Research Journal of Finance and Accounting www.iiste.

org

ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online)

Vol 2, No 2, 2011

Tax Policy and the Growth of SMEs: Implications for the Nigerian
Economy
Stephen Aanu Ojeka (Corresponding Author)
Covenant University, Nigeria
Telephone: 07039528774, 08032068000, E-mail: [email protected]

Abstract

Small and Medium Enterprises play a very important role in development of the Nigerian
economy. Making up about 97% of the entire economy, they serve as a source of employment
generation, innovation, competition, economic dynamism which ultimately lead to poverty
alleviation and national growth. Tax policy is one of the factors that constitute the SMEs’
economic environment. This research work tries to establish if any relationship exists between
the growth of SMEs and the tax policy environment in which they operate in Nigeria.
Questionnaires were distributed to SMEs in Zaria, North Central, Nigeria and non probability
judgmental sampling method was employed. The hypothesis was tested using Spearman’s Rank
Correlation. It was found out that from most SMEs surveyed, they were faced with the problem
of high tax rates, multiple taxation, complex tax regulations and lack of proper enlightenment or
education about tax related issues. Although there was a general perception that tax is an
important source of fund for development of the economy and provision of social services, the
study revealed a significant negative relationship between taxes and the business’ ability to
sustain itself and to expand. In order to obtain a vibrant and flourishing SME sector, the tax
policy needs to be appropriate such that it will neither be an encumbrance to the SMEs nor
discourage voluntary compliance. A suggested solution is by increasing tax incentives through
reducing tax rates and increasing tax authorities’ support services towards small and medium
enterprises.
Key words: SMEs, Tax Policy, Nigerian Economy
1.0 Introduction
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. Panitchpakdi (2006) sees SMEs 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.
Research Journal of Finance and Accounting www.iiste.org

ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online)

Vol 2, No 2, 2011

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 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 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 SMEs and the most effective ways to administer them. The
importance of SMEs 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 SMEs 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.
However, Holban (2007) posited that taxation can contribute to development and to welfare
through three sources; It must be able to generate sufficient funds for financing public services
and social transfers at a high level of quality, it should offer incentive for more employment and
for an efficient and lasting use of natural resources, finally it should be able to reallocate income.
But in the case of SMEs, tax must be done in such a way that puts their income and need for
survival into consideration. It is expedient that enough profit is allowed them for the purpose of
expanding their businesses. The tax policy must be one that will not encourage SMEs to remain
in the informal sector or to evade or avoid tax payments. Moreso, many small firms in Africa,
including Nigeria, choose to remain in the informal sector because the perceived benefits
outweigh the perceived costs. Firms rarely see their tax contributions at work and the compliance
costs are high, thus discouraging compliance. The government is also discouraged from
collecting taxes from small firms, because the cost of monitoring and collecting tax from small
businesses by revenue authorities, whose resources are usually scarce, sometime outweighs the
revenues generated by small businesses (Stern and Barbour 2005).
The focus of this research therefore is to determine the importance of taxes to the Nigerian
economy, to establish the relationship between tax policy and the growth of SMEs in Nigeria and
to evaluate the factors that encourage non-compliance with tax obligation by SMEs. The paper is
divided as follows: following this section is section 2 which looks at the different literatures on
tax and SMEs growth, section 3 discusses the methodology, section 4 looks at the analysis of
hypotheses and lastly section 5 concludes the paper.

Statement of Hypothesis
H0: There is no significant relationship between tax and the SME’s ability to expand

2.0 Literature Review

Introduction
Research Journal of Finance and Accounting www.iiste.org

ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online)

