CHAPTER ONE

INTRODUCTION

BACKGROUND OF THE STUDY

Tax studies have become increasingly sophisticated especially during the past decade and have yielded conflicting results as regards the tax matter. Some studies focus on the cost and benefit of tax incentives while a few look at whether public funds could have been better spent or if tax incentives were economically justified. Tax studies offer little guidance to policy makers who are concerned about tax rates or tax offerings and the effectiveness of employing tax incentives as an economic and developmental tool.The mode by which industrial development and economic growth can be effectively, efficiently, stimulated and developed is very demanding. As a result of this, the government charges less tax and gives tax holidays in order to encourage investments and economic activities in those areas which help to improve production capabilities, activate economic growth as well as the allocation of resources in a socially desirable manner.Investors often emphasize on the relative importance of a good tax system in investment decisions compared with other considerations such as political and economic stability, availability of social infrastructure, security of the life and property and also the general cost of doing business and so on. To the prospective investor, the general feature of a tax system (tax base rate) is more important than the tax incentives in many developing countries. The tax laws are not clearly written and may be subject to frequent review which makes long-term planning difficult for businesses and add to the perceived risks of undertaking major capital intensive projects.Taxation is a process or means through which communities or groups are made to contribute a part of their income for the sole purpose of societal administration while tax, is a compulsory levy levied on the people at a given place for the sole purpose of government revenue for government expenditure.Tax incentive itself, is the use of government spending and tax policies to influence the level of national income. This measure encourages the springing up and gradual growth of new enterprises by the reduction of profit tax, which in turn encourages production, influences the production level and curbs unemployment. So, the government should provide such tax incentives in order to boost development which will bring about an increase in employment opportunities and also cause an improvement in the economy. Amadiegwu (2008:74), a tax expert wrote that the objective of tax incentive is that by borrowing rather than taxing, the government has a better chance of expanding investment spending which is essential in enlarging production possibilities and attaining a sustainable improvement in the standard of living of the people.Dotun and Sanni (2009:265), in their Nigerian companies taxation stated that these incentives can be targeted on the low income earners, local and developing industries, farmers, which will increase their savings and is necessary for higher investment. Tax incentives create employment opportunities for the people, helps to fight economic depression and inflation thereby increasing the equitable distribution of income and wealth.A good economic development policy should contain the following elements.