EFFECT OF CORPORATION TAX REVENUE ON THE PROFITABILITY OF BUSINESS ORGANZATION IN ABIA STATE. NIGERIA

TABLE OF CONTENTS

Title page                                                                       i        

Declaration                                                             ii

Certification                                                                iii

Dedication                                                               iv

Acknowledgement                                                         v

Table of content                                                              vi

List of table                                                                ix

Abstract                                                                   x

CHAPTER ONE: INTRODUCTION

1.1  Background of the Study                                               1

1.2  Statement of the problem                                     3

1.3  Objectives of the Study                                                3

1.4  Research Question                                               4

1.5  Research Hypotheses                                                  4

1.6  Significant of the Study                                  4

1.7  Scope of the Study                                                     5

CHAPTER TWO: REVIEW RELATED LITERATURE

2.1    Conceptual framework                         5

2.1.1 The concept of taxation                    5

2.1.2 Tax                                                5

2.1.3 Classification of tax                      5

2.1.4 Income tax                                            6

2.1.5  The effectiveness of income tax administration          7  

2.1.5.1 Approaches to tax administration      

2.2.2 Small scale business                                         10

2.1.6 Problem encountered by small- scale business in trying to comply with tax        policies                            12

2.1.7 Tax payer’s knowledge                                         12

2.1.8 Nagative effects of income tax administration       13

2.1.9 Fines and penalties                           14                        

2.1.11 Problems faced in income tax administration            15

2.1.12 Profitability of small- scale businesses                                      16                                                     

2.1.13 The concept of profitability     16                                                   

2.1.14 Indicators of profitability                                                                              19

2.1.15 Measurement of profitability                                                                        19

2.1.16 Factors affecting profitability                                                                       20                                                    

2.2 Theoretical framework                                                                                      21                                                     

2.3 Empirical Review                                                                                              23

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CHAPTER THREE                                                         

METHODOLOGY

3.1 Research Design                                                                                                 25

3.2 Population of the Study                                                                                      25 

3.3 Sample and Sampling         Techniques                                                                      25

3.4 Method of Data Collection                                                                               25                                                         

3.5 Instrument Reliability                                                                                    26

3.6 Instrument Validity                                                                                         26

3.7  Method of Data Analysis                                                                               26

CHAPTER FOUR

DATA PRESENTATION, ANALYSIS AND INTERPRETASION

4.1 Presentation of Data                                                                                         28

4.1.2 Descriptive Analysis Result                                                                           29

4.2 Test of Hypotheses                                                                                            30

4.3 Discussion of Finding                                                                                       36

CHAPTER FIVE

SUMMARY, CONCLUSION AND RECOMMENDATION

5.1 Summary of Finding                                                                                         39

5 .2 Conclusion                                                                                                        39

 5.3 Recommendations                                                                                             40

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

In Nigeria Small and Medium enterprises (SMEs) are increasingly seen as engines of economic growth of the country, contributing 75% of GDP and constituting 90% of the private sector. This is because they contribute to sustained creation of employment approximated to be 2.5 million, improve living standards and ensure social and political stability (Hatega, 2017). On the other hand, it has been observed from previous taxation studies that several SMEs in developing economies are  generally not compliant to tax despite the significant number of reforms intended to enhance compliance (Terkper, 2016; James, Barbour & Stern, 2017; Ayoki, 2017). Such enterprises cannot easily be located by tax administration (Teera, 2015), and those who can be traced pay less than their fair share of tax (Ahmed& Braithwaite, 2015).

Income tax is therefore defined as a tax imposed on a person's taxable income at specific rates. A person includes an individual, company, partnership, trustee, government and sub divisions of government. Income tax is charged on every person who has chargeable income for every year of income. Chargeable income is derived from three main types of income, namely; business, employment and property. In addition, a tax is referred to as a non-quid pro quo, implying that a tax is paid by assesses without corresponding returns in form of social goods and services from the government. Justice Holmes described tax as the price for civilization. Ismail Kintu (2016).

Muwanga, (2014). Profitabilityhas been defined as an organizations ability to earn revenues in excess of expenses over a period. Pandey noted that, a company should earn profits to survive and grow over a long period. Firms must earn profits to maximize their shareholders wealth, to generate income for expansion and to finance their daily operations.

Governmental establishment in Abia State, low relative sales attainment, high alarming costs, static or no business growth, no business expansion, numerous license subscription, robbery, and electricity which is high rated, low levels of capital invested, low levels of market share, limited diversification of the business, decrease in assets and low levels of dividend distribution.  As a result, Abia State revenue declined. The possible causes include poor tax assessment, poor Presumptive tax collection, strict tax regulations, and poor location of Presumptive tax payers.  Complaints of Presumptive tax payers have been forwarded to the president of Nigeria through (State internal revenue service) and also presumptive tax payers have made several demonstrations as regards to import tax administration although nothing has been done to solve the problem (Sekiito, 2018).  

