1.1 BACKGROUND TO THE STUDY
Small businesses are seen as one key source of economic growth. For this reason, myriad economic policies have been devoted to promote the economic 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 a good 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 taxation 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