Impact of Taxation on Performance in Small-Scale Enterprise
Chapter One
Objectives of the Study
In this section general objective and specific objectives are stated.
General objective
Generally, the study sought to assess the effect of tax administration on of small-scale business enterprises in Port Harcourt.
The specific objectives
More specifically the study attempted to:
- To determine how tax system affects performance of small-scale business enterprises in Port Harcourt.
- To determine the tax policy used to administer tax on small-scale business enterprises in Port Harcourt.
- To analyze the perception of SMEs about tax
CHAPTER TWO
LITERATURE REVIEW
Introduction
This chapter elaborates critically a review of various related literature to the problem under study. Kombo et al (2006) argue that Literature review is a critical summary of related studies on a research under study, generally surveyed to put the study in context and provides an integrated overview of the field of research. Therefore, it is very important to review different literatures which are relevant to the problem under the study because it provides a classification and evaluation of what accredited scholars and researchers have written on a topic, organized according to a guide concept like research objective or a problem a researcher wishes to address. It also provides broader conceptual or theoretical framework as well as presenting different theories or concepts pertinent to the study. Important theoretical and practical problems are brought out, relevant literature on the aspects pertaining to the effects of taxation on SMEs.
Theoretical Review
Theory of Business Growth
Various authors have postulated theories on business growth. The oldest and the most used theory according to Elhiraika and Nkurunziza (2006) is Gibrat’s law of proportionate effect (LPE); (1931). Here, Gibrat stipulates that the rate of performance of a firm is independent of its initial size. By implication it would mean that large firms are preferable in context of private sector development given that they create more employment than small firms. Conversely, Jovanovich (1982) states in his learning model that younger firms learn over time, which helps them improve their performance as they accumulate market knowledge. According to this model, young firms grow faster than old ones. Moreover, given that younger firms are usually smaller than older ones (businesses) for the reasons discussed earlier; Jovanovich deduces that small firms grow faster than large ones. This is a convergence process where small firms will eventually become as large as any other longer firm in the same sector as time goes by. Church and Lewis (1983) as cited in Olawale & Garire (2010) on the other hand claim that as a new small firm start and develops, it moves through some growth stages. He also identified the stages of performance of SMEs as; existence, survival, success, take off and resource maturity. In each stage of development as different set of factors is critical to the firm’s survival and success the Churchill Lewis model gives an insight into the dynamics of SMEs growth including the distinguishing characteristics, problems and requirement of growing SMEs and explains business growth process amongst SMEs, The precise moment in time in which a startup venture becomes a new business has not yet been theoretically determined. However, the ideal business survival could be equated with a firm that has fully completed the transaction to stage two organizations in the five stages of small business growth.
Theory of taxation
According to the theory of taxation, an efficient taxation policy should minimize costs of taxation to society, per unit of tax revenue raised. When economic agents are more or less similar for their size, business and value of sales and it is possible to calculate fixed sums for them to pay, lump-sum taxes should be imposed. This would be of especial importance in transition economies when authorities do not have the capacity to effectively impose sophisticated tax systems. Presumably, as the market economy matures, the tax system might take on some of the elements of tax systems found elsewhere. Good taxes meet four major criteria. They are (1) proportionate to incomes or abilities to pay (2) certain rather than arbitrary (3) payable at times and in ways convenient to the taxpayers and (4) cheap to administer and collect.
Theories of Tax Compliance
Various opinions exist about the best ways to improve tax compliance (Kastlunger et al., 2009). Given the chance, a lot of businesses will not pay taxes unless there is a motivation to do so. Some believe that the best way is to increase incentives, while others believe the best way is to increase penalties (Chaudhry, 2010). Tax compliance theories can be broadly classified into two. They are; economics based theories and psychology based theories.
CHAPTER THREE
RESEARCH METHODOLOGY
Introduction
This chapter covers the description of the study area research approach, data types that was used and their sources, research design, target population, sample and sampling technique, data collection method, data analysis, validity and reliability of data, ethical considerations that the study was guided with and finally the expected result of this research.
Area of the Study
The study was conducted at Port Harcourt. The selected area had the available data to fulfill the study needs, it was within the researcher’s reach, and amount of funds allocated for the research was sufficient to conduct the study within the area. The researcher selected SMEs because of his familiarity and awareness of these businesses. Following the fact that SMEs are highly affected by tax administration of our country, which is the main concern of this research
Study Population
The study comprised of a population of small-scale enterprises, which included retail shops, hardware shops, groceries, and dealers in general merchandise and TRA tax administrators.
CHAPTER FOUR
DATA ANALYSIS, INTERPRETATION AND DISCUSSION
Introduction
This chapter presents analysis and discussion of the findings from the empirical study considering the research questions, the research design and the data analysis techniques. Consideration was made to assess impact of taxation on the performance of small micro enterprises: a case of SMES in Port Harcourt, Nigeria. The data were presented by using table and figures, hypotheses were tested by using regression analysis technique. The variables that were tested were tax system, tax policy and perception of tax system.
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATIONS
Introduction
This chapter presents a summary of the results obtained in chapter four. The discussion of results is followed by conclusion, recommendations, and recommended areas for further research as per the study objectives.
