Emeni, F. K.

Covenant University Repository

. . : ·· ... : · C> ( I I \I I I\ I \I< I I( LE -· "TAXATioN IN FINANCIAL PLANNING AND DECISION MAKING I Emeni, Kehinde Francis B.Sc., MBA, ACA I 1NTRODUCTION "Taxation is an important fiscal instrument employed in every modem economy to promote economic activity and growth while ensuring that there is balance and fair play among the actors"Oni (1998). Through taxation, the management of an organisation can forecast the consequences of some of its various investment, financing and dividend decisions and weigh the effects of various alternatives. For business organisations in Nigeria to remain in contention in the 21st century, they must have to improve on their financial planning and decision making vis- a-vis taxation. Taxation is a tool to facilitate and promote financial planning and decision making in business organisations. Tools are meant to be put to positive use, and when they are, they make the tasks easier. If taxation is a tool, then it should; Facilitate investment, financing and dividend decisions; and be an important instrument for generating strategic decisions and competitive advantage. Before looking critically at the issue of taxation in financial planning and decision making, let's look briefly at the various types of taxes in Nigeria. TYPES OF TAXES Basically, taxes are classified into ''Direct and Indirect". This classification is based on how the taxes are paid. Direct taxes:- are the taxes levied on an individual or an institution. Examples of direct taxes in Nigeria are: (1) Personal Income Tax this is administered under the Income Tax Management Act (ITMA ), 1961 which has now been amended through Personal Income Tax Act (PITA), 104 of 1993. It is also assessed under the "Pay-As-You-Earn" Basis. (2) Companies Income Tax - this is levied on the profit of companies registered under the Companies and Allied Matter Act (CAMA) 1990. It is currently charged at the rate of 30% of the total profit. (3) Capital Gains Tax this is levied on profit realised on disposal of chargeable assets e.g. buildings, works of arts, and any currency other than Nigeria curr~ncyK It is administered under Capital Gains Tax Act of 1967. · Indirect taxes:- these, although levied on the manufacturers or wholesalers and importers of goods, are passed on to the ultimate consumers in the form of price increase. The tax is included in the cost of the goods and services. Indirect taxes include, customs duty, stamp duty and value-Added -Tax (VAT). cfkAkC~Ai PLANNING AND DECISION MAKING Financial planning involves analyzing the financial flows of an individual or coporate organisation (company), forecasting the consequences of various investment, financing and dividend decision, and weighing the effect of various alternatives. Drucker (1974); defined decision making as ''the process through which organisations organise and evalute alternative course of action to select those that promise maximum contribution to specified objectives". Stoner (1970); decision making process consists of five alternative stages including; problem definition; generation of information and alternative courses of action; screening of information and alternative courses of action with regard to strenght and weaknessess; review of evaluated course of action and selection of that with maximum contribution; implementation of selected courses of action as decision. The idea of financial planning and decision making is to determine where the individual or organisation h!ts been, where it is now and where it is going and should be. NIGERIAN TAXATION, Jan./ June, 2000 137 I I  I  I  - ; -I ·  I  \ T U R E  A R T I C L E  T A X A T I O N  I N  P E R S O N A L  F I N A N C I A L  P L A N N I N G  A N D  D E C I S I O N  M A K I N G  .  