EFFECTS OF MULTIPLE TAXATION ON GROWTH AND PROFITABILITY OF SMALL SCALE ENTERPRISES IN NIGERIA
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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 markets.
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 payments.
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 boys”.
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 Barbour 2005).
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 scale business.
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 possible mis-statements.
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 to 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.