Impact Of Taxation On The Operation Of Small And Medium Scale Business (A Case Study Of SMEs In Abeokuta Metropolis)

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Impact Of Taxation On The Operation Of Small And Medium Scale Business (A Case Study Of SMEs In Abeokuta Metropolis)


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 policy 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 Abeokuta, Nigeria. 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 like proportional tax and tax holiday. 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 policy 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 Contents


  • Contents
  • Certification
  • Declaration
  • Dedication
  • Acknowledgements
  • Table of Contents
  • List of Tables
  • Abstract

Chapter One

Introduction

  • 1.1 Background of the Study
  • 1.2 Statement of Research Problem
  • 1.3 Research Aim and Objectives
  • 1.4 Research Questions
  • 1.5 Research Hypotheses
  • 1.6 Significance of the Study
  • 1.7 Limitation of the Study
  • 1.8 Scope of the Study
  • 1.9 Outline of Chapters
  • 1.10 Operationalization
  • 1.11 Definition of Terms

Chapter Two

Literature Review

  • 2.1 Introduction
  • 2.2 Conceptual Review
  • 2.2.1 Taxation
  • 2.2.1.1 Role of taxation in the economy
  • 2.2.1.2 Small scale business:
  • 2.2.1.3 Problems faced by small scale business
  • 2.2.2 Economic advantage of SMEs in Nigeria
  • 2.2.3 Reducing Tax burden for SMES as well as increasing revenue
  • 2.2.4 Performance
  • 2.3 Theoretical framework
  • 2.3.1 Benefit theory
  • 2.3.2 the cost of service theory
  • 2.3.3 Ability to pay theory
  • 2.3.3.1 Proportional Tax
  • 2.3.4 Tax Holiday
  • 2.4 Empirical framework
  • 2.5 Gap in literature

Chapter Three

Research Methodology

  • 3.1 Introduction
  • 3.2 Research Method
  • 3.3 Research Design
  • 3.4 Population of Study
  • 3.5 Sampling Technique / Procedure
  • 3.6 Research Sample Frame
  • 3.7 Sources of Data and Procedure for Data Collection
  • 3.8 Research Instruments
  • 3.9 Validity of Research Instruments
  • 3.10 Reliability of the Research Instrument
  • 3.11 Ethical Issues for Consideration

Chapter Four

Data Analysis and Presentation

  • 4.1 Introduction
  • 4.2 Presentation of Data
  • 4.3 Data Analysis and Interpretation
  • 4.3.1 Analysis of Demographic Data
  • 4.3.2 Test of Questionnaire
  • 4.5 Discussion of Results

Chapter Five

Summary, Conclusion and Recommendation

  • 5.0 Introduction
  • 5.1 Summary
  • 5.2 Summary of Findings
  • 5.2.1 Theoretical Findings
  • 5.2.2 Empirical Findings
  • 5.3 Conclusion
  • 5.4 Recommendations
  • 5.5 Suggestion for Further Study
  • References
  • Questionnaires

Chapter One


Introduction

1.1 Background of the Study

The development of small and medium scale business enterprises is greatly affected by the level of taxation, its administration and compliance; The higher the task risk of the greater the efforts to fulfill taxation requirements as well as to check how those requirements are met, the lower the initiatives for small and medium scale businesses to work hard. Thus, maintaining the tricky balance between tax rate, compliance cost, tax administration and economic growth should be a major goal of every tax policy.

The relationship between taxation and the level of growth of small and medium scale enterprises has been a debatable issue over the years. The perceived relationship can be either positive or negative depending on the type of tax policy adopted by the government. However, it is generally agreed that high task rate can lead to decrease in business activities since it dampens the incentives to invest while low tax rate, on the other hand, tends to increase growth of business activities as profits are increased which lead to further investment as well a expansion of business. A high marginal tax rate lowers an investor’s willingness to invest by lowering the returns on his investment (palacio and Harischandra, 2008). In the same vein, a reduced amount of business activities has a number of negative consequences including decreased productivity of workers and reduced output, employment and ultimately, living standard of the people.

