Nigerian Tax System: The Significance of Company Income Tax and Its Effects on Nigerian Companies

Nigerian Tax System: The Significance of Company Income Tax and Its Effects on Nigerian Companies


It is a known fact that taxation is one of the major sources of government funds. There are various forms of levies in the Nigerian tax system, among these is Company Income Tax. The present study focuses on the significance of Company Income Tax on the Nigerian economy and its effects on Nigerian companies, a case study of Union Bank Plc, Illorin. Company Income Tax is a levy, which is imposed on Nigerian companies and its objective is to examine the way company income tax is being administered as well as other related taxes, it also contains formulated hypothesis. A sample size of the top management staff within the Accounting Department was used. Out of the 40 workers, a sample size of 30 respondents was drawn. The data obtained were represented in a tabular form and the use of a chi-square statistical table was used in testing the hypothesis which helps to determine the premises of accepting or rejecting the hypothesis. From the research, it was discovered that company income tax has an adverse effect in various forms on Nigerian companies. Since research is an ongoing process, no study could be exhaustive. The study, therefore, ended with some appropriate recommendations for the companies so that the excessive incidence of tax on them (companies) could be minimized.


Title Page i

Certification ii

Approval iii

Dedication iv

Acknowledgment v

Abstract vii

Table of Contents viii

List of Tables


1.0 Introduction1

1.1 Background of the Study1

1.2 Statement of the Problem 3

1.3 Objectives of the Study3

1.4 Research Questions 4

1.5Research Hypothesis 5

1.6 Significance of the Study5

1.7 Scope of Study 5

1.8 Limitation of the Study6

1.9 Definition of Terms 6

References 8


2.1 An Overview of Nigeria Tax System 10

2.1.1 Tax Law 10

2.1.2 Tax Administration10

2.2 Historical Outline of Taxation 11

2.2.1 History of Company Income Tax 12

2.3 Administration of Company Income Tax, Education Tax, and With-Holding Tax 12

2.3.1 Administration of Company Income Tax 12 Roles of Company Income Tax 14 Stabilization Policies Role 15

2.3.2 Administration of Education Tax16

2.3.3 Administration of With-holding Tax 16

2.4 Filling of Returns 18

2.5 Computation of Tax Liability 18

2.6 Loss Relief and Capital Allowance 20

2.6.1 Loss Relief20

2.6.2 Capital Allowance 21

2.7 Assessment Procedure 21

2.7.1 Notice of Assessment 22

2.7.2 Additional Assessment22

2.7.3 Amended Assessment 23

2.7.4 Assessment Lists 23

2.7.5 Validity of Assessment 23

2.7.6 Finality of Assessment 24

2.8 Objection and Appeal 24

2.8.1 Objection 24

2.8.2 Appeal 25

2.9 Minimum Tax Computation 26

2.10 Dormant Company Levies 27

2.11 Collection Procedure of Company Income Tax 27

2.12 Offences and Penalties of Company Income Tax 28

References 31


3.0 Introduction 32

3.1 Research Design 32

3.2 Area of Study 33

3.3 Population of Study 33

3.4 Sample and Sampling Technology 33

3.5 Sources of Data 34

3.5.1 Primary Data 34

3.5.2 Secondary Data34

3.6 Instruments for Data Collection 35

3.7 Validity and Reliability of Instruments 35

3.8 Administration of the Instrument 36

3.9 Method of Data Analysis36


4.1 Introduction 38

4.2 Data Presentation (Annual Reports) 39

4.2.1 Profit Left for Appropriation 39

4.2.2 Working Capital Position 41

4.2.3 Re-Investment Capacity44

4.3 Basic Control and Prevention of Direct Incidence of Tax 44

4.4 Analysis of Questionnaire 46

4.5 Test of Hypothesis 57

4.6 Discussion of Findings62



5.1 Summary 63

5.2 Conclusion 63

5.3 Recommendation 64

References 66

Questionnaires 69

Appendix 76




The numerosity of government wants at the expense of its limited resource make it imperative to source funds through other means. One of the forms through which the government sources funds to meet its obligation is taxation.

The versatility of taxation cannot be overemphasized. This is true because it does not only serve as one of the major sources of government revenue through which public interests are satisfied but also it is one of the major fiscal policy measures being used in stabilizing the economy. For instance, it can be used to curtail the velocity of money when inflation arises. Taxation also serves as an effective way of redistributing income among citizens of a nation.

Taxation plays a crucial role in promoting economic activity and growth. through taxation, the government ensures that resources are channeled towards Important projects in society (Emeni, 2000).

It is necessary to mention that during the pre-colonial period, taxation functioned more or less on an ethnic basis. The Nigerian tax system took after the British tax system both in administration and governing

enactments. It is therefore not surprising that income tax as we know it today was first introduced into Nigeria by the British through Lord Lugard in 1904 in the North (Abdul Razaq, 1993).

The Nigerian tax system has about ninety various forms of levies which it imposes on the citizens and companies. These taxes fall under two basic categories, which are direct and indirect taxes.

Direct taxes are those taxes that are levied on the incomes/profits of individuals, partnerships, and companies. These levies have a direct incidence and Impact on the taxpayer. Examples of direct taxes include personal income tax, company income tax, which this research work is focused upon, capital gain tax, petroleum profit tax, and capital transfer tax which had been abolished in Nigerian with effect from 1st January 1996 (Abdul Razaq, 1993 and Osita, 1999).

