CHAPTER ONE
INTRODUCTION
BACKGROUND TO THE STUDY
Taxation is a compulsory levy imposed by the Government on the incomes of taxpayers in a geographical territory in order to defray the expenses of governance. This implies that anybody that generates income must compulsorily pay taxes. There are different types of taxation. These include the personal income tax, company’s income tax, and petroleum profit tax, value added tax and the capital gains tax. Recently, the issue of capital gains tax in the Nigerian has come to the fore. Government, from time to time, has the responsibility of reviewing the tax position as a component of the subsisting fiscal policy for the purpose of meeting given objectives. However, each review naturally elicits mixed reactions from the stakeholders.
Governments in all parts of the world and at all points in history have faced similar challenges when it comes to funding their ambitions to develop their country or state and to give a good standard of living to the masses in their country or state. We do not believe that governments in the past or in today’s developing world are any less rational or farsighted compared to those in today’s developed world. For this reason, in most countries of the world, the primary objective and purpose of taxation is essentially to generate revenue or raise money for government expenditures on social welfare.
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).
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.
With the federal government poised to eliminate the budgetary deficit in the coming year, a debate has commenced about how best to direct future budget surpluses. Some voices have called for tax relief while others have emphasized new spending.
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 board of inland revenue (FBIR) 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.
The backdrop to these fiscal policy discussions is a sluggish economy. The consensus view of most economists is that the Nigeria economy will continue to struggle with lowers than “normal” or historic levels of economic growth. Low economic growth has broad implications including slower growth in employment, income, and ultimately living standards. This means any debate about using future budgetary surpluses should focus on policy measures that can improve economic growth in both the short and the long term.
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.
The primary reason that capital gains tax reform can have these positive effects is related to what economists call the “lock-in effect.” Because capital gains are only taxed upon realization, high tax rates on capital gains can create an incentive for investors and asset holders to retain their current investments even if more profitable and productive opportunities are available. The magnitude of the lock-in effect depends on a number of factors, but a series of empirical studies has found a negative relationship between capital gains tax rates, asset sales, share prices, and other proxies for investor activity.
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