1.1. BACKGROUND TO THE STUDY
Many businesses in Nigeria can tell you horror stories of multiple
taxation. The “agents” that come to collect random taxes you’ve never
heard of. The frustration of dealing with many different faces of the
tax law. The sheer amount of tax you have to pay. This is a major
hindrance to running a business smoothly in Nigeria.
In recent time the world economy has developed tremendously and this
has been linked with activities of Small and Medium Scale Enterprises
(SMEs), especially in developing countries. A Study carried out by the
Federal Office of Statistics shows that in Nigeria, Small and Medium
Scale Enterprises make up 97% of productive units of the economy (Ariyo,
2005). Although smaller in size, they are the most important
enterprises in the economy due to the fact that when all the individual
effects are aggregated, they surpass that of the larger companies, the
social and economic advantages of small and medium scale enterprises
cannot be overstated. Panitchparkdi (2006) sees SMEs 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,
SMEs also contribute to better income distribution. Over the years,
small and medium scale enterprises 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 enterprises have undoubtedly
improved the standard of living of so many people especially those in
the rural areas (Ariyo, 2005).
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 compulsory payment
made by individuals and institutions to the government are regarded as
tax. A good tax possesses the following qualities: fairness,
convenience, simplicity, and minimum cost of collection and minimum
distortions. Musgrave (1980) noted that taxes should be chosen so as to
minimize interference with economic decisions in otherwise efficient
However, the mortality rate of these small firms is very high.
According to the Small and Medium Scale Enterprises Development Agency
of Nigeria (SMEDAN), 80% of SMEs 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
enterprises are usually viewed and treated in the same light as large
corporations. However, their size and nature make them unique, though,
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 SMEs, 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 SMEs to remain in the informal sector or to evade or avoid tax
Operators of Small and Medium Enterprises (SMEs) have at one time or
another lamented the indiscriminate imposition of taxes by the three
tiers of government and other agencies. The Federal Government on the
other hand, has promised to tackle the issue without success so far,
thereby forcing many SME outfits to close shops, yet it is no gainsaying
that Small and Medium Enterprises (SMEs) remain the engine of growth of
many developed countries, as they offer about 70 to 80 percent of
employments to the youths of such climes.In Japan, United States of
America, China, Germany and many other countries, SMEs offer the highest
percentage of employment to the working class. In Nigeria, most SME
outfits are finding it difficult to survive, due to the many challenges
they grapple with.While many developed countries exempt their SMEs
outfits from payment of taxes, the reverse is the case in Nigeria, where
they face multiple taxation from the various tiers of the government
agencies and even street urchins known in the local parlance as “area
However, SMEs are perceived as minute establishments that have
minimal effect on the state of the economy. However, if favorable
environment is created for these SMEs to grow through proper regulation,
the SMEs 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.
Statement of problem
Most SMEs in Nigeria die within their first five years of existence, a
smaller percentage goes into extinction between the sixth and tenth
year while only about five to ten percent survive, thrive and grow to
maturity, 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).
Finally, 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, this is why many small firms in 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
Finally, While the Federal Government is cl'amouring 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, not
nearing in minds that Multiple taxation increases the cost of doing
business in Nigeria, discourages local trade and investment and also
gives a negative perception of the Nigerian business environment to
foreign investors, even some states have as many as 97 different taxes,
levies and charges that are imposed on businesses. This is simply not
economically viable – the costs to the government of administering these
various taxes and the costs to business of paying these taxes outweigh
their benefits to both the private businesses and the government. In
addition, the multiplicity of taxes on the transportation of goods
impairs the integration of internal markets and the establishment of a
fully integrated economic space within Nigeria. By impairing the
integration of the national market, these mobile levies also reduce
competition between companies located in different states in Nigeria.
1.3 OBJECTIVES OF THE STUDY
The general objective of the study is to assess the effect of
multiple taxations on the growth and profitability of small scale
enterprises in Nigeria.
Other specific objectives include:
- Examine the relationship between multiple taxation and SMEs survival.
- Ascertain whether the size and ability of SMEs to pay taxes affect their survival.
- Determine role of multiple taxation on investment decision of the owners of Small scale enterprise.
- Explore whether the effect of multiple taxation on financial performance of SMEs.
- Suggest a possible solution/recommendation to challenges faced by SMEs towards current tax policy.
- Evaluate the factors that encourage non-compliance with tax obligation by SMEs.
1.4. RESEARCH QUESTION
To achieve the objectives of the study, the researcher was guided by the following set of questions;
- Relationship between multiple taxations and SMEs survival?
- The size and ability of SMEs to pay taxes affect their survival?
