CHAPTER ONE
INTRODUCTION
- Background to the Study
Small and medium enterprises (SMEs) 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). Although smaller in size, they are the most important enterprises in the economy due to the fact that when all their individual effects are aggregated, they surpass that of the larger companies. The social and economic advantages of small and medium enterprises cannot be overstated. Panitchpakdi (2006) sees SMEs as a source of employment, competition, economic dynamism, and innovation which stimulate 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 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. However, the mortality rate of these
small firms is very high. According to the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN) Nigeria, 80% of SMES die before their 5th anniversary. Among the factors responsible for these untimely close-ups are tax-related issues ranging from multiple taxation to enormous tax burdens.
In many government policies, small and medium enterprises are usually viewed and treated in the same light as large corporations. However, their size and nature makes them unique. Therefore, in dealing with small and medium enterprises, these unique qualities need to be considered. In levying of taxes for these enterprises in particular, issues that need to be considered are how these tax policies can be designed to bolster the growth of SMEs and the most effective ways to administer them. The importance of SMEs as a mechanism of economic growth and development is often ignored. They are perceived as minute establishments that have minimal effect on the state of the economy. However, if a thriving environment is created for these SMEs to grow through
proper regulation, the SME sector has the highest propensity to transform developing economies.
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. According to Holban (2007), taxation can contribute to development and to 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. In the case of small and medium enterprises, it must at the same time be done in such a manner that puts their income and need for survival into consideration.
Small and Medium Enterprises have always been considered an important force for economic development and industrialization in smaller economies (Oludele & Emilie, 2012). These small enterprises have increasingly been recognized as enterprises that contribute considerably to the creation of jobs, economic growth and eradication of poverty in Africa. According to the 2005 World Development Report, the creating of “sustainable” jobs and opportunities for smaller entrepreneurs are the key strategies to take people out of poverty. Small and medium enterprises are mostly private enterprises and they face difficulties when dealing with the government in general and the tax administration in particular mostly the developing countries. Many of the difficulties with the tax authorities may be deemed as the consequences of poorly conceived tax policies and a lack of certainty regarding future policy changes. However, it would be rare indeed to not observe complaints about the complication and/or ambiguity of the tax laws as well as high tax rates (Baurer, 2005).
If the tax structure is not adequately designed to the specific environmental conditions, it may create a greater burden to the tax-paying organizations and eventually affecting the final consumer due to the shifting ability of tax. According to a study report by Mnewa and Maliti (2008), the majority of small businesses are less likely to attain or maintain their growing profitability due to factors including tax policies. This implies that as a policy maker and regulator, Government must consider the factors that could affect the competitiveness of the small enterprises.
The focus of this research therefore is to evaluate the impact of taxation on the performance of SMBs in Port Harcourt, Nigeria, the suitability of tax policies for performance of SMBs, and establish how taxation affect the Nigerian economy.
1.2 Statement of Problem
Although there is a general perception that tax is an important source of fund for development of the economy and provision of social services, the problems faced are in the area of negative relationship between taxes and the business’ ability to sustain itself and to expand. 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). This and other factors are responsible for the problems and low performance of small and medium scale business enterprises and these problems seen to defy all efforts by the 3 tiers of government in Nigeria to properly address.
1.3 Objectives of Study
In the context of the above mentioned problems, the mail purpose of this study is to analyze the the impact of taxation on the performance of SMBs in Port Harcourt.
Which are as follows:
- To examine the relationship between double taxation and SMEs survival in Port Harcourt.
- To examine whether SMEs ability to pay taxes depends on their size.
- To examine how Government and support institutions facilitate and encourage small scale enterprises.
- Research Questions
The following research questions were formulated to guide the study:
- What are the relationship between double taxation and SMEs survival in Port Harcourt?
- What are SMEs ability to pay taxes depends on their size.
- How Government and support institutions facilitate and encourage small scale enterprises.
1.5 Statement of Hypotheses
Ho0: There is no significant difference between impact of taxation on the performance of SMBs in Port Harcourt.
Hoa: There is significant difference between impact of taxation on the performance of SMBs in Port Harcourt.
1.6 Significance of the Study
Small and medium scale enterprises are believed to be a backbone for the economic development of any nation and Nigeria economy is no exception. This study therefore shall be of immense benefits to the following:
Small and Medium Scale Business Enterprise
The research project will be a source of assistance to the managers of small and medium scale business enterprises. It will provide a framework to how they could solve their financial and managerial problems.
The Government and Supporting Institution
This research will as well provide valuable assistance to government and their supporting institution in the area of suggestion on how to have feed-back on the capital they have advanced to the small scale enterprises.
Future Researchers
The findings of the study will as well serve as a source of reference to future researchers who may wish to replicate this research work.
1.7 Scope of the Study
This project work is restricted to small and medium scale enterprises in PHALGA. It will borders on government with small scale business enterprise, provision of finance and taxation problems of small scale business enterprise.
1.8 Definition of Terms
Taxation: the levying of tax.
Small Scale Business: Are privately owned corporations, partnerships, or sole proprietorships that have fewer employees.
Business Ownership: This refers to the different forms in which a business can be owned such as sole proprietorship, partnership, cooperatives, etc.
Economic Development: Isthe development of economic wealth of countries, regions or communities for the well-being of their inhabitants.
Entrepreneurship: The capacity and willingness to develop, organize and manage a business venture along with any of its risks in order to make a profit.
Finance: It is the money used to run a business, an activity or a project.
Profit: It is money gained or benefit obtained from investment.
Gross Domestic Product: The total value of goods produced and services provided in a country during a specified period of time, usually one year.
Development: This is the structural changes in the society and the economy.