Vol 2, No 2, 2011

Over the years, Nigeria has depended on oil for its major income and foreign exchange. Oil
accounts for about 80 percent of federal government revenues, and 95 percent of foreign
exchange earnings. The National Centre for Economic Management and Administration
(NCEMA) reports that Nigeria, with a population of about 120 million, is Africa’s most
populous country and the continent’s third largest economy yet it still remains one of the poorest
oil producing countries. With a continuously declining per capita income, comparatively
unfavorable social indicators, dynamic world economy and the fact that countries are looking
into alternative sources of energy it is time to begin to look into alternative sources of income for
sustenance in the long run when the demand for oil will dwindle to nothing. Even with the
present rates of petroleum products, Nigeria’s GDP is below ideal with the SMEs contributing
therefore it would not hurt to diversify the economy even before the demand for petroleum
products finally diminishes. This means it is time to begin to give more attention to the other
sectors of the economy.
This translates into looking at non-oil based sectors in Nigeria such as agriculture,
manufacturing, commerce and tourism. These industries are primarily made up of SMEs as such
it goes without saying that SMEs are important to the Nigerian economy. With over 120 million
people, productive farmlands, rich variety of minerals deposits, Nigeria should be a haven for
Small and Medium Industries. The human and natural resources base is a significant feature that
gives the country a special status in Africa. For governments, however, large companies are a
more attractive, more clear-cut and less complex set than SMEs. In designing public policies,
particularly tax policies, governments have usually targeted their strategies to large companies
(Holban, 2007), there is therefore a need to devise methods to encourage the growth and
development of these enterprises to ensure that they reach their full potential. Subsequently, a
favorable business and regulatory environment needs to be created for them to thrive. For the
purpose of this study, the focus will be on supporting SMEs growth through tax policy. Most
large companies have their roots in small and medium enterprises; they started out as SMEs
before expanding. This means the future large corporations are the SMEs present today that
should be nurtured to ensure their growth. Furthermore, they are generally perceived to be the
seedbed for indigenous entrepreneurship and generate all the many small investments, which
would otherwise not have taken place (Aryeetey & Ahene, 2004). Therefore, Nigeria needs to
further the development of its private sector. It can be done by creating an environment favorable
to the growth of SMEs, strengthening the factors that lead to business success, and addressing
the problems threatening the existence and advancement of small and medium enterprises (Chu,
Kara & Benzing, 2008)
With the dismantling of trade and other barriers, the world has been transformed into a global
village. Consequently, SMEs in developing countries are struggling to survive under intense
competitive environments both domestic and international. 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). It is for this reason that an ideal tax policy needs to be adopted in order to
ensure economic growth and proper utilization of resources. However this is not the case because
taxes which are levied for regulating the investment behavior of the households and not for
suffocating any entrepreneur initiative seem to be a major constraint to the development of the
SMEs they are out to cater for.
Research Journal of Finance and Accounting www.iiste.org

ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online)

Vol 2, No 2, 2011

2.1 Definition of SMEs

The Monetary Policy Circular No. 22 of 1988 of the Central Bank of Nigeria defined small-scale
enterprises as enterprises whose annual turnover was not more than N500, 000. In the 1990
budget, the Federal Government of Nigeria defined small-scale enterprises for purposes of
commercial bank loans as those with an annual turnover not exceeding N500,000, and for
Merchant Bank Loans, those enterprises with capital investments not exceeding 2 million naira
(excluding cost of land) or a maximum of N 5 million. The National Economic Reconstruction
Fund (NERFUND) put the ceiling for small-scale industries at N10 million. Section 37b(2) of
the Companies and Allied Matters Decree of 1990 defines a small company as one with an
annual turnover of not more than N 2 million and net asset value of not more than 1 million
naira. (Ekpenyong & Nyong, 1992). The Small and Medium Enterprise Equity Investment
Scheme (SMEEIS) sees the SME as “any enterprise with a maximum asset base of N500 million
(excluding land and working capital), and with no lower or upper limit of staff”. However, for
tax purposes, Section 40(6) of the Companies Income Tax Act Cap C21 LFN 2004 alludes to
companies with a turnover of N1 million and below operating in the manufacturing, agricultural
production, solid mineral mining, and export trade sectors as SMEs; While subsection 8 states
that as from 1988 all companies engaged in trade or business with a turnover of N500,000.00 and
below qualify as small and medium enterprises. (Iwuji, n.d)

