CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND TO THE STUDY

One of the common tools for macro- economic development in developing countries is tax incentives. Government tries to attract domestic and foreign capital using tax incentives to boost her economic activities. Many countries have determined that the tax incentives covered by the tax incentive provision should be defined precisely to ensure that tax incentive is granted only for an agreed concession. These countries have concluded that general references to special incentive laws are designed to promote economic development. This is commonly done through a direct reference to domestic legislation.

Tax incentives are generally intended to encourage the start-up of new operations. It has therefore been found appropriate in some treaties to place a time limit on the availability of the tax sparing relief for each tax payer, thereby preventing tax sparing from becoming a permanent concession.

Every investor will consider the host country’s tax system in their investment decisions along with other important matters such as security of lives and properties, infrastructural facilities, political and economic policies.

Tax incentives are measures that provide for more favorable tax treatment of certain activities or sectors compare to what is generally obtainable.

Under this description, a general cut in the tax rate or generous depreciation scheme applicable to all firms would not be considered as tax incentives (Klemm 2009:3)

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In order words, tax incentives are special arrangements in tax laws to attract, retain or increase investment in a particular sector or for a particular purpose over a given period of time.

Nigeria’s economic decline since the 1980’s has created a hostile environment that is unfavorable to entrepreneurial success. The Nigerian infrastructure limits entrepreneurial effectiveness and is a barrier to success. The high cost of carrying out business operations in Nigeria, such as the lack of adequate supply of electricity and other basic amenities. Tax incentives are not sufficient to investors without favorable business environment especially needed infrastructure that will enable them to compete in price, quality and quantity internationally.

The main argument of this study is based on the pressures caused by the unemployment and tax incentives are mainly analyzed as a tool of entrepreneurship attraction to reduce the pressure of unemployment. Empirical analysis is used to illustrate the effects of tax incentives, highlighting pioneer tax incentives. The new and old arguments are combined to produce a set of criteria that can be used to evaluate tax incentives. As an additional innovation, this study inevitably repeats many well-known points of the area of study in order to provide a self contained discussion of the issue.

A good economic development policy should contain the following elements.

a.   GOALS AND OBJECTIVES

Goals and objectives create a context for accountability as regards the use of economic and developmental incentives. Common goals used in economic development include targeted economic sector growth, business retention and/or recruitment, geographic focus, job creation, light mitigation, improving on distressed areas and environmental improvements.

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b. FINANCIAL INCENTIVES TOOLS AND LIMITATIONS

An economic development policy should define the type of incentives and the extent to which the government will use them. For example, the government may decide to grant an entitlement to any firm that meets the minimum required qualification or may choose to provide incentives based on the assessment of individual firms. Government may also establish maximum funding for a particular process.

c. EVALUATION PROCESS

A clearly defined evaluation process should be outlined in an economic development policy for the purpose of consultancy and transparency which include:

i)                   How the purpose of the tax incentive measures up to establish development criteria.

ii)                 A cost benefit analysis

An evaluation of a tax based impact both in terms of increase in taxable value.

Economic and industrial development incentives Act (2008) both financial and non-financial include a broad range of tools ranging from expected planning processes to direct or indirect funding. Government often use these incentives to pursue specific economic goals such as tax base diversification, job creation, business retention, and expansion that are usually set by the government which consists of both the federal, state and local practice. The use of financial incentives to benefit private parties introduces risk factors which are not generally present in other public financial management areas. For this reason, economic incentives must be based on

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a policy that establishes parameters for their appropriation in developmental goals of the government.

relation  to  the  economic

It is therefore desirable that a research with emphasis on the significance of tax incentives and infrastructural development be conducted.

1.2    STATEMENT OF THE PROBLEM

There are different views on the introduction of tax incentives as a catalyst economic growth and development. Empirical studies like those of (Sanni 2002) and (Dotun 2009) has reported different views on tax incentives as a catalyst for economic growth and development. A school of thought believes that tax incentive propels economic growth and development while others believes that it reduces revenue to the government therefore it is counter- productive, as there will be no means of financing government projects.

However, most of the economic measures put in place by government in the past to stimulate economy have not yielded significant positive result hence tax incentive cannot be held responsible for economic stagnation.

Litwack (2013) argues that seventy million Nigerians are poor. According to World Bank (2012) Nigeria country profile statistics indicates an income inequality of 0.49; this is correlated with differential access to infrastructural amenities.

This problem of high poverty rate due to youth unemployment may be solved by the influence of local and foreign direct investment to some extent but the question is whether or not tax incentives are the right approach to solve them, when there is no model for measuring the influence of tax incentives in investment.

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An advantage of tax incentives is that it is used for infrastructural development and entrepreneurship. But, most tax experts, consultants, Individuals and economic analysts ignored or criticized the incentive for the following reasons: