CHAPTER ONE

INTRODUCTION

1.1. BACKGROUND TO THE STUDY

Small businesses are seen as one key source of economic growth. For this reason,myriadeconomicpolicieshavebeendevotedtopromotetheeconomic activity within small businesses (Buss 2001).

Small and medium enterprises (SMEs) 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). 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 enterprises cannot be overstated.

This SMEs are seen as a source of employment, competition, economic dynamism, and innovation which stimulate the entrepreneurial spirit and the diffusion of skills. Because they enjoy a wider geographical presence than big companies, SMEs also contribute to better income distribution. Over the years, small and medium enterprises have been an avenue for job creation and the empowerment of Nigeria’s citizens providing about 50% of all jobs in Nigeria and 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.

The mode by which SME development and economic growth can be effectively, efficiently, stimulated and developed is very demanding. As a result of this, the government charges less tax and gives tax holidays in order to encourage investments and economic activities of these small scale entrepreneur in those areas which help to improve production capabilities, activate economic growth as well as the allocation of resources in a socially desirable manner.

To the small scale enterprises, the general feature of agood  tax system (tax base rate) is more important than the tax incentives in many developing countries. The tax laws are not clearly written and may be subject to frequent review which makes long-term planning difficult for businesses and add to the perceived risks of undertaking major capital intensive projects.

Taxation is a process or means through which communities or groups are made to contribute a part of their income for the sole purpose of societal administration while tax, is a compulsory levy levied on the people at a given place for the sole purpose of government revenue for government expenditure.

Tax incentive itself, is the use of government spending and tax policies to influence the level of national income. This measure encourages the springing up and gradual growth of new enterprises by the reduction of profit tax, which in turn encourages production, influences the production level and curbs unemployment. So, the government should provide such tax incentives in order to boost development which will bring about an increase in employment opportunities and also cause an improvement in the economy, tax incentives according to Kuewumi (1996) encompass all the measures adopted by government to motive tax payers to respond favorably to their tax obligations. It includes adjustments to tax policy aimed at lessening the effects of taxation on an industry, a group of persons or the provision of certain services. Such measures may subsume the adoption of benign low tax rate; the effective dissemination of fiscal information by tax authority; or the non-imposition of tax at all.

Amadiegwu (2008:74), a tax expert wrote that the objective of tax incentive is that by borrowing rather than taxing, the government has a better chance of expanding investment spending which is essential in enlarging production possibilities and attaining a sustainable improvement in the standard of living of the people.

Dotun and Sanni (2009:265), in their “Nigerian companies’ taxation” stated that these incentives can be targeted on the low income earners, local and developing industries, farmers, which will increase their savings and is necessary for higher investment. Tax incentives create employment opportunities for the people, helps to fight economic depression and inflation thereby increasing the equitable distribution of income and wealth.

1.2. STATEMENT OF PROBLEM

The mortality rate of these small scale enterprises is very high. According to the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN) Nigeria, 80% of SMES 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 developing countries like Nigeria, there is an urgent need to provide the required enabling environment for the development of SMEs, so that they could adequately play the role expected of them in economic transformation. Such role includes mobilization of domestic savings for investment, appreciable contribution to gross domestic product, increased harnessing of local raw materials, employment generation, and significant contribution of poverty reduction efforts through sustainable livelihoods and enhancement in personnel income, technological development and export diversification (Smatrakalev, 2006), however this is not the case because taxes which are levied for regulating the investment behavior of the households are suffocating the entrepreneur growth and development, and this also serves as a major constraint to the development of the SMEs they are out to cater for.

Various people believes that a tax incentive encourages economic growth and industrial development of SMEs while another believes that it reduces revenue accruable to the government, As a result of this, it does not stimulate the economy. The poverty alleviation programme aimed at reducing the rate of poverty among the masses, was introduced. This programme covered the provision of jobs for able and unemployed youths, provision of loans for small and medium scale enterprises at a minimum lending rate, yet there is no gainsaying that this measures and policies taken so far, yield positive development to the economy.

Finally, most tax experts, consultants, Individuals and economic analysts ignored or criticized the incentive for the following reasons:

1. That the impacts of the tax incentives are not effective in the economy.
2. That the exemption privilege not granted to all SMES places some enterprises at a competitive advantage over others.
3. That the incentive granted are not adequate for the developmental and industrial growth of SMEs.
4. Most entrepreneurs, firms and industries lack the awareness of the incentive.

