Income Tax And Investment


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The economic resources available to society are limited and as such an increase in government expenditure normally means a reduction in private spending and savings since income tax has been increased. An adage that “Once government gives with right hand, they take away with the left hand”. Taxation is one method of transferring resources from the private hand to the public sector, but there are other ways, one of these alternative methods is the debasement of the currency through the production of too much money. The government simply creates mere money and uses it to purchase goods and services. This technique has been tried many times over the centuries and was for example vehemently condemned in the fourteenth century by Nicholas Oreseme (C.1360). The main problem is that it leads to inflation. As the value of currency falls, purchasing power is transferred from holder’s money to government. This process has therefore been described as an “inflation tax” by Johnson (1971), Friedman (1980) and others.

What is Tax?

Tax according to (Abimaje Akpa, 2004) is a compulsory levy imposed on the residents and other legal personalities living in a society by government otherwise known as the “tax authority”, the payment of tax once levied is compulsory and its none payment usually attracts some penalty.

Tax is therefore a creation of status and no tax can be levied without the backing of the law. In Nigeria, the power to make law is contained in the second schedule that is, the legislative list of the Nigeria constitution. This comprise of the exclusive and concurrent lists, the following important items, which had helped in the development of Nigeria economy, items 15, customs and exercise duties, items 22 export duties, items 58 taxation of income project and capital gain. The concurrent legislative list is the part two of the second schedule and in this list; section D, deals with collection of taxes amongst other various taxpayers, therefore the legal history of personal income tax in Nigeria dates back to colonial era which government created direct ordinance and income ordnance in 1940.

The direct tax ordnance applies to all citizens except those who live in Lagos Township, the income tax ordnance to expatriate other Nigeria living Lagos. In 1956, eastern region passed the finance law No 1 while the basic of computation of tax liability remained the same as in the ordinance in 1943, tax allowance where providing for married tax payers and also for the family with children up to maximum of three, the system also introduced pay as you earn (PAYEE) method of taxation and this law became operative on 1st April, 1956 and 1962, the region passed another law which replaces the 1956 law. In 1958 Riesman Fiscal Commission was appropriated to work towards uniformity in taxation and basic principles for taxing income of persons other than limited liability companies were introduced through Nigeria. The recommendation was embedded in the Nigeria order – in – council 1960, it formed the basis of income tax management act 1961 (ITMA). In addition, it was meant to formulate a broad frame work within which other personal income laws were to operate and it serves the same purposes today and can contribute to the development of the Nigerian economy.

DEFINITION OF INCOME TAX

Income is said to be money derived from daily activities in the way of wages, salaries, bonus etc. Tax is a compulsory levy against as individuals by the government for development and essential services. Therefore income tax is seen as the tax imposed on individual’s income, group, companies etc. It is a direct tax such as personal income tax, company profit tax etc. Investment in general terms is an expenditure undertaken for the production of consumer and product goods. It is the act of using money value of purchase an asset for safe keeping as to enable it to gain future profit.

THE BASIC OF INVESTMENT CATEGORIES AND TYPES OF INCOME

The three basic investment categories are,

  1. Cash (Saving Accounts, Bank Certificate of deposits, Money market fund).

  2. Growth (Usually Stocks) and,

  3. Fixed income (Usually Bonds).

  4. Diversified portfolio (mutual funds)

  1. Cash:

To an investor, cash has several advantages. It offers stability amid other change. It is easily available and so can meet short term needs. It is the basic of an emergency nest egg. On the other hand, cash grows more slowly than other investments if inflation strikes, cash can actually loos value in comparison to rising prices before investing in stock and bonds. You should have enough saving in cash to live on for six months, don’t invest this cash in other asset categories you may need a reserve, if you loose you job in savings accounts earn a small amount in interest between 2.0% to 4.0%.

  1. Growth Investment (Stocks):

Stock also called equities represent shared ownership of a company, because stocks can increase in value freely and quickly they offer a greater chance of significant investment growth than cash or bond do.

