Research Project: Impact of Petroleum Profit Tax on Economic Growth and Development by Onjewu Michael Bsc Economics

CHAPTER ONE

 INTRODUCTION

1.1 Background of the Study

The Petroleum Industry is the largest and main generator of revenue to the Gross Domestic Product (GDP) in Nigeria which is the most populous nation in Africa. Since the British discovered oil in large quantity in the Niger Delta in 1956; the oil industry has become the main stay of the Nigerian economy.

According to Statistics from the Central Bank of Nigeria, as at 2014, oil and gas exports accounted for more than 78% of export earnings and about 83% of federal government revenue, as well as generating more than 81% to GDP.

The Petroleum Profit Tax Act 1959 (PPTA) provides for the imposition of tax on the chargeable profits of companies that are engaged in petroleum operations in Nigeria.

Taxes are instruments of fiscal control and serve the purpose of raising revenue/funds for the public sector. These include the public contribution to economic investment, as well as enabling people to meet their basic needs and enjoy wider opportunities. Without taxation, government cannot create a better society. One of the ways to collect tax is through petroleum profit tax.

One of the ways to collect tax is through petroleum profit tax. The oil industries have achieved great prominence in the Nigerian economic environment since early seventies. The Government has attached importance to oil exploration and production such that the taxation of profits of companies engaging in such operations are taxable under a tax law known as Petroleum Profits Tax Act (PPTA).

According to Azaiki and Shagari (2007) the Petroleum Industry constitutes a major source of income and occupies a strategic position in the economic development of Nigeria. For the past decades, the industry has been playing vital and dominant role to the economic growth of Nigeria, both in foreign exchange earnings and domestic income generation.

1.2 Statement of the Problem:

Petroleum taxation is meant to serve as an instrument for wealth re-distribution between the wealthy and industrialized economies represented by the multinational organizations, who own the technology, expertise and capital needed to develop the industry on one hand, and the poor emerging economies from where the petroleum resources are extracted on the other hand. A high profit profile of a successful investment in the oil industry makes it a veritable source for satisfying government objective of raising money to meet its socio-political and economic obligations to the citizenry, thereby, translating to economic growth; However this seem not to be the case in Nigeria. Huge amount of revenue accrued from the petroleum sector is published yearly and yet when compared to reality; it cannot be ascertained whether there is a meaningful contribution to economic development in the case of Nigeria.        

 From Previous researches by the likes of Odusola (2006), Nwete (2004), Omojimite (2012) and Ogunjemilusi (2011) however, indicates that Petroleum Profit tax can cause an increase or a decrease in economic growth and development of a nation, depending on the type of theory, policy and practical implementation the government in power adopts. In this regard, there have been discrepancies and hence the need to examine the basis for the discrepancies, and evaluate the relative impact of crude oil on the economy.

1.3  Research Questions:

This study seeks to answer the following research questions:

·        What is the relationship between petroleum profit tax and economic development?

·        What is the effect of the weak and poor administration of petroleum profit tax on Federal Government revenue generation in Nigerian economy?

·        What are the effects of tax evasion and tax avoidance of petroleum profit tax on the development of Nigerian economy?

1.4 Objectives of the Study:

 The main objective of the study is to appraise the effect of Petroleum Profit Tax (PPT) on economic growth (proxy by GDP) in Nigeria over the years. The trend of Petroleum profit tax (PPT) would be assessed with reference to the Nigerian economy. Other specific objectives of the study are:

1.     To investigate the impact of Petroleum Profit Tax on the economy in Nigeria

2.     To examine the effect of Domestic Consumption and Production of crude oil on economic growth in Nigeria.

1.5 Hypothesis of the Study:

This research work will be guided by the following Null hypothesis:

 H₀: There is no significant relationship between petroleum profit tax and economic growth in Nigeria.

H₁: There is a significant relationship between petroleum profit tax and economic growth in Nigeria.

1.6 Justification of the Study:

The problems with Nigerian economy have been traced to failure of successive governments to use oil revenue and excess crude oil income effectively in the development of other sectors of the economy.

Over all, there has been poor performance of national institutions such as power, energy, road, transportation, politics, financial systems, and investment environment have been deteriorating and inefficient.

Despite the fact that crude oil has been the source of Nigerian economy, the economy is facing with high rate of unemployment, wide spread oil spillage, increasing poor standard of living as a result of decreasing gross domestic product, per capita income, high rate of inflation and high level of interest rate which has led to the effect of the economic development.

Therefore at this juncture, it is important to examine the effect of petroleum profit Tax (PPT) on economic growth and development in Nigeria for the period (1980 to 2014).

 Also, this study would enable policy makers to stimulate other sectors of the economy so as to contribute to the revenue generation of the country. Therefore this study would give a clearer picture of the happenings of the Nigerian economy and why with a continuous increase in PPT, the level of economic growth experienced cannot be compared.

1.7 Scope and Limitations of the Study:

 Data on petroleum profit tax and its impact on the performance of the economy shall be examined with data spanning from 1970-2014, which is forty- five (43) years in order to establish both long run, medium term and short term impact on growth, since the federal government started collecting Petroleum tax in 1970 therefore it is only appropriate to start the research from the inception of the tax,  Attention shall be on the aggregated petroleum profit tax which is a summation of royalties, prospecting and exploration lease, rents, margin and profit sharing elements.

 A limitation of the study with secondary data analysis is that there is insufficient information about how the data was collected. The NNPC makes it difficult to get the breakdown of the components of petroleum tax and therefore, one has to make use of the available data published by the Central Bank of Nigeria.

1.8 Outline of Chapters:

This study would consist of five (5) chapters, which include:

Following this introductory Chapter, Chapter two would present the literature review on the subject matter, such as definition of key terms, theoretical framework, and empirical framework. Methodology to be adopted in the study would be stated in Chapter (3) three. Chapter four would focus on the data presentation and analysis of the result findings. While Chapter (5) five would comprise of the summary, conclusion and recommendation.

 * For the complete project and abstract, contact me on 07032879723 or send me a mail at michaelonjewu@yahoo.com