The Impact Of Taxation On Profit Levels Of Small Scale Business Enterprises

Project and Seminar Material for Entrepreneurship

Abstract

Small and medium enterprises play a very important role in development of the Nigerian economy. The SMEs sector’s importance in the economic development of any country in recent years cannot be underrated especially with regard to creation of employment, innovation, uplifting the people‟s standard of living and financial contribution to the growth of the country‟s GDP. This sector’s growth is hindered by the challenges of lack of financial resources to expand, the entrepreneur managerial skills, unskilled labour, production of poor quality goods, lack of market for their products, infrastructure and above all taxation policy which does not favour their growth potential. The study looked at the impact of tax influence on SMEs sector growth in Nigeria. The study employed descriptive design. Primary data was collected on valuables contributing to tax influence and their effect of the growth of SMEs. A total of 50 respondents were considered out of the entire population in the Iten town. The study found that there was a significant correlation between taxation and SMEs sector growth. The study recommends that there be a friendly tax policy for all start up businesses preferably a tax holiday, or an introduction of a growth limit which can be said to be a level stable enough to sustain tax payment. It also recommends that, KRA; should supply tax assessment forms in time, intensify on the sensitization different tax rates and introduce a scheme that allows taxpayers to pay the tax obligation in installment to better the profitability of small-scale businesses. There is therefore need for more research on firms‟ management techniques, the role of bookkeeping and profitability of small and micro enterprise.

Chapter One

Introduction

1.1 Background to the Study

Business growth and tax policies enormously rely upon each other for survival of changes lately. With the assistance of different studies and research done by tax specialists, tax laws are being checked on with the point of repulsing obsolete clauses and simplifying the primary ones. The desire to have an enlightened state with strong as well as sound economy is a fantasy for most nations including Nigeria. Tax instalment is the show of such longing, though some income workers view it as techniques for abuse by the decision powers. Tax Payment is a required duty forced by the organization on singular wage labourers, associations, money related authorities, exporters, and merchants (Murphy, 2005). Income got from tax gathering is an imperative wellspring of income to the legislature of Nigeria, and everything considered is fundamental instrument used as a piece of change of Nigeria and her economy. A country’s tax approaches and frameworks are immensely related with the business wanders in the country. An economy that sanctions good and dynamic tax laws and strategies will breed productive and finance strong business affiliations (Coso, 2002).

When business thrive, the economy prospers also, as there is no speedier method for mixing up the issues of economy without help of associations that move administrations, merchandise, cash and ventures from those with and products (Baurer, 2005). Basically, Small business enterprises are for the most part perceived as imperative drivers of monetary achievement. They are key element of a solid economy, as job creators, sales generators and source of tax income. In Nigeria, the significance of small ventures as job creators, especially for those with low skills level, is broadly perceived. SMEs contribute significantly to the Nigeria’s gross domestic product (GDP) and utilize around 98% 0f the workforce in the private sector. In the course of the most recent couple of years the development of SMEs work has surpassed the development in their commitment to the GDP the motivation behind why the Nigerian government has been strikingly supporting them through monetary organizations credit lending (ROK, 2015).

Taxation is now considered to be the key source of revenue that the Nigerian government is now using to provide public services to its citizenry since the dwindling price of oil in the international market. Due to its importance, tax policy debates and decision making becomes a critical issue to the public, to businesses and the economy at large owing to the varied impact that it will have on each of these entities (Mutua, 2011). Regulations and tax policies are accounted for to be one of the hindrances of expansion of small enterprise in Nigeria and globally. Nonetheless, these undertakings like the rest of businesses in Nigeria are obligated to various types of taxes paid at various phases of the business. For purposes of this study, the emphasis is put on how the tax rates, tax policies and various types of taxes affected growth of small and medium sized enterprises in Nigeria. Therefore the design and performance of the tax system has implications for inequality and as such it is the role of the government to ensure that it pursues a fair tax system for equitable distribution of income and welfare of the citizens. The other important benchmarks for assessing the tax system include simplicity, adequacy and neutrality.

