THE EFFECT OF TAXATION ON INVESTMENT DECISION: [A CASE STUDY OF SELECTED COMPANIES IN ANAMBRA STATE]

ABSTRACT

The choice of the topic “The Effect of Taxation on Investment Decision” comes from the fact that most management of business entities are yet to come to terms with the realities of the implication of taxes on the overall performance of their business. To many, corporate  taxes  is  an  uncontrollable  business  expense  and  as such, does not deserve any consideration whatsoever in business decisions. It is, therefore, the intention of the researcher to bring to the light the implications of this “oversight”,  and also to expose managers   and   prospective   investors   to   some   tax   saving techniques. In doing this, the researcher went through textbooks and journals to establish why corporate tax is essential, and its development within the context of the Nigerian economy; equally, questionnaires were issued to both the employees and top management of the selected companies in order to ascertain their views on corporate taxation as it relate to their companies. It must also  be  stated  that  this  research  work  is  designed  to  take cognizance of existing taxation laws with regards to tax reduction techniques.  Finally, it is the intention of the researcher to provide as concise as possible, a research work that would be of immense benefit to successive researcher on this topic and to managers and investors alike.

CHAPTER ONE INTRODUCTION

1.1    BACKGROUND OF STUDY

Revenue accrues to the government through diverse sources which include the following: foreign aid and Humanitarian Grants. Income from Government’s direct investments in commercial ventures, Bilateral and International trade and Taxation.

Taxation may not be the most important source of revenue to the government in terms of the magnitude of revenue derivable from it. However, it is the most important source of revenue to the government, from the point of view of certainty and consistency. Taxation therefore, is the compulsory levy by the Government through   its   various   agencies   on   the   incomes,   capital   or consumption of its subjects. These levies are made on personal income such as salaries, business profits, interests, dividends, commissions,  royalties or rent. It may also be levied on capital gains and petroleum profits.

Every tax imposed on an organization needs continual interpretation of its specific applicability and effect on the various transactions  of the organization.  The fields of taxation  changes everyday as new court rulings are announced, and as laws are made.  Every  business  organization  must  therefore,  be  alert  to such changes.

Since its inception, taxation of corporate income has been a pervasive force tending to influence the economic decisions of business entities. On the part of the government, there have been tougher economic measures in order to control the adverse economic condition of the country. Among such measures are tax rules which are designed  to increase revenues and accomplish other   economic   goals,   but   invariably;   these   rules   having   a significant impact on business and investment decisions. In other words, any rational decision should be on after tax consideration.

However, income tax rules and regulations are such that informed  investors  can  reduce  the  amount  of  their  tax  liability through various proper and timely actions. It is therefore, the researcher’s aspiration to find out ways of breaking through these constraints facing business organizations in order that they may realize their objectives.

1.2    STATEMENT OF PROBLEM

Depending on the nature of tax, taxation may have either a negative or positive effect on the individual and the organization at large. With a high marginal rate of tax, in excess of 50%, tax will be a deceptive to work; while a low marginal rate of tax will be an incentive to work. The value added tax is an incentive to save, while tax levied on interest earned on bank deposits is a deceptive to save. Taxation may lead to a distortion in the consumption pattern of  the  society  especially  if  it  is  indirect  tax.  For  instance,  high import duty imposed on certain classes of goods will lead to a shift away from the consumption of such goods to other goods with low import duty. Also as a tool for government  economic policy, it may be used  to  achieve  the  following  objectives:  the  redistribution  of wealth, to effect changes in the country’s balance of payments with other countries, to effect the mobilization of economic resources, to influence the level of economic activities and to combat inflation. The  problem  now  is  that  many  organizations  do  not  know  the effects of taxation and as such do not consider the effects on their investment decisions. More so, are there commensurate services for the tax paid.

1.3    THE PURPOSE OF THE STUDY

The purpose of this research includes the following:

[i]      To  find  out  how  tax  rules  affect  certain  specified  and important management decisions.

[ii]     To explore all relevant sources available for tapping usable information.

[iii]     To provide some knowledge into the operations of investors in  Anambra  state  for  the  sole  purpose  of  making  effective investment decisions as to lessen the burden of taxation within the confines of the law.

1.4    RESEARCH HYPOTHESES

In  order  to  find  answers  to  the  questions  raised  in  the statement of problem, the following hypotheses are necessary:

Hypothesis 1:

Ho1: Tax   consideration   does   not   have   significant   effect   on investment decisions.

H11:  Tax   consideration   has   significant   effect   on   investment decisions.

Hypothesis 2:

Ho2     Tax consideration does not lead to sound business planning and control and therefore, increased profitability.

Ho2     Tax  consideration  lead  to  sound  business  planning  and control and therefore, increased profitability.

1.5    SIGNIFICANCE OF THE STUDY

It has been observed that most businesses in Nigeria do not take into consideration the effect of taxation on their portfolio selection,  and  this  has  been  partly  responsible  for  the  low investment levels in such organizations. The research study is therefore, necessitated by the need for business organizations to be  aware  of  the  manner  in  which  taxation  rules  affect  their decision. Good   management   requires   that   the   transaction   of   a business  should  be  planned  in  a  manner  that  minimizes  the amount paid as tax when tendering a report for tax purposes. The management should deploy those tax planning methods which will enable them reduce their tax liabilities. Thus  the  significance  of  this  study  lies  in  the  need  for taxation to be properly planned and optimally utilized for the achievement of organizational goals.

1.6    SCOPE AND LIMITATIONS OF THE STUDY

Investment decision involves the best combination of assets portfolio to select and it runs through the whole life and operations of the business. Taxation   in   the   context   of   this   study   includes   mainly company income tax; however, such taxes like capital gain tax, partnership tax will be mentioned where necessary. It is worthy to note that the scope  of this study will be restricted  to Anambra state, the town of our case study.

Constraints: A research of this nature cannot be carried out without difficulties in the process.

TIME:   Time constraint is one of the factors that confronted the researcher. The approval of the topic was at the middle of the first semester. Within the period the project was written, the researcher was running around from one company to the other searching for information while lectures and other academic program were going on.

Respondents:   The nature of the topic of this research work imposes some other problems. Taxation being a sensitive matter does not attract the cooperation of the company’s employees.

Even when the researcher  got approval from top management, obtaining the necessary information from the departments needed for the study became a major problem.

In effect, the researcher took time explaining the basic objective of the research study before they accepted to complete the questionnaire.

1.7    ORGANISATION OF THE STUDY

For the purpose of clarity and systematic presentation, this research work has been planned under five chapters.

Chapter one introduces the topic under study by stating the statement of problem, purpose of the study, research hypotheses, scope and limitation of the study and its organization.

Chapter   two   deals   with   related   literature   review.   This involves an exposition of the key variables involved in the research and their inter-relationship.

Chapter three deals with the historical background of case study companies.

Chapter four dwells on research methodology. It contains sample selection, research designs, sample design and method of data analysis.

Chapter five is devoted to data analyses. Here the stated hypotheses  stated  in  chapter  one  are  tested  for  the  ultimate purpose of accepting or rejecting them.

Chapter six contains the summary, conclusion and recommendations.

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