T h e  i m p o r t a n c e  o f  t a x a t i o n  i n  p e r s o n a l  f i n a n c i a l  p l a n n i n g  . a n d  d e c i s i o n  m a k i n g  i s  e v i d e n t  i n  f i n a n c i a l  a n a l y s i s  a n d  f o r e c a s t  o f  t a x  i m p l i c a t i o n s  o f  t h e  i n d i v i d u a l ' s  f i n a n c i a l  d e c i s i o n .  F o r  i n s t a n c e ,  i n  w e i g h i n g  t h e  e f f e c t o f i n d i r e c t t a x ,  t h e  i n d i v i d u a l  m a y  d e c i d e  t o ;  ( i )  b u y  a n  a r t i c l e  m a n u f a c t u r e d  i n  N i g e r i a ,  t h e r e b y  a v o i d i n g  t a x a t i o n  w h i c h  t a k e s  t h e  f o r m  o f  i m p o r t  d u t y  o n  i m p o r t e d  a r t i c l e s ;  ( i i )  a v o i d i n g  t h e  c o n s u 1 1 1 p t i o n  o f  a r t i c l e s  w i t h  i n d i r e c t  t a x e s  i n c o r p o r a t e d  i n  t h e i r  p r i c e s  e . g .  t o b a c c o ,  a l c o h o l  a n d  ( i i i )  d e s c r i b i n g  a n  a r t i c l e  a s  m e d i c i n a l  e . g .  r i b e n a  d r i n k  i n  o r d e r  t o  a v o i d  p a y i n g  s a y ,  V a l u e - A d d e d -T a x  ( V A  D .  t h e r e b y  l e a d i n g  t o  r e d u c t i o n  i n  p r i c e s  a n d  h e n c e ,  f i n a n c i a l  e x p e n d i t u r e .  A l s o ,  b e c a u s e  o f  t a x a t i o n ,  a n  i n d i v i d u a l  m a y  d e c i d e  t o  i n v e s t  i n  a  p i o n e e r  c o m p a n y  i n s t e a d  o f  a  n o n - p i o n e e r  c o m p a n y ,  i n  o r d e r  t o  e n j o y  b e n e f i t s  a v a i l a b l e  u n d e r  t h e  I n d u s t r i a l  D e v e l o p m e n t  I n c o m e  T a x  R e l i e f  A c t  o f 1 9 7 1 .  T A X A T I O N  I N  C O R P O R A T E  F I N A N C I A L  P L A N N I N G  A N D  D E C I S I O N  M A K I N G  T h e  e f f e c t  o f  t a x a t i o n  i n  c o r p o r a t e  f i n a n c i a l  p l a n n i n g  a n d  d e c i s i o n  m a k i n g  c a n n o t  b e  o v e r e m p h a s i s e d .  I n  !  ~ f  (  J  . . . .  ( v )  a  c o m p a n y  d e c i d i n g  t o  s e t  u p  . i t s  n e w  a g r i c u l t u r e  f a c t o r y  o r  e q u i p m e n t  s o  a s  t o  o b t a i n  t h e  a d d i t i o n a l  r a t e  o f i n v e s t m e n t  g r a n t  a n d  b o o s t  i t s  f i n a n c i a l  p o s i t i o n .  O n  c o n s i d e r i n g  i m p l i c a t i o n  o f  t a x a t i o n  o n  i n d i v i d u a l /  c o r p o r a t e  f i n a n c i a l  p l a n n i n g  a n d  d e c i s i o n  m a k i n g ,  a s  t o  p l a n n i n g  a n d  f o r e c a s t i n g  o f  f i n a n c i a l  f l o w s ,  t h e  i n d i v i d u a l  o r  c o r p o r a t e  b o d y  s h o u l d  c o n s i d e r  t a x  s a v i n g s  ( I n f l o w )  a s s o c i a t e d  w i t h  h i r e  p u r c h a s e  i n t e r e s t ,  c a p i t a l  a l l o w a n c e  a n d  l e a s e  r e n t a l s ,  i n  c a s e  o f  i n v e s t m e n t  o p t i o n  t o ;  b u y  o n  c a s h ;  b u y  o n  h i r e  p u r c h a s e ;  a n d / o r  l e a s e  a  Q u a l i f i e d  C a p i t a l  E x p e n d i t u r e  a n d  t a x  d u e  ( o u t f l o w )  e . g .  o n  i n c o m e .  