The Impact of Taxation on Small and Medium-Scale Businesses in Nigeria
Chapter One
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:
- To assess the impact of taxation on small and medium-scale business enterprises in Nigeria.
- To find out if taxpayers are aware of all their tax obligations and policies.
- To find out problems affecting taxpayers and their business.
CHAPTER TWO
LITERATURE REVIEW
Introduction
The subject of taxation has received huge rational and scholarly attention in the literature. Taxation is one of the most subtle subjects in governance both in the developing and developed nations. Rakner and Gloppen (2002) noted that for most countries, taxation goes hand-in hand with economic growth and taxes have become the life blood for governments to deliver essential services and to make long-term investments in public goods. According to Nightingale (2001), “a tax is compulsory contribution, imposed by government, and while taxpayers may receive nothing identifiable in return for their contribution, they nevertheless have the benefit of living in a relatively educated, healthy and safe society”. The study further explained that taxation is part of the price to be paid for an organized society and identified six reasons for taxation: provision of public goods, redistribution of income and wealth, promotion of social and economic welfare, economic stability and harmonization and regulation. As it were in other countries of the world, governments impose tax in African countries and the proceeds are used for the development of public goods, provision of social amenities and economic regulations amongst others.
First detailed information about taxation can be found in Ancient Egypt (Webber and Wildavsky, 1986). The Pharaohs appointed tax collectors (called scribes) and paid them high salaries to reduce the incentives to enrich themselves alone. Furthermore, scribes working in the field were controlled by a group of special scribes from head office. Corruption of tax agency has been a problem especially in developing countries. According to the traditional model of tax compliance by Allingham and Sandmo (1972), the model presents and specifies the extent of compliance as positively correlated with the probability of detection and the degree of punishment and penalty as factors influencing taxpayers’ behaviour.
Some preliminary tax morale research was conducted during the 1960s by the Cologne School of Psychology, that tried to narrow the bridge between economics and social psychology by emphasizing that economic phenomena should not only be analyzed from the traditional neoclassical point of view but also from social psychology perspective. They saw tax moral as an integral attitude that was related to tax compliance. This early work foreshadowed the emerging importance of “behavioral economics” as a tool in understanding individual and group behavior, and it is reflected in a range of related approaches, with roots in the psychology of taxation (Lewis, 1982 & Kirchler, 2007). In the specific context of tax compliance, tax morale is most obviously linked to “intrinsic motivation” (Frey, 1994, 1997). It is also connected to “taxpayer ethics” (Song and Yarbrough, 1978), to “social norms” (Alm, McClelland and Schulze, 1999), to perceptions of “power” and “trust” (Kirchler, Hoezl and Wahl, 2008).
Tax morale is defined as the “moral obligation” or an “intrinsic motivation” to pay taxes (Torgler and Schneider, 2006). Torgler (2002) and Frey (2003) stressed its relevance to understand the high observed level of compliance. Tax morale has evolved as an instrumental component in understanding voluntary tax compliance using a more integrated approach with a bias for non-economic factors. According to Everest-Phillip and Sandall (2009) the public perception of government accountability can influence tax morale and voluntary compliance. Both authors argued that through payment of taxes the government is able to meet its obligations to the people.
CHAPTER THREE
METHODOLOGY
Research Design
A survey research design was employed which involves an observation of the operations and activities of Small and Medium Enterprises in Ilorin Kwara State, Nigeria as it relates to voluntary tax compliance.
Population of the study
The target population for this study comprised of the owners of Small and Medium Enterprises in Nigeria which are chargeable to tax under the Personal Income Tax Act in Nigeria, three (3) local governments were selected Ilorin Kwara State. The local governments selected are Ilorin East Local Government, Ilorin South Local Government and Ilorin West Local Government. This selection was based on my belief that the economic circumstances of local governments in Nigeria are not significantly different; therefore, selecting any other local government is as good as the three local governments selected for this study. Furthermore, the three local governments were purposefully selected because most of the SMEs are predominantly spread across these local governments.
