Project Materials

IMPACT OF MULTIPLE TAXATION ON SMALL AND MEDIUM SCALE ENTERPRISES IN NIGERIA (A CASE STUDY OF SELECTED SMALL AND MEDIUM SCALE ENTERPRISES, ANAMBRA STATE)

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND TO THE STUDY

Asmelash (2002) describe small scale enterprises as an activities engaged by people who are unable to secure paid jobs or start economic activities of their choice. These kinds of business are family oriented and are often manage or controlled as family business. It is an accepted fact that small and medium scale is an engine to economic growth of the economy.

Taxation can simply be seen as a required transfer or payment of money from private individuals, institutions or groups to the government. It may be levied upon wealth or revenue in the form of surf-charge on prices. Taxes therefore are a proportion of the produce of land and labor of a country placed at the disposal of the government. Multiple taxation on the other hand, is the imposition of different types of taxes that could have come under one major tax form on the people by the government.’

At times some of the taxes are christened levies. However, within the context of this work, all required payment made by individuals and institutions to the government are regarded as tax. Taxes generally provide basis for government revenue, which help them in carrying out their functions. This is why Ojo (1996) defined tax as a means by which government suitable part of private sector’s revenue and expenditure for the purpose of meeting recurrent expenditure and creating public capital formation towards the development and growth of goods and services-of the economy.

A tax, although may be imposed for the above purposes fit has effects on the behavior of the payer and some variables within his revenue and consumption function. Small-scale enterprises have so many definitions due to different criteria employed by different people and institutions in defining it.

There is no single, uniformly accepted definition of a small firm (Storey, 2011) Firms differ in their levels of capitalization, sales and employment. Hence, definitions which employ measures of size (number of employees, turnover, profitability, net worth, etc.) when applied to one sector could lead to all firms being classified as small, while the same size definition when applied to a different sector could lead to a different result.

However, Holban (2007) suggested that taxation can add to the 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 revenue. But in the case of SMEs, tax must be done in such a way that puts their revenue 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 SMEs 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 tax from small businesses by revenue authorities, whose resources are usually scarce, sometime outweighs the revenues generated by small businesses (Stem and Barbour 2015). In the Nigerian context, the multiplicity of definitions for small scale enterprises is the rules rather than exception. Nwankwo (1992) noted that as a result of differences .in policy focus, different government agencies in Nigeria apply various definitions to small and medium scale enterprises.

The Centre for Industrial Research and Development (1990) defined small-scale enterprise as one whose total assets in capital equipment, plant and working capital are less than two hundred and fifty thousand naira and employing fewer than fifty full-time workers. Central Bank of’ Nigeria (2002) defined SME as a firm with capital outlay of not more than N200m. National Council of Industries (2008) defined small enterprise as a project with capital investment of over Nl.5 million but not more than N50 million and/or work force of between 11 to 100 workers.

In fact, the concept, small scale enterprise more often called small and medium-size enterprise (SME) is relative and dynamic, hence there is no universal definition for small scale enterprises. Researchers, because of this problem of definition adopt definitions for small-scale enterprises, which are more suitable to their particular target group.

To this effect, small scale enterprise within the context of this work is any business organization which has working capital between one hundred thousand naira and ten million naira excluding land and employs fewer than fifty full-time workers. Sule (1986) observed that definitions of SMEs vary across countries and business environment as a result of differences in industrial organization at different level of economic development in parts of the same country. 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, 2015).

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.

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. SMES 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 SMEs 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 SMEs, in Nigeria especially this issue of multiple taxation which is a worm eating deeply and the large chunk of revenues generated by these SMEs for their growth and survival. These have led to increase in record of dearth of Small and Medium Scale Enterprise (SMEs).  Government in order to meet up with its responsibilities of providing social infrastructures and other development projects for her citizens imposes taxes on her citizens. This is done by the different tiers of Government-Federal, States and Local Governments with respect to their fiscal powers (Tax Powers). However, the rate at which the governments concerned increase the existing taxes should be a thing of concern to economic agents. While the Federal Government is clamoring for a stable general price level, increased rate of growth in Gross Domestic Product (GDP), increased employment opportunities, through the establishment of small-scale enterprises; the state and local governments are busy introducing new taxes and increasing the rate of the existing taxes. It is in view of this that the researcher intends to investigate the effect of multiple taxation on the growth and development of small scale enterprise in Nigeria.

1.3 AIMS OF THE STUDY

The major purpose of this study is to examine        the impact of multiple taxation on small and medium scale enterprises. Other general objectives of the study are:

1. To examine the effect of multiple tax burden on business performance of small scale enterprise
2. To assess the impact of multiple taxation on the non- survival of small scale enterprise
3. To assess the impact of multiple taxation on small and medium scale enterprises in Nigeria
4. To examine the consequences of multiple taxation on the profitability of small scale enterprise
5. To examine the relationship between multiple taxation and SMEs in Nigeria.
6. To examine ways of sustaining small and medium scale enterprises in Nigeria.

1.4 RESEARCH QUESTIONS

1. What is the effect of multiple tax burdens on business performance of small scale enterprise?
2. What is the impact of multiple taxation on the non- survival of small scale enterprise?
3. What is the impact of multiple taxation on small and medium scale enterprises in Nigeria?
4. What are the consequences of multiple taxes on the profitability of small scale enterprise?
5. What is the relationship between multiple taxation and SMEs in Nigeria?
6. What are the ways of sustaining small and medium scale enterprises in Nigeria?

1.5 RESEARCH HYPOTHESES

Hypothesis 1

H0: There is no significant impact of multiple taxation on small and medium scale enterprises in Nigeria.

H1: There is a significant impact of multiple taxation on small and medium scale enterprises in Nigeria.

Hypothesis 2

H0: There is no significant relationship between multiple taxation and SMEs in Nigeria

H1: There is a significant relationship between multiple taxation and SMEs in Nigeria

1.6 SIGNIFICANCE OF THE STUDY

This work is being carried out due to the under-rated roles of SMES in developing the national economy. It is therefore, hoped that the findings of this research work will guide fiscal policy makers on the type of fiscal policies they make for SMES. It will also be useful to scholars of public finance and fiscal policy, development economics, managerial courses etc since it will provide a research base for them. It is hoped that this work will highlight on the essence of taxation and suggest for efficientt tax system devoid of tax multiplicity. It will also help in resolving the conflicting objectives of the federal government and those of the lower tiers of government concerning tax relief and revenue maximization.

1.7    SCOPE OF THE STUDY 

The study is based on the impact of multiple taxation on small and medium scale enterprises in Nigeria, case study of selected small and medium scale enterprises in Anambra state.

1.8 LIMITATION OF STUDY

Financial constraint– Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

Time constraint– The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

1.8 DEFINITION OF TERMS

Impact: Impact in this study refers to the effect of revenue generated on service delivery by state government. It also determined the extent to which state government was able to deliver services with resources at its disposal.

Tax: is a percentage of persons’ income or of the price of goods takes by the government to help pay the benefit received.

Multiple Taxation: Spurious, unjustifiable and/or inappropriate levies imposed by MDAs at the Federal, State or Local Government levels on small and medium scale enterprises operations. “Taxation” used generically, not within its classical context.