Stock prices tend to rise with inflation and so buffer its effects. Stock in a company that pays relatively large dividends also provides returns on investment without resale. But stocks are far more vulnerable to risk than cash or bonds. Stock prices fluctuate in reaction to news about a company’s financial well being or its potential for growth. Owing a range of stock as in a mutual range of stock as in a mutual fund limits dependence on one company’s success etc.

  1. Fixed Income (Bond):

Bonds provide a fixed sale of income regardless of stock market fluctuations. They bring stability to a portfolio of investments the interest rate in a bond is often higher than that in bank deposits or money market finds. The interest on some government bond is free of some taxes although money invested in a bond is not readily available. Bonds can be bought up and sold and changes in bond values often smooth out ups and downs in the stock market. When stock values are insecure, demand for bonds increases and so do bond prices.

Bonds are a firm of indebtedness that are sold to the public in set increments in returns for loaning the debtor the money, the lender gets a pieces of paper that stipulates how often interest will paid and the term of the loan.

Deficit – laden governments across the world use bond as a way to finance their operations. Cash strapped company sell dept in order to get the money they need to expand. Even individuals routinely take out interest-bearing loans, whether they are credit card balances, car loans or mortgages, Bonds are known as “fixed-income” securities because the amount of income the bond will generate each year “fixed or set when the bond will generate each year” fixed or set when the bond is sold no matter what happens or who holds the bond, it will generate exactly the same amount of money.

There are five basic kinds of bonds all defined by who is selling the debt. Public bond market comprises of:

  • The first one bonds sold by the federal governments

  • The second are bonds sold by state governments.

  • The third are bonds sold by local governments.

  • The fourth type of bonds is those sold by limited liability companies, constituting the private bond market.

  • The last type of bond investors might encounter is bonds sold by foreign government although these can be difficult for the individual investors to buy and sell outside of a mutual find.

The Federal Government bonds are sold by the Central Bank of Nigeria (CBN). They come in a variety of different ‘‘maturities’’ or length of time until maturity, ranging from 3 months to 30 years.

Various types of bonds include treasury motes, Treasury bill, treasury bonds and development bonds. These all vary based on maturity and amounts of interest paid these are called gilt edge, securities or risk force-securities.

State and local governments’ issues to financial budgetary deficits, They have to offer competitive interest rates just like cooperate bonds companies though, the only way the state can get more income is to raise tax on it citizens always an unpopular move. As a way around this problem, the federal government permits state and local government can also state and local taxes in the bonds, this even though they pay lower rate of interest, for borrowers high tax bracket bond can actually have a higher after tax field than forms or fixed income investments.

The types of income are:

  • Earned income and

  • Unearned income

Earned Income:

Personal income tax decree defined earned income in relation to individual as income derived from trade employment profession, vacation or employment or pension derived from previous employment.

Unearned Income:

This is income derived from source other than trade, profession, business vocation or employment examples are dividends, interests, rents etc they are usually derived from investment.


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REFERENCES

Aruwa S.A.S, & Abu J.O. (2007). Investing in the Nigeria capital market; Kaduna; Entrepreneurship Academic Publishing Centre.

Jude C.N. (2000). Principles of personal income taxation in Nigeria: Enugu, precision pointers published.

Anyafo A.M.O. (1996). Public Finance in a Developing Economy: the Nigeria case. Enugu B&F Publication, UNEC.

Agyei A.K. (1985). Principles of personal income taxation: Lagos Academy press Ltd.

Akpa .A. (2004). public finance and budgeting: Makurdi academy Press.

Buhari A.I. (1993). Straight to the Point/ICAN/Polytechnic, public finance Ilorin: University of Ilorin Press.

Angahar .P. (2007). Tax reforms for enhanced revenue harvest in the Local Government System: a paper presented at a workshop, Organized by Hagaz international limited held in Anyagba Hotel, Kogi State.

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