CHAPTER FOUR
DATA ANALYSIS AND RESULTS
Introduction
This section presents the data, the analysis and the results of the analysis. Out of the one hundred and fifty (150) copies of the questionnaire distributed, one hundred and twenty eight (128) mwere received while the remaining twenty-two (22) were either not responded to or inadequately completed,This constitutes about 85% response rate. The responses from the one hundred and twenty eight (128) effective respondents were therefore analysed.
CHAPTER FIVE
SUMMARY,CONCLUSION AND RECOMMENDATION
Summary
The study covered the interactions between tax compliance and predictor variables (tax morale, trust in government and cultural norms). the study examine the impact of tax morale on voluntary tax compliance in Nigeria among small and medium scale business owners. Survey design was used with questionnaire as the major tool of data collection. Copies of questionnaire were administered to one hundred and fifty (150) respondents and 83% of these respondents returned their questionnaires.
The result showed that tax morale impacts positively on voluntary tax compliance among small and medium enterprises (SMEs) in Ilorin metropolis. From the computation using the Pearson moment correlation and multiple linear regressions, it can be deduced that tax morale and trust in government have a positive impact on voluntary tax compliance among SMEs in Ilorin metropolis.
Conclusion
From the research findings, it can be summarized that tax morale has a significant effect on tax compliance. Torgler (2002) and Fred (203) also found significant correlations between tax compliance and tax morale in their research findings. It can also be deduced from the findings that trust in government also has a significant effect on tax compliance. Torgler (2004) and Levi (1998) also found that trust in government has an effect on tax compliance in their research findings. The study also found out that cultural norm has no effect on tax compliance. Empirical findings indicated that cultural norms have no significant effect on tax compliance. On the other hand, there is a significant positive effect of tax morale and trust in government on tax compliance.
Putting into consideration that a society is heterogeneous, a person’s type plays an important role in determining which laws are followed and which are not. In general tax payers are more inclined to comply with the laws if the relationship between the tax paid and the performed government services is found to be equitable. Thus, government and tax administration’s strategy aimed at creating confidence in their credibility and their capacity is rewarded with higher tax morale. This study can be seen as one that incorporates non-economic factors into the economic analysis of voluntary tax compliance. The study reveals that tax morale and trust in government have effect on voluntary tax compliance.
Recommendation
Therefore, it is recommended that the government should pay close attention to factors that would boost public morale on tax payment since it readily influences tax compliance. Nonetheless, the study reveals that cultural norm does not have any significant impact on tax compliance.
From the foregoing, the impact analysis of tax policy and the performance of small and medium scale enterprises in Nigerian economy, the following recommendations were itemized for government immediate actions:
- For Small and Medium Enterprises to get better equipped, have enough funds and survive in a competitive market, the rate of tax levied on the small business should be lower.
- The rate of tax incentives and exemptions which serve as catalysts and bait for attracting investors should be highly increased by the three tiers of government in Nigeria.
- Government should promulgate a policy that will help to avoid illegal taxes, such as community levy, boys or youth levy and as well as association or union levy.
- Any policy that will push for enough funds and other activities that will lead to Small and Medium Enterprises growth is good for promulgation
- There should be consistency in tax policy that will cushion the effects of factors that militate against the expansion of SMEs in relation to their ability to pay taxes by government.
- The tax policy should be designed in a manner that it will encourage those whoare potential tax payers, voluntary compliance and ultimately leads to expansion ofexisting business interests of the SMEs in Nigeria
REFERENCES
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- Akpo, U. (2009). The people as government: The importance of tax payment. Akwa Ibom State Revenue Summit. Uyo: Akwa Ibom State Internal Revenue Service.
- Azeez, A; (2009) Contesting “Good Governance” in Nigeria: Legitimacy and Accountability Perspectives.Journal of Social Science, 21(3): 217-224.
- Bobek, D. D., & Hatfield, R. C. (2003). An investigation of the theory of planned behaviour and the role of moral obligation in tax compliance. Behavioural Research inAccounting , 15, 13-38
- Everest-Phillip, M., & Sandall, R. (2009). Linking business tax reform with governance:How to measure sucess. Working paper, Investment Climate Department, World BankGroup
