ABSTRACT
Capital gain tax (CGT) is a form of tax chargeable on capital gains arising from the disposal of chargeable assets. This implies that anybody that generates income from the disposal of chargeable assets pays taxes known as capital gains tax. In Nigeria capital gains tax administration aims and tries to tax each company in the state more effectively in order to generate revenue. The study analysed the effect of capital gains tax on the economic growth of Nigeria (1999 – 2018). In Nigeria, to tackle the problem of high incidence of tax evasion and avoidance by tax payers by examining the extent to which capital gains tax affect gross domestic product and gross national product. Secondary data was used and it was sourced from CBN statistical Bulletin. The data covered from 1999 – 2018. The economic tool used was simple regression analysis. From the results, it was found that capital gain tax has significant effect on gross domestic product of Nigeria and capital gain tax has significant effect on gross national product of Nigeria. Based on the findings, it was recommended that there is need to capture more taxable items into the data base of the nation so as to enable the government have an effect and efficient data base that will enhance more capital gain taxes to further improve economic growth in Nigeria. Also government should enact policies (such as the maximum time for collection of all taxes) so to ensure adequate collections of taxation and government should embarked on massive awareness and sensitization on the importance of taxation to the populace.
TABLE OF CONTENTS
Title page i
Declaration ii
Certification iii
Dedication iv
Acknowledgements v
Table of contents vi
List of Table ix
Abstract x
CHAPTER ONE: INTRODUCTION
1.1 Background to the study 1
1.2. Statement of the Problem 3
1.3. Research Objectives 5
1.4. Research Questions 5
1.5. Research Hypotheses 5
1.6. Significance of the Study 5
1.8. Scope of the study 6
1.9. Operational Definition of Terms 7
CHAPTER TWO: REVIEW OF RELATED LITERATURE
2.1 Conceptual Framework 8
2.1.1 Concept of Taxation 8
2.1.2 Tax Structures in Nigeria 11
2.1.3. Nature of Capital Gain Tax in Nigeria 13
2.1.4 Chargeable Gains 18
2.1.5 Assessment of Capital Gains Tax 19
2.1.6 Rate and Computation of Capital Gains Tax 20
2.1.7. Exempted Bodies under Capital Gain Tax Act 22
2.1.8 Problems of Capital Gains Tax Act, 2004 23
2.1.9. Assets Exempted From Capital Gains Tax 25
2.10. Concept of Economic Growth 26
2.2. Theoretical Framework 29
2.2.1. Benefit Theory 29
2.2.2 The Cost of Service Theory 29
2.2.3 Ability to Pay Theory 30
2.2.4 The Financial Theory 31
2.3. Empirical Review 32
2.4. Gap in Literature 42
CHAPTER THREE: METHODOLOGY
3.1 Research Design 43
3.2 Area of the Study 43
3.3 Sources of Data Collection 43
3.4. Validity and Reliability of Instrument 44
3.5. Data Analysis Technique 44
3.5.1 t-statistic 44
3.5.2 F-statistic 45
3.5.3 R-squared 45
3.5.4 Durbin-Watson statistic 45
3.6. Model Specification 45
3.7. Description of Variables 46
3.7.1 Dependent variable 46
3.7.2. Independent Variable 47
CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS
4.1 Data Presentation 48
4.2 Data Analysis 48
4.2.1 Data Validity Test 48
4.2.2 Descriptive Statistics 49
4.2.3 Regression of the Estimated Model Summary 50
4.2.4 Regression Results 52
4.2.5 Test of Research Hypotheses 53
4.3 Discussion of findings 54
CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATION
5.1 Summary of Findings 56
5.2 Conclusions 56
5.3 Recommendations 57
5.4 Limitations of the Study 57
5.5 Suggestions for Further Research 58
REFERENCES
APPENDIX I
APPENDIX II
LIST OF TABLES
Table 4.1 Presents the descriptive statistics of all the variables 49
Table 4.2.1 Presents the regression result between CGT and GDP 50
Table 4.2.2, Presents the regression result between CGT and GNP 51
Table 4.3.1 The relationship between CGT and GDP 52
Table 4.3.2 The relationship between CGT and GNP 53
CHAPTER ONE
INTRODUCTION
1.1 Background to the study
The development of any nation depends on the amount of revenue generated by the government for the provision of infrastructural facilities. One major source of generating this revenue is taxation. According to Azubike (2009), tax is a major source of government revenue all over the world, including Nigeria. Government use tax proceeds to render their traditional function of law and order, defense against external and internal aggression, regulation of trade and business to ensure social and economic justice. Taxation is a compulsory levy imposed by the government on the incomes of taxpayers in order to pay the expenses of governance.