1.2 Statement of the Problem

Income tax rates that are charged on small and medium enterprises are not accurate. In many instances, the tax rates are computed with lack of assessment of the actual revenue of an entity, despite these entities making losses. In addition, business rates have been enhanced since the introduction of devolved government hence increasing the tax burden to most small and medium sized enterprises. Profit maximization is the major goal of every small scale enterprise. However, this is not always the case as big percentages of them are not able to attain this goal (Patricoff, 2005). Income tax administration contributes greatly with regard to revenue collection and profitability of all entities. In a bid for the state to improve its tax base, the tax burden for majority of organizations increases. In spite of this, the tax administration system is often poor, the tax liability is based on mere estimates, incomplete record of SMEs, with some missing out completely, a situation that lead to tax overcharge and penalties. In return, this has a direct impact on the growth of the enterprise and may threaten its survival because taxes are paid out of profits (Murphy, 2008).

Kazemy (2011), evaluated the effective factors on survival of SME’s, a case study of Iran. Their findings showed that human, marketing and financial factors were effective for the survival of the SME’s in the studied population. As evidenced above, other researches have focused on several other factors. Studies have shown that the SMEs sector in Nigeria is a strong contributor to the national Gross Domestic Product. (McCormick & Dorothy 1988). However most studies in the past on SMEs and their growth have focused on accessibility to credit and inflation in the country as the main factors inhibiting growth and development of SMEs in Nigeria. It should be noted that the current government has promised to provide millions of jobs to the many unemployed youths since the beginning of their tenure in the next years and the government has identified the SME sector as the one to provide these jobs. This promise comes at the back drop of a similar promise by the previous government and out of which nothing much was achieved. However, there exists an academic gap in that while it is indisputable that these studies are important since they address factor that influence growth of SME’s, they do not address whether taxation affects the profits and growth of Small and Medium Enterprises in Nigeria.

1.3 Research Objectives

The general objective or main objective of this study is to investigate the impact of taxation on profit levels of small scale business enterprises. The specific objectives are:

To evaluate how the rate of taxation affects the rate of investments in the economy.
To investigate the rate of expansion by small business relative to the different rate of taxation
To examine the general desirability of the firms and individuals for investment purposes as a result of taxation
To determine the various measures introduced to boost industrial production and its financing and how this has affected the realization of the set goals.
To establish the impact of taxation on the small business with the relevant data collected from some firms.

1.4 Research Questions

The following are some of the questions which this study intends to answer:

How has the rate of taxation affects the rate of investments in the economy?
What is the rate of expansion by small business relative to the different rate of taxation?
What is the general desirability of the firms and individuals for investment purposes as a result of taxation?
What are the various measures introduced to boost industrial production and its financing and how this has affected the realization of the set goals?
What are the impacts of taxation on the small business with the relevant data collected from some firms?

1.5 Research Hypotheses

The following will be the research hypotheses to be tested for this study

There is no significant effect between tax rates and the growth of SMEs in Nigeria
There is no significant effect between tax policy and the growth of SMEs in Nigeria
There is no significant effect between types of taxes and the growth of SMEs in Nigeria

1.6 Significance of the Study

One of the most frequent discussed issues in Nigeria now is how to solve the economic hardship in the country and how to create an industrial base that can guarantee self sustaining growth. Nevertheless, the country which is richly endorsed with the necessary human and material resources has turned from an agricultural resources economy to a “mono prominent” Economy dependent on the petroleum for the foreign exchange earnings. Unfortunately too, the country has achieved only a fragile industrial development after adopting strategy based on large industries, which tend to be capital intensive and mapropriate, given the nation’s resources endowment.

But it is important to note that with the supporting role of the government, small businesses are capable of pulling Nigeria out of the present economic malaise, especially if the raw materials are sourced locally. This research is significant in the sense that it seeks to find out the reasons that make small scale business not easily able to diversity or expand as well as offer solution to this problem. Again, this research is of academic significance to the extent that it will serve for better understanding of the impact of taxation on small scale business in a developing economy like Nigerian.