Summary
General Summary
The Main purpose of this study was to assess the effect of tax administration on of small-scale business enterprises in Port Harcourt. The study determined how tax system affects performance of small-scale business enterprises in Port Harcourt and how the tax policy used to administer tax on small-scale business enterprises in Port Harcourt. Also the study analysed the perception of SMEs about tax system. The study employed quantitative approach, informed by a cross sectional survey design. The purposive sampling techniques were employed to obtain the respondents. Mainly the respondents were small business owners and Tax administrators in Port Harcourt. The sample comprised of 100 respondents. Data was collected through questionnaires. The quantitative data were processed with the help of Statistical Package for Social Science (SPSS) software program version 22 and were summarized in tables of frequencies percentages, and regression analysis.
Summary of Findings
Under this section, findings of the study are discussed objective wise:
Tax system
The study focused on how tax system affects performance of small-scale business enterprises. Majority of respondents agreed that transparency on tax collection is managed by tax system. The study reveal that tax system fascinate inflation rates. From the findings it is obvious that tax system employed does not facilitate economic growth but increase inflation rates. Findings unveiled that tax system decrease of awareness of tax laws among tax payers.
Tax policy
The findings in this study have shown that, majority of the respondents agreed that tax policy oppress SMEs growth. This corresponds with past studies (Yagavda, 2010), which indicated that tax policy perceived to be a major problem for both young and old firms. Also majority of respondents agreed that SMEs don’t have clear knowledge and understand of tax policies implementation and disagreed that SMES taxpayers have good attitude with tax policy. Nevertheless, a study conducted by Coleman and Wilkins (2001) revealed that there was a diversity of opinion and attitudes towards the tax policies and compliance issues amongst the SMEs.
Perception of SMEs about tax system
Furthermore, the study proposed to observe the positive relationship between tax system perception and the performance of small-scale business enterprises. The findings revealed that Tax system is complicated hence repress the performance of SMEs. This relates with past studies (Bowbow, 2012), who discovered that SME owners see tax system as just governmental way of earning revenue with no much good to the SMES and the society at large. SMES under the regulatory system of taxation are discriminated against since the requirement of compliance cost of compliance and tax rate are the same for both small and large corporations. Also the findings reveal that tax system does not provide services at promised time since 73% of the respondent disagreed.
Hypothesis
The result from regression analysis reveal that relationship between SMEs perception, Tax system, Tax policy and SMEs growth.
Implication of Findings
The Government
The Government through TRA is advised to charge a single tax for small taxpayers which combine all types of taxes (i.e. income tax, VAT, excise tax etc.). This will help to engineer the performance of SMEs since it will reduce the burden of tax and it will help the authority concern i.e. TRA to collect enough revenue since tax evasion will be minimized to a greater extent
Policy Makers
The TRA is also advised to allow tax holidays, tax incentives, or relief from taxation based on new business investments as this may encourage the entrance of new business. This should be applied to all new business investment with full registration and it should be applied to all forms of businesses equally. Almost many countries employ some form of grant, subsidy, investment credit or deduction so as to attract new businesses.
TRA
Nigeria Revenue Authority (TRA) is advised to increase taxpayers’ assistance and educational programs. This can include internet services and electronic filing of tax returns where technology and legislation permit. Electronic payment of taxes through the banking system should also be utilized. When taxpayers are educated about various tax matters, they will know their rights and there will be less/ no tax ambiguity and tax evasion.
SMEs
Small and Medium Enterprises are advised to maintain primary books of accounts and payroll summaries since they may help them to know the actual amount collected as revenue and the actual expenditure of their businesses. This may help to reduce the amount paid as tax since the tax imposed on them will be reflecting the true figure of business’ turnover.
Limitations of the Study
Researcher faced the following challenges during conducting this study:
- Important information was disclosed from the respondents due to issue of confidentiality of information.
- Financial problem arisen since researcher had no sufficient money to meet the costs of study.
Conclusion
Small and medium taxpayers play a key role of providing socio-economic activities. It has a great potential to increase domestic revenue mobilization and to reduce huge budget deficits in the informal sector. On the basis of the findings from this study as presented, analyzed and interpreted in chapter four the main conclusion is that of tax administration impact performance of SMEs different ways. From the study it has been found that tax system, tax policy and perception of SMEs owners impact the performance of SMEs hence clear and simple tax regulations should be instigated also tax administration should design logical measures to protect the performance of SMEs as well as increase the revenue mobilization of taxes by the government.
Recommendation
Recommendations for Action
Based on the findings made from this study, the following recommendations are therefore made:
- Tax regulations governing SMEs should be simplified in order to make compliance easier for them. This includes clear and simple tax regulations, and an undemanding tax filing process. The use of information technology should be
- Tax administrators should carry out their duties more efficiently with the most care and integrity as this will help combat issues such as multiple taxes.
- Tax administrators should improve their support services towards SMEs for example, small business owners should be educated on issues such as taxes they are expected to pay and the incentives and exemptions they are eligible for.
Recommendations for Future Research
In relation to this particular study, further study should be conducted in utilization of tax revenue and how perception that the taxpayers did not benefit from their tax revenue was the true factor in influencing their attitude to taxes.
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