Impact Of Tax Reforms On Performance Of Small And Medium Enterprises In Maiduguri

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Impact Of Tax Reforms On Performance Of Small And Medium Enterprises In Maiduguri


Abstract


Small and Medium Enterprises play a very important role in development of the Nigerian Economy. Making up about 97% of the entire economy, they serve as a source of employment generation, innovation, competition, economic dynamism which ultimately lead to poverty alleviation and national growth. Tax policies is one of the factors that constitute the Small businesses’ economic environment. This research work tries to establish if any relationship exists between the growth of Small businesses and the tax policy environment in which they operate in Nigeria. Questionnaires were distributed to Small businesses in maiduguri, Nigeria and non probability judgmental sampling method was employed. It was found out that from most Small businesses surveyed; they were faced with the problem of high tax rates, multiple taxation, complex tax regulations and lack of proper enlightenment or education about tax related issues. Although there was a general perception that tax is an important source of fund for development of the economy and provision of social services, the study revealed a significant negative relationship between taxes and the business’ ability to sustain itself and to expand. In order to obtain a vibrant and flourishing SME sector, the tax reform needs to be appropriate such that it will neither be an encumbrance to the Small businesses nor discourage voluntary compliance. A suggested solution is by increasing tax incentives through reducing tax rates and increasing tax authorities’ support services towards small and medium enterprises.


Table of Content


  • Title Page
  • Certification
  • Dedication
  • Acknowledgement
  • Table of Content
  • List of Tables
  • Abstract

Chapter One:

Introduction

  • 1.1 Background of the Study
  • 1.2 Statement of the Problem
  • 1.3 Objective of the Study
  • 1.4 Research Questions
  • 1.5 Research Hypothesis
  • 1.6 Significance of the Study
  • 1.7 Scope of the Study
  • 1.8 Limitation of the Study
  • 1.9 Definition of Terms
  • 1.10 Organisations of the Study

Chapter Two:

Review of Literature

  • 2.1 Conceptual Framework
  • 2.2 Theoretical Framework
  • 2.3 Empirical Review

Chapter Three:

Research Methodology

  • 3.1 Research Design
  • 3.2 Population of the Study
  • 3.3 Sample Size Determination
  • 3.4 Sample Size Selection Technique and Procedure
  • 3.5 Research Instrument and Administration
  • 3.6 Method of Data Collection
  • 3.7 Method of Data Analysis
  • 3.8 Validity of the Study
  • 3.9 Reliability of the Study
  • 3.10 Ethical Consideration

Chapter Four:

Data Presentation and Analysis

  • 4.1 Data Presentation
  • 4.2 Analysis of Data
  • 4.3 Answering Research Questions
  • 4.4 Test of Hypotheses

Chapter Five:

Summary, Conclusion and Recommendation

  • 5.1 Summary
  • 5.2 Conclusion
  • 5.3 Recommendation
  • References
  • APPENDIX
  • QUESTIONNAIRE

Chapter One


Introduction

1.1 Background of the Study

Small and medium enterprises (SMEs) have often been described as an engine of growth. Studies by Ogujiuba (2004); Onugu, (2005) and Ihua (2009) have validated the claim that SMEs form the bedrock of economic growth and development. The much importance place on SMEs is premised on the several roles which it can perform. Studies have showed that it generates employment opportunities, rural sector development, capacity development, encourages dispersal of industries, boosts local resources utilization, technological advancement, mobilization of local savings, linkages of industries, improvement in living standard and poverty reduction (Oluseye, 2013: Emmanuel & Daniya, 2012). Small and medium enterprises are sub-sector of the industrial sector which play crucial role in industrial development. Ologun (2004) define small and medium enterprises as those undertaking the task of creating and managing enterprises for a purpose. The purpose may be personal, social or development. SMEs are those establishments that employs not more than hundred people with an annual turnover of less than N750,000.

