Impact Of Taxation On Small And Medium Scale Business In Nigeria

Project and Seminar Material for Taxation

Impact Of Taxation On Small And Medium Scale Business In Nigeria


Abstract


The study was carried out to find out the impact of taxes on small and medium scale business enterprises in Nigeria. The study aimed at assessing the performance of business enterprises in Nigeria, finding out if tax payers are aware of all their tax obligations, policies and problems affecting them as well as their businesses. The study applied both qualitative and quantitative research designs where interviews and questionnaires were used. Data was collected from both primary and secondary sources. Data was processed and analysed using formal tables, pie charts, narrative text, and correlation to find out the relationship between the impact of taxes and performance of small scale businesses. A total of 50 respondents were considered out of the entire population of small scale and medium enterprises. The findings indicated that the performance of small scale business is affected by stock levels, capital employed, daily expenses, daily sales and the average amount of taxes paid annually. Most business owners are aware of taxes paid, uncertain of the mode of assessment and little assistance is given as regards tax awareness. The findings revealed the problems faced by the small and medium business men as regards mode of assessment, collection and tax collectors, inefficiency by tax collectors, loss of equipment, loss of sales and loss of stock as a result of taxes. Recommendations on impact of taxes included; improvement on the method of collecting taxes, educating the business community about its different tax rates and introducing a scheme that allows tax payers to pay the tax obligation.


Table Of Contents


Preliminary Page(s)

  • Certification
  • Dedication
  • Acknowledgement
  • Outline page
  • Abstract

Chapter One

Introduction

  • 1.1 Background of the study
  • 1.2 Statement of the problem
  • 1.3 Purpose of the study/Objective of the Study
  • 1.4 Research questions
  • 1.5 Scope of the study
  • 1.5.1 Subject scope
  • 1.5.2 Geographical scope
  • 1.5.3 Time scope
  • 1.6 Significance of the study

Chapter Two

Literature Review

  • 2.1 Introduction
  • 2.2 Theoretical Review
  • 2.3 Theory of Planned Behaviour
  • 2.4 Theory of Taxation
  • 2.5Ability-to-Pay Principle
  • 2.6 Concept of Small Scale Enterprises
  • 2.7 The concept of tax compliance
  • 2.8 problem of tax compliance
  • 2.9 Contribution of Tax Policy on the Growth of SMEs
  • 2.10 Factors that Favour the Growth in SMEs
  • 2.11 Policy Measures that will Encourage SMEs Growth

Chapter Three

Methodology

  • 3.1 Research Design
  • 3.2 Population of the study
  • 3.3 Sample design
  • 3.4 Method Of Data Collections
  • 3.5 Methods of Data Analysis

Chapter Four

Data Analysis and Results

  • 4.1 Introduction
  • 4.2 Results of correlation and multiple linear regressions

Chapter Five

Summary, Conclusion and Recommendation

  • 5.1 Summary
  • 5.2 Conclusion
  • 5.3 Recommendation
  • Bibliography
  • Appendix A
  • Appendix B

Chapter One


Introduction

1.1 Background of the study

Taxation increases incentives for public participation in the political process and creates pressure for more accountability, better governance, and improved efficiency of government spending. Taxation also creates incentives for governments to upgrade their institutions for tax collection and administration and to provide more public services (Moore, 2007).

Taxes have existed virtually as long as there have been organized governments. The first tax law legislation was introduced in 1919 and ever since then taxes have evolved through a number of reforms. The government in an attempt to widen the tax base and collect more revenue has had to levy several taxes especially on business enterprises in Nigeria which constitute a large part of the formal sector. The taxes charged on business enterprises in Nigeria include; corporation tax, value added tax, presumption tax and exercise duty. In 1997 the Income Tax Act was made. This was to give guidance in assessment and computation of taxes (Campsy, 1997). The Nigerian government has made some recommendable efforts to promote development through taxation since the inception of the current taxation laws for purposes of promoting development. The main objective of taxation in Nigeria has always been to mobilise resources needed to meet the aspiration of government. This is because for any government to be effective, strong, competent and capable of spearheading development, resources have to be readily available in its treasury so as to be in position to provide goods and services to the people adequately. The Nigerian government has always had to ensure proper resource mobilization (Musa, 1992).

According to Manasseh (2000), a tax is generally referred to as a compulsory levy imposed by government upon various categories of assets and taxation is a compulsory and non refundable contribution imposed by government for public purposes. In Nigeria a considerable fraction of the businesses are sole traders operating small scale business, locally owned and managed by individuals or families and often with very few employees working at a single location (Nigeria development bank report, 1988). Taxation in Nigeria is based on system that existed in Britain as it was a British colony. This also applied to other colonies elsewhere and for East Africa, one tax system operated under British administration. This process began in 1900 with the hut tax regulation which imposed a standard charge for every hut/dwelling.

During that period, taxation was aimed at raising revenue for the administrative structure imposed by the colonial government but also as a means of encouraging monetary/economic activities. It was the Local Authority Ordinance of 1991 that governed the collection of taxes. In September 1991, after a period of review the Rural Revenue Authority (URA) was established. All taxes including income tax came under the umbrella of the URA. From 1992, URA has been organizing and strengthening the administrative procedures and in 1993 this process assisted by a grant from the British government of approximately US$ 10million.

At least 50 small scale business enterprises were selected in illorin, almost all of them employ 2-4 people. These small scale businesses are locally owned and managed by private individuals who sometimes employ their family members. These small and medium scale businesses bear a wide tax burden which has led to poor performance. Therefore, it was against this background that the researcher undertook the study to investigate more about the problem using Nigeria as a case study to evaluate the impact of taxes on small and medium scale business enterprises.


