EFFECTS OF TAXATION ON SMALL AND MEDIUM SCALE BUSINESSES IN ENUGU METROPOLIS (A STUDY OF HARDIS AND DROMEDAS COMPANY LIMITED EMENE, ENUGU)
ABSTRACT
This research work examined The Effect of Taxation on Small and Medium Scale Businesses in Enugu metropolis with Hardis and Dromedas (Nig) Limited, Emene, Enugu. as a case study. The objectives of the study includes to: ascertain the extent small and medium scale businesses pay tax, ascertain how multiple taxation negatively affects the growth and survival of small and medium scale businesses in Nigeria, ascertain whether small and medium scale business’s ability to pay taxes depend on their size and determine the relationship between small and medium scale businesses and their ability to pay tax. The major instrument of data collection was the questionnaire. The sources of data were the primary and secondary sources. The population of the study was 60 while the sample size of 60 was determined by applying the rule governing the population with sample size. The data collected were presented in tables, using frequencies and percentages and analyzed using the five point likert system. The hypotheses were tested using the chi-square distribution formula. The findings include that small and medium scale businesses pay tax to many agencies in Enugu metropolis, multiple taxation affects the growth and survival of small and medium scale businesses in Hardis and Dromedas Company Limited, Emene-Enugu, tax collectors should consider the size of businesses in collection of taxation and that the relationship between the small and medium scale businesses is significant. The research concluded that a friendly tax policy is instrumental to the survival and growth of the small and medium enterprises and it was recommended that Tax collection should be defined with respect to which government should collect certain taxes from small and medium scale businesses, Government should also put a policy in place to avoid illegal taxes, such as community levy, boys or youth levy and as well as association or union levy and Tax administrators should carry out their duties more efficiently with the most care and integrity as this will help combat issues such as multiple tax.
TABLE OF CONTENTS
CHAPTER ONE
NTRODUCTION
1.1     Background of the Study                            
1.2     Statement of the Problem                            
1.3     Objectives of the Study                             
1.4     Research Questions                            
1.5     Research Hypotheses                             
1.6     Significance of the Study                            
1.7    Scope of the Study                             
1.8    Limitation                                     
1.9     Operational Definition of Terms                     
References                                     
CHAPTER TWO
REVIEW OF RELATED LITERATURE
2.1     Conceptual Framework of the Study                    
2.1.1 Features of Small and Medium Scale Business            
2.1.2 Growth Challenges of Small and Medium Scale Business in
Enugu metropolis                                
2.1.3  Role of Small and Medium Scale Businesses                     
2.1.4.    Tax Policy and the Growth of Small and Medium Scale
Businesses                                    
2.1.5.    Strategies that will Encourage Small and Medium Scale
Businesses Growth in Nigeria                        
2.2     Theoretical Framework of the Study                    
2.2.1 Benefit Theory                                
2.2.2 Ability to pay Theory                            
2.2.3 The sacrifice Theory                            
2.3 Historical Background of the Study                    
2.3. 1 Hardis and Dromedas Company Limited                
2.4     Empirical Review                                 
2.5     Summary of Literature Review                        
References                                     
CHAPTER THREE
RESEARCH METHODOLOGY
3.1    Research Design                                
3.2    Area of the Study                                
3.3    Sources of Data                                
3.3.1 Primary Sources                                
3.3.2 Secondary Sources                                 
3.4     Population of the Study                            
3.5    Sampling Techniques and Sample Size Determination         
3.6     Reliability of the Instrument                        
3.7    Validity of the Instrument                        
3.8     Method of Data Analysis                            
References                                             
CHAPTER FOUR
DATA PRESENTATION, ANALYSIS AND DISCUSSION OF FINDINGS
4.1    Data Presentation and Analysis                         
4.2    Testing of Hypotheses                             
4.3    Discussion of Findings                             
4.3.    Discussion of Findings                            
4.3.1  Tax Payment on Small and Medium Scale Businesses         
4.3.2  Effects of multiple taxation on the growth and survival of small
and medium scale businesses                        
4.3.3  Consideration of Tax Collection based on the Size of
    Business                                    
4.3.4  Relationship Between Small and Medium Scale Businesses
and Their Ability to Pay Tax                         
CHAPTER FIVE
SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS
5.1    Summary of Findings                             
5.2     Conclusion                                     
5.3        Recommendations                                 
5.4        Suggestions for Further Research                    
5.5     Contributions to Knowledge                        
Bibliography                                 
Appendix                                    
Questionnaire
CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
Referring to Ariyo (2005), in recent time, the world economy has developed tremendously and this has been linked with activities of small and medium scale businesses, especially in developing countries. A study carried out by the Federal Office of Statistics shows that in Nigeria, small and medium scale businesses make up 97% of the economy. 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 businesses cannot be overstated. Panitchpakdi (2006) sees small and medium scale 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, small and medium scale businesses also contribute to better income distribution.
Over the years, small and medium scale businesses have been an avenue for job creation and the empowerment of Nigerian citizens providing about 50% of all jobs in Nigeria, 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:).
However, the mortality rate of these small firms is very high. According to the Small and Medium Scale Enterprises Development Agency of Nigeria (SMEDAN) Nigeria, 80% of small and medium scale businesses die before their 5th anniversary. Among the factors responsible for these untimely close-ups are tax burdens, ranging from multiple taxations to enormous tax related issues. In many government policies, small and medium scale businesses 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 scale businesses, these unique qualities need to be considered. In levying of taxes for these businesses in particular, issues that need to be considered are how these tax policies can be designed to boaster the growth of small and medium scale businesses and the most effective ways to administer them. The importance of small and medium scale businesses as a mechanism of economic growth arid development is often ignored. They are perceived as minute establishments that have minimal effect on the state of economy.
