IMPACT OF TAX INCENTIVES ON ENTREPRENEURSHIP DEVELOPMENT IN NIGERIA (A CASE STUDY OF SELECTED SMEs IN LAGOS STATE)

CHAPTER ONE

INTRODUCTION

1.1. BACKGROUND OF THE STUDY

Nigeria is endowed with the main requirements for entrepreneurship, such as natural resources in oil, water, land, agriculture and human capital. Sometimes tax incentives are not as beneficial as expected (Klemm, 2009; Bazo, 2008). Reforms did not yield the desired effect for instance poverty is high for lack of production and employment (Litwack, 2013; Gberevbie, Duruji, and Bankole, 2013). Giriuniene & Giriunas (2014) links tax system with entrepreneurship. This study relates entrepreneurship with tax incentives. Over the years, entrepreneurship has been identified as a key driver of economic growth and development of any country, as it influences the economy in the areas of employment creation, innovations, export promotion, and economic dynamism which eventually bring about poverty alleviation and national growth (Ocheni, 2015). According to the Small and Medium Scale Enterprises Development Agency of Nigeria (SMEDAN), about 80% of Small and Medium Scale Enterprises (SMEs) die within the first five years of commencement. Part of the factors responsible for their untimely demise, are tax related issues, ranging from multiple taxations to heavy tax burdens among other issues. Therefore, in dealing with entrepreneurs, their unique role in economic growth need to be given due consideration. In levying of taxes, some key issues that need to be considered include how tax policies can be designed to foster the growth and continued existence of entrepreneurship and the most effective ways to administer them (Ocheni, & Gemade, 2015). The development of entrepreneur is therefore an essential element in the growth strategy of most economies and hold particularly significance for Nigeria. A major gap in Nigeria industrial development process in the past has been the absent of a strong small and medium enterprises sub-sector. The little progress recorded from the courageous effort of the first generation of indigenous industrialist were almost wiped out by the massive dislocated, traumatic development which took place under the structural adjustment program and government inability to effective utilize its fiscal policy instrument towards their growth. In a bid to maintain rapid growth among new established small and medium enterprises, fiscal incentives becomes a vital tool of government investment promotion strategy, fiscal incentives can play an important role in attracting and encouraging firms to expand supply by stimulating their investing power. Fiscal incentives available at the disposal of Nigeria government with which it can encourage the small and medium enterprise include: reduced cooperation tax through reduced tax, flat rate, tax exemption and tax stability agreement and subsidy or grant and tax holiday and investment allowance. The most commonly used incentive by the government is tax holiday, but this provision exempt firms from other tax liability, it also denies some firms certain tax deductions over the tax holiday period e.g. depreciation cost and interest expense tending to offset at least in part investment incentives. Though, tax incentives are viewed erroneously as simple incentives with a relatively low compliance burden e.g. no need to calculate income tax over the holiday period. This perception makes tax incentives more attractive at stimulating the growth and expansion of entrepreneurship. It has been a great concern to all and sundry to promote the welfare of entrepreneurship and 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 entrepreneurs. 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 entrepreneurship. The time is now to do something surgical to the situation of our entrepreneurs given the aggravating level of poverty in Nigeria and the need to meet up with the Millennium Declaration Goals. The decreasing level of Nigeria’s per capita income, which declined from $870 in 1981 to $260 in 1998, and $205 in 2013 as well as a low level of agricultural, industrial and infrastructural development (irrigation, road and railway networks) all represent disturbing indices, which also contribute to the dismal performance and contribution of our entrepreneurs.