The flow of investment expenditure at any time depends on the comparisons operators do between the potential benefit and the cost of making that investment (Ndebbio, 2007). Tax on the other hand is more of less an appropriation of the realized benefits of investors or business operators. The consequence of this appropriation is a reduction in business profit (Bassey, 2005). Business operators operating at any point in time are usually guided by their propensity to maximize the contribution to valve creation (Ndebbio, 2007). To this effect, business are not always made where they obtain the highest pre-tax return, rather, they are interested in operating where they obtain the highest post-tax return which is the income they take home or retain (Cappelea, 2001).

Small and medium scale businesses or enterprises are of crucial importance in a developing economy as it helps to bridge and reduce unemployment gap in such economy. Small and medium scale enterprise is vital to the economic growth of Ogun State as it constitutes nearly 70% of business organizations in the state.

The government of Ogun State in an attempt to widen the tax base and collect more revenues has had to levy several taxes especially on business enterprises in the state and this has resulted in slow pace of the growth of small scale enterprises as high tax rate has a major adverse effect on business decision making through affecting the profit of a firm thereby reducing the amount of after tax profit meant for re-investment and expansion. Thus, it is of great importance that the researcher is studying the impact of taxation on small scale enterprises in Abeokuta metropolis

In Nigeria, emphasis is at present on small-scale business in all sectors of the economy. With the supportive role of the government, small scale business are capable of pulling Nigeria out of the present economic malaise’s especially if the land materials are locally sourced. Many Nigerians are being called upon to invest in small and medium scale business. To back up this determination, the federal government has established some agencies to advice and co-ordinate the efforts of small business entrepreneurs. However, there is a need to emphasize that the small business is still affected by the government fiscal policy like taxation. This research work is of the intent to examine the impact of taxation on small business in developing economy. It is most unfortunate that a lot of small business outfits deliberately evade tax payment, despite the fact that they are usually given tax holiday for their first five years of their commencement of business. This could be attributed to their ignorance of some objective which taxation might be used to accomplish. The general objectives of taxation can be stated as follows: –

  1. Restraining or curtailing and this transferring resources from consumption to investment.
  2. To counter or reduce inflation
  3. Modify the pattern of investment
  4. Mitigation of economic inequalities
  5. Maintenance of balance of payment
  6. Increase the incentive to save and invest.

Taxation can help small business to get a high profit target bearing in mind that they will pay tax from the profits they make. From the above assertion, it is obvious that taxation has some impact on the establishment of small business. In the economy, there are manipulations of taxation rules for the encouragement of small business. This research work is an attempt to Enquirer whether a high incidence of corporate tax will go a long way to reducing the number of small business establishments which can bring about unemployment in the country.


1.2 Statement of Problem

There is a sweeping and effective revenue mobilization drive in Ogun State, most of which are carried out by contracted agencies that sometimes come up with various taxes and levies and impose them on business operators in the state. This numerous taxes and levies have been dwindling business fortunes of most operators with lots of consequences which include cost of unemployment, slowing down of economic activities in the state and even loss of revenue by the state due to the fact that the taxes are not optimal and hence when business shot down, they will no longer be there to pay any tax at all.


1.3 Research Objectives

The main objective of this research is to ascertain the impact of taxation on small and medium scale enterprises in Abeokuta metropolis.

The specific objectives include:

  1. To examine the impact of tax holiday on profit in SMEs.
  2. To ascertain the impact of tax holiday on productivity in SMEs.
  3. To know the impact of progressive tax on productivity in SMEs.
  4. To examine the impact of progressive tax on profit in SMEs.

1.4 Research Questions

To achieve the purpose of the study research questions were formulated as follows:

  1. What is the effect of tax holiday on profit in SMEs?
  2. What is the impact of tax holiday on productivity in SMEs?
  3. What is the effect of progressive tax on profit in SMEs?
  4. What is the impact of progressive tax on productivity in SMEs?

1.5 Research Hypothesis

  • Null Hypothesis: Tax holiday has no impact on profit in SMEs.
  • Null Hypothesis: Tax holiday has no impact on productivity in SMEs.
  • Null Hypothesis: Progressive tax has no impact on profit in SMEs.
  • Null Hypothesis: Progressive tax has no impact on productivity in SMEs.

1.6 Significance of the Study

This study will benefit investors, policy makers and academicians.

For investors, the study will create awareness on the procedure of starting business in capital city of Ogun state (Abeokuta) and various charges and taxes levied by the state government.

For policy makers, the study will reveal the effect of their fiscal policy specifically taxation on small and medium scale businesses in the state.

