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
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
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.
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
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.
A capital gain (or loss) generally refers to
the price of an asset when it is sold compared to its original purchase price.
A capital gain occurs if the value of the asset at the time of sale is greater
than the initial purchase price. A capital loss occurs if the value of the
asset at the time of sale is less than the purchase price.
Capital gains taxes, of course, raise
revenues for government but they do so with considerable economic costs.
Capital gains taxes impose costs on the economy because they reduce returns on
investment and thereby distort decision making by individuals and businesses.
This can have a substantial impact on the reallocation of capital, the
available stock of capital, and the level of entrepreneurship.
Capital gains are taxed on a realization
basis. This means that the tax is only imposed when an investor opts to
withdraw his or her investment from the market and realize the capital gain.
One of the most significant economic effects is the incentive this creates for
owners of capital to retain their current investments even if more profitable
and productive opportunities are available.
Capital gains tax has been justified on the
ground that capital gain on assets increases a person or person’s taxable
capacity by increasing his power to spend or save. Capital gains are not distributed
among the different members of the tax paying community in fair proportion to
their taxable incomes, but are concentrated in thehands of property owners and
it has been argued that theirexclusion from the scope of taxation constitutes a
serious discrimination in tax treatment in favour of a particular class of
Non payment of capital gains tax will create discrimination
in favour of property owners that will lead to further reinvestment of those
gains in assets thereby perpetuating further severe inequalities in income and wealth
as capital gains only accrue to those who own property. Non payment of capital
gains tax accruing especially to those in the upper income bracket puts a greater
relative burden on the income tax of those who do not enjoy such gains (Ayua,
In developing countries capital gains tax is
a lucrative ground for raising money for purposes of development. In addition,
In a (developing) countries like Nigeria there exist large opportunities for
the realization of capital gains because of the tendency of rising prices
inevitably accompanying a process of accelerated economic development, besides,
the process of economic development itself tends to generate capital gains
because of the rise in real income, company profits and the value of shares.
But as the proportion of wealth held in the form of equity shares of the capital
gain arises to the owners of property such as land and real estate. Thus, the
taxation of capital gains tax constitute an important fiscal mechanism to plough
back a proportion of the increase benefits accruing to the holders of property
as a result of a process of development into the developmental funds of public
There are many types of taxes that are often
levied on individual and corporate entities. Capital gain tax is on income
derived from the sale of a capital asset. This paper will examine the concept
of tax, reasons for taxation, features of a good tax system, nature, arguments
against Capital Gain Tax and recommendations for effectiveness of this form of