These taxes are governed by Decrees, Acts, and Case Laws, which constitute the statute in force today, personal income tax, company income tax, capital gain tax, and petroleum profit are governed by Income Tax Management Act 1961, Company Income Act 1979, Capital Gain Tax Act 1967 and Petroleum Profit Tax 1959 respectively

Company income tax is governed by the Company Income Tax Act of 1979. This Act consolidated the Company Income Tax Act 1961 and other amending legislations. This is true because existing Laws and Acts are only amended since no new ones have been enacted.

Part 1, Section 1 of the Company Income Tax Act 1979 provides that “administration of company income tax is to be by a Board of which the official name shall be the Federal Board of Inland Revenue”. Thus, the Federal Board of Inland Revenue is responsible for the administration of company income tax which governs company income tax.

The other category of taxes which is indirect taxes are those taxes levied on the manufacturers, wholesalers, and importers of goods and services in which effects are shifted wholly or partly to the final consumers of such goods and services. An example includes custom duty, Import duty, and Value Added Tax (VAT).

Having taken interest in the happenings in recent times on the Nigerian tax system and current economic trends in the country, this research work is focused on the significance of company income tax on the Nigerian economy and its effects on Nigerian companies.


Despite the significance of taxation, it is noticed that it has various impact which includes;

Company income tax is imposed on the taxable profit of the company, which reduces the investment capacities of the company

The company income tax has some adverse effects on the performance and financial position of the companies.

According to Abdul Razaq (1998), the tax system makes it more expensive for a company to maintain its net flow of dividends to its shareholders.

Withholding tax, which is a tax-deductible from source, on the sum of all forms of contract and services of the companies, has the capacity of tying down the capacity of companies.

Also, the education tax makes the companies pay excess taxes, which results in a reduction in their profits.

The retained earnings of companies are adversely affected.


It is not an understatement that income tax has adverse effects on Nigerian companies, despite all its benefits to the Nigerian economy.

In the light of the above, this study extensively explains the company income tax by;

examining the way it (company income tax) is being administered as well as other related taxes.

analyzing various ways through which Nigerian companies are affected by the imposition of company income tax.

providing useful suggestions and recommendations to the foregoing.


This research work is designed to carry out an in-depth study of the significance of company income tax and its effect on Nigerian companies like Union Bank PLC.

The questions are:

1. What are the roles of Company Income Tax in Union Bank PLC?

2. How does Company Income Tax affects Union Bank?

3. How does Company Income Tax reduce the investment capacities of Union Bank PLC?

4. To what extent does the Company Income Tax affect the retained earnings of Union Bank?

5. What are the control measures of Company Income Tax adopted by Union Bank?

6. How does with-holding tax affect the capacity of Union Bank?

7. How does the tax system in Union Bank affects the net flow of dividends of its shareholders?


Ho: Union Bank PLC is not affected by the imposition of Company Income Tax

H1: Union Bank PLC is affected by the imposition of Company Income Tax

Ho: Company Income Tax does not provide useful suggestions to Union Bank.

H1: Company Income Tax provides useful suggestions to Union Bank Plc.

Ho: Company Income Tax is not properly administered in Union Bank.

H1:Company Income Tax is properly administered in Union Bank.


The significance of Company Income Tax and taxation as a whole cannot be undervalued because they contribute immensely to economic growth and development.

This work will help tax administrators and the government to realize the importance of taxation, so that much attention will be paid to it.

Also, this work is useful for our lawmakers since the critical effects of taxation on Nigerian companies are analyzed so that only reasonable laws will be made.


The scope of the study can be defined geographically, temporally, and in terms of the subject matter. There are various forms of levies in the Nigerian Tax System, examples include Petroleum Profit Tax, Personal Income Tax, and Company Income Tax.

Hence, the scope of this study is limited to Company Income Tax and its effects on Nigerian companies.

Also, because Nigerian organizations are multifarious in operation; ranging from Banking, Sea, Air, Insurance, and others made it was difficult for the research work to touch every sector. The Union Bank Ilorin is chosen as the case study. The recent five years (1999 to 2004) annual reports and financial statements of the organization are analyzed. Since there was no publication in the year 2000.


Since no study is perfect, this study is therefore limited by the fact that the effects of taxes on companies are not contained in most texts, thus available data from the concerned organization are made use of.


Assessable Profits: According to Section 25, Subsection 1 of the Company Income Tax Act (1990), assessable profits are the profits of any company for each year of assessment from such source of its profits. They are the adjusted profits of any company for each year of assessment.

Balancing Charge: Ishola (1999) defined a balancing charge as the excess of the sale proceeds from the disposal of assets over the tax was written down value.

Basis Period: This refers to the accounting period of a business where income is assessable to tax in the year of assessment (Ishola 1999).

Capital Allowances: These are allowances granted to any individual i.e. sole trader or partners in a partnership or corporate body who during an accounting year ended in the preceding year of assessment incurred qualifying capital expenditure in respect of assets in use for a trade or business in the last day of the basis period. It is given in place of depreciation (Baiyewu 2000).

Preceding Year Basis (PYB): Ishola (1999) defined the preceding year basis of assessment under which the profit of the accounting period ending in the preceding year of assessment is assessable to tax in the year of assessment under consideration. It is a basis on which taxation of any company arises.

Tax Avoidance: Tax avoidance can be described as the art of dodging tax without actually breaking the law (Abdul Razaq, 1993).


This research work is divided into five chapters.

Chapter one is the theoretical background of the study. It states the rationale behind the study as well as the objectives for which the study is being carried out.

Chapter two is a critical review of the relevant literature that has a direct bearing on the study.

Chapter three clearly states the methodology employed in data collection and data analysis.

Chapter four focuses on the analysis of data collected and the presentation of findings.

Chapter five contains the summary, the conclusion as well as recommendations.

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