2.2 Problems Faced SMEs

There are a lot of problems that bedevil SMEs and stunt their growth. Although there are some
problems peculiar to a particular country, the challenges faced by SMEs in different countries
and geopolitical divisions are basically the same. For instance, a survey of Turkish SMEs by
Organization for Economic Co-operation and Development (OECD) in 2004 showed that they
were suffering the consequences of policy inconsistency, poor access to finance, insufficient
know-how and low level of technology, and so many others. The same problems were also
registered by other authors concerning other regions like the Philippines, Malaysia and other
European states and of course in Sub-Saharan Africa-Nigeria inclusive as shown by different
authors on the issue. Uzor (2004) believes that the constraints faced by SMEs in developing
countries are not only accentuated with ineffective policy design, but also by market failures in
the region. Their lack information technology and knowledge of automation is gradually being
reduced given that they serve as contractors for larger firms particularly the foreign
manufacturing firms.
A major difficulty faced by SMEs is that of lack of access to short and long term capital. A
publication of the Weekly Trust of Saturday, January 22, 2011 recognizes the fact that collateral-
based financing has become increasingly difficult for SMEs, whether as existing businesses, in
their expansion states or as startups hence more SMEs are resorting to viability lending in which
case they obtain loans based on the viability of the business and health of cash flow. Banks are
usually reluctant to lend to SMEs and this is because of problems such as the SMEs’ inability to
meet the bank’s lending requirements, promoters’ low education, management and
entrepreneurial skills and poor and unreliable financial records which makes financial review
difficult. (Aderemi, 2003). There is also the problem of unsound accounting system and lack of
full financial disclosure (Jan, n.d.). Areetey& Ahene, (2004) buttressed this assertion by listing
lack of access to land, utility installation and services, and import procedures as constraints to
SME growth Summarily, these problems make SMEs a “high-risk” venture. The above named
reasons are in and of themselves problems that impede SME growth because not only do they
become obstacles in accessing financing, they are capable of hindering growth on their own.
Moreso, in Nigeria, the problems faced by SMEs as posited by Oboh (2002); Okpara (2000);
Wale-Awe (2000) and Chu, Kara & Benzing, (2008) include astronomically high operating
Research Journal of Finance and Accounting www.iiste.org

ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online)

Vol 2, No 2, 2011

costs; lack of transparency and corruption; and the lack of interest and lasting support for the
SMEs sector by government authorities, dilapidated state of Infrastructural facilities, unreliable
employees and Weak economy, unsafe location, undependable electricity supply are common
phenomenon.
2.3 Economic Advantages of Small and Medium Enterprises in Nigeria
SMEs have been an important tool of economic development for Nigeria. The future of any
growing economy such as Nigeria’s depends on the entrepreneurial energy of vibrant SMEs
because a lot of large businesses start out as SMEs. Many authors believe that they are the
starting point of development in the economy towards industrialization. Udechukwu (2003) for
example sees the SME sector as a very important sector that will enhance the contributions of the
private sector and provide the critical building blocks for industrialization and sustainable
economic growth. SMEs broaden the base of participation in society, decentralize economic
power and give people a stake in the society’s future (Williams, 2006). SMEs have also been
recognized as a channel for improving the efficiency of domestic markets and making productive
use of scarce resources, and thus facilitating long-term economic growth in poor countries
(Aryeetey & Ahene, 2004). Given that a large proportion of Nigeria’s population relies either
directly or indirectly on small and medium enterprises for survival, their importance cannot be
overemphasized.
A major contribution made by SMEs is in the area of employment (Yaobin, 2007) Small and
medium-sized enterprises are a key source of new jobs, innovation, economic dynamism and
greater social inclusion in the European Union. Other important they play an important role in
secondary labour markets (that is, they offer a high amount of employment in casual, part-time,
low training, low-skilled jobs); they are an invaluable source of ‘entrepreneurship’, employment
growth. Findings from a study carried out by Chu, Kara & Benzing (2008) suggest that Nigerians
consider entrepreneurship an avenue leading to job security and improving their livelihood. They
also regard business ownership as a means of controlling their destiny and deriving self-
satisfaction. Being more labour intensive, SME expansion is more likely to boost employment
than large enterprises where expansion means higher degree of automation and machining.
Hence, SME subsidization will lead to poverty alleviation (Beck, Demirguc-Kunt & Levine,
2005)
2.4 Theory of Taxation
According to Eftekhari, (2009) taxation has always been an issue for the government and
taxpayers alike from the early years of civilization. The issue of taxation has generated a lot of
controversy and severe political conflicts over time. According to its importance, several
economic theories have been proposed to run an effective system. Taxes are generally classified
under three different theories as given: ability to pay principle, benefit approach and equal
distribution principle. However, in this paper we shall be considering ability to pay principle.