However, if favorable environment is created for this small and medium scale business to grow through proper regulation, the small and medium scale business 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. Holan (2007) posited that taxation can contribute to development and to welfare through three sources.
It must be able to generate sufficient funds for the 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, and finally it should be able to reallocate income. But in the case of small and medium scale businesses, tax must be done 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 small and medium scale businesses to remain in the informal sector or to evade or avoid tax payments. More so, many small firms in Africa, including 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 tax from small businesses y revenue authorities, whose resources are usually scarce, sometime outweighs the revenues generated by small businesses stern and Barbour (2005). It is based on this that the researcher finds the needs to investigate the Effect of Taxation on Small and Medium Scale Businesses in Enugu metropolis. (A Study of Hardis and Dromedas (Nig) Limited, Emene, Enugu).
1.2.    Statement of Problem
Although there was 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. Small and medium scale businesses 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 small and medium scale businesses are facing in other developing countries like Nigeria; the internal problems of Small and medium scale businesses in Nigeria include: inadequate working capital, stiff competition from larger companies, difficulties in sourcing raw materials, low capacity utilization, lack of management strategies, poor educational background of operators, and huge financial problems, while the external problems include: policy inconsistencies, multiple taxation, harsh regulatory requirements and trade groups and the government regulations which is most affecting the operation of small and medium scale businesses in Nigeria especially the issue of multiple taxation which is a worm eating deeply and the large chunk of revenues generated by these small and medium scale businesses for their growth and survival. These have led to increase in record of dearth of small and medium scale businesses in Enugu metropolis.
1.3.    Objectives of the Study
The general objective of the study is to examine the effect of taxations in small and medium scale businesses on the economy of Enugu metropolis (A study of Hardis and Dromedas (Nig) Limited, Emene-Enugu. The specific objectives include the following:
1.    To ascertain the extent small and medium scale businesses pay tax.
2.    To ascertain how multiple taxation negatively affects the growth and survival of small and medium scale businesses in Nigeria
3.    To ascertain whether small and medium scale business’s ability to pay taxes depend on their size.
4.    To determine the relationship between small and medium scale businesses and their ability to pay tax.
1.4.    Research Questions
In order to solve the research problems, the following research questions were asked:
1.    To what extent do small and medium scale businesses pay tax?
2.    To what extent has multiple taxation affected the growth and survival of small and medium scale businesses in Nigeria?
3.    To what extent do tax collectors consider the size of businesses?
4.    To what extent is the relationship between small and medium scale businesses and their ability to pay tax?
1.5.    Research Hypotheses
Based on the problems and objectives of this study, the following research hypotheses have been formulated:
Hypothesis One
H0:    Small and medium scale businesses do not pay tax to an extent.
H1:    Small and medium scale businesses pay tax to an extent.
Hypothesis Two
H0:    Multiple taxation does not affect the growth and survival of small and medium scale businesses.
H1:    Multiple taxation affects the growth and survival of small and medium scale businesses.
Hypothesis Three
H0:    Tax collectors do not consider the size of businesses.
H1:    Tax collectors consider the size of businesses.
Hypothesis Four
H0:    There is no significant relationship between small and medium scale businesses and their ability to pay tax.
H1:     There is significant relationship between small and medium scale businesses and their ability to pay tax.
1.6.    Significance of the Study
The research work will be of great relevance to researchers, employers of labour, students, practicing managers and business scholars and also non managers that are concerned with productivity. The study is also significant because it will give a clear insight into the various ways in which tax policies in Nigeria can be executed efficiently to favour small and medium businesses. Moreover, it is significant because some taxation policies in Nigeria, Enugu precisely can be properly tackled.
The study also gives a clear insight into the various causes of why small and medium businesses fail in Nigeria. 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.
As a student researcher, this work will also be beneficial to me because it is an essential requirement for the award of my PGD certificate degree in Business Administration. The business operators will benefit when tax policies are considerably designed and implemented accordingly.
1.7.    Scope of the Study
This research extends its interest to the effect of taxation on small and medium scale businesses in Enugu metropolis.
1.8.    Limitations of the Study
The following are the limiting factors encountered in the course of this study:
1.    Financial Constraints: Research work is an expensive venture; money is spent on transportation for collection of data and production of the work.
2.    Time Constraints: The researcher was faced with time intensive activities which he was unable to undertake in combination with load of family issue, office work and academic course work.
3.    Acquisition of data for this kind of study requires series of contact with different small and medium scale business organizations and by this means; it poses serious problems to the said researcher, because it is not easy booking appointment with most of them.
1.9.    Definition of Operational Terms
1.    Effect: It is simply a change that something causes in somebody else.
2.    Taxation: can be defined as a compulsory levy paid by the individuals and firms to the government.
3.    Small/Medium scale businesses: can be conceptualized as an enterprise with a maximum asset base of five hundred million naira (N500m) (excluding land and working capital), and with no lower or upper limit of staff.
REFERENCES
Ariyo, D. (2005). Small Firms are the Backbone of the Nigeria Economy. Retrieved from http: JIwww. africaeconomicanalysis. orgi article/ genlSmallhtm.html.
Hoban, O.L. (2007). “The Taxation of Small and Medium Sized Enterprises - A Hindering Factor Influencing the European Economic Growth”. Doctoral Dissertation, Alexandry Loan Cuza University of Lasi and Academy of Economics Studies from Bucharest Romania. 1(2): 20-30.
Panichpakdi, S. (2006). Seminar at the 10th Session of the Commission of Enterprise, Business Facilitation and Development, Geneva. 12(8): 5-7
Stern, R.E. & Barbour, P.A. (2005). Designing a Small Business Tax System that Enhances Growth: Lesson from Africa.www. fias,netnsf.