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This study was carried out to investigate Economic impact of taxation on small and medium scale enterprise. To achieve this objective, four research questions and two research hypotheses were formulated to guide the study. The data was collected from primary sources. The primary data were collected with the help of a well-structured questionnaire of two sections administered to staff and management of selected small and medium scale enterprises in Uyo Metropolis. The collected data were analyzed with tables and simple percentages to analyze the research questions chi-square statistical tools were used to test research hypotheses. The study reveals that there is a relationship between Economic impact of taxation on small and medium scale enterprise. The study concluded with some recommendations that taxes should be collected in relation to the sizes and profit of SMEs considering all other factors that can constrain the progress of such SMEs as there is a relationship between SMEs sizes and their ability to pay.
1.1 Background to the Study
The desire to build a civilized country with a strong and sound economy is the desire of every Country, including Nigeria. Tax payment is the demonstration of such a desire, although some income earners see it as a means of exploitation by the government. Tax payment is a voluntarily contribution imposed by the Government on personal income earners, companies, investors, exporters, importers etc. revenue realized from taxation is a major source of revenue to the Government of Nigeria, and as such is an important tool used in the development of Nigeria and her economy. A country’s tax policies and systems are greatly related with business ventures in that country. An economy that enacts favorable and progressive tax laws and policies will definitely breed successful and finance-healthy business organizations. Once businesses flourish, the economy flourishes as well, as there is no quicker way of stirring the affairs of an economy without the help of organizations that move services, goods, money and investments from those with surplus to those with deficit; those with marketable ideas/output to those who need these ideas and products. In essence, businesses and tax policies greatly depend on one another for survival. If one is greatly affected, the other follows suite.
The Nigerian Tax System has undergone significant changes in recent times. With the help of various studies and research done by tax experts, tax laws are being reviewed with the aim of repelling obsolete provisions and simplifying the main ones. Under current Nigerian law, taxation is enforced by the 3 tiers of Government, i.e. Federal, State, and Local Government with each having its sphere clearly spelt out in the Taxes and Levies (approved list for Collection) Small businesses are generally recognized as important drivers of economic success. They are a key ingredient in the ecology of firms in a healthy economy, as job creators, sales generators and a source of tax/fiscal revenue. In Nigeria the importance of small business as a creator of jobs, particularly for those with a low skills level, is widely recognized. Small, medium and micro-enterprises (SMEs) contribute 36.1% of the country’s gross domestic product (GDP) and employ 68.2% of the workforce in the private sector. In the agriculture, construction and retail sectors, SMMEs employ more than 80% of the total workforce. Over the last few years, the growth in employment by SMMEs has exceeded the growth in their contribution to GDP, highlighting the job creation potential of this sector of the economy. Regulations and red tape are reported as one of the constraints to the expansion of businesses both in Nigeria and internationally. International research in this field shows that tax regulatory compliance costs are a significant portion of the total regulatory cost. Several other patterns emerged from the various local and international studies performed, among the most important being that tax compliance costs comprise a much larger proportion of total compliance costs for smaller firms. Furthermore, various research has suggested that any effective approach to assist small business requires both policy and administration model adjustments in order to be effective. The 2005 year, therefore, saw the beginning of a process of structural change that was intended to build a positive tax compliance climate in Nigeria. This report is focused on the survey of the compliance experience of professional accountants and bookkeepers (referred to as tax practitioner for the purposes of this document) in respect of their small business clients in Nigeria. It will be complemented by two related surveys, one of small businesses that are registered with the Federal Inland Revenue Service (FIRS), regarding their time and cost requirements for tax compliance, and one of informal businesses, regarding their perceptions about tax compliance.
1.2 Statement of the Problem
Small and medium enterprises (Small businesses) 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). 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 Small Businesses die before their 5th anniversary. Among the factors responsible for these untimely close-ups are tax related issues, ranging from multiple taxations to enormous tax burdens etc. 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 Small businesses and the most effective ways to administer them. The importance of Small businesses 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 conducive environment is created for these Small businesses to grow through proper regulation, the SME 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. Tax burden is a major problem in Nigeria as many business organizations are not favored by the tax systems and policies in place. Some businesses are already collapsing; while majority are still struggling to meet up with high tax rates to ensure their businesses still exist. According to a study conducted by Bateman (2007), it was reported in a survey that 90% of business owners admitted that taxes were a huge constraint to their businesses, as they claim taxes are high and do not allow new businesses to cover up initial cost.
1.3 Objectives of the Research
The main objective of this study is to examine the economic impact of taxation on small and medium scale enterprise. The specific objectives are as follows:
a. To examine how SMEs, respond to tax.
b. To find out whether SMEs ability to pay Tax depends on its size.
c. To evaluate the extent of the influence of tax on SMEs performance.
d. To identify challenges faced by SMEs noncompliance with tax
1.4 Research Questions
In order to achieve the objectives stated above, the following research questions were used as a guide in achieving the objectives of this research:
a. How does SMEs, respond to tax?
b. Is SMEs ability to pay Tax dependent on its size?
c. To what extent is the influence of tax on SMEs performance?
d. What are the challenges faced by SMEs noncompliance with tax?
1.5 Research Hypothesis
Hypothesis is a proportion that is stated in a testable form and that predicts a particular relationship between two or more variable. By test, we mean either to confirm it or to prove it wrong (Baily, 1987).
The hypothesis in this case are:
H01: There is no significant relationship between SMEs size and its ability to pay tax.
H02: There is no significant influence of taxation on SMEs performance.
1.6 Significance of the Study
This study gives a clear insight into the various ways in which tax policies in Nigeria can be executed efficiently to still favor small businesses and how some taxation policies in Nigeria can be properly tackled. The study also gives a clear insight into the various causes of why small businesses fail in Nigeria as well as the challenges of the tax policies in Nigeria. The findings and recommendations of the researcher would help in building a strong and better tax policy system in Nigeria, if taken seriously by government and the general public. The challenges of taxation in Nigeria are outlined in-order for drastic measures to be taken to tackle these challenges and meet the prospects of the general public so that revenue from tax policy to the government can be increased.
1.7 Scope of the Study
This research focuses mainly on the impact of Nigerian tax policies on the economy and small scale businesses in Nigeria. The study only torches on the challenges tax policies in Nigeria and how it can affect self-employed business men and women, traders, and other forms of sole proprietorship businesses. Based on the findings of this study other possible researchable areas may include studies on the various challenges of other forms of tax such as the Value Added Tax (VAT), Capital gains tax, Import and Export duties tax. Etc. Further research can also be done on curbing tax evasion in Nigeria.
1.8 Limitation of the study
The only limitation faced by the researcher in the course of carrying out this study was the delay in getting data from the various respondents. Most respondents were reluctant in filling questionnaires administered to them due to their busy schedules and nature of their work. The researcher found it difficult to collect responses from the various respondents, and this almost hampered the success of this study.
1.9 Organization of the study
This research was structured into five chapters. Chapter one is the introduction. Chapter two is the review of related literature while research methodology was presented in chapter three. In the fourth chapter, the data collected were presented, analyzed and interpreted. The work is summarized, concluded and recommendations made in chapter five.
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