2.4.1 Ability-to-Pay Principle

As the name suggests, it says that the taxation should be levied according to an individual’s
ability to pay. It says that public expenditure should come from “him that hath” instead of “him
that hath not”. The principle originated from the sixteenth century, the ability-to-pay principle
was scientifically extended by the Swiss philosopher Jean Jacques Rousseau (1712-1778), the
French political economist Jean-Baptiste Say (1767-1832) and the English economist John Stuart
Mill (1806-1873). This is indeed the basis of ‘progressive tax,’ as the tax rate increases by the
increase of the taxable amount. This principle is indeed the most equitable tax system, and has
been widely used in industrialized economics. The usual and most supported justification of
ability to pay is on grounds of sacrifice. The payment of taxes is viewed as a deprivation to the
Research Journal of Finance and Accounting www.iiste.org

ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online)

Vol 2, No 2, 2011

taxpayer because he surrendered money to the government which he would have used for his
own personal use. However, there is no solid approach for the measurement of the equity of
sacrifice in this theory, as it can be measured in absolute, proportional or marginal terms. Thus,
equal sacrifice can be measured as (i) each taxpayer surrenders the same absolute degree of
utility that s/he obtains from her/his income, or (ii) each sacrifices the same proportion of utility
s/he obtains from her/his income, or (iii) each gives up the same utility for the last unit of
income; respectively.

2.5 Tax Policy and the Growth of SMEs

According to Tomlin (2008), economists argue that the resources smaller companies direct
towards tax compliance are resources that could otherwise be used for reinvestment, facilitating
future growth. Hence, there is a belief that taxes and a complex tax system put disproportionate
pressure on smaller businesses. Small taxpayers under the regular system of taxation are
discriminated against, since the compliance requirements, cost of compliance and tax rate are the
same for both small and large enterprises. Reducing the compliance costs and tax rate increases
the small enterprises profit margin. It also increases the Government’s tax revenue, since the
simplified provisions for a micro enterprise historically reduce the size of the shadow economy
and the number of non-complying registered taxpayers (Vasak, 2008). Furthermore, SMEs
usually have to operate in an overbearing regulatory environment with the plethora of regulatory
agencies, multiple taxes, cumbersome importation procedure and high port charges that
constantly exert serious burden on their operations. Many SMEs have to deal with myriad of
agencies at great cost. As stated earlier they are heterogeneous and these differences in size and
structure may in turn carry differing obligations for record-keeping that affect the costs to the
enterprises of complying with (and to the revenue authorities of administering) alternative
possible tax obligations. Public corporations, for example, commonly have stronger accounting
requirements than do sole proprietorships, and enterprises with employees may be subject to the
full panoply of requirements associated with withholding labor income taxes and social
contributions (International Tax Dialogue 2007).
An overly complex regulatory system and tax regime or one opaque in its administration and
enforcement makes tax compliance unduly burdensome and often have a distortionary effect on
the development of SMEs as they are tempted to morph into forms that offer a lower tax burden
or no tax burden at all (Masato, 2009) and this results in a tax system that imposes high expenses
on the society. A poorly executed tax system also leads to low efficiency, high collection
charges, waste of time for taxpayers and the staff, and the low amounts of received taxes and the
deviation of optimum allocation of resources (Farzbod, 2000). Existing empirical evidence
clearly indicates that small and medium sized businesses are affected disproportionately by these
costs: when scaled by sales or assets, the compliance costs of SMEs are higher than for large
businesses (Weichenrieder, 2007). Among the factors militating against SME tax compliance
with are: high tax rates, Low efficiency, high collection charges, waste of time for taxpayers and
the staff, and the low amounts of received taxes and the deviation of optimum allocation of
resources (Farzbod, 2000). Others according to Yaobin, (2007) are double taxation, no
professional tax consultancy, weak tax planning, high taxation cost.

