EFFECT OF TAX INCENTIVES AND CONCESSION ON GROWTH AND DEVELOPMENT OF SMEs IN NIGERIA CASE STUDY OF (SME TAXPAYERS IN IKEJA LAGOS STATE, IBADAN)
1.1. BACKGROUND TO THE STUDY
Small businesses are seen as one key source of economic growth. For
activity within small businesses (Buss 2001).
Small and medium enterprises (SMEs) 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). 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
enterprises cannot be overstated.
This SMEs are seen as a source of employment, competition, economic
dynamism, and innovation which stimulate 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 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.
The mode by which SME development and economic growth can be
effectively, efficiently, stimulated and developed is very demanding. As
a result of this, the government charges less tax and gives tax
holidays in order to encourage investments and economic activities of
these small scale entrepreneur in those areas which help to improve
production capabilities, activate economic growth as well as the
allocation of resources in a socially desirable manner.
To the small scale enterprises, the general feature of agood tax
system (tax base rate) is more important than the tax incentives in many
developing countries. The tax laws are not clearly written and may be
subject to frequent review which makes long-term planning difficult for
businesses and add to the perceived risks of undertaking major capital
Taxation is a process or means through which communities or groups
are made to contribute a part of their income for the sole purpose of
societal administration while tax, is a compulsory levy levied on the
people at a given place for the sole purpose of government revenue for
Tax incentive itself, is the use of government spending and tax
policies to influence the level of national income. This measure
encourages the springing up and gradual growth of new enterprises by the
reduction of profit tax, which in turn encourages production,
influences the production level and curbs unemployment. So, the
government should provide such tax incentives in order to boost
development which will bring about an increase in employment
opportunities and also cause an improvement in the economy, tax
incentives according to Kuewumi (1996) encompass all the measures
adopted by government to motive tax payers to respond favorably to their
tax obligations. It includes adjustments to tax policy aimed at
lessening the effects of taxation on an industry, a group of persons or
the provision of certain services. Such measures may subsume the
adoption of benign low tax rate; the effective dissemination of fiscal
information by tax authority; or the non-imposition of tax at all.
Amadiegwu (2008:74), a tax expert wrote that the objective of tax
incentive is that by borrowing rather than taxing, the government has a
better chance of expanding investment spending which is essential in
enlarging production possibilities and attaining a sustainable
improvement in the standard of living of the people.
Dotun and Sanni (2009:265), in their “Nigerian companies’ taxation”
stated that these incentives can be targeted on the low income earners,
local and developing industries, farmers, which will increase their
savings and is necessary for higher investment. Tax incentives create
employment opportunities for the people, helps to fight economic
depression and inflation thereby increasing the equitable distribution
of income and wealth.
1.2. STATEMENT OF PROBLEM
The mortality rate of these small scale enterprises is very high.
According to the Small and Medium Enterprises Development Agency of
Nigeria (SMEDAN) Nigeria, 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
In developing countries like Nigeria, there is an urgent need to
provide the required enabling environment for the development of SMEs,
so that they could adequately play the role expected of them in economic
transformation. Such role includes mobilization of domestic savings for
investment, appreciable contribution to gross domestic product,
increased harnessing of local raw materials, employment generation, and
significant contribution of poverty reduction efforts through
sustainable livelihoods and enhancement in personnel income,
technological development and export diversification (Smatrakalev,
2006), however this is not the case because taxes which are levied for
regulating the investment behavior of the households are suffocating the
entrepreneur growth and development, and this also serves as a major
constraint to the development of the SMEs they are out to cater for.
Various people believes that a tax incentive encourages economic
growth and industrial development of SMEs while another believes that it
reduces revenue accruable to the government, As a result of this, it
does not stimulate the economy. The poverty alleviation programme aimed
at reducing the rate of poverty among the masses, was introduced. This
programme covered the provision of jobs for able and unemployed youths,
provision of loans for small and medium scale enterprises at a minimum
lending rate, yet there is no gainsaying that this measures and policies
taken so far, yield positive development to the economy.
Finally, most tax experts, consultants, Individuals and economic
analysts ignored or criticized the incentive for the following reasons:
1. That the impacts of the tax incentives are not effective in the economy.
2. That the exemption privilege not granted to all SMES places some enterprises at a competitive advantage over others.
3. That the incentive granted are not adequate for the developmental and industrial growth of SMEs.
4. Most entrepreneurs, firms and industries lack the awareness of the incentive.
1.3. OBJECTIVES OF THE STUDY
Tax incentive scheme is an economic policy which exists among many
other competing alternatives. The scheme may be an inducement towards
rightful investment, securing proposal on private investors lay behind,
it then follows that if the scheme is a pale shadow for pilling stock of
profitable that the benefits expected from these incentives should be
able to justify the cost.