For academicians, the study will add to the existing stock on study of small and medium scale enterprise and taxation.


1.7 Limitations

The research is limited to few SMEs in Abeokuta metropolis alone, as it will be difficult to generalize the findings to other states. Another limitation faced by the researcher in the course of carrying out this study was getting accurate information and data.


1.8 Scope of the Study

This research work is on the impact of taxation on small and medium scale business enterprises in Abeokuta metropolis. The research look at how the enormous taxes levy on small scale business operators in the state affect the growth of the small and medium scale industry.


1.9 Outline of the chapters

The study is organized into five chapters. Those chapters are organized as below

  • Chapter 1 is the introductory part of the research which provides an inclusive overview of the background of the study, followed by the problem statement, research objective, research questions, hypothesis of the study, significance of the study, source of data, limitation of the study, outline of the chapters, operationalization and definition of the terms.
  • Chapter 2 contains the review of literature, review of relevant theoretical framework, conceptual framework, and empirical framework.
  • Chapter 3 this will cover the research methodology. This chapter includes research method, research design, population of the study, sample and size determinations, sampling techniques, data collection, research instrument, validity of research instrument, reliability of research instrument, and ethical considerations
  • Chapter 4 this captures data presentation and data analysis
  • Chapter 5 this deals with the summary and findings; conclusions and policy recommendations.

1.10 Operationalization.

X=f(Y)
X= independent variables
Y= dependent variables

Taxation (X) Small and Medium scale businesses (Y)
X1 Progressive Tax Y1 Profit
X2 Tax holiday Y2 Sales
X3 Regressive Tax Y3 Expenses
X4 Proportional Tax Y4 Productivity
X1 Progressive Tax Y1 Profit

X2 Tax holiday Y4 Productivity


1.11 Definition of Terms

In order to clear the air to avoid ambiguity, the following are defined.

Tax:

This is a compulsory financial charge or other levy upon and individual or legal entity by a state or the functional equivalent of money paid to the government other than for transaction-specific goods and service. It is not a voluntary contribution, payment or donation but rather, it is imposed by government under the 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.

Tax Burden or Tax Base:

Otherwise called tax incidence is on whom a tax is collected from. Depending on the elasticity of product, a tax imposed on a seller can be ultimately paid by the buyer simply by shifting the burden in form of a higher price.

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.

Abeokuta:

Abeokuta is the largest city in and the state capital of Ogun state in southwest Nigeria. It is situated on the east bank of the Ogun River, near a group of rocky outcrops in a wooded savanna; 77km(48 mi) north of Lagos by railway, or 130km(81 mi) by water. As of 2016, Abeokuta and the surrounding area had a population of 449,088 (Wikipedia.com)

Excess Burden of a Tax:

In economics, the excess burden of taxation, also known as the deadweight cost or deadweight loss of tax is one of the economic losses that society suffer as the result of taxes or subsidies.

Tax holiday:

A government incentive program that offers a tax reduction or elimination to businesses. Tax holidays are often used to reduce sales taxes by local governments, but they are also commonly used by governments in developing countries to help stimulate foreign investment

Progressive Tax:

Is a tax in which the tax rate increases as the taxable amount increases. The term ‘progressive’ refers to the way the tax rate progresses from low to high, with the results that a taxpayer’s average tax rate is less than the persons marginal tax rate.


Chapter Five


Summary, Conclusion and Recommendations

5.0 Introduction

This chapter of this research work gives an overview of the entire research work. It starts with the summary of the work from the first chapter to the last chapter. The findings were looked at from the theoretical and the empirical point of view, conclusions were also made on all the content and contexts already discussed, after which recommendations were proffered as a means of setting benchmark and target for future researches and providing solution to small and medium scale business and taxation constraints identified in this work.

The purpose of this study is to examine impact of taxation on small and medium scale business.


5.1 Summary of the Work

This research work started with the background of this research topic which was explained to the best of the ability of the researcher. The objectives of the study was drawn from the statement of the research problem; to define taxation. to ascertain whether taxation actually affects the survival and growth of small and medium scale business and their ability to pay taxation. In other for this study to be given full details. It was restricted to some specific variables includes; age of the entrepreneur, gender, marital status, location of business, year existence and type of business. Literature of other authors were reviewed as they relate to the research topic then the theories that are surrounding this research topic were brought to light in the theoretical framework, empirical framework and the gap in the literature reviewed.

