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.
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
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
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.
1.3 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 multiple taxation 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
1.4 RESEARCH QUESTIONS
In order to achieve the objectives stated above, the following
research questions were used as a guide in achieving the objectives of
- 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
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.
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.