Effects of Multiple Taxation on Growth and Profitability of Small Scale Enterprises in Nigeria
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Chapter one on Effects of Multiple Taxation on Growth and Profitability of Small Scale Enterprises in Nigeria
Background to the Study
The rationale for imposing taxes in any nation stems from government numerous responsibilities and her desire to stimulate growth of economic activities in specific sectors. Taxation, apart from being the major source to finance government’s responsibilities citizens, it is also a means of ensuring that certain economic policies of government such as creation of friendly environment for private business/enterprises are brought into fruition. As economic regulator, taxation is a potent tool for promotion economic welfare through creation of tax friendly economy conducive for businesses to survive and grow (Osita, 2011).
Government plays great role in any national economy. This is particularly true in the developing countries where government has to initiate and promote economic development. To achieve its purpose, government uses different instruments to mobilize funds and channel same to the provision of essential services and amenities; protection of its nationals, provision of education, health care services etc. By so doing, the government raises revenue which takes a number of different forms such as taxation, borrowing, grants, rents royalties, fees and other charges.
Multiple Tax or Multiplicity of Taxes (MT) refers to unlawful and compulsory payment collected mostly by local and state government without legal backing (Abiola, 2012). It is a situation where a tax payer is forced by two (2) or more levels of government to pay either the same or similar taxes in desperate bid to increase their revenue base (Folayin, 2015). Abiola (2016) viewed MT as a situation where the same level of government imposes two or more taxes on the same base. Adum (2018) described MT as a case where profit or wealth of an individual or corporate body is taxed more than once.
Taxation is the main source of government revenue and tax can be defined as “a compulsory levy imposed by a public authority on the income, capital, and profit or wealth of an individual, family, community, estate, corporate or unincorporated body for the public purpose” (Okezie, 2003). The policy of taxation in Nigeria is directed towards achieving specific objectives which include among others revenue generation and economic growth. Therefore, avoidance and evasion affect both the volume and nature of government finances generated being the key to economic development. Tax administration has been structured in such a way that from the federal government level through state to the local government level it can be assessed and collected in all sectors of the economy.
It is the desire of nations developed or developing for private enterprises to thrive. In Nigeria, private businesses in the category of Small and Medium Enterprises (SMEs) has been playing a crucial role in job creation and poverty alleviation contributing significantly to the country’s Gross Domestic product (GDP). The socio-economic contribution of SMEs to the growth of the country cannot be overemphasized as the sector has been the major some of employment, innovation and wealth creation (Faloyin, 2015).
The world over, small scale business plays a much more important role in economic growth and development, which can best be described as the bedrock of rapid and sustainable growth and development of any society. Prior to the 19th century, cottage industries mostly small and medium scale business controlled the economy of Europe (Joseph, 2004). The industrial revolution changed the status quo and introduced mass production by 1970s. The mass production model was seen as not relevant which eventually led to the unexpected reappraisal of the role and importance of small-scale business in the global economy. The value of small-scale industries cannot be over emphasized. Small scale business can be characterized by dynamism, innovations, efficiency and their small size allows for faster decision-making process.
Poverty is one of the most serious problems confronting Nigerians today (Joseph, 2004). Therefore, absolute poverty exists, due to the inability of a person or group of persons to satisfying their most basic and elementary requirements of human survival in terms of good nutrition, clothing, shelter, education, recreation etc. It is generally believed that absolute poverty can be eradicated or reduced thus, government introduction of some intervention programs. Nigerian government has realized the importance of small-scale industries and has formulated public policies to encourage, support and fund small scale business (ltodo, 2011). Hence, Small scale business creates avenue for employment generation, solid entrepreneurial base and encourage the use of local raw materials and technologies. Small scale business creates employment, increase job growth, induce change, innovation and competition. The benefits accruable from small scale industries are easily noticeable. These benefits include contribution to the economy in terms of output of goods and service; creation of jobs at relatively low capital cost, especially in the fast-growing service sector. Provides a vehicle for reducing income disparities, develops a pool of skilled and semi-skilled workers as a basis for the future industrial expansion; often, an excellent breeding ground for entrepreneurial and managerial talent, the critical shortage of which is often a great handicap to economic development and provides opportunities for development among others. The fact that small scale business contributes greatly in development of nation’s economy; yet, Nigerians still face harsh economic conditions since early 1980s (Ezekiel, 2009). These resulted in several government policies designed to alleviate the bad situation (Okauru, 2012). Among these policies is the Structural Adjustment Program (SAP) which was supposed to make Nigerians look inward for solutions to their problems. The Federal Government of Nigeria has emphasized that one of the solutions to such unhealthy situation is the establishment of small-scale business. However, in recent times in Nigeria, the World Bank by some estimates said that 56 percent of Nigerian youths were jobless. However, Adebisi (2013) is of the view that over the years, small and medium scale enterprises have been an avenue of job creation and the empowerment of Nigerian citizens, providing about 50% of all jobs in Nigeria and also for local capital formation. The M.O Ibrahim foundation opined that Nigerian educational system is not structured in such a model as can produce graduates who are comprehensively groomed with the 21st century compliant skills. Furthermore, Ibrahim (2003) also said that Africa had the lowest share of engineering graduates in the world which has grossly discouraged the growth of small businesses among Nigerian Youths who in their millions roam the streets searching for the elusive white collar jobs rather than being encouraged and empowered to become investors and small business operators. Despite the laudable objective of the government, the rate of failure of small-scale business had been quite high (Adebisi, 2013). Small scale business is characterized by mismanagement, lack of capital backup, inability to train and retrain workers, lack of certified public accountants to help in keeping accounting records, inadequate knowledge of the market situation, limited control to ascertain fraud, illiteracy and ignorance, inability to distinguish between working capital and personal cash, lack of growth, inadequate funding, incessant closure of business, unorganized system of account or poor management of funds, non- motivational welfare factors, inadequate resources and raw materials needed for production, ineffective communication among others.