Capital Gains Tax (CGT) is a form of tax chargeable on capital gains arising from the disposal of chargeable assets (Obaje, 2012). This implies that anybody that generates income from the disposal of chargeable assets pays taxes known as capital gains tax. There are different types of taxation. These include the Personal Income Tax, Company’s Income Tax, Petroleum Profit Tax, Value Added Tax and the Capital Gains Tax. Recently, the issue of capital gains tax in Nigeria has come to the fore.
The importance of taxation lies primarily in its ability to raise capital formation for development and growth of the economy and also, in assisting in the regulation of consumption pattern resulting in economic stabilization and effective redistribution of income (ICAN, 2009). Taxation has key role in developmental policies. It is further interlinked with other policy areas. Taxation forms good governance to formalize the economy for spurring growth; provides funds for the government to build the infrastructure; creates a healthy atmosphere to promote business and international trade, shapes the way for government activities and also plays a crucial role in mobilization of domestic resources. So, taxation has diverse effects on aggregate economic activity, where economic activity means growth in consumption, investment, employment and finally growth of GDP (Lescaroux and Mignon, 2008). If these are the main objectives of taxation, it is therefore highly important to have in place a strong and vibrant tax system, not only at the Federal level but also at the state and local government levels, so as to ensure that the objectives of tax system are achieved.
Capital gains tax is income derived from the sale of a capital asset. Gain here, means increases resulting in the market value of assets to a person who does not regularly offer them for sale and in whose hands they do not constitute stock in trade. Capital gains may arise in two instances, in the first place, where the asset appreciate in value while still in the hands of the owner or maybe he realized gains when the assets are sold or disposed off. Capital gains tax are payable on stocks, shares, securities, land and buildings, plant and machinery every business assets such as good will and secret processes (Obaje, 2012)
In Nigeria the Capital gain tax administration aims and tries to tax each company in the state more effectively. However the level at which the capital gain tax administration in Nigeria tend to achieve its desired goals and objectives depends mostly on the tax office and the company that is operating in each state, also when an individual or company is been taxed by the Federal Inland Revenue Services (FIRS) such taxpayer is meant to give an accurate information about their gain or income but some go to the extent of forgery in provision of their documents which gives an incorrect information to the board, thereby causing reduction in their tax assessment.
One area of policy reform that could contribute to higher levels of economic activity is capital gains taxation. A wealth of research shows that capital gains tax reform can increase the supply and lower the cost of capital available to new and expanding firms, and in turn lead to higher levels of entrepreneurship, economic growth, and job creation Azubuike (2009).
In developing countries capital gains tax is a lucrative ground for raising money for purposes of development. In addition, In a (developing) countries like Nigeria there exist large opportunities for the realization of capital gains because of the tendency of rising prices inevitably accompanying a process of accelerated economic development, besides, the process of economic development itself tends to generate capital gains because of the rise in real income, company profits and the value of shares. But as the proportion of wealth held in the form of equity shares of the capital gain arises to the owners of property such as land and real estate. Thus, the taxation of capital gains tax constitute an important fiscal mechanism to plough back a proportion of the increase benefits accruing to the holders of property as a result of a process of development into the developmental funds of public sectors. There are many types of taxes that are often levied on individual and corporate entities. Capital gain tax is on income derived from the sale of a capital asset.
