PETROLEUM PROFIT TAX AND CAPITAL EXPENDITURE OF THE NIGERIAN ECONOMY (A CASE STUDY OF LAGOS STATE)

CHAPTER ONE 

INTRODUCTION   

1.0    BACKGROUND OF STUDY 

For the development and growth of any economy, the provision of basic infrastructure is quite necessary. Among these are the provisions of schools, hospitals, construction of roads, bridges, railway lines, airports and seaports. Generally, government is saddled with the responsibility of providing some basic infrastructures for her citizens. In lieu of this, the government of any society seeks sources of fund to maintain the development, and meet the needs of its society. Meeting the needs of the economy call for huge funds which an individual or society can’t contribute alone. There are two ways of financing government expenditure in Nigeria; these are, through oil revenue and through non-oil revenue. The Nigerian government sources a large proportion of its total revenue from oil since Nigeria has been seen as a country rich with this natural resources. The petroleum industry generated about 82 per cent income for Federal Government while 18 per cent came from non-oil revenue. The Petroleum Industry constitutes a major source of income and occupies a strategic position in the economic development of Nigeria. For the past decades, the industry has been playing vital and dominant role to the economic growth of Nigeria, both in foreign exchange earnings and domestic income generation. One of the sources of petroleum income is the Petroleum Profit Tax, this is just among others, as royalties, rents, oil pipeline and license fees, signature bonuses penalty from gas flared, NNPC earnings from direct sales, proceeds from local sales of crude oil to NNPC, proceeds from export sales of crude oil and gas etc. are sources of petroleum income. But for the purpose of this research, the researcher will be focusing on an aspect of the sources of petroleum income, which is, petroleum profit tax (PPT).Petroleum refers to crude oil and natural gas or simply put, oil and gas. Petroleum, or oil and gas, production and export play a dominant role in the economy of Nigeria and account for about 70 per cent of the nation’s GDP and over 90 per cent of her foreign earnings. Nigeria has been seen to be the largest oil producing country in Africa and the eleventh in the world. Petroleum industry is the leading sector in the Nigerian economy. Oil being the mainstay of N-igerian economy plays a vital role in shaping the economic and political destiny of the country. The contributions of the petroleum industry to public expenditure has been phenomenal. Taxation is the system of collecting money by taxes i.e. the system by which taxes are imposed or the process or system of raising income through the levying of various types of taxes. Taxes are  levies imposed by government against the income, profit or wealth of an individual, partnership and corporate organization. From the definitions given it can be said that the main purpose of tax is to provide government with money to provide public services to citizens and it is necessary that all citizens, whether individuals or artificial bodies, pay taxes. The Petroleum Profit Tax Act (PPTA) is the tax law responsible for the governing of the taxation of companies engaged in petroleum operations and, the Act defines petroleum operations as “the winning or obtaining and transportation of petroleum or chargeable oil in Nigeria by or on behalf of a company for its own account by any drilling, mining, extracting or other like operations or process, not including refining at a refinery, in the course of a business carried by the company engaged in such operations, and all operations incidental there to and sale of or any disposal of chargeable oil by or on behalf of the company” . The definition is applicable to the upstream sector of the petroleum industry; hence, only companies in the upstream sector are charged with petroleum profit tax (PPT).The importance of taxation on petroleum profits cannot be overemphasized as tax revenue derived from tax in petroleum profits contributes, largely, to the total tax revenue available to the Nigerian government. Petroleum profit tax generate about 42% income for federal government.