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PROPOSAL ON COMPANIES INCOME TAX AND INVESTMENT DECISIONS

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PROPOSAL ON COMPANIES INCOME TAX AND INVESTMENT DECISIONS CASE STUDY BRAISAL INTERNATIONAL LIMITED IN ABUJA

INTRODUCTION

 

 

1.1          BACKGROUND OF STUDY

 An efficient allocation of capital is the most important investment function in the modern times. It involves decisions to commit the firms fund to the long term assets. According to Pandey (1995) investment decisions are of considerable importance to the company since they tend to determine its value by influencing its growth. Investment decision is defined, as the company decision to invest its current funds most efficiently in the long term assets in anticipation of an expected flow of benefits over a series of years. However, investment decisions of companies are mostly fiscal weapon. Taxation is regarded as an indispensable measure towards any nation’s development among the various sources of achieving economic goal of any nation precisely developing country like Nigeria, corporate tax stands out as the most important in economic analysis. The question then is what is the concern of corporate taxation in investment decision of companies?

 

It is well understood that corporate taxation can distort investment plans by reducing the after-tax returns to new investment. A large literature, starting with Hall & Jorgensen (1967) has attempted to assess the empirical relevance of such distortions. However, there is another channel through which corporate taxes can affect investment that is largely unexplored. If financing frictions make raising external capital costly, a firm’s investment may be constrained by the amount of cash flow it is able to generate  internally.

Corporate taxes then could also impact investment by reducing the amount of cash flow a firm has available to invest. The research examined the effect of corporate taxes on investment decisions

 

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  investment decisions. More so, are there commensurate services for the tax paid.

1.3                The Objective Of The Study

The purpose of this research includes the following:

  1. To find out how tax rules affect certain specified and important management decisions.
  2. To explore all relevant sources available for tapping usable information.
  3. To provide some knowledge into the operations of investors in Abuja 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.

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Hypothesis 2:

Ho2 Tax consideration does not lead to sound business planning and control and therefore, increased profitability.

H12 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.

1.6                              SCOPE 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 Braisal international limited in Abuja.

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