THE EFFECT OF TAXATION IN BUSINESS DEVELOPMENT AND DECISION MAKING
ABSTRACT
This study examined the effect of taxation in business development and decision making. Taxation in business development and decision is one that established two divides for assessment of subjects. One taxed alongside employment and the other as a body corporate. Those taxed alongside employment pays less, these may influence choice of forms, which may have avoidance connotation. The study evaluates the effect of tax differential on choice of business form of investors. The study reveals that tax differential affect investors decision on choice of Business form and that the existing differential reduces government revenue potential. Segregation of personal income tax between employment and business incomes is recommended. Because of desirability problem revealed in the study, an equal business tax could not be recommended, rather the kind of differential that currently exist under company income tax was recommended. Ii is expected to be applied to all the forms in an equitable manner. The researcher used primary and secondary methods of data collection to gather the needed data. The data obtained through questionnaires were presented in tables and analyzed using the simple percentage. The findings have also shown that factors which militate against successful taxation in business development and decision making are: raising of revenue, redistribution of wealth, management of the economy. The study recommends that Government should help to increase business operation by reducing the high cost of tax in other to increase the economy growth of the nation.
CHAPTER ONE
INTRODUCTION
1.0 BACKGROUND OF THE STUDY
The political, economic and social development of any country depends on the amount of revenue generated for the provision of infrastructure in that given country. Taxes have the characteristic of being a common source of revenue to all countries. It is not dependent on availability of resources like could be said of oil and other minerals revenue Hassett (1992). However, yield differs from country to country or even region to region within a country, depending on nature’s endowment, ability to administer and collect, and the extent to which the revenue from it is required by the government of individual state, among other thing. Taxes that apply to business income fall under direct taxes and under Nigerian Law; it is administer in two forms. According to Auerbach (2002), one is assessing business income to tax only in the hand of the owners of the businesses, which is the case when business is a sole proprietorship or partnership. The other, taxes business income first, taken the business as a person, and later assess the dividend received by owners from the same business’s profit to tax. If tax is properly administered generally, the revenue through it can improve greatly and government expenditure needs could be better met.
The place of business taxation is particularly important in Nigeria because out of the over twenty million population only a small fragment takes up salaried employment and more are in one trade, business or other crafts Hubbard (2002). All these non-salaried income earners could be classified under sole trade partnership or company, all of whom are not discriminated against in terms of use of government provided amenities, accessibility to labour and capital market and enjoyment of customer-ship. However, one means of generating the amount of revenue for providing the needed infrastructure is through a well-structured tax system. The importance of taxation in the activities of any government cannot be overemphasized. The world over, tax system is one major source of government revenue, however, not every national government have been able to effectively exploit this great opportunity of revenue generation Nzotta (2007:19). This can be attributed to a number of reasons including the system of taxation; tax legislation, tax administration and policy issues; over reliance on other sources of revenue (such as foreign aid and grants), corrupt practice in the system especially as it relates to the system of tax collection and behavoiur of the citizens towards tax payment and ease of tax payment. According to Ogbonna Appah (2012:7), in Nigeria, the level of tax evasion is quite high. The effect is seen in the lack of resources for effective business development and decision. If Nigerian Nation is to make the transaction from perpetually development to a developed nation then they need to be tax compliant. According to Azubike (2009:134) who also pointed out that tax system is an opportunity for government to collect additional revenue from individual and business dealers needed in discharging its pressing obligation. Business development and decision can be considered one of the most important instruments taken by financial managers, for effective business productivity if not the most important one.
The business decision making process influence the enterprise affirmation in the business environment and increase its market share Summers (1991:212). It concerns with the issue of capital allocation for fixed assets or financial assets; central place returns to fixed assets, acquired as a result of capital investment. By this decision, financial resources at its disposal are allocated efficiently to the acquisition, construction, modernization of fixed assets and the accumulation of material stocks, in the appropriate volume and adequate structure for its function at the highest parameters. Also, the available liquidities may be placed respecting the efficiency criteria on the capital market, to purchase financial assets. Regardless of the selected variants, the business decision should be subordinated to accomplish the performance objectives at long-term, established by the general policy of the enterprise. In another approach Bucataru, (2002: 22), opined that business development and decisions are those concerning the conversion of capital money in material form such as machinery, equipment, buildings, through operations of acquisition of these assets. Most actions of economic entities are influenced by taxes. In order to obtain an unbiased valuation of business development, it is essential for organizations, especially for those who operate internationally to consider the impact of taxes. However, business decisions are often based on very simplistic tax models. The implementation of these concepts in the finance curriculum enables businessmen to assess the importance of taxes, especially in cross-border investments. According to Schramm (2007:115), it pertinent to attempts to narrow the gap between research and practice by breaking these partly complex models down and by making them more accessible. By reducing the complex reality to its fundamental components, this approach helps businesses to focus on the essentials and to understand the idea behind the complex research concepts. Business decisions in all areas of responsibility have the common goal of maximizing long-term wealth by cash flow enhancement Foley, and Hines (2004).