Economic growth means expansion of the supply side of the economy and of potential Gross Domestic Product (GDP). This expansion could be an increase in the annual growth rate, a one-time increase in the size of the economy that does not affect the future growth rate but puts the economy on a higher growth path, or both. The economic resources available to society are limited, and so an increase in government expenditure normally means a reduction in private spending. In this regard James (2000) states that taxation is one method of transferring resources from the private to the public sector. Generally, governments levy taxes for multiple of purposes, but mainly to raise funds in order to cover public expenditures and on the other hand to properly allocate resources. Based on the foregoing, the study therefore seek to analyze the effect of capital gain tax on economic growth of Nigeria.
1.2. Statement of the Problem
There is high incidence of tax evasion and avoidance by tax payers, thereby affecting the amount of revenue collectible by the government for the running of its administration. Furthermore, it is hoped that people were wrongly assessed and the assessment sometimes result to regressive taxation. Though capital gain tax has increased in relative importance as a source of revenue, its contribution to GDP is still lagging behind market economies.
Tax avoidance and evasion have really dealt on tax revenue of the country. Both individuals and organization in Nigerian are involved in tax avoidance and tax evasion. They constantly report loss or low revenue in order to pay little or no tax.
However, when there is low revenue on capital gain tax, the total revenue of the country will reduce thereby affecting the growth of the economy. A study carried out by Lennox (2005), revealed that low rate of capital gain tax has a negative effect on gross domestic product, total tax revenue and overall revenue of the country. The above study did not take recent issues of capital gains tax into consideration, due to the period covered, compared to the present revenue generation of Nigeria and its administration. The above gap have made it necessary for the researcher to examine the effect of capital gains tax on economic growth of Nigeria, from 1999 to 2018. The research work therefore seeks to provide solutions on recent issues of capital gains tax as it affect the economic growth of Nigeria, through its results and findings.
1.3. Research Objectives
The major objective of this work is to examine the effect of capital gains tax of economic growth of Nigeria. The specific objectives include:
1. To ascertain the effect of capital gains tax on gross domestic product of Nigeria
2. To evaluate the effect of capital gains tax on gross national product of Nigeria
1.4. Research Questions
1. To what extent does capital gains tax affect gross domestic product of Nigeria?
2. To what extent does capital gains tax affect gross national product of Nigeria?
1.5. Research Hypotheses
H01. Capital gains tax have no significant effect on gross domestic product of Nigeria
H02: Capital gain tax has no significant effect on gross national product in Nigeria.
1.6. Significance of the Study
This study will significant to the following stakeholders:
1. Academicians: This study will help other academicians, researchers and scholars in formulating research questions and hypotheses that would guide their study. Literature generated in the study will also help them develop appropriate literature framework and theoretical framework for their study.
2. Policymakers: This study will enable policymakers to have a deeper understanding of the effect of CGT on the economy in order to make policies that will lead to a more efficient application and operation of CGT. This will enable them to decide whether to increase (or decrease) the CGT rate charged in their countries or see the need to expand the CGT base.
3. Tax Administrators: This study will enable tax administrators and the government to have a more in-depth understanding of the extent to which capital gains tax revenue has influenced the level of economic growth in Nigeria recently. With this knowledge, they will be able to guard against “ghost” invoices and false refund claims in CGT administration which Nigeria is not exempted from. This is because ghost invoices and false refund claims frits away expected government revenue.
1.8. Scope of the study
This study “effect of capital gains tax on the Economic growth of Nigeria” will cover the areas on which capital gains tax act are regulated and enacted in Nigeria. For the course of this study, the research will cover a period of 20 years tax period starting from 1999-2018.
1.9. Operational Definition of Terms
Capital Gain tax: Capital gains tax is a levy assessed on the positive difference between the sale price of the asset and its original purchase price. Long-term capital gains tax is a levy on the profits from the sale of assets held for more than a year.
Economic Growth: this is the increase in the amount of the goods and services produced by an economy of a country over time
Revenue: this is the amount of money that a company actually receives during a specific period, including discounts and deductions for returned merchandise. It is the top line or gross income figure from which costs are subtracted to determine net income.
Gross domestic product: this is the aggregate value of goods and services supplied within Nigeria in a given fiscal year.
Gross national product: this is the aggregate value of goods and services supplied by Nigeria (both exported), in a given fiscal year.
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