The Relationship Between Company Income Tax and the Performance of the Telecommunication Sector in Nigeria

ABSTRACT

This study investigates the effect of company income tax on the performance of the telecommunication industry in Nigeria. The study employs the ordinary least squares (OLS) method to examine the impact of company income tax, leverage, and firm size on profit after tax. Data were obtained from the annual financial statements of MTN from 2014 to 2018. Descriptive statistics, correlation analysis, regression analysis, and Granger causality tests were applied and discussed in Chapter Four.

The study finds that company income tax has a negative and significant effect on profit after tax. Additionally, leverage significantly affects profit after tax, while firm size has a positive and significant effect.

The study concludes that taxation negatively affects the performance of the telecommunication industry in Nigeria. It recommends that telecommunication companies should explore available tax opportunities, adopt investment-friendly taxation strategies, monitor their debt levels, and optimize asset utilization. Furthermore, government policies should encourage a tax system that supports industry growth.

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

In recent years, government fiscal responsibilities have expanded due to population growth and increased demand for social services. Beyond providing shelter and food, governments now focus on employment generation, infrastructure development, poverty alleviation, and education. Consequently, governments seek to expand their revenue base to meet these obligations.

Taxation remains the primary source of government revenue across all levels. It is a compulsory instrument imposed on citizens to fund public services and regulate economic activity. According to Wambai and Hanga (2013), taxation also serves as a tool to monitor and control the informal sector, which dominates many developing economies. However, Akintoye and Tashie (2013) note that not all governments fully exploit tax potential due to system inefficiencies, policy gaps, corruption, reliance on foreign aid, and citizens’ compliance behaviors.

In Nigeria, the major form of taxation is company income tax (CIT), first enacted on April 10, 1954. Although the concept was initially proposed by German industrialist Wilhelm Van Siemens in 1918, CIT has since become a critical source of revenue in Nigeria and other African countries such as Ghana, Kenya, and Senegal (Adereti et al., 2011).

The telecommunication sector is crucial for economic development because it connects different sectors and promotes trade, commerce, and globalization (Adebayo & Akejiuba, 2016). Moreover, Shakeel, Khan, and Malik (2012) highlight that the sector reduces operating costs, enhances efficiency, and expands market access for goods and services. As a result, countries such as China, India, Germany, the USA, and the UK prioritize telecommunication development.

Despite these contributions, Musgrave and Musgrave (2004) note that developing countries often struggle to generate sufficient tax revenue to support economic development. Countries like Canada, the USA, the Netherlands, and the UK demonstrate how efficient taxation, including CIT, can drive growth (Oluba, 2008). In Nigeria, tax revenue has increased over the years, rising from N2.83 trillion to N4.71 trillion between 2010 and 2014 (Ofoegbu, Akwu, & Oliver, 2016).

However, revenue leakages and inefficiencies persist despite policies like the Single Treasury Account. These challenges hinder government capacity to provide services, creating a critical need to study the impact of company income tax on key sectors like telecommunications (Iweala, 2012).

1.2 Statement of the Problem

Tax revenue is vital for government operations and economic development. Yet, Nigeria continues to experience low growth, high unemployment, poverty, inadequate infrastructure, and insufficient per capita income despite abundant natural and human resources (Hakeem, Chisom, & Ikenna, 2016).

Government borrowing has increased due to gaps between projected and actual revenue, which raises debt service costs and limits funds for development. Additionally, the Nigerian tax system faces challenges such as poor documentation, corruption, multiple taxation, non-compliance, and tax evasion (Anaesoronye, 2013). Companies in Nigeria often cite excessive taxation as a burden, with some closing down due to the high tax rate and multiple tax system.

Given the importance of the telecommunication sector to the Nigerian economy, it is necessary to examine how company income tax affects its performance.

1.3 Research Objectives

The study aims to:

1. Examine the effect of company income tax on the performance of the telecommunication industry in Nigeria.

2. Determine the effect of leverage on the performance of the telecommunication industry.

3. Assess the effect of firm size on the performance of the telecommunication industry.

4. Evaluate the direction of causality between company income tax and telecommunication industry performance.

1.4 Research Questions

The study addresses the following questions:

1. What is the effect of company income tax on the performance of the telecommunication industry in Nigeria?

2. How does leverage affect the performance of the telecommunication industry?

3. What is the effect of firm size on telecommunication industry performance?

4. What is the direction of causality between company income tax and telecommunication industry performance?

1.5 Research Hypotheses

The study tests the following hypotheses:

• Ho1: Company income tax has no significant effect on the performance of the telecommunication industry.

• Ho2: Leverage has no significant effect on telecommunication industry performance.

• Ho3: Firm size has no significant effect on telecommunication industry performance.

• Ho4: There is no significant causality between company income tax and telecommunication industry performance.

1.6 Significance of the Study

Taxation underpins government operations, including the provision of social amenities, security, and public services. Therefore, this study highlights the importance of taxation and examines the contribution of the telecommunication sector to government revenue.

Moreover, the study provides insights for telecommunication firms to understand their performance trends and optimize contributions to national development. Policymakers can also use these findings to design tax policies that support sector growth. Finally, the study contributes to the existing literature and serves as a reference for future research.

1.7 Scope of the Study

The study focuses on the relationship between company income tax and the performance of Nigeria’s telecommunication sector. Data were collected from the annual financial statements of MTN.

1.8 Operational Definitions of Terms

• Taxation: A compulsory levy imposed on citizens to fund government activities.

• Company Income Tax (CIT): Tax charged directly on corporate earnings to support state development.

• Value Added Tax (VAT): Tax levied on goods and services, borne by the final consumer.

• Telecommunication Sector: The industry responsible for transmitting and receiving information, essential in the digital era.

• Performance: The overall effectiveness and productivity of a sector or organization.