2.6 Policy Measures that will Encourage SMEs Growth

Although there is certain policy measures geared towards SME growth in Nigeria, the support
needs to be increased, standardized and systematic. Iwuji (n.d) believes that it is the role of the
government to provide and enabling environment and social services that support businesses and
persons. This means enhancing the investment climate in Nigeria for increased economic growth
Research Journal of Finance and Accounting www.iiste.org

ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online)

Vol 2, No 2, 2011

and subsequent tax contribution from all citizens which is necessary because a good number of
SMEs operate in the informal economy due to the fact that they deem the tax environment within
which they operate unfavourable. These SMEs constitute untapped revenue potential and an
uneven playing field in many countries (International Tax Dialogue, 2007) as such they need to
be captured by the tax net. The legislation is a necessary regulator for protection of the business
environment and security of the economic agents, for establishment of the necessary social
security regulations but at the same time it hampers the business with additional expenditures
and administrative obstacles, which place in different positions the SME. The big companies
have more choices possibilities. They can either share part of the staff or hire people to deal only
with studying the legal requirements and complying with the new regulations, or contract some
personal service firm (like E&Y, Deloitte and Touché, Price Waterhouse etc) to deal with their
tax compliance, planning etc. For SME this is a great expense out of their abilities (Smatrakalev,
2006). Shahroodi, (2010) believes that for a tax system to be efficient, the tax policy needs to be
designed such that the tax rates are appropriate and rational, the exemptions are lower in amount,
the tax collection organization are more efficient, the tax burden of the indigent people should be
lighter and the fight against corruption and tax evasion should be much more intense. Tax
policies can be designed in such a way that they do not only directly affect SMEs but also
indirectly push for their growth for example the practice in China where tax policy has been
designed to encourage SME financing by granting exemptions from business tax for financial
corporations that provide guarantee for loans to SMEs and granting tax deductions to market
entities and venture capitalists that invest in high-tech SMEs the tune of 70% of the investment
value.
Another way is by designing tax policies that encourage human capital training. (Yaobin, 2007)
declared that special tax regimes for SMEs may be appropriate policy instruments for
minimizing the cost of collection. It is important to note that the awareness of the dangers of
inadequate attention to the taxation of SMEs has grown. It can lead, for example, to distortions
of competition as a result of uneven tax enforcement, with incentives created to limit growth and
to avoid tax through artificial splitting of enterprises. Not least, voluntary compliance by larger
enterprises themselves, and by wage earners, may be undermined by the (correct) perception that
their smaller counterparts, or better-off neighbors, are getting away with poorer compliance.
(International Tax Dialogue, 2007) Hence government intervention will help maintain balance
while helping countries exploit the social benefits from greater competition and
entrepreneurship. Furthermore, policy incentives such as tax rebate for SMEs that put effort on
local sourcing of raw materials, serious in adding value to commodities for exports and other
business ethics, should be employed by government. Similarly, government could increase
funding for the development of the sub-sector through direct budgetary allocations and enhance
private sector investment opportunities that will focus on specific areas of capacity enhancement.
Tax law should be simplified continuously, mainly for three reasons, namely to lower both
compliance costs and administrative costs, to reduce uncertainty faced by taxpayers; and to
improve the levels of voluntary compliance (Kasipillai, 2005). And also tax law should be
simplified continuously, mainly for three reasons, namely to lower both compliance costs and
administrative costs, to reduce uncertainty faced by taxpayers; and to improve the levels of
voluntary compliance (Kasipillai, 2005). Pro-business (and Pro-SME) Tax regimes and
enforcement should be simple, consistent and predictable.