1.2 Statement of the problem

Taxes are raised by the government to generate revenue used to provide services to the public such as; Health centers, telecommunication, roads, schools and electricity and this have helped to improve the performance of small and medium scale business enterprises. Despite the services provided, small and medium scale business enterprises performance in Nigeria is still poor. This could be due to the increasing tax burden brought about by tax rates which are revised annually. These rates seem to be taking an upward trend (Gordon and Dawson, 1987) which has led to winding up of some small scale business enterprises. This prompted the researcher to investigate more about the impact of taxes on small scale business enterprises.


1.3 Purpose of the study/Objective of the Study

The purpose of the study was to evaluate the impact of taxes on small scale business enterprises in Nigeria. The specific objectives are:

  1. To assess the impact of taxation on small and medium scale business enterprises in Nigeria.
  2. To find out if tax payers are aware of all their tax obligations and policies.
  3. To find out problems affecting tax payers and their business.

1.4 Research questions

  1. What is the effect of taxes on the performance of small scale business in Nigeria?
  2. Are tax payers aware of all their obligations?
  3. What are the problems faced by tax payers?

1.5 Scope of the study

1.5.1 Subject Scope

The study covered small and medium scale businesses in Nigeria. Specifically, the study investigated the performance of small scale businesses, the awareness of the tax payers regarding their obligations, problems faced by the tax payers and the relationship between the taxes paid and the performance of the small scale businesses.

1.5.2 Geographical Scope

The study was carried out in Ilorin Kwara State, Nigeria. The area was purposely selected because the researcher worked within the vicinity and therefore this eased data collection.

1.5.3 Time Scope

The study considered a period of four to six months. This period was selected to enable the researcher come up with coherent information from the respondents as it would enable them (Respondents) to give responses that are typical of their opinion from the observations made over this period.


1.6 Significance of the study

The findings of the study are significant on the following ways;

  1. To scholars and researchers, the findings of the study are expected to contribute to the existing literature about taxation and the effect it causes to the economy as a whole.
  2. To the tax authority and government, the study will guide them in adjusting tax policies so that they suit requirements of small and medium scale businesses.
  3. To future academicians especially of Nigeria University students, the study will help in gaining insight about taxes and performance of small scale business enterprises.
  4. The accomplishment of the study will enable the researcher to acquire hands on skills about processing of research work and data analysis. This proficiency will enable the researcher to handle such related work with a lot of precision and proficiency.

Chapter Five


Summary, Conclusion and Recommendation

5.1 Summary

The study covered the interactions between tax compliance and predictor variables (tax morale, trust in government and cultural norms). the study examine the impact of tax morale on voluntary tax compliance in Nigeria among small and medium scale business owners. Survey design was used with questionnaire as the major tool of data collection. Copies of questionnaire were administered to one hundred and fifty (150) respondents and 83% of these respondents returned their questionnaires.

The result showed that tax morale impacts positively on voluntary tax compliance among small and medium enterprises (SMEs) in Ilorin metropolis. From the computation using the Pearson moment correlation and multiple linear regressions, it can be deduced that tax morale and trust in government have a positive impact on voluntary tax compliance among SMEs in Ilorin metropolis.


5.2 Conclusion

From the research findings, it can be summarized that tax morale has a significant effect on tax compliance. Torgler (2002) and Fred (203) also found significant correlations between tax compliance and tax morale in their research findings. It can also be deduced from the findings that trust in government also has a significant effect on tax compliance. Torgler (2004) and Levi (1998) also found that trust in government has an effect on tax compliance in their research findings. The study also found out that cultural norm has no effect on tax compliance. Empirical findings indicated that cultural norms have no significant effect on tax compliance. On the other hand, there is a significant positive effect of tax morale and trust in government on tax compliance.

Putting into consideration that a society is heterogeneous, a person’s type plays an important role in determining which laws are followed and which are not. In general tax payers are more inclined to comply with the laws if the relationship between the tax paid and the performed government services is found to be equitable. Thus, government and tax administration’s strategy aimed at creating confidence in their credibility and their capacity is rewarded with higher tax morale. This study can be seen as one that incorporates non-economic factors into the economic analysis of voluntary tax compliance. The study reveals that tax morale and trust in government have effect on voluntary tax compliance.


5.3 Recommendation

Therefore, it is recommended that the government should pay close attention to factors that would boost public morale on tax payment since it readily influences tax compliance. Nonetheless, the study reveals that cultural norm does not have any significant impact on tax compliance.

From the foregoing, the impact analysis of tax policy and the performance of small and medium scale enterprises in Nigerian economy, the following recommendations were itemized for government immediate actions:

  1. For Small and Medium Enterprises to get better equipped, have enough funds and survive in a competitive market, the rate of tax levied on the small business should be lower.
  2. The rate of tax incentives and exemptions which serve as catalysts and bait forattracting investors should be highly increased by the three tiers of government in Nigeria.
  3. Government should promulgate a policy that will help to avoid illegal taxes, suchas community levy, boys or youth levy and as well as association or union levy.
  4. Any policy that will push for enough funds and other activities that will lead to Small and Medium Enterprises growth is good for promulgation
  5. There should be consistency in tax policy that will cushion the effects of factors that militate against the expansion of SMEs in relation to their ability to pay taxes by government.
  6. The tax policy should be designed in a manner that it will encourage those who are potential tax payers, voluntary compliance and ultimately leads to expansion of existing business interests of the SMEs in Nigeria

Impact Of Taxation On Small And Medium Scale Business In Nigeria


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