In most industrialized and well developed economies, SMEs have proved itself as the hub of development employing a large percent of the labour force and contribute commendable proportion to the GDP. For instance 80% of the total industrial labour in Japan is located in SMEs contributing well over 39% to the GDP. The report is the same among developing countries. Fissareha (1991) posit that about 22% of adult population in developing countries is engaged in SMEs, hence, small firms are the main source of employment in developing countries. Kombo et al. (2011) submit that SMEs have made considerable contribution to the growth of Kenyan economy and accounts for 12-14 % of its GDP through employment generation, training and exposing entrepreneurs, serve as a source of income and livelihood for majority of its citizens.

SMEs have gained increased attention in Nigeria after the Structural Adjustment Programme (SAP) in 1986. Prior to SAP, the country emphasizes more on large-scale concerns that are heavily import dependent. The fiscal retrenchment of the state under the public sector reform and the attendant retrenchment of public sector workers created untold hardship on the people. In addition, most of the large scale concerns could not cope with the new policies brought by SAP. It then became clear that the only way to escape poverty and unemployment is to engage in small businesses. The government has not failed in expressing the pivotal essence of SMEs to national development. The government has gone out of its ways to setup schemes and initiate legislation that will catalyze SMEs (see Jimodu, 1998; Kayode, 2001; Hassan, 2003). Efforts by the government notwithstanding the performance of SMEs, is dismal. Fatality rate has been high among SMEs. The Manufacturing Association of Nigeria once position that it is only 10% of SMEs that are operational in Nigeria. Several studies have examine the problems of SMEs in Nigeria and mentioned problems include; financial constraints, infrastructural and institutional bottlenecks, managerial skill gap and multiple taxation amongst others (Mba & Emeti, 2014).

The place of taxation in the survival of SMEs is well documented in extant literature. For instance, climes with high tax rate and incidence of multiplicity of taxation tend to increase the cost of production for most SMEs. Financial constraints together with harsh tax policies form critical issues that bedeviled most SMEs. The Nigerian government in a bid to create favourable tax climate that encourages investment and business has undergone several tax reforms. Basically, there are three major tax reforms and they are tax reforms of 1991 and 1992, tax reform of 2003 and the new national tax policy of 2012.

The desire to build a civilized country with a strong and sound economy is the desire of every Country, including Nigeria. Tax payment is the demonstration of such a desire, although some income earners see it as a means of exploitation by the government. Tax payment is a voluntarily contribution imposed by the Government on personal income earners, companies, investors, exporters, importers etc. revenue realized from taxation is a major source of revenue to the Government of Nigeria, and as such is an important tool used in the development of Nigeria and her economy. A country’s tax policies and systems are greatly related with business ventures in that country. An economy that enacts favorable and progressive tax laws and policies will definitely breed successful and finance-healthy business organizations. Once businesses flourish, the economy flourishes as well, as there is no quicker way of stirring the affairs of an economy without the help of organizations that move services, goods, money and investments from those with surplus to those with deficit; those with marketable ideas/output to those who need these ideas and products. In essence, businesses and tax policies greatly depend on one another for survival. If one is greatly affected, the other follows suite.

The Nigerian Tax System has undergone significant changes in recent times. With the help of various studies and research done by tax experts, tax laws are being reviewed with the aim of repelling obsolete provisions and simplifying the main ones. Under current Nigerian law, taxation is enforced by the 3 tiers of Government, i.e. Federal, State, and Local Government with each having its sphere clearly spelt out in the Taxes and Levies (approved list for Collection) Small businesses are generally recognized as important drivers of economic success. They are a key ingredient in the “ecology of firms” in a healthy economy, as job creators, sales generators and a source of tax/fiscal revenue. In Nigeria the importance of small business as a creator of jobs, particularly for those with a low skills level, is widely recognized. Small, medium and micro-enterprises (“SMMEs”) contribute 36.1% of the country’s gross domestic product (“GDP”) and employ 68.2% of the workforce in the private sector. In the agriculture, construction and retail sectors, SMMEs employ more than 80% of the total workforce. Over the last few years, the growth in employment by SMMEs has exceeded the growth in their contribution to GDP, highlighting the job creation potential of this sector of the economy.

