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IMPACT OF
MULTIPLE TAXATION ON SMALL AND MEDIUM SCALE BUSINESSES IN NIGERIA
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 Calabar,
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 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.
CHAPTER I
INTRODUCTION
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.
BACKGROUND
OF THE STUDY
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.
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.
OBJECTIVES
OF THE RESEARCH
In-order to
achieve the purpose of this research, the following are the objectives of the
research:
To identify
the challenges of Nigerian tax policies.
To examine
the influence of these challenges 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.
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:
What are the
various challenges facing tax policies in Nigeria?
What are the
influences of the challenges of tax policies in Nigeria on small businesses and
the economy?
What must be
done to address the challenges of tax policies in Nigeria to suite small
businesses?
SIGNIFICANCE
OF THE STUDY
This study
gives a clear insight into the various ways in which tax policies 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.
SCOPE OF THE STUDY
This
research focuses mainly on the impact of Nigerian tax policies on the economy
and small businesses in Nigeria. 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.
TIME FRAME
This study
lasted for four months before it was complete. The study lasted from January
2011 to April 2011.
LIMITATION
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.
CHAPTER SCHEME
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.
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