CHAPTER ONE

INTRODUCTION

Tax policy among other being the basic objective of the encouraging capital formation for economic development.

Income that would otherwise be spent on non-essential is usually taxed out of their holder to mobilize enough savings to finance needed investment both in the manufacturing and social overhead capital.

However, in thud capital formation, sole development of the economy lies in the conflict between the need for high rate to raise enough capital for the government owned investment in utilities and infrastructures which are essential for development and industrializations and the need to keep tax rate low enough to encouraged private investor in industries and in agriculture.

The situation is further compounded by the fact that by and large, income are low in the development economy (giving rise to low tax revenue generally) and those tax which vary directly and rise progressively with the income and which are most effective in retrieving a good portion of gain of the economic development are the once likely to affect return from private investment.

In other to meet up with those conflicting demand, the approach is to combine high rate of tax with preferential treatment to categories of desired development activity (with penalty tax for undesired activities). At 45%, the company income tax rate in Nigerian as considered high enough could be an effective tool for any necessary deduction in the economic activity. But apart from the deriving, the must effective way of mobilizing capital , there is still he need to direct investment to the desired sector of the economy. Other dilemma here is that investment which meet the main motor of the private investor (capital profits) are not necessary those that bring about high social benefits. In fact before 1964, value added production was quit unattractive to entrepreneur. They regard trading and contract business as the quickest way of increasing the income. In addition, the British trading firm that dominated the economy with the assistance of the colonial government discourages diversified indoctrination in Nigerian to protect their own trading interest.

But with the Nigerian political independency in 1960, come the international completion for the Nigerian vast market. The intensification of this competition coupled with the government active encouragement gave impetus to industrialization. The investment in the industry after a public policy is a challenge to influence the level, composition and direction of the manufacturing output and capital production. Such policies at first encouraged the domestic production of various goods previously imported but latter emphasis has shifted to maximization of value added to the grose domestic product the policy is therefore at encouraging the utilization of our local raw material by the manufacturing firm in place of the imported ones and also for encouraging production for foreign market. Nigerian has been utilizing a system of fiscal incentive, which is consciously manipulated to influence the direction of investment in activities in the private sector. These incentives are embodies in fire legal enactment as follows;

1.     The industrial development (income tax relief) Act of 1958 as amended by decree 22 of 1971.

2.     The industrial development, (import duties relief) Act of 1957.

3.     Costumes duties (dumped and subsidized goods Act of 1958.

4.     The customs (draw back) regulation of 1958

5.     The income tax (amendment) Act of 1959)

THE STATEMENT OF PROBLEM

Tax holiday scheme is wildly used by the developing countries in the belief that it is a useful fiscal industrial policy for rapid economic development, sine it is activity in the preferred sector of the economy. But the scheme can activity be providing subsidy to all the firm benefiting by it without necessary stimulating fir example if for a firm that enjoys tax holiday, the volume and timing of the incentive as well as the decision concerning the input and output market of an opportunity and other pioneer and other infant company sector. Condition of the firm remains as would have been without the tax holiday. Though the subsidy is enjoy but that firm become socially non beneficial.

It is therefore important to determine and to what extent is a firm stimulated to invest by tax holiday and them know which among the infant industry are stimulated and which are not from the which knowledge we can then determine the extent of the effectiveness of the tax scheme.

OBJECTIVE OF THE STUDY

In deciding whether a companies incentive included that (is stimulated) , two things comes to mind, whether the company decide to go into business because of the offer ( of the tax holiday which we shall not investigate here) also whether the company subsequent decision on investment are included by tax holiday subsidy.

Apart from using the liquidity model to evaluate the extent of inducement for subsequent investment of infant industry in Imo State (selection region) this study will also examine other basic issue that influence the effectiveness of tax holiday scheme.

SCOPE OR DELIMITATION OF THE STUDY

The researcher carried out the study wit limits imposed by practical consideration of the financial involvement and time constraint. Considering the geographical areas of the nation, the researcher chose seven companies in Imo State.

RESEARCH QUESTION

The following research question is used for the project topic” the impact of tax holiday investment in private or infant industries ( a case of companies in Imo State.

1.     Did your industry decide to go into business in the first place because for the offer of tax holiday

2.     Is your industry subsequent decision on investment induced by tax holiday subsidy

3.     Is tax holiday scheme influencing the size of investment in your industry

4.     In what can increase in the investment as a result of fiscal inducement (some time coupled with the condition that indigenous labour must be used by the benefiting company) cause the red action in unemployment.

5.     How can tax holiday scheme be used to redirect investment pattern  

HYPOTHESIS FORMULATION

In order to employ a scientific approach to the realization of the objective of this research work, the following hypothesis were analyzed.

Ho: the impact of tax holiday on investment is not favorable in the infant industry in Imo state.

Hi; the impact of tax holiday to the infant industry in Imo state is favorable in Imo state

SIGNIFICANCES OF THE STUDY

The holiday involves the government expenditure in two forms

(a)              In form of subsidy to the infant industry

(b)             In form of cast of administering the pioneer scheme

Been an expenditure, there should be benefit to show for it 9 particularly in this austere time) else the fund expended on it should be directed to other areas of need. This is why the evaluation of the scheme becomes important. Beside the scheme is an industrial policy, which there are alternative and one of which is government direct participation in the sector in which private investors lad behind. If the scheme is found to be an effective inducement, the alternative strategy for building stock of profitability investment in the relevant sector should take it place.

DEFINITION OF TERMS

The definition is for use in this book only and not for general standard definition. They are relevant to this context

1.     Infant or pioneer industry: industry operating in Nigerian and in those areas where the government consider being beneficial to the Nigerian and assistance to which will in public interest.

2.     Tax holiday: the period of time allowed of granted to the pioneer industry to enjoy income tax relief

3.     Investment: the economic activity design to increase in dimension of growth or to maintain the production quality of the existing stock or capital.

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