Regulations and red tape are reported as one of the constraints to the expansion of businesses both in Nigeria and internationally. International research in this field shows that tax regulatory compliance costs are a significant portion of the total regulatory cost. Several other patterns emerged from the various local and international studies performed, among the most important being that tax compliance costs comprise a much larger proportion of total compliance costs for smaller firms. Furthermore, various research has suggested that any effective approach to assist small business requires both policy and administration model adjustments in order to be effective. The 2005 year, therefore, saw the beginning of a process of structural change that was intended to build a positive tax compliance climate in Nigeria. This report is focused on the survey of the compliance experience of professional accountants and bookkeepers (referred to as “tax practitioners” for the purposes of this document) in respect of their small business clients in Nigeria. It will be complemented by two related surveys, one of small businesses that are registered with the Federal Inland Revenue Service (FIRS), regarding their time and cost requirements for tax compliance, and one of informal businesses, regarding their perceptions about tax compliance.


1.2 Statement of the Problem

Small and medium enterprises (Small businesses) form the core of majority of the world’s economies. A study carried out by the Federal Office of Statistics shows that in Nigeria, small and medium enterprises make up 97% of the economy (Ariyo, 2005). However, the mortality rate of these small firms is very high. According to the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN) Nigeria, 80% of small businesses die before their 5th anniversary. Among the factors responsible for these untimely close-ups are tax related issues, ranging from multiple taxations to enormous tax burdens etc. In many government policies, small and medium enterprises are usually viewed and treated in the same light as large corporations. However, their size and nature makes them unique. Therefore, in dealing with small and medium enterprises, these unique qualities need to be considered. In levying of taxes for these enterprises in particular, issues that need to be considered are how these tax policies can be designed to bolster the growth of Small businesses and the most effective ways to administer them. The importance of Small businesses as a mechanism of economic growth and development is often ignored. They are perceived as minute establishments that have minimal effect on the state of the economy. However, if conducive environment is created for these Small businesses to grow through proper regulation, the SME sector has the highest propensity to transform our economy. In the same light, taxes are important for the government as they are the major source of funds for government expenditure. Income obtained from taxation of individuals and businesses are used to run governments as well as provide infrastructure such as good roads, water supply, and electricity which are essential for the smooth running of these businesses that are mainly manufacturing companies and as such rely on these commodities to survive.

Tax burden is a major problem in Nigeria as many business organizations are not favored by the tax systems and policies in place. Some businesses are already collapsing; while majority are still struggling to meet up with high tax rates to ensure their businesses still exist. According to a study conducted by Bateman (2007), it was reported in a survey that 90% of business owners admitted that taxes were a huge constraints to their businesses, as they claim taxes are high and do not allow new businesses to cover up initial cost.


1.3 Objectives of the Study

In-order to achieve the purpose of this research, the following are the objectives of the research:

  1. To identify the challenges of Nigerian tax reforms.
  2. To examine the influence of multiple taxation on small businesses and the economy as a whole.
  3. To identify ways of properly addressing the challenges of Nigerian tax policies in order to favour small businesses as well as encourage tax compliance.

1.4 Research Questions

In order to achieve the objectives stated above, the following research questions were used as a guide in achieving the objectives of this research:

  1. What are the various challenges facing tax reforms in Nigeria?
  2. What are the influences of the challenges of tax reforms in Nigeria on small businesses and the economy?
  3. What must be done to address the challenges of tax policies in Nigeria to suite small businesses?

1.5 Hypothesis of the Study

The following hypothesis was formulated and tested by the study in order to achieve the research objectives;

  • Ho: There is no significant relationship between tax reforms and performance of small and medium enterprises in Maiduguri
  • Hi: There is a significant relationship between tax reforms and performance of small and medium enterprises in Maiduguri

1.6 Significance of the Study

This study gives a clear insight into the various ways in which tax reforms in Nigeria can be executed efficiently to still favor small businesses and how some taxation policies in Nigeria can be properly tackled. The study also gives a clear insight into the various causes of why small businesses fail in Nigeria as well as the challenges of the tax policies in Nigeria. The findings and recommendations of the researcher will help in building a strong and better tax policy system in Nigeria, if taken seriously by government and the general public. The challenges of taxation in Nigeria are outlined in-order for drastic measures to be taken to tackle these challenges and meet the prospects of the general public so that revenue from tax policy to the government can be increased.


