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THE IMPACT
OF TAXATION ON PROFIT LEVELS OF SMALL SCALE BUSINESS ENTERPRISES
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
Business
growth and tax policies enormously rely upon each other for survival of changes
lately. With the assistance of different studies and research done by tax
specialists, tax laws are being checked on with the point of repulsing obsolete
clauses and simplifying the primary ones. The desire to have an enlightened
state with strong as well as sound economy is a fantasy for most nations
including Nigeria. Tax instalment is the show of such longing, though some
income workers view it as techniques for abuse by the decision powers. Tax
Payment is a required duty forced by the organization on singular wage
labourers, associations, money related authorities, exporters, and merchants
(Murphy, 2005). Income got from tax gathering is an imperative wellspring of income
to the legislature of Nigeria, and everything considered is fundamental
instrument used as a piece of change of Nigeria and her economy. A country's
tax approaches and frameworks are immensely related with the business wanders
in the country. An economy that sanctions good and dynamic tax laws and
strategies will breed productive and finance strong business affiliations
(Coso, 2002).
When
business thrive, the economy prospers also, as there is no speedier method for
mixing up the issues of economy without help of associations that move
administrations, merchandise, cash and ventures from those with and products
(Baurer, 2005). Basically, Small business enterprises are for the most part
perceived as imperative drivers of monetary achievement. They are key element
of a solid economy, as job creators, sales generators and source of tax income.
In Nigeria, the significance of small ventures as job creators, especially for
those with low skills level, is broadly perceived. SMEs contribute
significantly to the Nigeria’s gross domestic product (GDP) and utilize around
98% 0f the workforce in the private sector. In the course of the most recent
couple of years the development of SMEs work has surpassed the development in
their commitment to the GDP the motivation behind why the Nigerian government
has been strikingly supporting them through monetary organizations credit
lending (ROK, 2015).
Taxation is
now considered to be the key source of revenue that the Nigerian government is
now using to provide public services to its citizenry since the dwindling price
of oil in the international market. Due to its importance, tax policy debates
and decision making becomes a critical issue to the public, to businesses and
the economy at large owing to the varied impact that it will have on each of
these entities (Mutua, 2011). Regulations and tax policies are accounted for to
be one of the hindrances of expansion of small enterprise in Nigeria and
globally. Nonetheless, these undertakings like the rest of businesses in Nigeria
are obligated to various types of taxes paid at various phases of the business.
For purposes of this study, the emphasis is put on how the tax rates, tax
policies and various types of taxes affected growth of small and medium sized
enterprises in Nigeria. Therefore the design and performance of the tax system
has implications for inequality and as such it is the role of the government to
ensure that it pursues a fair tax system for equitable distribution of income
and welfare of the citizens. The other important benchmarks for assessing the
tax system include simplicity, adequacy and neutrality.
1.2 Statement of the Problem
Income tax
rates that are charged on small and medium enterprises are not accurate. In
many instances, the tax rates are computed with lack of assessment of the
actual revenue of an entity, despite these entities making losses. In addition,
business rates have been enhanced since the introduction of devolved government
hence increasing the tax burden to most small and medium sized enterprises.
Profit maximization is the major goal of every small scale enterprise. However,
this is not always the case as big percentages of them are not able to attain
this goal (Patricoff, 2005). Income tax administration contributes greatly with
regard to revenue collection and profitability of all entities. In a bid for
the state to improve its tax base, the tax burden for majority of organizations
increases. In spite of this, the tax administration system is often poor, the
tax liability is based on mere estimates, incomplete record of SMEs, with some
missing out completely, a situation that lead to tax overcharge and penalties.
In return, this has a direct impact on the growth of the enterprise and may
threaten its survival because taxes are paid out of profits (Murphy, 2008).