The income tax act defines small business taxpayer for income tax purposesas a resident taxpayer whose gross turn over from all businesses earned by such a person a year is more than 5million shillings but less than 50million shillings. Income Tax Act, ITA (2017)laws of Nigeria. Taxpayer whose gross turn over does not exceed fifty million shillings a year may pay taxes at presumptive rates. This is not applicable to a person providing professional services. Section 4(2) of the ITAshows the application of the relevant rates of tax determined to be charged on the incomes of the tax payer for the year of income and from the resulting amount are subtracted any tax credits allowed to the tax payer for the year of income.

Taxation has played a big role in helping the government to intervene in the market mechanism in order to perform the functions of allocation, regulation, distribution and stabilization. However, the existence of multiple taxes has been a major barrier to the operations of small-scale businesses. The multiplicity of taxes whose burden also falls on small-scale enterprises has a negative effect on their performance. In addition to the above, the existence of a large number of minor taxes such as residue taxes on non-citizens and car benefit taxes on all cars owned by these firms has also affected their performance. Notably, the rationale of these taxes is questionable and their implications have to be fully considered before they are imposed. Thus, taxes impede the natSIRSl evolution of successful and dynamic small-scale firms into ones that are more efficient because they reduce the firm's profits and hence saving and investment potential, winters and McKay, (2015).

Income tax administrators have been faced with confusion interpreting the law. In most cases, the administrators have not followed the law or followed it but interpreted it to favor themselves to the disadvantage of the taxpayers, which has brought about friction between the taxpayers and the administrators. Poor tax administration involves poor assessment of taxes and tax liability, computation based on estimates leading to over charge of small-scale business enterprises. Since tax is a cost and has to be paid out, poor tax administration greatly reduces the firms would be profits, Musgrave R, (2016). Therefore there should be a political will to make tax systems work and all tax payers should be treated fairly but not equally for a more transparent tax system.

1.2 Statement of the Problem

Income tax administration plays a pertinent role regarding revenue collection as well as profitability of any business entity. In an effort for the government to increase its tax base, the tax burden for many firms increases. However, the tax administration system is poor as at times, the tax liability computation is based on estimates, records of many small business firms are incomplete, and some miss out completely leading to tax over charge. In return, this directly affects the profitability of the enterprise and may threaten its survival because taxes are paid out of profits. 

Income tax administration rate system was enacted by government as per second schedule of section 5 of the income tax act (2016) to promote SBES. However, it has affected their profitability as measured by the return on capital employed.  The Income tax administration operates in such a way that those business whose annual turnover is less than five million are exempt from tax. Those whose gross turnover is more than five million but less than twenty million pay 100,000,those whose annual turnover is more than twenty million but less than fifty million  pay 250,000 or 1% of gross turnover.lastly,those whose gross turnover is more than fifty million pay 450,000 or 1% of gross turnover which is ever lower(Pius,2016). Despite the fact that Income tax administration was enacted to promote Small Business Enterprises, they have continued to perform poorly (Kiiza, 2015), 35% of Small Business Enterprises do not survive for more than one year after commencement Ismail Kintu (2011). Therefore, failure to have an effective tax administration system adversely affects the profitability of small-scale businesses.

1.3 Objectives of the Study

The main objective of this work is to ascertain the effect of tax revenue on the profitability of business organization in Abia State.

Specifically, it intends to:

1. Evaluate the effect of the income tax  on profit after tax of the selected firms in Abia State
2. Examine the effect of the income tax  on return on asset of the selected firms in Abia State
3. Determine the effect of the income tax  on net profit margin of the selected firms in Abia State

1.4 Research Questions

The study was guided by the following research questions;

1. What is the effect of the income tax  on profit after tax of the selected firms in Abia State
2. What is the effect of the income tax  on return on asset of the selected firms in Abia State
3. What is the effect of the income tax  on net profit margin of the selected firms in Abia State

1.5  Research Hypotheses

H₀₁: Company income tax has no significant effect on profit after tax of the selected firms in Abia State

H_02:Company income tax has no significant effect on return on asset of the selected firms in Abia State

H₀₃: Company income tax has no significant effect on return on Capital Employed  of the selected firms in Abia State

1.6 Significance of the Study

The findings enrich the available literature on the study of income tax administration and profitability of small-scale businesses.

The study assisted the tax administrators in Nigeria to design and formulate tax policies that improved on the profitability of small-scale business enterprises.

The accomplishment of the study enabled the researcher to acquire hands on the skills about processing of research work and data analysis. This proficiency enabled the researcher to handle such related with a lot of precision and proficiency.

The study is vital for the public as it brings out the effect of taxes on investment, which served as a basis for future.

1.7 Scope of the Study

The research work studies the relevance of the the effect of tax revenue on the profitability of business organization in Abia State.This research study will be restricted to three selected business located in Abia State. The researcher however, believes that the findings will be applicable to other sectors of industry

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