1.3. OBJECTIVES OF THE STUDY

Tax incentive scheme is an economic policy which exists among many other competing alternatives. The scheme may be an inducement towards rightful investment, securing proposal on private investors lay behind, it then follows that if the scheme is a pale shadow for pilling stock of profitable that the benefits expected from these incentives should be able to justify the cost.

In the light of the above, the study shall seeks to examine the extent to which tax incentives affects the growth and development of small scale entrepreneurs.

Other specific objective includes:

1. Establish the relationship between tax policy and the growth of SMEs in Nigeria
2. Assess the various incentives available to small scale entrepreneur.
3. To examine the relationship between tax incentives and SMEs survival
4. Ascertain how tax incentives stimulate individuals to establish new enterprises which will boost industrial development and economic growth
5. Determine how tax incentives affect productivity level and growth of new small scale enterprises.
6. Assess the economic implication of granting tax incentives to SMEs.

1.5 SIGNIFICANCE OF THE STUDY

Tax incentive is a strong fiscal measure or policy which can stimulate investment and savings leading to capital information. This capital acquisition can be used productively in economic and industrial development of companies and individual can use them effectively. In deciding if these incentives can stimulate the companies and individuals to invest in the economy. One basic fact is this whether the company individual concern decided to go into business because of tax incentives offered.

This study will contribute immensely to existing literature on benefits of tax incentives to small scale enterprises, and as a result of the creation of more SMES and with the expansion of the existing ones, the standard of living of the populace will be positively affected.

It will also broaden the knowledge of small taxpayers on various types of tax incentives available to them, and how the various tax incentive scheme leading to economic diversification result in increasing urban and rural development.

The study is also important as it will help ascertain if fiscal authority is keeping track on tax mobilization with GDP growth and to identify those taxes which are income elastic or otherwise in order to raise overall tax revenue.

Finally this study will be of great significance to government, tax officials, tax authority, small scale entrepreneur, investors, corporate organizations, schools and students who are regular taxpayers, it will serve as a reference point for student who would like to make future research or contribute to the existing literature.

1.6. SCOPE OF THE STUDY

The research study will be limited to the use of questionnaires and oral interviews when appropriate and to a review of related literature (review of relevant books and journals) that could provide an insight into the effect of tax incentives on industrial growth and development of SMEs.

Case studies will be restricted to seventy (70) small business owners who are taxpayers in Ikeja Metropolis, Lagos State.

The State is situated in southwestern region, and it is selected for this research study because it is part of the major industrial areas in the country.

1.7. LIMITATION OF THE STUDY

The constraints of this study may be attributed to:

1. Inherent limitations of the analytical method of gathering information such as the un-cooperative attitude of the respondents.
2. Irrelevant or unreliable information obtained from oral interviews. This is based on the degree of the respondent’s truthfulness in answering the question’s raised during oral interviews. Some of the respondents thought that the research work is meant to expose their enterprise and thus, were not ready to give relevant information.
3. The writer was also faced with time constraint which involved appropriating her time between writing the project work and performing her academic function as well as meeting her social needs.
4. Also encountered was the problem of getting an exact from the school authorities for the purpose of the research work.

1.8. DEFINITION OF TERMS

1. INCENTIVE:An incentive is a form of tax relief, inform of a reduction in or an exemption from the tax which someone, a firm, or an industry would normally be liable. 
2. TAX INCENTIVES-These are reliefs granted to tax payers or industries in form of an off-set from the total profit before tax liability is determined. In case of industries and firms, tax incentives are given inform of tax holidays which is established by the legislative authorities on such payment of taxes. 
3. INVESTMENT ALLOWANCE– Investment allowance is given as a tax incentive to a certain category of companies for incurring some qualifying capital expenditure on plant and equipment used for the business at the rate of 10% on cost.
4. RURAL INVESTMENT ALLOWANCE– This is granted to all capital expenditures incurred by companies established in rural areas in respect of providing a lacking infrastructural facility.
5. TAX HOLIDAYS: this is a temporary exemption of a new firms or investment from certain specified taxes, typically corporate income tax.
6. CAPITAL ALLOWANCE– This is granted by the act on a qualifying capital expenditure incurred wholly, exclusively, for the purpose of trade or business. 
7. TAX:  is a compulsory levy payable by individual economic units or corporate bodies to government without any direct quid pro quo from the government.
8. 8.  SMALL SCALE BUSINESS: It is defined as any business undertaken, owned, managed and controlled by not more than two entrepreneurs, has no more than twenty employees, has no definite organizational structure (i.e all employees report to the owners) and has relatively small shares of its market.
9. BUSINESS GROWTH: this refers to the increase in the size, value and financial performance of a firm or company.