C O N C L U S I O N  I n  v i e w  o f t h e  f o r e g o i n g  t a x  i m p l i c a t i o n  i n  f i n a n c i a l  p l a n n i n g  a n d  d e c i s i o n  m a k i n g ,  i n d i v i d u a l s  a n d  c o r p o r a t e  b o d i e s  a r e  h e r e b y  e n j o i n e d  t o  p u r s u e  p o l i c i e s  a n d  p r o g r a m m e s  t h a t  w o u l d  g u a r a n t e e  g r o w t h  a n d  s u r v i v a l  w i t h i n  t h e  s h o r t e s t  p o s s i b l e  tim~ F o r  i n d i v i d u a l s  a n d  c o r p o r a t e  b o d i e s  t o  r e m a i n  i n  c o n t e n t i o n  i n  t h e  2 1 s t  c e n t u r y  N i g e r i a ,  t h e y  s h o u l d  c o n s i d e r  t h e  t a x  i m p l i c a t i o n  o f  t h e i r  f i n a n c i n g ,  i n v e s t m e n t  a n d  d i v i d e n d  d e c i s i o n s .  E m e n i  t e a c h e s  T a x a t i o n  a t  A u c h i  P o l y t e c h n i c  i n  E d o  S t a t e ,  N i g e r i a .  a n a l y s i n g  i t s  f i n a n c i a l  f l o w s ,  f o r e c a s t i n g  t h e . , . - - - - - - - - - - - - - - - - - -c o n s e q u e n c e s  o f  v a r i o u s  i n v e s t m e n t ,  f i n a n c i n g  a n d  d i v i d e n d  d e c i s i o n s ,  a n d  w e i g h i n g  t h e  e f f e c t s  o f  v a r i o u s  a l t e r n a t i v e s ,  a  c o r p o a r a t e  b o d y  m a y  d e c i d e  f o r  i n s t a n c e ;  ( i )  ( i i )  ( I i i )  ( i v )  t o  b u i l d  a  c o v e r  t o  a  l a r g e  i t e m  o f  p l a n t  i n s t e a d  o f  p l a c i n g  t h e  s a m e  i t e m  o f  p l a n t  i n  a n  e x i s t i n g  b u i l d i n g  a s  t o  c l a i m  c a p i t a l  a l l o w a n c e s ,  e n g a g i n g  i n  p i o n e e r  i n d u s t r y  a n d  a p p o i n t i n g  o u t s i d e  a s s o c i a t e s  a s  b u y i n g  a g e n t s  e n t i t l e d  t o  c o m m i s s i o n s ,  s o  a s  t o  e n j o y  t a x  h o l i d a y  f o r  s o m e t i m e  a n d  b o o s t  i t s  f i n a n c i a l  b a s e ;  o i l  c o m p a n i e s  p a y i n g  h u g e  s u m s  t o  f o r e i g n  c o n t r a c t o r s  w h o  a r e  t a x  e x e m p t ,  t h e r e b y  r e d u c i n g  i t s  t a x  b u r d e n  a n d  f i n a n c i a l  s t r e s s ;  d e c i s i o n  t o  t r a n s f e r  s h a r e s  r e c e i v e d  o n  a  b o n u s  i s s u e ,  w h i l e  t h e y  a r e  i n  a l l o t m e n t  l e t t e r  f o r m  a n d  p r i o r  t o  t h e  s h a r e  c e r t i f i c a t e  b e i n g  i s s u e d  t h e r e b y  s a v i n g  s t a m p  d u t y / c o s t ;  l A V E  V O L '  C H A N G F , D  Y O U R  A D D R E S S  C o m p l e t e  t h e  c o u p o n  a n d  m a i l  t o  t h e  S e c r e t a r i a t  o f  t h e  I n s t i t u t e .  C H A N G E  O F  A D D R E S S  N a m e :  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  .  M e m b e r s h i p  N u m b e r  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  .  F o r m e r  N u m b e r  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  .  N e w  A d d r e s s :  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  .  T e l e p h o n e  N o  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  .  F a x  N o :  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  .  E - m a i l  a d d r e s s :  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  . .  S i g n a t u r e :  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  . .  D a t e :  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  . .  N I G E R I A N  T A X A T I O N ,  J a n .  I  J u n e ,  2 0 0 U .  .  '  

Taxation in Financial Planning and Decision Making

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Taxation in Financial Planning and Decision Making

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