TAXATION AND SMALL BUSINESS PROBLEMS AND PROSPECTS IN NIGERIA (A CASE STUDY OF RIVERS STATE)

CHAPTER ONE

INTRODUCTION

BACKGROUND OF THE STUDY

Small businesses are generally regarded as being critical to economic growth and equitable development in developing economies like Nigeria. They are generally seen as labour intensive, capital saving and capable of helping create jobs. Small businesses are also perceived as the key to Nigeria’s economic growth, poverty alleviation and employment creation. But their below average performance in employment generation over the years has generated a lot of research interests on their challenges and prospects. After Nigeria’s independence in 1960, much emphasis has been laid on the growth of the small business sector as a means of reducing the menace of poverty and unemployment in the country. Since the adoption of the economic reform programme in 1986, there has been a decisive shift from grandiose, capital intensive and large scale industrial projects based on import substitution to small scale industries with immense potentials for developing domestic linkages for sustainable industrial development. Apart from small businesses potential for self-reliant industrialization using local raw materials, they are in a better position to boost employment, guarantee even distribution of industrial development and facilitate the growth of non-oil exports. Fissaeha(2000), states that small businesses employ 22% of the adult population in developing countries while Fabayo(2006) observed that small firms are major source of employment opportunities for a wide cross-section of the workforce: the young, old part-time workers and the cyclically unemployed. Kombo Kassie (2009), submitted that “small businesses have contributed greatly to the growth of Kenyan economy, accounting for 12-14% of GDP, through creating employment opportunities, training entrepreneurs, generating income and providing a source of livelihood for the majority of low income households in the country”. Hence, promotion of such enterprises in developing economies like Nigeria will bring about great distribution of income and wealth, economic self-dependence, entrepreneurial development and a host of other positive economic uplifting factors. Small businesses are veritable engines for attainment of national objective in terms of employment generation at low investment cost, development of entrepreneurial capabilities and indigenous technology. They reduce the flow of people from rural to urban areas and can easily be established with minimal skill. They also contribute substantially to the country’s gross domestic product, export earnings and development of employment opportunities. Most small businesses in Nigeria operate as family/sole proprietorship business and are generally classified into commercial, industrial and agricultural categories depending on their activities though commercial small businesses constitute more than 90% of the entire number. There are 1,200 registered small businesses in Nigeria offering various products/services to the general public ( Aderemi 2003).

Because, small businesses can be established with minimal capital/registration/managerial skill, there are in the most vantage position for employment generation and promotion of Nigeria, the high rate of unemployment (28%) in a population of more than 160 millionpersons suggests that these small businesses are experiencing some major challenges that are hindering their performance. (Nnanna Godwin 2005)

The Nigerian Tax System has undergone significant changes in recent times. With the help of various studies and research done by tax experts, tax laws are being reviewed with the aim of repelling obsolete provisions and simplifying the main ones especially as it concerns small and medium scale enterprises in Nigeria. Under current Nigerian law, taxation on small businesses is enforced by the 3 tiers of Government, i.e. Federal, State, and Local Government with each having its sphere clearly spelt out in the Taxes and Levies (approved list for Collection)

As pointed out earlier small businesses are generally recognized as important drivers of economic growth. They are a key ingredient in a healthy economy, as job creators, sales generators and a source of tax/fiscal revenue. This has resulted to the critical examination of taxation on small businesses problems and prospects in Nigeria

STATEMENT OF THE GENERAL PROBLEM

Small businesses form the core of majority of the world’s economies. A study carried out by the Federal Office of Statistics shows that in Nigeria, small and medium enterprises make up 97% of the economy (Ariyo, 2005). However, the mortality rate of these small businesses is alarmingly high. According to the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN) Nigeria, 80% of small businesses die before their 4th anniversary. Among the factors responsible for these untimely close-ups are tax related issues, ranging from multiple taxations to enormous tax burdens etc. In many government policies, small businesses are unfortunately seen and treated in the same light as large business organizations. However, their size and nature makes them unique. Therefore, in dealing with small businesses, these unique qualities need to be considered. In levying of taxes for small and medium scale enterprises, issues that need to be considered are how these tax policies can be designed to enhance the growth of Small businesses and the most effective ways to administer and enforce them. But unfortunately during the administration and enforcement of taxation, the importance of Small businesses as a mechanism of economic growth and development is often ignored. They are perceived as minute establishments that have little or no effect on the state of the economy. However, if conducive environment is created for these Small businesses to thrive through proper regulation, the SME 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 small 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.

Tax burden is a major problem in Nigeria as many small businesses are not favored by the tax systems and policies in place. Some of these businesses are already collapsing; while majority are still struggling to meet up with high tax rates to ensure their businesses do not die.

OBJECTIVES OF THE STUDY

The major aim of the study is to examine the effect of taxation on small businesses in Nigeria and its potential growth. Other specific objectives of the study include;

1. To examine the level of taxation on small businesses in Nigeria
2. To examine the major cause of small business failure in Nigeria.
3. To examine the effect of taxation on small business performance in Nigeria.

RESEARCH QUESTIONS

1. To what extent has taxation impacted on small businesses in Nigeria?
2. What is the importance of favourable taxation on small business survival in Nigeria?
3. How would you rate small business failure in Nigeria?
4. What is the effect of taxation on small business performance in Nigeria?
5. How would you rate government policies on their operations?

RESEARCH HYPOTHESIS

H01: Multiple taxation has no significance influence on small business performance in Nigeria.

H02: Inadequate social infrastructures do not constitute a major challenge to small business growth in Nigeria.

H03: government policies have no significant relationship on the operations of small businesses in Nigeria.

SIGNIFICANCE OF THE STUDY

The study would be of immense importance to the development of small businesses in Nigeria as it would examine the influence of taxation on the problems and prospects of small and medium scale enterprises. 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.

SCOPE AND LIMITATION OF THE STUDY

The study is on taxation and small business problems and prospects in Nigeria using small businesses in Port Harcourt as a case study.

LIMITATION OF THE 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.

ORGANISATION OF THE STUDY

Chapter one of this study introduced the problem statement and described the specific problem addressed in the study.

Chapter two presents a review of literature and relevant research associated with the problem addressed in this study.

Chapter three presents the methodology and procedures used for data collection and analysis.

Chapter four contains an analysis of the data and presentation of the results.

Chapter five offers a summary and discussion of the researcher's findings, summary/conclusion, and recommendations.

DEFINITION OF TERMS

SMEs: Small and Medium Enterprises are those firms, which satisfy the definitions given above

SMEDAN: Small and Medium Enterprises Development Agency of Nigeria

MSME: Micro, Small and Medium Enterprises

NEEDS: National Economic Empowerment and Development Strategy

Taxation: A means by which governments finance their expenditure by imposing charges on citizens and corporate/business entities. Governments use taxation to encourage or discourage certain economic decisions.

Small Business: A business whose total cost including working capital but excluding cost of land is between ten million naira (N10,000,000) and one hundred million naira (N100,000,000) and/or a workforce between eleven (11) and seventy (70) full-time staff and/or with a turnover of not more than ten million naira (N10,000,000) in a year.

Medium Business: A company with total cost including working capital but excluding cost of land of more than one hundred million naira (N100,000,000) but less than three hundred million naira (N300,000,000) and/or a staff strength of between seventy-one (71) and two hundred (200) full-time workers and/or with an annual turnover of not more than twenty million naira (N20,000,000) only.