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THE IMPACT
OF TAXATION ON SMALL AND MEDIUM SCALE BUSINESS IN NIGERIA
Abstract
The study
was carried out to find out the impact of taxes on small and medium scale
business enterprises in Nigeria.The study aimed at assessing the performance of
business enterprises in Nigeria, finding out if tax payers are aware of all
their tax obligations, policies and problems affecting them as well as their
businesses. The study applied both qualitative and quantitative research
designs where interviews and questionnaires were used. Data was collected from
both primary and secondary sources. Data was processed and analysed using
formal tables, pie charts, narrative text, and correlation to find out the
relationship between the impact of taxes and performance of small scale
businesses. A total of 50 respondents were considered out of the entire population
of small scale and medium enterprises.
The findings indicated that the performance of small scale business is
affected by stock levels, capital employed, daily expenses, daily sales and the
average amount of taxes paid annually.Most business owners are aware of taxes
paid, uncertain of the mode of assessment and little assistance is given as
regards tax awareness. The findings revealed the problems faced by the small
and medium business men as regards mode of assessment, collection and tax
collectors, inefficiency by tax collectors, loss of equipment, loss of sales
and loss of stock as a result of taxes.Recommendations on impact of taxes
included; improvement on the method of collecting taxes, educating the business
community about its different tax rates and
introducing a scheme that allows tax payers to pay the tax obligation.
CHAPTER ONE
INTRODUCTION
1.1 Background of the study
Taxation increases incentives for public
participation in the political process and creates pressure for more
accountability, better governance, and improved efficiency of government
spending. Taxation also creates incentives for governments to upgrade their
institutions for tax collection and administration and to provide more public
services (Moore, 2007).
Taxes have existed virtually as long as
there have been organized governments. The first tax law legislation was
introduced in 1919 and ever since then taxes have evolved through a number of
reforms. The government in an attempt to widen the tax base and collect more
revenue has had to levy several taxes especially on business enterprises in
Nigeria which constitute a large part of the formal sector. The taxes charged on
business enterprises in Nigeria include; corporation tax, value added tax,
presumption tax and exercise duty. In 1997 the Income Tax Act was made. This
was to give guidance in assessment and computation of taxes (Campsy, 1997). The
Nigerian government has made some recommendable efforts to promote development
through taxation since the inception of the current taxation laws for purposes
of promoting development. The main objective of taxation in Nigeria has always
been to mobilise resources needed to meet the aspiration of government. This is
because for any government to be effective, strong, competent and capable of
spearheading development, resources have to be readily available in its
treasury so as to be in position to provide goods and services to the people
adequately. The Nigerian government has always had to ensure proper resource
mobilization (Musa, 1992).
According to Manasseh (2000), a tax is
generally referred to as a compulsory levy imposed by government upon various
categories of assets and taxation is a compulsory and non refundable
contribution imposed by government for public purposes. In Nigeria a
considerable fraction of the businesses are sole traders operating small scale
business, locally owned and managed by individuals or families and often with
very few employees working at a single location (Nigeria development bank
report, 1988). Taxation in Nigeria is based on system that existed in Britain
as it was a British colony. This also applied to other colonies elsewhere and
for East Africa, one tax system operated under British administration. This
process began in 1900 with the hut tax regulation which imposed a standard
charge for every hut/dwelling.
During that
period, taxation was aimed at raising revenue for the administrative structure
imposed by the colonial government but also as a means of encouraging
monetary/economic activities. It was the Local Authority Ordinance of 1991 that
governed the collection of taxes. In September 1991, after a period of review the
Rural Revenue Authority (URA) was established. All taxes including income tax
came under the umbrella of the URA. From 1992, URA has been organizing and
strengthening the administrative procedures and in 1993 this process assisted
by a grant from the British government of approximately US$ 10million.
At least 50
small scale business enterprises were selected in illorin, almost all of them
employ 2-4 people. These small scale businesses are locally owned and managed
by private individuals who sometimes employ their family members. These small
and medium scale businesses bear a wide tax burden which has led to poor
performance. Therefore, it was against this background that the researcher
undertook the study to investigate more about the problem using Nigeria as a
case study to evaluate the impact of taxes on small and medium scale business
enterprises.
1.2 Statement of the problem
Taxes are
raised by the government to generate revenue used to provide services to the
public such as; Health centers, telecommunication, roads, schools and
electricity and this have helped to improve the performance of small and medium
scale business enterprises. Despite the services provided, small and medium
scale business enterprises performance in Nigeria is still poor. This could be
due to the increasing tax burden brought about by tax rates which are revised
annually. These rates seem to be taking an upward trend (Gordon and Dawson,
1987) which has led to winding up of some small scale business enterprises.
This prompted the researcher to investigate more about the impact of taxes on
small scale business enterprises.
1.3 Purpose
of the study/Objective of the Study
The purpose
of the study was to evaluate the impact of taxes on small scale business
enterprises in Nigeria. The specific objectives are:
1. To assess the impact of taxation on small
and medium scale business enterprises in Nigeria.
2. To find out if tax payers are aware of all
their tax obligations and policies.
3. To find out problems affecting tax payers
and their business.
1.4 Research
questions
1. What is the effect of taxes on the
performance of small scale business in Nigeria?
2. Are tax payers aware of all their
obligations?
3.What are
the problems faced by tax payers?
1.5 Scope of
the study
1.5.1
Subject scope
The study
covered small and medium scale businesses in Nigeria. Specifically, the study
investigated the performance of small scale businesses, the awareness of the
tax payers regarding their obligations, problems faced by the tax payers and
the relationship between the taxes paid and the performance of the small scale
businesses.
1.5.2
Geographical scope
The study
was carried out in Ilorin Kwara State, Nigeria. The area was purposely selected
because the researcher worked within the vicinity and therefore this eased data
collection.
1.5.3 Time
scope
The study
considered a period of four to six months. This period was selected to enable
the researcher come up with coherent information from the respondents as it
would enable them (Respondents) to give responses that are typical of their
opinion from the observations made over this period.
1.6
Significance of the study
The findings
of the study are significant on the following ways;
1. To scholars and researchers, the findings of
the study are expected to contribute to the existing literature about taxation
and the effect it causes to the economy as a whole.
2. To the tax authority and government, the
study will guide them in adjusting tax policies so that they suit requirements
of small and medium scale businesses.
3. To future academicians especially of Nigeria
University students, the study will help in gaining insight about taxes and
performance of small scale business enterprises.
4. The accomplishment of the study will enable
the researcher to acquire hands on skills about processing of research work and
data analysis. This proficiency will enable the researcher to handle such
related work with a lot of precision and proficiency.
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