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EFFECT OF CAPITAL ALLOWANCES ON THE PERFORMANCE OF SMALL AND
MEDIUM SCALE ENTERPRISES
EFFECT OF CAPITAL ALLOWANCES ON THE PERFORMANCE OF SMALL AND
MEDIUM SCALE ENTERPRISES
(A CASE STUDY OF SELECTED CONSTRUCTION COMPANIES IN NIGERIA)
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Historically, Nigeria’s experience of taxation predates the
colonial period. The Hausas of Northern Nigeria were paying taxes, though in
kind, to the Emir in return for security and common services. However, with the
advent of the colonialists, direct taxation was introduced in 1904 by Sir Lord
Lugard, the then British appointed Governor. Its implementation started first
in the North and later in the Southern and Eastern regions.
According to Ezejelue and Ihendinihu (2006) taxation can be
defined as the demand made by the government of a country for a compulsory
payment of money by the citizens of the country with the objective of raising
revenue, satisfy collective wants of the people and regulate economic and
social policies.
Aguolu (1999:17) defined capital allowance as expenditures
deducted from profits before taxation to reduce the effect of taxation and thus
encourage savings and investment. These capital allowances can come in form of
expenses on assets, investments and other noncurrent assets/activities of the
organization.
These capital allowances are however backed by various
Government legislations. They are granted to enhance the growth and development
of industries as well as empowering individuals and corporate taxpayers
economically. This work will therefore focus on Capital allowances and their
effect on small-scale industries with emphasis on selected small-scale
industries in Nigeria, using Rivers State as a case study.
The modern day taxation and its use as a fiscal policy could
be traced to 1926, which was a year of economic depression in Great Britain.
During this period, Britain witnessed an unprecedented decline in her overall
economic activities resulting to reduction in total earnings, shortage of fund
in the private sector and reduced income per capital with attendant low
standard of living. The effect of this depression was felt not only in Britain
but almost the world over. Governments at this time were trying to revive,
rehabilitate and mobilize enough capital to provide for economic and social
expenses and to raise the standard of living of its populace. In doing this,
various fiscal policies were formulated which include taxation.
According to Aguolu (1999: 1); taxation may be defined as a
compulsory levy by Government through its agencies on the income, consumption
and capital of its subjects. These levies are made on personal income such as
salaries, business profits, interests, dividends, discounts and royalties. They
are used to provide security, social amenities and create conditions for the
economic well being of the society. The main purpose of taxation according to
Ola (1998:14) is to raise funds to meet Government’s expenditure and to
redistribute wealth and management of the economy.
1.2 STATEMENT OF THE PROBLEM
The objective of granting capital allowances and incentives
to small and medium scale enterprises is to enhance their growth and
development, thus contributing to the overall economic development of the
country. But the objective cannot be achieved in a situation where the would-be
beneficiaries are not even aware of the existence of such incentives. Moreover,
the few who are aware of these incentives do not even bother to apply for them
due to the poor and inefficient tax administration. Therefore, there is the
need to proffer solutions to these problems to ensure the growth and
development of our economy.
1.3 OBJECTIVE OF THE STUDY
The main objective of this study is to examine the effect of
capital allowances on the performance of small and medium scale businesses in
Nigeria. Specific objectives of the study are:
1. To identify capital
allowances available to SMEs in Nigeria.
2. To examine the
level of taxpayers’ awareness of the existence of capital allowances.
3. To examine the
effect of capital allowances on the profit after tax of small and medium scale
businesses in Nigeria.
4. To determine the
relationship between capital allowances and growth of small and medium scale
enterprises in Nigeria.
1.4 RESEARCH
QUESTIONS
The following research questions will be considered in this
study:
1) What are the
Capital allowances available to small scale enterprises in Nigeria?
2) What is the level
of taxpayers’ awareness of the existence of these incentives?
3) What effects do Capital allowances have on after tax
profits of small scale enterprises?
4) Is there any
relationship between Capital allowances and the growth of small scale
enterprises in Nigeria?
1.5 RESEARCH HYPOTHESES
In order to ascertain the effect of Capital allowances on the
performance of small-scale enterprises, the following hypotheses have been
formulated:
Ho1: Capital allowances do not have any
significant effect on the after tax profits of small-scale industries.
Ho2: Capital
allowances do not enhance the growth of small scale enterprises.
1.6 SIGNIFICANCE OF THE STUDY
The research will be of benefit to the government – policy
makers and tax revenue authorities. It will provide a framework for the
critical evaluation of tax policies, provides a basis for the modification of
tax incentive design and identify loopholes in the present tax system that
serves as disincentive to investment.
It will also benefit other researchers, forming a basis for further
research on the subject in future. The study also 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.
1.7 SCOPE OF THE STUDY
The study covers various capital allowances in assets such as
buildings, vehicles, plants and machineries, and how they affect performance of
small and medium scale enterprises in Nigeria, using selected small and medium
businesses in Rivers state.
1.8 LIMITATION OF THE STUDY
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.
1.9 DEFINITION OF TERMS
Capital Allowance: Thisrefers to sums of money a business can
deduct from the overall corporate or income tax on its profits. These sums
derive from certain purchases or investments etc.
SME: Small and Medium Scale Enterprise
Performance: The accomplishment of a given task measured
against preset known standards of accuracy, completeness, cost, and speed. In a
contract, performance is deemed to be the fulfillment of an obligation, in a
manner that releases the performer from all liabilities under the contract
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