Kazemy
(2011), evaluated the effective factors on survival of SME’s, a case study of
Iran. Their
findings showed that human, marketing and financial factors were effective for
the survival of the SME’s in the studied population. As evidenced above, other
researches have focused on several other factors. Studies have shown that the
SMEs sector in Nigeria is a strong contributor to the national Gross Domestic
Product. (McCormick & Dorothy 1988). However most studies in the past on
SMEs and their growth have focused on accessibility to credit and inflation in
the country as the main factors inhibiting growth and development of SMEs in
Nigeria. It should be noted that the current government has promised to provide
millions of jobs to the many unemployed youths since the beginning of their
tenure in the next years and the government has identified the SME sector as
the one to provide these jobs. This promise comes at the back drop of a similar
promise by the previous government and out of which nothing much was achieved.
However, there exists an academic gap in that while it is indisputable that
these studies are important since they address factor that influence growth of
SME’s, they do not address whether taxation affects the profits and growth of
Small and Medium Enterprises in Nigeria.
1.3 Research Objectives
The general
objective or main objective of this study is to investigate the impact of
taxation on profit levels of small scale business enterprises. The specific
objectives are:
i) To evaluate how the rate of
taxation affects the rate of investments in the economy.
ii) To investigate the rate of
expansion by small business relative to the different rate of taxation
iii) To examine the general desirability
of the firms and individuals for investment purposes as a result of taxation
iv) To determine the various measures
introduced to boost industrial production and its financing and how this has
affected the realization of the set goals.
v) To establish the impact of taxation
on the small business with the relevant data collected from some firms.
1.4 Research Questions
The
following are some of the questions which this study intends to answer
i) How has the rate of taxation
affects the rate of investments in the economy?
ii) What is the rate of expansion by
small business relative to the different rate of taxation?
iii) What is the general desirability of
the firms and individuals for investment purposes as a result of taxation?
iv) What are the various measures
introduced to boost industrial production and its financing and how this has
affected the realization of the set goals?
v) What are the impacts of taxation on
the small business with the relevant data collected from some firms?
1.5 Research Hypotheses
The
following will be the research hypotheses to be tested for this study
i) There is no significant effect
between tax rates and the growth of SMEs in Nigeria
ii) There is no significant effect
between tax policy and the growth of SMEs in Nigeria
iii) There is no significant effect between
types of taxes and the growth of SMEs in Nigeria
1.6 Significance of the Study
One of the
most frequent discussed issues in Nigeria now is how to solve the economic
hardship in the country and how to create an industrial base that can guarantee
self sustaining growth. Nevertheless, the country which is richly endorsed with
the necessary human and material resources has turned from an agricultural
resources economy to a “mono prominent” Economy dependent on the petroleum for
the foreign exchange earnings. Unfortunately too, the country has achieved only
a fragile industrial development after adopting strategy based on large
industries, which tend to be capital intensive and mapropriate, given the
nation’s resources endowment. But it is important to note that with the
supporting role of the government, small businesses are capable of pulling
Nigeria out of the present economic malaise, especially if the raw materials
are sourced locally. This research is significant in the sense that it seeks to
find out the reasons that make small scale business not easily able to
diversity or expand as well as offer solution to this problem. Again, this
research is of academic significance to the extent that it will serve for
better understanding of the impact of taxation on small scale business in a
developing economy like Nigerian.
1.7 Scope of the Study
The scope of
this research covers a critical examination of the impact of taxation on
small-scale business enterprises in a developing economy. It will also analyse
the function of taxation.
1.8 Limitation of the study
There were a
lot of difficulties encountered in obtaining information for this study. Most
of the respondents were unwilling to release useful and reliable information in
a study of the nature. Some persons who were around were skeptical to which use
the data supplied would be put. Most of the small-scale business outfits used
do not keep accurate accounts and records of the amount of taxes they pay. It
was not possible for the researcher to go round the while state in the country
to gather information.
1.9 Definition of Terms
Tax: this is
a compulsory financial charge or other levy upon and individual or legal entity
by a state or the functional equivalent of the state such that failure to pay
is punishable by law. It is not a voluntary contribution, payment or donation
but rather, it is imposed by government under t6hthe name of import duty,
exercise, etc.
Tax rate:
taxes are most often levied as a percentage. Thus, tax rate is the percentage
of income or profit of individual paid as tax.
Small scale
enterprise: This is sometime called small scale business. It is a business that
employs small number of workers and does not have a very high volume of sales.
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