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

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

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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.
TABLE OF CONTENTS
Title Page - - - - - - - - ii
Certification - - - - - - - - iii
Approval Page - - - - - - - - iv
Dedication - - - - - - - - v
Acknowledgement - - - - - - - vi
Abstract - - - - - - - - - vii
Table of Contents - - - - - - - viii
CHAPTER ONE: INTRODUCTION
1.1 Background of Study - - - - - - 1
1.2 Statement of Problem - - - - - 3
1.3 The Purpose of the Study - - - - - 4
1.4 Research Hypotheses - - - - - 4
1.5 Significance of the Study - - - - - 5
1.6 Scope and Limitations of the Study - - - 6
1.7 Organization of the Study - - - - - 7
References - - - - - - - 8
CHAPTER TWO: LITERATURE REVIEW
2.1 Theory of Taxation - - - - - 9
2.1.1 Canons of Taxation - - - - - 10
2.2 The Need for Company Taxation - - 14
2.3 Historical Background of Company Tax in Nigeria 15
2.4 Companies Income Tax Act [CITA] 1979 - 18
2.4.1 Powers and Duties of the Board - - - 19
2.4.2 Basis and Procedures for Assessment - - 20
2.5 Financial Administration of Taxes - - 22
2.5.1 Organization and Staff for Tax Management of a
Company - - - - - - - 22
2.5.2 Tax Calendars, Records, Files and Source of
Information - - - - - - 27
2.5.3 Tax Planning - - - - - - 28
2.6 Varying Degrees of Risk in investment with Tax
Benefits - - - - - - - 29
2.6.1 High Risk Investment with Tax Benefits - - 30
2.6.2 Medium Risk Investment with Tax Benefits - 30
2.6.3 Low Risk Investment with Tax Benefits - - 31
2.7 Effects of Taxation on Investment Decision - 31
2.8 Techniques of Tax Savings - - - 32
2.8.1 Tax Avoidance - - - - - - 32
2.8.2 Choice of Depreciation Method - - - 33
2.8.3 Choice of Accounting Method - - - 34
2.9 Conclusion - - - - - - 35
References - - - - - - 36
CHAPTER THREE: HISTORICAL BACKGROUND OF CASE
STUDY COMPANIES
3.1 Introduction - - - - - - 37
3.2 The Nigerian Bottling Company Ltd. [NBC] - 37
3.3 HYCO Chemical and Industries Ltd. Ogidi Anambra
State - - - - - - - 38
3.4 Anambra Motor Manufacturing Company [ANAMCO] 39
CHAPTER FOUR: RESEARCH METHODOLOGY
4.1 Introduction - - - - - - 40
4.2 Research Design - - - - - 40
4.3 Sample Design - - - - - - 42
4.4 Methods of Data Analysis - - - - 44
CHAPTER FIVE: DATA PRESENTATION AND ANALYSIS
5.1 Introduction - - - - - - 48
5.2 Presentation of Data - - - - - 48
5.3 Regression of Total Corporate Tax [Y] on Profit before
Tax [X] of Nigeria Bottling Company PLC - 59
5.4 Testing of Hypothesis - - - - 63
5.5 Conclusion - - - - - - 68
CHAPTER SIX: SUMMARY, RECOMMENDATIONS AND
CONCLUSION
6.1 Summary of Findings - - - - - 69
6.2 Implication of Findings - - - - 71
6.3 Recommendations - - - - - 72
6.4 Conclusion - - - - - - 73
Appendix 1 - - - - - - 75
Questionnaires - - - - - 76
Bibliography - - - - - - 81
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
2
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.
3
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
4
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.
5
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.
6
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.
7
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.
REFERENCES
Aguolu, O, [2001], “Tax Management in Nigeria”
[Enugu: Meridian Associates.
Glynne – Williams, R. [1975], Elements of Taxation, Norwich:
Donnington Press.
Orogo,Ola J. [1979], Company Tax Law in Nigeria, [London: Sweet
and Maxwell Ltd.
M. Uchendu [2001], Introduction to Taxation [Ibadan: University

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