The business decision making involves identifying and analyzing alternative courses of action, including after-tax cash flows. Since the amount and timing of income tax can vary significantly between alternatives, the impact of taxes should always be considered in the decision-making process of all managers in business organizations. Management’s role is to be aware of and apply known tax law, as opposed to interpreting tax law which is the function of independent advisors. All factors that affect profit and cash flows are relevant to a business decision. Income tax would be one of these relevant factors and should be addressed in the same manner as other relevant factors. Including tax implications is not synonymous with tax avoidance. According to Klemm (2002), it is simply the inclusion of a relevant cost and, in fact, the lowest tax alternative may not be the alternative chosen. The management process will be enhanced when the decision maker is aware of the amount and timing of the related tax consequences. The effect of taxes on business development and decision is one of the central questions in both public finance and development. This effect matters not only for the evaluation and design of tax policy, but also for thinking about economic growth Barro V. (1991).
STATEMENT OF THE PROBLEM
The problems identified with taxation in business decision and development is a situation where two businesses probably, making similar profit from similar turnover that is also a result of equivalent level of investment, pays different amount as tax simply because one is a Company and the other is not, is one. A clear demonstration of inequality is depicted here especially in a situation where there is no discrimination among forms of businesses. Various means of avoiding taxes exists. What this perceivable inequality could lead to is a form of tax avoidance in which case, investors who are conscious of above facts may from the threshold (even with all the capabilities of floating a Company) choose a partnership or sole trade, even if it is glaring that it is not appropriate, because of tax advantage. A second possibility is the fact that existing investors in an organization that has gained reasonable ground may deliberately liquidate and raise partnership business to avoid high taxes.
OBJECTIVES OF THE STUDY
1. To examine effect of taxation on business decision for Economic growth.
2. To assess the benefit of business decision and development in for effective tax compliance
3. To identify the strategies for efficient business decision to enhance adequate tax payment.
4. To examine the ways to minimize the high rate of taxation business development and decision.
RESEARCH QUESTIONS
1. What are the effects of taxation on business decision for Economic growth?
2. What are the benefit of business decision and development in for effective tax compliance?
3. What are the strategies for efficient business decision to enhance adequate tax payment?
4. What are the ways to minimize the high rate of taxation business development and decision?
SIGNIFICANCE OF THE STUDY
In this research, the significance of this study is to bring together the various ways and facts as regards to subject matter, the effect of taxation in business development and decision making.
1. It is believed that the outcome of this research work will be of interest to businessmen and organizations.
2. The research work will provide them with vital information regarding challenges facing business growth through heavy taxation. Businessmen and organizations can utilize this study to make amendments or control a number of lapses that may be affecting the business development and decision for efficient productivity in country.
3. It will also highlight the benefits of business development and decision on productivity to increase the economy status and create employment.
4. This research work will also serve as a vital material to those who may want to carry out further research work in this regard.
SCOPE OF THE STUDY
This research focus on the effect of taxation in business development and decision making.
LIMITATION OF THE STUDY
This research was constrained by so many factors:
1. TIME FACTOR: A study of this nature needs relatively long time during which information for accurate or at least near accurate inference could be drawn. The period of the study was short, time posed as constraints to the research.
2. FINANCIAL FACTOR: The research would have extended the survey to other area at the empirical level, but limitation as included cost of transportation to the source of material and the cost of time setting of the already completed work.
3. LACK OF COOPERATION: Many of the respondents are usually aggressive to relay the issue that borders cooperation among the respondents border.
4. MATERIAL FACTOR: – Shortage of relevant materials for literature review posed a great difficulty.
a. In ability to retrieve all the questionnaire forms for good representative used for the anticipation sample.
b. The study equally limited to the information gathered from primary and secondary sources.
DEFINITION OF TERMS
Business: – A business, also known as an enterprise or a firm, is an organization involved in the trade of goods, services, or both to consumers. Businesses are prevalent in capitalist economies, where most of them are privately owned and provide goods and services to customers in exchange for other goods, services, or money.
Development: – The act or process of developing, growth and progress.
Decision: – This can be regarded as the cognitive process resulting in the selection of a belief or a course of action among several alternative possibilities. Every decision-making process produces a final choice that may or may not prompt action.
Revenue: – Is income that a company receives from its normal business activities, usually from the sale of goods and services to customers. In many countries and states, revenue is referred to as turnover.
Tax: – Is a financial charge or other levy imposed upon a taxpayer (an individual or legal entity) by a state or the functional equivalent of a state to fund various public expenditures.