3.0 Section Three: Research Method

The research is an explanatory or a causal study. This is because it is a research that it is aimed at
establishing causal relationship between two variables i.e. the relationship between tax policy
and the growth of SMEs. Since it involves collecting the views, perspectives or opinions of
Research Journal of Finance and Accounting www.iiste.org

ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online)

Vol 2, No 2, 2011

respondents regarding a particular issue or research interest, it employed the survey method
using questionnaires, personal interviews with respondents and perusal of past records and
publications. This choice was made due to the fact that the survey method is effective when it
comes to getting opinions, attitudes and descriptions as well as for getting cause and effect
relationships (Ghuari and Gronhaug 2005). The research was on the sample of 150 SMEs with
different ownership and legal structures and at different levels of development by so doing
obtaining a fair representation of the population.
A total number of 150 questionnaires were distributed, of this number, 107 were returned and 43
were not. This gives a retrieval rate of 71.33% which is reliable enough to base a research on.
The location of study for this research is Zaria, Kaduna State. Krejcie & Morgan (1970) in
Amadii (2005) agrees with the sample as they proposed the population proportion of 0.05 as
adequate to provide the maximum sample size required for generalization. The expert opinion
was sought for in order to validate the content and the structure of the questionnaire during the
pilot study. For testing the hypothesis, a statistical non parametric Spearman’s Rank Correlation
is used. Spearman’s rank correlation measures the strength of association between two variables
i.e the extent to which, as one variable increases, the other variable tends to increase, without
requiring that increase to be represented by a linear relationship. Moreover the Spearman
Correlation is a non-paracontinuous-level test, which does not assume that the variables
approximate multivariate normal distribution. Spearman’s test does not depend on the
assumption of an underlying bivariate normal distribution. And this is done through the use of
SPSS statistical package.

4.0 Section Four: Empirical Results and Implication of Findings

Restatement of Hypothesis
H0: There is no significant relationship between tax and the SME’s ability to expand

4.1 Discussion of Results

From the Spearman’s rank correlation in table 1 (see appendix), it was discovered that
Spearman’s rank correlation coefficient (Rho) obtained was -0.152 at a two-tailed level of
significance of 0.015. This means that there is a weak negative correlation between the amount
of taxes paid and the number of projects carried out of business profits. Hence, the null
hypothesis (H0) should be rejected and the alternative hypothesis (H1) accepted.

The negative albeit weak correlation between taxes paid and projects carried out of business
profits indicates that the lower the amount of taxes paid by the SME, the greater the growth
related business project the profits are used for. The weak correlation suggests that there are
some other factors apart from tax that also affect SMEs’ ability to expand. According to the
International Tax Dialogue (ITD, 2007) a reduced tax rate will free more internal finance for
SMEs. This supports the assertion of Horsepower (2001) which states that reduced tax rates
improve internal financing which in turn enhance internal accumulation. Furthermore,
Tadjibaeva & Komilova (2009) have found that tax rate is one of the factors that affect the
prosperity of entrepreneurs.

5.0 CONCLUSION AND RECOMMENDATION

From the foregoing, it can be concluded that SMEs play an important role in the growth and
development of the Nigerian economy. It can also be concluded that a friendly tax policy is
Research Journal of Finance and Accounting www.iiste.org

ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online)

Vol 2, No 2, 2011

instrumental to the survival and growth of these small and medium enterprises. However, taxes
for SMEs have been more harmful than beneficial as they increase running costs and slow down
growth. Most of the SMEs surveyed are faced with the problem of high tax rates, multiple
taxation, complex tax regulations and lack of proper enlightenment or education about tax related
issues. Therefore, if SMEs are to flourish, an appropriate tax policy which will not be an
encumbrance to SMEs and which will also encourage voluntary compliance needs to be on
ground.

5.1 Recommendation
1. Small and Medium Enterprises should be levied lower amounts of taxes so that they will
have enough funds for other activities that will lead to business growth. Furthermore it
will help SMEs get better equipped to survive in a competitive market.