- Roles of multiple taxations on investment decision of the owners of Small scale enterprise?
- Effect of multiple taxations on financial performance of SMEs?
- Possible solution/recommendation to challenges faced by SMEs towards current tax policy?
- Factors that encourage non-compliance with tax obligation by SMEs?
1.5. SIGNIFICANCE OF THE STUDY
Just as it has been a great concern to all and sundry to promote the
welfare of SMEs, it has also been a great cause of concern to all, the
fact that the vital sub-sector has fallen short of expectation. The
situation is more disturbing and worrying when compared with what other
developing and developed countries have been able to achieve with their
SMEs. It has been shown that there is a high correlation between the
degree of poverty hunger, unemployment, economic well being (standard of
living) of the citizens of countries and the degree of vibrancy of the
respective country’s SMEs. If Nigeria were to achieve an appreciable
success towards attaining the Millennium Declaration Goals for 2015, one
of the sure ways would be to vigorously pursue the development of its
SMEs. Some of the key Millennium Declaration Goals like halving the
proportion of people living in extreme poverty, suffering from hunger,
without access to safe water, reducing maternal and infant mortality by
three-quarts and two thirds respectively and enrolment of all children
in primary school by 2015 may indeed be a mirage unless there is a
turnaround of our SMEs’ fortunes sooner than later.
It is hoped that this work will highlight and ne In addition it will
be a source of knowledge to small-scale enterprises (SSE) on the essence
of taxation and suggest for efficierit 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.
This study will also be of great significance to policy analysts
since it will assist in analyzing the effectiveness and success of the
work of the Small Scale Agency Board in Nigeria. It will therefore
equally be of immense help to the Small and Medium Scale Enterprises
Development Agency of Nigeria (SMEDAN), in evaluating the success of its
activities with specific reference to solving the problem of multiple
or double taxation in such industries. It would also assist the boards
in determining or formulating their future plans towards other
challenges facing SMEs in Nigeria.
It will also be of use to the student, researchers for further
research study, the existing and prospective entrepreneur as well as any
interested party. It will assist students in their knowledge build-up
and appreciation of the tax policy and legislation system of the small
1.6 RESEARCH HYPOTHESES
The hypotheses were stated in null form and they include:
Multiple taxes do not significantly affect the growth and profitability of small scale business.
The relationship between SMEs’ size and its ability to pay taxes does not significantly affect their survival.
1.7. SCOPE OF STUDY
From the foregoing discussion, the research focuses on the effects of
multiple taxations on the sustainable growth and profitability of
small scale enterprises in Ibadan Metropolis, using small scale business
owners whose tax clearance are up to date. The activities of the
regulating body Small and Medium Scale Enterprises Development Agency of
Nigeria (SMEDAN),were also put into consideration.
1.8. LIMITATION OF THE STUDY
As with all studies, limitations exist and must be acknowledged.
Moreover, the outcomes were based on the information solicited from the
respondents and such might be subjected to human errors, omissions and
The limitations of the study are as given below:
a) First of all time did not allow the researcher to glean information from the entire female entrepreneur in Osun State.
b) The study could not show the whole scenario of the entire Female entrepreneur in Nigeria.
c) Because the sample is chosen from the one state Of Nigeria.
That’s why the findings and analysis is varying slightly in organization
d) The questionnaire was not also understood by some respondent.
1.9. DEFINITION OF TERMS
- 1. Small Scale Enterprises:
It is defined as any business undertaken, owned, managed and controlled
by not more than two entrepreneurs, has no more than twenty employees,
has no definite organizational structure (i.e all employees report to
the owners) and has relatively small shares of its market.
- Multiple taxations in relation to a company or
individual is a situation where the same profit or income respectively
which is liable for tax in Nigeria has been subjected to tax by another
tax authority in Nigeria or another country outside Nigeria
- Tax evasion: refers to any intentional, illegal
reduction of tax payments, which usually takes the form of
underreporting income, sales or wealth, or overstating deductions
(Schneider, Braithwaite & Reinhart 2001), including failure to file
appropriate tax returns.
- Non-Compliance: can be defined as the failure on
the part of a taxpayer to correctly file returns, report actual income,
claim the correct deductions, reliefs and rebates and remit the actual
amount of tax payable to the authority on time.
- Profitability: The term profitability is referred to as the ability to make profits steadily over a long period of time.
- Taxation: is defined by Ogundele (1999) as the process or machinery
by which individuals, groups, or communities are made to contribute in
some agreed quantum and method for the purposes of the administration
and general development of the society they belong.
- Business Growth: This is a convergence process
where small firms will eventually become as large as any other longer
firm in the same sector as time goes by, as a result of expansion in
business or increase in returns.