In the light of the above, the study shall seeks to examine the
extent to which tax incentives affects the growth and development of
small scale entrepreneurs.
Other specific objective includes:
- Establish the relationship between tax policy and the growth of SMEs in Nigeria
- Assess the various incentives available to small scale entrepreneur.
- To examine the relationship between tax incentives and SMEs survival
- Ascertain how tax incentives stimulate individuals to establish new
enterprises which will boost industrial development and economic growth
- Determine how tax incentives affect productivity level and growth of new small scale enterprises.
- Assess the economic implication of granting tax incentives to SMEs.
1.5 SIGNIFICANCE OF THE STUDY
Tax incentive is a strong fiscal measure or policy which can
stimulate investment and savings leading to capital information. This
capital acquisition can be used productively in economic and industrial
development of companies and individual can use them effectively. In
deciding if these incentives can stimulate the companies and individuals
to invest in the economy. One basic fact is this whether the company
individual concern decided to go into business because of tax incentives
This study will contribute immensely to existing literature on
benefits of tax incentives to small scale enterprises, and as a result
of the creation of more SMES and with the expansion of the existing
ones, the standard of living of the populace will be positively
It will also broaden the knowledge of small taxpayers on various
types of tax incentives available to them, and how the various tax
incentive scheme leading to economic diversification result in
increasing urban and rural development.
The study is also important as it will help ascertain if fiscal
authority is keeping track on tax mobilization with GDP growth and to
identify those taxes which are income elastic or otherwise in order to
raise overall tax revenue.
Finally this study will be of great significance to government, tax
officials, tax authority, small scale entrepreneur, investors, corporate
organizations, schools and students who are regular taxpayers, it will
serve as a reference point for student who would like to make future
research or contribute to the existing literature.
1.6. SCOPE OF THE STUDY
The research study will be limited to the use of questionnaires and
oral interviews when appropriate and to a review of related literature
(review of relevant books and journals) that could provide an insight
into the effect of tax incentives on industrial growth and development
Case studies will be restricted to seventy (70) small business owners who are taxpayers in Ikeja Metropolis, Lagos State.
The State is situated in southwestern region, and it is selected for
this research study because it is part of the major industrial areas in
1.7. LIMITATION OF THE STUDY
The constraints of this study may be attributed to:
1. Inherent limitations of the analytical method of gathering
information such as the un-cooperative attitude of the respondents.
2. Irrelevant or unreliable information obtained from oral
interviews. This is based on the degree of the respondent’s truthfulness
in answering the question’s raised during oral interviews. Some of the
respondents thought that the research work is meant to expose their
enterprise and thus, were not ready to give relevant information.
3. The writer was also faced with time constraint which involved
appropriating her time between writing the project work and performing
her academic function as well as meeting her social needs.
4. Also encountered was the problem of getting an exact from the school authorities for the purpose of the research work.
1.8. DEFINITION OF TERMS
- INCENTIVE:An incentive is a form of tax relief,
inform of a reduction in or an exemption from the tax which someone, a
firm, or an industry would normally be liable.
- TAX INCENTIVES-These are reliefs granted to tax
payers or industries in form of an off-set from the total profit before
tax liability is determined. In case of industries and firms, tax
incentives are given inform of tax holidays which is established by the
legislative authorities on such payment of taxes.
- INVESTMENT ALLOWANCE- Investment allowance is given
as a tax incentive to a certain category of companies for incurring
some qualifying capital expenditure on plant and equipment used for the
business at the rate of 10% on cost.
- RURAL INVESTMENT ALLOWANCE- This is granted to all
capital expenditures incurred by companies established in rural areas in
respect of providing a lacking infrastructural facility.
- TAX HOLIDAYS: this is a temporary exemption of a new firms or investment from certain specified taxes, typically corporate income tax.
- CAPITAL ALLOWANCE- This is granted by the act on a
qualifying capital expenditure incurred wholly, exclusively, for the
purpose of trade or business.
- TAX: is a compulsory levy payable by individual
economic units or corporate bodies to government without any direct quid
pro quo from the government.
- 8. SMALL SCALE BUSINESS: 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.
- BUSINESS GROWTH: this refers to the increase in the size, value and financial performance of a firm or company.