2. The government should consider increasing tax incentives and exemptions as this will not
only attract investors who are potential tax payers, it will encourage voluntary
compliance and ultimately leads to expansion of existing business interests of the SMEs
in Nigeria.

References
Aderemi, A. (2003). Small and Medium Scale Enterprises: The Nigerian Situation. [Power Point
Slides] Capital Partners Limited. Retrieved from
www.capitalpartnersltd.com/Small%20Medium%20Scale.ppt
Ariyo, D. (2005): Small Firms are the Backbone of the Nigerian Economy. Retrieved October
22nd, 2010, from http://www.africaeconomicanalysis.org/articles/gen/smallhtm.html.
Aryeetey, E. & Ahene, A. (2004): Changing Regulatory Environment for Small-Medium Size
Enterprises and their Performance in Ghana (CRC Working Paper No. 30594),Centre on
Regulation and Competition (CRC). Retrieved from
http://ageconsearch.umn.edu/bitstream/30594/1/cr050103.pdf
Beck, T., Demirguc-Kunt, A. & Levine R. (2005): Smes, Growth, and Poverty: Cross Country
Evidence. NBER Working Paper 11224, National Bureau of Economic Research.
Retrieved from http://www.nber.org/papers/w11224.pdf
Chu, H.M., Kara, O. & Benzing, C. (2008): An Empirical Study of Nigerian Entrepreneurs:
Success, Motivations, Problems and Stress. International Journal of Business Research,
8(2), 102-116.
Eftekhari, A. (2009): Economic Theories of Taxation the Factors Involving in a Tax Policy. Suite
101.com. Retrieved from http://www.suite101.com/content/economic-theories-of-
taxation-a111542.
Ekpenyong, D.B., & Nyong M.O. (1992): Small and Medium-Scale Enterprises in Nigeria: their
Characteristics, Problems and Sources of Finance. (Research Paper 16). Retrieved from
African Economic Research Consortium:
http://idl- bnc.idrc.ca/dspace/bitstream/10625/9982/1/95971.pdf
Farzbod, J. (2000): Investigation of the Effective Factors in the Tax Efficiency. Unpublished
master’s thesis, Governmental Management Training Center, Tehran.
Ghauri, P. & Gronhaug, K. (2005): Research Methods in Business Studies: A practical guide (3rd
ed.). Essex: Pearson Education Limited.
Research Journal of Finance and Accounting www.iiste.org

ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online)

Vol 2, No 2, 2011

Holban, O.I. (2007). The Taxation of Small and Medium-Sized Enterprises-a Hindering Factor
Influencing the European Economic Growth. Doctoral dissertation, Alexandru Ioan Cuza
University of Iasi and Academy of Economies Studies from Bucharest Romania.
Horsepower (2001): The Promotion of Measures to Enhance Competitiveness of SMEs. Guangxi
Journal of Tax Management Institute, (4) :15-17.