In the course of this study, the researcher discovered that lack of proper assessment of business before taxation discourages the entrepreneur to pay tax. Over taxation by the government also responsible for the ability to pay tax. It is also discovered that contracting organization cannot influence provisions for contract labor as they are not their concern but the concern of the contract firm that employed them. In addition, contract labor were found to be working under a condition which is not conducive neither for their personal life nor to the organization.
As discovered in this study, though there are increase of number of establishment of small and medium scale business but needed tax holiday and progressive tax for the survival and growth of the business in the local government area.


5.2 Findings

The findings for this study are divided into 2 parts, theoretical findings and empirical findings. The theoretical findings are abstracted from the literature review in chapter 2 while empirical findings were derived from data generated from the field survey.

5.2.1 Theoretical findings

Theoretical findings of this study revealed the findings of the theories propounded that are in one way or the other related to this study. These theories include Taxation Theories (Wenzel, 1984), the small and medium scale business; challenge and prospect (Fred, 1982), (Eckeston, 1983) taxation and tax payer

Wenzel, (1984) through his theory which he called ‘taxation theories’ revealed that tax system is a means of ensuring the redistribution of income and wealth in order to reduce poverty and promote social welfare. For example, taxation can be used as economic regulator for promotion of economic stability and sustainable growth through fiscal policy. Government also has responsibility for fighting inflation, unemployment and creating a sound infrastructure for business.

Eckeston (1983) has said that a good tax policy should not impose taxes that are impossible to enforce even when people comply to tax laws voluntary, the government should verify the tax payment, if not the tax becomes an invitation to break the law. Also, tax which each individual is bound to pay ought to be certain and not arbitrary. The form of payment, the manner of payment, the quantity to be paid ought all to be clear and plain to the contributor and every other person.

The scope of tax should also be clear. It should be certain that the tax can and will be enforced, for a tax that is easily evaded causes resentment among the honest tax payers and often decline in tax payers morality. Secondly, the tax should be fair, that is the burden should be spread as fair as possible, with regard to the tax payers ability to pay and in light of his family circumstances, obligations and wealth. The taxes should also be equitable as between one tax payer and another; they should be of universal (general) application, and imposed without distinction of persons between citizens in similar circumstances.

Thirdly, the taxes should be easy, economical and convenient to administer that is the cost of collecting to the authority and the cost of compliance to the tax payer should be as low as possible and should be consistent with effective enforcement which means that the purpose and manner of payment of the taxes should be related to the habits of the community.

Another theory reviewed in this study is (Fred, 1982), there are a lot of problems that bedevil SMEs and stunt their growth. He argues that the resources smaller companies direct towards tax compliance are resources that could otherwise be used for reinvestment, facilitating future growth. Hence, there is a belief that taxes and a complex tax regular system of taxation are discriminated against, since the compliance requirements, cost of compliance and tax rate are the same for both small and large enterprises. Reducing the compliance costs and tax rate increases the small enterprises profit margin.

5.2.2 Empirical findings

Based on the data gathered and analyzed for this study, it was discovered that the hypothesis which stated that there is no significant relationship between taxation and SMEs survival is hereby accepted. Meaning that there is no significant relationship between taxation and SMEs survival

The hypothesis which stated that the relationship between small and medium scale business size and its ability to pay taxes does not significantly affect their survival hereby rejected. Meaning that the relationship between small and medium scale business size and its ability to pay taxes does significantly affect their survival.


5.3 Conclusion

Based on the above findings and discussions, this study concludes as follows:

  1. There is no significant relationship between taxation and SMEs survival
  2. The relationship between small and medium scale business size and its ability to pay taxes does significantly affect their survival

5.4 Recommendations

In view of the findings of this study, the following recommendations are made:

  1. There should be less taxation SMEs business in Abeokuta
  2. Government should be tax friendly with SME.
  3. There should be proper assessment of business for taxation

5.5 Suggestion for further study

The following are recommended for further study:

  1. Comparative study on this topic should be carried out
  2. Future researches could replicate this study in other states in Nigeria.

Impact Of Taxation On The Operation Of Small And Medium Scale Business (A Case Study Of SMEs In Abeokuta Metropolis)


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