1.7 Scope of the Study

This research focuses mainly on the impact of tax reforms on performance of small and medium enterprises in maiduguri. The study only torches on the challenges tax policies in Nigeria and how it can affect self employed business men and women, traders, and other forms of sole proprietorship businesses. Based on the findings of this study other possible researchable areas may include studies on the various challenges of other forms of tax such as the Value Added Tax (VAT), Capital gains tax, Import and Export duties tax. Etc. Further research can also be done on curbing tax evasion in Nigeria.


1.8 Limitation of the Study

The only limitation faced by the researcher in the course of carrying out this study was the delay in getting data from the various respondents. Most respondents were reluctant in filling questionnaires administered to them due to their busy schedules and nature of their work. The researcher found it difficult to collect responses from the various respondents, and this almost hampered the success of this study.


1.9 Definition of Terms

Tax:

This is a compulsory financial charge or other levy upon and individual or legal entity by a state or the functional equivalent of the state such that failure to pay is punishable by law. It is not a voluntary contribution, payment or donation but rather, it is imposed by government under t6hthe name of import duty, exercise, etc.

Tax Rate:

Taxes are most often levied as a percentage. Thus, tax rate is the percentage of income or profit of individual paid as tax.

Small Scale Enterprise:

This is sometime called small scale business. It is a business that employs small number of workers and does not have a very high volume of sales.


1.10 Organization of the Study

  • Chapter one of this study includes the general introduction, background information about the study, statement of the problem, objectives of the study, research questions, scope of the study, significance of the study, and the limitation of the study.
  • Chapter two reviews all relevant literatures relating to the study as well as the researcher’s views concerning previous studies on the challenges of tax policies.
  • Chapter three includes the methodology applied in collecting and analyzing data, population definition, study site, and limitations.
  • Chapter four presents the results of the study as well as data analyzed, and the interpretation of the analyzed data.
  • Chapter five includes a summary of the study, conclusion and recommendations based on the findings from the study.

Chapter Five


Summary, Conclusion and Recommendation

5.1 Summary

In this study, our focus was to examine the impact of tax reforms on performance of small and medium enterprises using small business owners in maiduguri as a case study. The study specifically was aimed at highlighting the challenges of Nigerian tax policies. To examine the influence of multiple taxation on small businesses and the economy as a whole. To identify ways of properly addressing the challenges of Nigerian tax policies in order to favour small businesses as well as encourage tax compliance. A total of 77 responses were validated from the enrolled participants where all respondent are drawn from small business owners in Maiduguri.


5.2 Conclusion

Based on the finding of this study, the following conclusions were made:

  1. Small businesses regularly face cash-flow problems
  2. By altering demand for goods and services
  3. By changing incentives to work, save and invest
  4. Tax policy makers should be considerate towards small business owners
  5. The tax levy on small business owners should be reduced to the barest minimum
  6. Small business owners should be considered when making tax policy

5.3 Recommendation

Based on the responses obtained, the researcher proffers the following recommendations:

  1. Nigerian tax system must seek to protect and promote the SMEs for them to contribute meaningfully to economic growth.
  2. It is also advisable to identify the agents responsible for illegal, multiple tax collections that seek to frustrate SMEs and deal with them accordingly.
  3. In order to give back to the tax payers and promote SMEs, the government at all levels must judiciously utilize taxpayers’ money
  4. Effective modalities should be put in place to ensure accountability, transparency, and stoppage of the leakages associated with customs service revenue generation to enable the operations of the service impact positively on the SMEs and the entire economy.
  5. Finally, government should be sensitive to the variables in the tax environment to enable the SMEs cope with the ever-changing dynamics of the SMEs environment.

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