of chargeable oil to
refinery, the tax is on the profit of the http://dx.doi.org/10.19085/journal.sijmd050701 75
company from petroleum operation under the provision of PPTA in Nigeria. The petroleum
operation as defined in the act, essentially involves petroleum exploration, development,
production and sales of crude oil. Section 8, of Petroleum Profit Tax Act (PPTA) states that
every company engaged in petroleum operation is under an obligation to render return, together
with properly annual audited account and computations, within a specified time after the end of
accounting period. Fasoranti (2013) affirmed that PPT involves charging of tax on income
accruing from petroleum operations. He noted that the importance of petroleum to Nigeria
economy gives rise to the enactment of different laws regulating taxation of incomes from
petroleum operations. Petroleum profit tax is a tax applicable to upstream operations in the oil
industry as it is related to rent, royalties, oil mining prospecting and exploration leases. It is an
important tax in Nigeria in terms of its contribution to total revenue as it contributes over 70% to
government revenue and 95% to foreign exchange earnings Kiabel (2009).Ilaboya (2012) hinted
that the basis period for Petroleum Profit Tax (PPT) is the actual profit of the accounting period.
This implies that, the basis period for any year of assessment is the same as the accounting
period of the company.
Company Income (CIT) Tax in Nigeria
Appah (2010) submitted that Company Income Tax is payable by all incorporated entities in
Nigeria on profits accruing in, derived from, brought into or received in Nigeria. It also includes
taxes on the profits of non-resident companies carrying on business in Nigeria and is paid by
both private and public limited liability companies. CIT was created by the Companies Income
Tax Act (CITA) 1979 and has its root in Income Tax Management Act of 1961. It is one of the
taxes administered and collected by the Federal Inland Revenue Service (FIRS), and the tax
contributes significantly to the revenue profile of the government. Such profits shall be deemed
to accrue in Nigeria wherever they have arisen (worldwide) and whether or not they have been
brought into or received in Nigeria (Ugochukwu&Azubike, 2015). These include profits in
respect of any trade or business, rent on use of property, dividends, interest, royalty, discounts,
charges, annuities, fees for services rendered and other sources of annual profits or gains.
Company Income Tax Act in Nigeria is therefore collected from both Nigerian as well as foreign
companies. Company income tax is one of the most important sources of revenue collection for
the Government of Nigeria.
Custom and Excise Duty
Fasoranti, (2013) described Import duty as a levy on imports by custom authorities in Nigeria to
raise revenue for the government and protect domestic industries from predator competitors
abroad. Oladipupo and Ibadin (2015), Import duty is generally on the value of goods oron the
weight, dimensions or some other criteria that are determined by the government. They are
charged as a percentage of the value of import or a fixed amount of specific quantity (Fasoranti,
2013).Import duties are either fixed or calculated as a percentage of the product’s value, which
can change (Olurotimi, 2013). Sometimes, government may want to protect certain domestic
product from foreign competition. One way of doing so is by imposing import duty, which
makes foreign products more expensive, thus keeping the same domestic products more
competitive (Ilaboya, 2012). Okoye and Gbegi (2013) held that government sometime imposes
duties to hurt another country by making its exports more expensive. This is usually done as a
retaliatory measure in a trade war. It is based on the value of goods called ad valorem duty or the
weight, dimensions, or other criteria of the item such as its size (Oladipupo&Ibadin, 2015).
Olurotimi, (2013) asserted that export duty is levied on the goods passing through a customs area
with a route to another area or country. Point of taxation will be occurring from the date of
export or from the movement of transferring goods from one country to another (Okoye&Gbegi
2013). Export duties are no longer used to a great extent, except for certain mineral, petroleum,
and agricultural products. Several resource-rich countries depend on export duties for much of
their revenue (Ugochukwu&Azubike, 2015). Export duties were common in the past; however,
were significant elements of mercantilist trade policies. Inyiama, Ikechukwu and Madubuko,
(2016) affirmed that an excise duty is the type of tax charged on goods produced within the
country (as opposed to customs duties, charged on goods from outside the country). Though the
collection of excise dutyaugments revenuegenerated by the government to provide public goods
and services, however, over the years it has been used as an instrument of fiscal policy to
stimulate economic growth (Olurotimi, 2013).
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