Page 1 of 12
Advances in Social Sciences Research Journal – Vol. 10, No. 1
Publication Date: January 25, 2023
DOI:10.14738/assrj.101.13769.
Ojelabi, S. A. (2023). Effect of Company Income Tax on Corporate Performance of Listed Manufacturing Firms in Nigeria. Advances
in Social Sciences Research Journal, 10(1). 48-59.
Services for Science and Education – United Kingdom
Effect of Company Income Tax on Corporate Performance of
Listed Manufacturing Firms in Nigeria
Ojelabi, Sunday Adeyemi
Anan University, Kwall, Plateau State
Nigeria
ABSTRACT
Conundrum of the Nigerian economy is traceable to its manufacturing sector
which is expected to stimulate the value-added economy and serve as a catalyst
for sustainable economic transformation. Regrettably, Nigeria's manufacturing
sector has been neglected without a clear policy direction with attendant
annihilation of the sector from the growth process. Nigeria today is facing series
of challenges when it comes to optimizing tax revenue for economic and social
growth. Ex-post facto research design was adopted for this study. The population
of this study covered all the 44 registered manufacturing firms dealing with
consumable foods in Nigeria, purposive sampling technique was adopted to select
only five listed manufacturing firms. The study found that CIT has a positive and
significant effect on profit after tax (PAT) in Nigeria listed manufacturing firms
that is, if there is a unit increase in Company income tax (CIT), profit after tax
(PAT) will increase with over a unit. The study also found that, CIT has a positive
and significant effect on Returns on Equity (ROE) while Change in Shareholders
Fund (CSF) has a negative and significant effect on ROE. Based on the findings, the
study concluded that, company income tax significantly affects the profit after tax,
performance of the firms and earnings of shareholders. Company income tax
significantly affects the profit after tax, performance of the firms and earnings of
shareholders. The study therefore recommended that, fiscal policy adopted in
Nigeria should consider the circumstances surrounding the activities of
companies located in the country and the special role they play in the pursuit of
economic growth of the nation. Also, government should ensure that revenue
generated from corporate tax especially company income tax (CIT) should be
utilized in the development of the general economy so as to improve the standard
of living of her citizenry and increase her Gross Domestic Product (GDP).
Keywords: Corporate Income Tax (CIT), Profit After Tax(PAT), Change in Shareholders
Fund ( CSF), Returns On Equity ( ROE).
INTRODUCTION
The conundrum of the Nigerian economy is traceable to its manufacturing sector which is
expected to stimulate the value-added economy and serve as a catalyst for sustainable
economic transformation. Regrettably, Nigeria's Manufacturing sector has been neglected
without a clear policy direction with attendant annihilation of the sector from the growth
process. This becomes evident following the low share of manufacturing sector contribution to
GDP and plummeted employment generation capacity of the sector (Ogudu, et at., 2018).
Nigeria's ostentatious importation of manufactured products and weak export base of finished
Page 2 of 12
49
Ojelabi, S. A. (2023). Effect of Company Income Tax on Corporate Performance of Listed Manufacturing Firms in Nigeria. Advances in Social Sciences
Research Journal, 10(1). 48-59.
URL: http://dx.doi.org/10.14738/assrj.101.13769
goods remains an undeniable signal to the inchoate weakness of the manufacturing sector.
Meanwhile, the weak performance of the manufacturing sector is also evidenced in the low
share of non-oil exports to total exports earnings, coupled with high share of manufactured
goods in total imports (Ogudu, et at., 2018).
The abysmal performance of the manufacturing industries in Nigeria is attributable to
inadequate electricity supply, smuggling of foreign products into the country, trade
liberalization, globalization, infrastructural decay, inadequate financial support and other
exogenous variables which has resulted in the reduction in capacity utilization, gross fixed
capital formation and economic growth of the economy (Tomola, et al, 2012). The
manufacturing sector is further bogged down by internal environment constraints. Aside
factors from the internal business environment such as lack of capital (inadequate
capitalization), inefficient management, unprofitable expansion (premature expansion), mode
of appointment of chief executives, fraud and audit failures –internal or external that may affect
corporate performance.
Corporate organizations all over the world are required to pay what is known as company
income tax. Company income tax is a mandatory payment imposed for various years of
assessment on the profit of companies deemed to have been accrued, derived or brought into a
country. For taxation purpose, companies are broadly classified into Nigerian companies
(which are companies incorporated under the Companies and Allied Matters Act (CAMA) 2020
as amended, and any profits made by such companies may be deemed to have accrued, derived
or brought into Nigeria) and foreign companies (which are companies established under laws
not enforceable in Nigeria, and any profit made by such company may be deemed to have
accrued, been derived from or arisen from outside Nigeria, to the extent that they are not
attributable to activities within Nigeria).