International Tax Dialogue. (2007): Taxation of Small and Medium Enterprises, Background
paper for the International Tax Dialogue Conference, Bueons Aires.
Iwuji, G.I. (n.d): Creating Awareness on Tax Matters for Small and Medium Units. [PowerPoint
Slides]. Retrieved from http://www.docstoc.com/docs/19747636/Creating-Small-and-
Medium-Enterprises-Tax-Matters-Awareness
Masato, A. (2009): Globalization of Production and the Competitiveness of Small and Medium-
sized Enterprises in Asia and the Pacific: Trends and Prospects. Publication of United
Nations Economic and Social Commission for Asia and the Pacific (ESCAP), Studies in
Trade and Investment Series chapter 1, 1-31.
Oboh G.A.T. (2002): Bank Participation in the Promotion of Small and Medium-Scale
Enterprises. Being a paper presented at the 6th Fellows and Associates Forum of CIBN
on 13th April.
Okpara FO (2000: Entrepreneurship (Text and Cases). Enugu Nigeria: Precision.
Panitchpakdi, S. (2006): Statements at the 10th Session of the Commission on Enterprise,
Business Facilitation and Development, Geneva, 21 February 2006. Retrieved from
http://www.unctad.org/templates/webflyer.asp?docid=6825&intItemID=4843&lang=1
Shahrodi, S.M.M. (2010): Investigation of the effective factors in the efficiency of tax system.
Journal of Accounting and Taxation, 2(3), 42-45.
Smatrakalev, G. (2006): Tax policy for small and medium enterprises. Paper deliverd at the 6TH
Global conference on business and economics; Gut man conference center, U.S.A
Stern, R.E., & Barbour P.A. (2005) Designing a small business tax system that enhances growth:
lessons from Africa, retrieved from
http://www.fias.net/ifcext/fias.nsf/AttachmentsByTitle/Zambiataxconference_PapersRich
ardandPaul/$FILE/Taxing+SMEs+in+Africa_Richard+Stern+and+Paul+Barbour.pdf
Tadjibaeva, D. & Komilova, I. (2009): The influence of tax reforms on the prosperity of micro-
firms and small businesses in Uzbekistan. Asia-Pacific Journal, 16(2), 31-64.
Tomlin, B. (2008): Clearing hurdles: key reforms to make small businesses more successful.
(Commentary No. 264). Toronto, Ontario C.D. Howe Institute. Retrieved from
www.cdhowe.org/pdf/commentary_264.pdf
Udechukwu, F.N. (2003): Survey of small and medium scale industries and their potentials in
Nigeria. Paper presented at the Central Bank of Nigeria seminar on small and medium
industries equity investment scheme (SMIEIS). Retrieved from
www.cenbank.org/out/Publications/guidelines/dfd/2004/smieis.pdf
Vasak, S. (2008). Small, medium, and large enterprises. USAID Business Climate Reform.
Retrieved from http://pdf.usaid.gov/pdf_docs/PNADQ675.pdf
Weichenrieder, A.J. (2007). Survey on the taxation of small and medium-sized enterprises: draft
report on responses to the questionnaire. Retrieved from Organization for Economic Co-
operation and Development web site:http://www.oecd.org/dataoecd/52/25/39597756.pdf
Research Journal of Finance and Accounting www.iiste.org

ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online)

Vol 2, No 2, 2011

Williams, E.S. (2006): Supporting the growth of small and medium enterprises. Central Bank of
Trinidad and Tobago
Yaobin, S. (2007). Tax, small business, growth: effect of taxation on investment and cross-
border trade. Paper presented at the ITD Conference on Taxation of SMEs.
APPENDIX

Table 1 Spearman’s Rank Correlation

Project Carried
Estimated out of Business
Percentage Taxes Profit

Spearman's rho Estimated Percentage Taxes Correlation Coefficient 1.000 -.152(*)

Sig. (2-tailed) . .015

N 91 91
Projects Carried out of Correlation Coefficient
-.152(*) 1.000
Business Profit

Sig. (2-tailed) .015 .

N 91 157
* Correlation is significant at the 0.05 level (2-tailed).
Source: Researcher’s Survey, 2011
This academic article was published by The International Institute for Science,
Technology and Education (IISTE). The IISTE is a pioneer in the Open Access
Publishing service based in the U.S. and Europe. The aim of the institute is
Accelerating Global Knowledge Sharing.

More information about the publisher can be found in the IISTE’s homepage:
http://www.iiste.org

The IISTE is currently hosting more than 30 peer-reviewed academic journals and
collaborating with academic institutions around the world. Prospective authors of
IISTE journals can find the submission instruction on the following page:
http://www.iiste.org/Journals/

The IISTE editorial team promises to the review and publish all the qualified
submissions in a fast manner. All the journals articles are available online to the
readers all over the world without financial, legal, or technical barriers other than
those inseparable from gaining access to the internet itself. Printed version of the
journals is also available upon request of readers and authors.

IISTE Knowledge Sharing Partners

EBSCO, Index Copernicus, Ulrich's Periodicals Directory, JournalTOCS, PKP Open

Archives Harvester, Bielefeld Academic Search Engine, Elektronische
Zeitschriftenbibliothek EZB, Open J-Gate, OCLC WorldCat, Universe Digtial
Library , NewJour, Google Scholar