1.2 STATEMENT OF PROBLEM

There is no gainsaying the fact that the growth and development of any economy is substantially dependent on the involvement of Entrepreneurs. The implication of this is that entrepreneurs must be encourage by government so as to create jobs because the unemployment rate is much, contribute to the Gross Domestic Product, Pay taxes, discourage export, and encourage import. Nigeria has not taken full advantage of globalization as it relates to trade liberalization. It trades only two products crude oil and agriculture.  Gberevbie, Duruji and Bankole (2013) argue that high unemployment rate requires that personal income needs to be self-achieved through entrepreneurship because unemployment results in poverty.  Poverty remains significant with GDP growth rate of 7.4%. Litwack (2013) argues that seventy million Nigerians are poor. According to World Bank (2012) Nigeria country profile statistics indicates an income inequality of 0.49; this is correlated with differential access to infrastructural amenities and devastating consequences of unemployment on wellbeing (Ayegba 2015). Entrepreneurs 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. (Ocheni, & Gemade, 2015) Since taxes reduces business available fund for expansion, it is believed by many that there exist a negative relationship between taxes and the business’ ability to sustain itself and to expand, thereby serving as a disincentive to investment and growth of businesses. Generally, tax is an important source of fund to government, for the development of the economy and provision of social services. A reduction in taxes to encourage entrepreneurs will eventually mean reduced revenue for government, which limits government ability to provide infrastructures needed for businesses to succeed. Recognizing the very important role of entrepreneurship in the Economic development and wellbeing of Nigeria, the government came up with certain incentives to encourage investment in certain sectors of the economy. The Industrial Development (Income Tax Relief) Act, Cap 17, LFN 2013 was introduced to serve that purpose. “A proactive preventive approach to the problem requires a critical evaluation of existing tax incentives available to pioneer companies to determine the growth of entrepreneurship in the nation to ensure that tax activities are carried out in accordance with established goals, policies and procedures” (Valenduc, 2009). There is therefore need to ascertain the impact of tax incentives on entrepreneurial development in Nigeria. Hence, the main argument of this study is based on the pressures caused by unemployment, and tax incentives are analysed as one tool of entrepreneurship attraction to reduce the pressure of unemployment. It is expected that tax incentives would not have a significant relationship with entrepreneurship development in Nigeria.

1.3 AIMS OF THE STUDY

The major purpose of this study is to examine the impact of tax incentives on entrepreneurship development. Other general objectives of the study are:

1. To examine the level at which entrepreneurship is sustainable in Nigeria through tax incentives.

2. To examine how tax incentives enhance entrepreneurship growth in Nigeria.

3. To examine the impact of tax incentives on entrepreneurship development in Nigeria.

4. To examine the benefit of granting tax incentives to small and medium enterprises by the government in the economy.

5. To examine the relationship between tax incentives and entrepreneurship development in Nigeria.

6. To examine how to proffer solutions to the problems that militates against entrepreneurial development in Nigeria.

1.4 RESEARCH QUESTIONS

1. At what level is entrepreneurship sustainable in Nigeria through tax incentives?

2. How do tax incentives enhance entrepreneurship growth in Nigeria?

3. What is the impact of tax incentives on entrepreneurship development in Nigeria?

4. What are the benefits of granting tax incentives to small and medium enterprises by the government in the economy?

5. What is the relationship between tax incentives and entrepreneurship development in Nigeria?

6. What are the solutions to the problems that militate against entrepreneurial development in Nigeria?

1.5 RESEARCH HYPOTHESES

Hypothesis 1

H0: There is no impact of tax incentives on entrepreneurship development in Nigeria.

H1: There is a significant impact of tax incentives on entrepreneurship development in Nigeria

Hypothesis 2

H0: There is no significant relationship between tax incentives and entrepreneurship development in Nigeria.

H1: There is a significant relationship between tax incentives and entrepreneurship development in Nigeria

1.6 SIGNIFICANCE OF THE STUDY

This study is significant in that it will help to identify the importance of entrepreneurship development in Nigeria.

• This study is significant in the sense that it will:  Highlights the importance of entrepreneurship training and its impact on unemployment reduction in Nigeria. One of the SDG (Sustainable Development Goal) goals highlights education (training) as a critical factor to reducing poverty and dependency. 
• Allow the identification of the concept and framework of entrepreneurship development and its contribution to Nigeria’s economy. 
• Generate greater awareness among tertiary institutions on the importance of having proper and practical strategies for acquiring entrepreneurial skills.
• This research work will further serve as a guide and provides insight for future research on the topic and related field for academia’s and policy makers who are willing to improve on it.

1.7    SCOPE OF THE STUDY 

The study is based on impact of tax incentives on entrepreneurship development, a case study of selected SMEs in Lagos state.

1.8 LIMITATION OF STUDY

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).

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.

1.8 DEFINITION OF TERMS

Entrepreneurship: entrepreneurship could be described as an act of how, by whom and with what effect opportunities to create future goods and services are discovered, evaluated and exploited (Scott and Venkataraman, 2012).

Entrepreneurial Development: This refers to every activities channelled towards creating and advancing the practice of entrepreneurship (Osemeke, 2012).

Tax Incentives: Tax incentives are relief’s granted to tax payers or industries in the form of set-offs from the total income before tax liability is determined. It could be in form of tax holidays or waivers. It is established by legislations or statute authorizing such payment of tax.

Incentive: An incentive is a form of tax relief, informs of a reduction in or an exemption from the tax which someone, a firm, or an industry would normally be liable. 

Relevant Tax Authority: There are two relevant tax authorities in Nigeria. The Board of Internal Revenue which is responsible at the state and the Federal Inland Revenue Board which takes charge of federal tax matters.