Full Project – Effect of multiple taxation on small scale business

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ABSTRACT

Small and Medium Businesses 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 Businesses.

CHAPTER ONE

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

In recent time the world economy has developed tremendously and this has been linked with activities of Small and Medium Scale Businesses (SMBs), especially in developing countries. A Study carried out by the Federal Office of Statistics shows that in Nigeria, Small and Medium Scale Businesses make up 97% of productive units of the economy (Ariyo, 2005). Although smaller in size, they are the most important Businesses in the economy due to the fact that when all the individual effects are aggregated, they surpass that of the larger companies.

Social and economic advantages of small and medium scale Businesses cannot be overstated. Panitchparkdi (2008) sees SMBs as a source of employment, competition, economic dynamism, and innovation which stimulates the entrepreneurial spirit and the diffusion of skills. Because they enjoy a wider geographical presence than big companies, SMBs also contribute to better income distribution. Over the years, small and medium scale Businesses have been an avenue for job creation and the empowerment of Nigeria’s citizens providing about 50% of all jobs in Nigeria and also for local capital formation. Being highly innovative, they lead to the utilization of our natural resources which in turn translates to increasing the country’s wealth through higher productivity. Small and medium scale Businesses have undoubtedly improved the standard of living of so many people especially those in the rural areas (Ariyo, 2005).

However, the mortality rate of these small firms is very high. According to the Small and Medium Scale Businesses Development Agency of Nigeria (SMEDAN), 80% of SMBs 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 among other issues etc. In many government policies, small and medium scale Businesses are usually viewed and treated in the same light as large corporations. However, their size and nature make them unique. Therefore, in dealing with small and medium scale Businesses, these unique qualities need to be considered. In levying of taxes for these Businesses in particular, issues that need to be considered are how these tax policies can be designed to bolster the growth of SMBs and the most effective ways to administer them. The importance of SMBs 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 favorable environment is created for these SMBs to grow through proper regulation, the SMBs 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.

However, Holban (2007) posited that taxation can contribute to development and welfare through three sources; It must be able to generate sufficient funds for financing public services and social transfers at a high level of quality, it should offer incentive for more employment and for an efficient and lasting use of natural resources, finally it should be able to reallocate income. But in the case of SMBs, tax must be imposed in such a way that puts their income and need for survival into consideration. It is expedient that enough profit is allowed them for the purpose of expanding their businesses. The tax policy must be one that will not encourage SMBs to remain in the informal sector or to evade or avoid tax payments. More so, many small firms in Africa, including Nigeria, choose to remain in the informal sector because the perceived benefits outweigh the perceived costs. Firms rarely see their tax contributions at work and the   compliance costs are high, thus discouraging compliance. The government is also discouraged from collecting taxes from small firms, because the cost of monitoring and collecting taxes from small businesses by revenue authorities, whose resources are usually scarce, sometimes outweighs the revenues generated by small businesses (Stem and Barbour 2005).

The focus of this research, therefore, is to examine the effect of multiple taxations on the performance of (SMBs) and the importance of taxes to the Nigerian economy, to establish the relationship between tax policy and the growth of SMBs in Nigeria and to evaluate the factors that encourage non-compliance with tax obligation by SMBs.

1.2     Statement of the Problem

Although there is a general perception that tax is an important source of fund for development of the economy and provision of social services, the problems faced are in the area of negative relationship between taxes and the business’ ability to sustain itself and to expand. SMBS are faced with the problem of high tax rates, multiple taxation, complex tax regulations and lack of proper enlightenment or education about tax related issues. Not minding other challenges that SMBs are facing in other developing countries like Nigeria; inadequate capital, poor technical and managerial skills, environmental effects and government regulations which   affect the operation of SMBs, in Nigeria especially this issue of multiple taxation which is a worm eating deeply and the large chunk of revenues generated by these SMBs for their growth and survival. These have led to increase in record of dearth of Small and Medium Scale Enterprise (SMBs).

1.3     Research Questions

To achieve the objectives of the study, the researcher was guided by the following set of questions;

• What is the relationship between multiple taxation and SMBs survival in Taraba State?
• Does the size and ability of SMBs to pay tax affect their survival?  

1.4     Objectives of the Study

The general objective of the study is

• To examine the effect of multiple taxations on SMBs performance in Taraba State.
• To examine the relationship between multiple taxation and SMBs
• To ascertain whether the size and ability of SMBs to pay taxes affect their survival.

1.5    Statement of Hypotheses

The following research hypotheses were developed in order to properly address the problems of the study. These hypotheses were stated in Null form as follows:

(i)       Ho1: There is no significant relationship between multiple taxation and        SMBs’ survival.

(ii)      Ho2: The relationship between SMBs’ size and its ability to pay taxes does not significantly affect their survival.

1.6     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.

1.7     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.

This study lasted for four months before it was complete. The study lasted from January 2011 to April 2011.

1.8     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.

1.9     DEFINITION OF TERMS

Tax: A tax is a financial charge or other levy imposed upon a taxpayer (an individual or legal entity) by a state or the functional equivalent of a state to fund various public expenditures. A failure to pay, or evasion of or resistance to taxation, is usually punishable by law.

Taxation: Taxation refers to compulsory or coercive money collection by a levying authority, usually a government. The term “taxation” applies to all types of involuntary levies, from income to capital gains to estate taxes.

Small Scale Enterprise: Sometimes called a small business, a small-scale enterprise is a business that employs a small number of workers and does not have a high volume of sales. Such Businesses are generally privately owned and operated sole proprietorships, corporations or partnerships.

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Full Project – Effect of multiple taxation on small scale business