1.7 Scope of the Study

The scope of this research covers a critical examination of the impact of taxation on small-scale business enterprises in a developing economy. It will also analyse the function of taxation.

1.8 Limitation of the study

There were a lot of difficulties encountered in obtaining information for this study. Most of the respondents were unwilling to release useful and reliable information in a study of the nature. Some persons who were around were skeptical to which use the data supplied would be put. Most of the small-scale business outfits used do not keep accurate accounts and records of the amount of taxes they pay. It was not possible for the researcher to go round the while state in the country to gather information.

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.

Chapter Five

Summary, Conclusion and Recommendations

5.0 Introduction

This chapter covers the summary of the findings, conclusions based on the findings and recommendations based on the conclusions.

5.1 Summary of Findings

From the review of the study, income tax administration is administered in three major ways, that is to say, identification of the taxpayer, assessment of income tax, and finally collection of tax dues. The findings of the study showed that tax payers were identified on the basis of their operation, however it was noticed that there were delays in the processing of assessment forms and collection of the tax dues was not easy since some of the tax payers defaulted on payment and others were given penalties. The researcher found out that local government often plays a critical role in the tax administration of small operators. However, municipal levies inhibit the creation of formal enterprises. For example, it was found out that licensing costs and requirements are a key driver of continued informality. Coordination between government agencies is usually very poor with inconsistent local and central government policies and multiple non-transparent taxes, fees, and non-regulatory “licenses” at the local level. This increases firm‟s compliance costs and the administrative costs of local authorities.

The findings of the study showed that the profit margins of the firms were too small to improve on the scale and size of the business. This is due to the high taxes imposed on these small firms that they could hardly have enough capital to re invest.

Other factors that affect the profitability of small-scale business enterprises apart from income tax administration include business location, seasonal variations and other types of taxes. Most of the respondents were unsatisfied with the income tax rate based on the sales turn over and some of the respondents did not fully understand income tax and its computation. The findings of the study showed that the introduction of income tax has adversely affected the profitability of small-scale industries according to the responses strongly agreed that income tax affects the profitability of their businesses. The study showed that sensitizing the people about income tax and extending the period of income tax return could improve on the profitability of small-scale enterprises without necessarily adjusting the income tax rate.

5.2 Conclusion

The administration of small firms is an afterthought for income tax administration and technical assistance programs. This is due to the low benefit-cost ratio of administering small contributors from a revenue perspective. Therefore creating successful small business administration is thus closely linked to the decentralization agenda.
Constructing appropriate indicators and setting an appropriate tax rate is challenging. It requires extensive analysis of profit margins and will usually be disputed by some in the business community. Small businesses are not necessarily small earners; rates need to be high enough to encourage firms at the upper end of the threshold to join the general system and low enough to encourage informal entrepreneurs to comply. This process requires extensive survey-based analysis of small firms‟ profit margins to determine presumptive tax rates, which will not affect the small business earners. Income tax administration has greatly affected the profitability of small-scale businesses. Nigeria revenue authority needs to intensify on the sensitization campaigns since the business communities do not take the education of income tax seriously.

5.3 Recommendations

The researcher made the following recommendations as a way of reducing the burden of income taxes on SMEs as well as to increase the revenue of the Enugu town. Enugu town should find a way of assessing the tax in that the SSBs should pay early in the financial year in order to give enough time to the businesses to pay their dues rather than make an assessment and demand for payment spontaneously.

Enugu town should introduce a scheme that allows taxpayers to pay the tax obligation in the installments over a given period as opposed to lump some at once. The FIRS should reach out and educate the business community about its different tax rates and mode of payment. The study revealed that the biggest problem with the tax paid is in fact that the SMEs community does not understand how the tax is arrived at as well as how it is paid but not because it is too high.

The FIRS should improve on the methods of collecting the taxes. It should adopt the closure of business premises on default only as a last resort after all the other methods of collection have failed. This should be an exception and not a rule. The FIRS should improve awareness amongst the taxpayers of the need to pay taxes and how their tax liability is determined and the time process of the tax assessment.

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