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Significant Effect Of Statutory Tax Rate (STR) On The Return On Equity (ROE) Of Deposit Money Banks (DMBs) In Nigeria

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1.1 Background to the Study

Tax is a compulsory payment made on different basis and rates by citizens (corporate bodies and individuals) to government, it is non-negotiable but obligatory. This payment is done not on the basis of direct exchange for the payment for goods and services.

It is non-negotiable because none of the citizens have any direct contribution to the composition of the basis and rates of payment. Government only classifies the items on which the tax is to be paid, and the category of citizens that should be subjected to the payment (Ariwodola, 2005). Taxes are paid by any citizen (individual or an incorporated enterprise/company) whether or not the citizen benefits from the government projects and programmes financed by the taxes.

In the present dispensation of Nigerian economy, taxation always was a means by which communities are provided with common facilities like basic socio-infrastructure such as access roads, healthcare, schools, security, amongst others from time immemorial (Obadimi, 1994).

Modern and well regulated taxation system in Nigeria started in 1940 with the introduction of direct taxation ordinance No. 29 (CAP 54) of the year. Before the 1940 ordinance, income tax has first been introduced in Northern Nigeria in 1904 by Lord Lugard. It was known as community tax, several changes were made to the community tax.

Most economies rely on income from taxation for its development. Aside from its uses as a means of raising government revenue, taxation is also often used as an instrument or tool for regulating economy, redistributing wealth and inducing preferred modes of behaviour, particularly consumption patterns and investment choices (Naiyebu, 1996, Oyebode, 2010).

Based on this relevancy of tax to macroeconomic variables of a nation, it is pertinent to note that those who pay these taxes are “citizens”. Citizens here refer to individual and corporate bodies, which Nigerian banks are inclusive. Thus, the importance of these banks’ financial performance cannot be over emphasized.

Banking is an economic activity, which primarily deals with the intermediation of financial resources between the surplus units and the deficit units of an economy and the channelling of such resources to profitable investments. Banks also facilitate the provision of an efficient payment system. A sound, profitable, efficient and well managed banking system contributes to the stability of the financial system and protects a country from any undesirable financial crisis (Aburime, 2008 and Ramlall, 2009 cited in Ogunbiyi and Ihejirika, 2014).

In Nigeria, banks are regarded as dominant financial institutions thus, their health condition is crucial to the general health of the economy. Therefore, having the knowledge of factors influencing deposit money bank’s financial performance is not only important but also essential in stabilizing the country’s banking industry and economy at large.

Financial performance with respect to profitability, efficiency (managerial and operational) are considered as crucial objectives to conduct a business without which deposit money banks will not be in business. With good performance trend, banks are able to enhance the confidence of their stakeholders, maximize shareholders wealth, being able to stay competitive in the financial market as well as performing their obligatory duty in paying and/or remitting the taxes; which serves as a vital source of revenue to the government.

Before a country considers how best to administer its tax system it must possess a clear picture of the scope of its tax system. The quantity and quality of resources required by tax administrators are to a large extent determined by the type of tax system which is introduced.

A nation’s tax goals are not achieved by designing a tax system which is fair. Any fair system which is not administered as planned becomes inequitable (Micah, Ebere and Umobong, 2012).

Thus, a good tax system is capable of financing the necessary level of public spending in the most efficient and equitable way possible. The Nigerian Tax system is lopsided and dominated by oil revenue and therefore the establishment of effective and efficient tax systems faces some formidable challenges. The first of these challenges is non availability of tax statistics. The second is the inability to prioritize tax effort. The third is poor tax administration. The fourth is the multiplicity of taxes.

The fifth is the structural problems in the economy that affects the maximization of Value Added Tax (VAT). The tax system is one of the most powerful levies available to any government to stimulate and guide its economic and social development. The more effective the tax system is the stronger the capability; prosperity and legitimacy of the state (Everest-Phillips, 2008)


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