Profitability is the ability of an enterprise to use its resources to generate revenues in excess of its expenses. Profitability always fascinates a businessman. This is because the business owner is always interested in success than failure. Those charged with running businesses whether small or large know all too well that failure is a possibility if the right steps are not taken. Cross the thin line, and at the slightest mistake, failure will show its face. Failure can stem from excessive payment of tax or double taxation. Records show that businesses close down after one or two years of operation particularly new businesses. This could be attributed to high taxes, incessant and arbitrary payment of taxes, and lack of provision of essential amenities by the government even after payment of tax, non-documentation or registration of small-scale businesses by tax authorities etc. Profit is one of four building blocks for analyzing financial statements and company performance as a whole. Profitability is the primary goal of all business ventures. Without profit, the business will not survive in the long run. So, measuring current and past profitability and projecting future profitability is very important. Profitability is measured with income and expenses.
Statement of the Problem
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. In recent times it is believed that small scale businesses provide about 50% of all jobs in Nigeria and also for local capital formation. Its benefits are inexhaustible. Sad enough, the mortality rate of small-scale business is very high. Among some of the factors responsible for the mortality of small scale include multiple taxation, incessant high and arbitrary payment of taxes, and inadequate provision of essential social amenities by tax authorities even after payment of tax and, non-documentation/registration of small-scale business by tax authorities. To explain this fact, Adebisi (2013) in his findings revealed that multiple taxation of the resources of small-scale businesses have negative effect on their survival in Nigeria. He further stressed that “existing empirical evidence clearly indicates that small and medium sized businesses are affected disproportionately by costs when scaled by sales or assets, the compliance costs of Small and Medium Enterprises (SMEs) are higher than large businesses”. Government tax agents justify the collection of these taxes by arguing that the infrastructure provided by government with tax revenue, in no little measure contribute to the increased productivity of the SMEs. SMEs operators on the other hand, argue that the government is not providing any infrastructure to attract the numbers of levies being imposed on them. The question then is, does the multiplicity of taxes by the lower tiers of government enhance or constrain the operational capacities of small-scale enterprises? How can we then evolve an efficient and effective process to ensure optimum tax collection by the government to meet its financial obligation without taxing the small-scale businesses arbitrary but as required by the law to enable them remain in business? How can the scenario of multiple taxations be reversed to create room for small scale business to thrive? Hence the present study tends to investigate the effect of multiple taxation on the growth and profitability of small and medium enterprises in Nigeria.
Objectives of the Study
The study sought to know the effect of multiple taxation on the growth and profitability of small and medium enterprises in Nigeria. Specifically, the study sought to;
i. determine the relationship between multiple taxation and the growth and profitability of small and medium enterprises in Nigeria.
ii. examine the impact of multiple taxation on investment decision of entrepreneurs of small and medium enterprises in Nigeria.
iii. Challenges/problems that constraint the growth and profitability the of small and medium enterprises in Nigeria.
i. What is the relationship between multiple taxation and the growth and profitability of small and medium enterprises in Nigeria?
ii. What is the impact of multiple taxation on investment decision of entrepreneurs of small and medium enterprises in Nigeria?
iii. What are Challenges/problems that constraint the growth and profitability the of small and medium enterprises in Nigeria?
H01: There is no relationship between multiple taxation and the growth and profitability of small and medium enterprises in Nigeria.
H02: Multiple taxation has no impact on investment decision of entrepreneurs of small and medium enterprises in Nigeria.
Significance of the Study
The findings of this study will be significant fiscal policy makers by guiding them on the type of fiscal policies they make for small and medium enterprises. The study will help to highlight on the essence of taxation and suggest for efficient 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 immense benefit to other researchers who intend to know more on this study and can also be used by non-researchers to build more on their research work. This study will contribute to knowledge and could serve as a guide for other study.
Scope/Limitations of the Study
This study is on the effect of multiple taxation on the growth and profitability of small and medium enterprises in Nigeria with a view of finding solutions to the problems/challenges posed by multiple taxation to small and medium enterprises.
Limitations of study
1. Financial constraint: Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).
2. Time constraint: The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.
Definition of Terms
Tax: A tax is a compulsory financial charge or some other type of levy imposed upon a taxpayer by a governmental organization in order to fund various public expenditures.
Multiple Taxation: Multiple Taxation is situation in which the same earnings are taxed more than twice.
Business Growth: Business Growth is a stage where the business reaches the point for expansion and seeks additional options to generate more profit.
Profitability: The degree to which a business yields profit or financial gain.
Small and Medium Enterprises: Small and medium-sized enterprises or small and medium-sized businesses are businesses whose personnel numbers fall below certain limits.
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