The Company Income Tax (CIT) was created by the Companies Income Tax Act (CITA) which
was enacted in the year 1979 which originates from the Income Tax Management Act of 1961.
The federal government of Nigeria implemented its Voluntary Assets and Income Declaration
Scheme (VAIDS) which kicked off from July 2017 down to June 2018, purpose of which was to
present defaulting taxpayers an opportunity to regularize their tax affairs with full amnesty
(KPMG Nigeria, 2019). According to KPMG Nigeria (2019) “the approach was modestly
successful since it assisted the FIRS in its ability to expand the tax net and achieve its record tax
revenue collection of ₦5.3 trillion in 2018”. In 2019 the actual tax revenue generated was
₦5,263.1013 trillion of which Company Income Tax was ₦1607.3201 trillion which is about
31% of total tax revenue for 2019 (Federal Inland Revenue Service, 2020).
To further explicate, there are three tax authorities in Nigeria charged with the ability to collect
various designated taxes, the Federal Inland Revenue Service (FIRS) which is the operating arm
of Federal Inland Revenue Service Board, is responsible for collecting taxes on behalf of Federal
government, example of which include (Company Income Tax, Withholding Tax, Petroleum
Profit Tax, Value added Tax etc.), the State Inland Revenue Services (SIRS) collecting State taxes,
some examples of which include (Personal Income Tax, PAYE, individuals withholding tax, road
tax etc.) and the Local Government Revenue Committee (LGRC) which collect taxes like Shop
and Kiosk rates, Tenement rates, On and off liquor license etc. (Institute of Chartered
Accountants of Nigeria, 2019).
Page 3 of 12
50
Advances in Social Sciences Research Journal (ASSRJ) Vol. 10, Issue 1, January-2023
Services for Science and Education – United Kingdom
Nigeria today is facing series of challenges when it comes to optimizing tax revenue for
economic and social growth. The role of tax revenue with regards to promoting economic
activities and growth is not felt in Nigeria because despite tax revenue and expenditure
reported year in year out by government, the physical conditions of the nation in terms of social
amenities and infrastructure is dwindling and gradually moving to a pit of no return. This can
evidently be seen in the lack of basic social amenities. Some of the biggest problems being faced
in the country is finding the optimal balance between a tax regime that is business and
investment friendly while at that same period generating enough revenue to cover public
expenditures which in turn attracts potential investors.
Corporate organizations are faced with the issue of being subjected to tax on the profits made
by its holding company and that of its foreign subsidiaries and branches. Some firms indulge in
tax evasion and avoidance practices, all in a bid to avoid the issue of double taxation and some
other challenges posed by corporate taxes. In other to curb these challenges, a balance between
government goals and objective in terms of revenue generation through tax and the goals of
corporate organization should be reached so as to ensure sustainable growth and development
(Agbetunde, 2010). Corporate organizations loose huge amount of profit in form of tax year in
year out, where such loss of profit is ploughed back into the company and effectively utilized, it
can change the fortunes of the company and that of its stakeholders. The importance of
corporate profitability and of keeping a low corporate tax rate cannot be overemphasized. It is
such that every government that considers economic and employment growth a priority must
reflect in their fiscal policy (Cordelia & Amah, 2018).
LITERATURE REVIEW
Tax charged by government is based on the profit of the organization, and the Profitability
depends on the ability of a firm to produce more revenue which is capable of absorbing all
expenses incurred in generating such revenue, including tax and still have a balance called
retained earnings which could be absorbed back into the business for expansion (Omodero &
Amah , 2018).
Corporate taxes are one of the major sources of revenue available to finance government
expenditures and it’s also an important factor that determines capital investment in every
nation of the world (Ileana, et a., 2016). Companies Income Tax (CIT) is a tax imposed on the
profits of registered companies in Nigeria and those of foreign companies carrying on any
business in Nigeria. Companies Income Tax Act, 2007 (as amended) is a principal law that
regulates the taxation of companies in Nigeria and also empowers the Federal Inland Revenue
Service Board (FIRSB) with the ability to assess and collect taxes from all limited liability
companies that carries out their operation from or within Nigeria except those specifically
exempted from tax by the ACT. Tax system is structured in a way that allows domestic
corporations to be taxed on its assessable profit which is generated from all its activities carried
out globally while foreign corporations are subjected to tax only on income from domestic
activities within the jurisdiction (Adejare, 2015). After all allowable expenses have been
deducted of as specified by the Act; companies are required by the Act to pay 30% of their
assessable profit to the government as tax. However, the CIT rate for small companies is 0% for
companies with gross turnover of N25 million or less and that of medium companies with gross
turnover greater than N25 million and less than N100 million to be 20%
(Pricewaterhousecoopers, 2021). Organizations are also subjected to various taxes such as