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 Small businesses’ economic environment. This research work tries to establish if any relationship exists between the growth of Small businesses and the tax policy environment in which they operate in Nigeria. Questionnaires were distributed to Small businesses in Abeokuta, Nigeria. It was found out that from most Small businesses 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 like proportional tax and tax holiday. 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 Small businesses 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.












1.1Background of the Study 1

1.2 Statement of Research Problem 3

1.3 Research Aim and Objectives 3

1.4 Research Questions 4

1.5 Research Hypotheses 4

1.6 Significance of the Study 5

1.7 Limitation of the Study 5

1.8 Scope of the Study 5

1.9 Outline of Chapters 5

1.10 Operationalization 7

1.11 Definition of Terms 8



2.1 Introduction 9

2.2 Conceptual Review 9

2.2.1 Taxation 9 Role of taxation in the economy 12 Small scale business: 13 Problems faced by small scale business 14

2.2.2Economic advantage of SMEs in Nigeria 15

2.2.3 Reducing Tax burden for SMES as well as inreasing revenue 16

2.2.4 Performance 18

2.3 Theoretical framework 21

2.3.1 Benefit theory 21

2.3.2 the cost of servieTheory 22

2.3.3 Ability to pay theory 25 Porportional Tax 26

2.3.4 Tax Holiday 27

2.4 Empirical framework 28

2.5 Gap in literature 30



3.1 Introduction 31

3.2 Research Method 31

3.3 Research Design 32

3.4 Population of Study 32

3.5 Sampling Technique/ Procedure 33

3.6 Research Sample Frame 33

3.7 Sources of Data and Procedure for Data Collection 33

3.8 Research Instruments 33

3.9 Validity of Research Instruments 34

3.10 Reliability of the Research Instrument 34

3.11 Ethical Issues for Consideration 35


4.1Introduction 36

4.2Presentation of Data 36

4.3Data Analysis and Interpretation 36

4.3.1 Analysis of Demographic Data 36

4.3.2 Test of Questionnaire 40

4.5 Discussion of Results 53


5.1 Introduction 54

5.2 Summary 54

5.3 Summary of Findings 55

5.3.1 Theoretical Findings 55

5.3.2 Empirical Findings 55

5.4 Conclusion 56

5.5 Recommendations 56

5.6 De-limitation 56

5.7 Suggestion for Further Study 57

5.8 Contribution to Knowledge 57


Appendix II 65



1.1     Background of the Study

The development of small and medium scale business enterprises is greatly affected by the level of taxation, its administration and compliance; The higher the task risk of the greater  the efforts to fulfill taxation requirements as well as to check how those requirements are met, the lower the initiatives for small and medium scale businesses to work hard. Thus, maintaining the tricky balance between tax rate, compliance cost, tax administration and economic growth should be a major goal of every tax policy.

The relationship between taxation and the level of growth of small and medium scale enterprises has been a debatable issue over the years. The perceived relationship can be either positive or negative depending on the type of tax policy adopted by the government. However, it is generally agreed that high task rate can lead to decrease in business activities since it dampens the incentives to invest while low tax rate, on the other hand, tends to increase growth of business activities as profits are increased which lead to further investment as well a expansion of business. A high marginal tax rate lowers an investor’s willingness to invest by lowering the returns on his investment (palacio and Harischandra, 2008). In the same vein, a reduced amount of business activities has a number of negative consequences including decreased productivity of workers and reduced output, employment and ultimately, living standard of the people.

The flow of investment expenditure at any time depends on the comparisons operators do between the potential benefit and the cost of making that investment (Ndebbio, 2007). Tax on the other hand is more of less an appropriation of the realized benefits of investors or business operators. The consequence of this appropriation is a reduction in business profit (Bassey, 2005). Business operators operating at any point in time are usually guided by their propensity to maximize the contribution to valve creation (Ndebbio, 2007). To this effect, business are not always made where they obtain the highest pre-tax return, rather, they are interested in operating where they obtain the highest post-tax return which is the income they take home or retain (Cappelea, 2001).

Small and medium scale businesses or enterprises are of crucial importance in a developing economy as it helps to bridge and reduce unemployment gap in such economy. Small and medium scale enterprise is vital to the economic growth of Ogun State as it constitutes nearly 70% of business organizations in the state.

The government of Ogun State in an attempt to widen the tax base and collect more revenues has had to levy several taxes especially on business enterprises in the state and this has resulted in slow pace of the growth of small scale enterprises as high tax rate has a major adverse effect on business decision making through affecting the profit of a firm thereby reducing the amount of after tax profit meant for re-investment and expansion. Thus, it is of great importance that the researcher is studying the impact of taxation on small scale enterprises in Abeokuta metropolis

In Nigeria, emphasis is at present on small-scale business in all sectors of the economy. With the supportive role of the government, small scale business are capable of pulling Nigeria out of the present economic malaise’s especially if the land materials are locally sourced. Many Nigerians are being called upon to invest in small and medium scale business. To back up this determination, the federal government has established some agencies to advice and co-ordinate the efforts of small business entrepreneurs. However, there is a need to emphasize that the small business is still affected by the government fiscal policy like taxation. This research work is of the intent to examine the impact of taxation on small business in developing economy. It is most unfortunate that a lot of small business outfits deliberately evade tax payment, despite the fact that they are usually given tax holiday for their first five years of their commencement of business. This could be attributed to their ignorance of some objective which taxation might be used to accomplish. The general objectives of taxation can be stated as follows: –

a. Restraining or curtailing and this transferring resources from consumption to investment.

b. To counter or reduce inflation

c. Modify the pattern of investment

d. Mitigation of economic inequalities

e. Maintenance of balance of payment

f. Increase the incentive to save and invest.

Taxation can help small business to get a high profit target bearing in mind that they will pay tax from the profits they make. From the above assertion, it is obvious that taxation has some impact on the establishment of small business. In the economy, there are manipulations of taxation rules for the encouragement of small business. This research work is an attempt to Enquirer whether a high incidence of corporate tax will go a long way to reducing the number of small business establishments which can bring about unemployment in the country.

1.2     Statement of Problem         

There is a sweeping and effective revenue mobilization drive in Ogun State, most of which are carried out by contracted agencies that sometimes come up with various taxes and levies and impose them on business operators in the state. This numerous taxes and levies have been dwindling business fortunes of most operators with lots of consequences which include cost of unemployment, slowing down of economic activities in the state and even loss of revenue by the state due to the fact that the taxes are not optimal and hence when business shot down, they will no longer be there to pay any tax at all.

1.3     ResearchObjectives 

The main objective of this research is to ascertain the impact of taxation on small and medium scale enterprises in Abeokuta metropolis. The specific objectives include:

1. To examine the impact of tax holiday on profit in SMEs.

2. To ascertain the impact of tax holiday on productivity in SMEs.

3. To know the impact of progressive tax on productivity in SMEs.

4. To examine the impact of progressive tax on profit in SMEs. 

1.4   Research Questions

To achieve the purpose of the study research questions were formulated as follows: 

(1) What is the effect of tax holiday on profit in SMEs?

(2) What is the impact of tax holiday on productivity in SMEs?

(3) What is the effect of progressive tax on profit in SMEs?

(4) What is the impact of progressive tax on productivity in SMEs?

1.5   Research Hypothesis

Null Hypothesis: Tax holiday has no impact on profit in SMEs.                              

Null Hypothesis: Tax holiday has no impact on productivity in SMEs.    

Null Hypothesis: Progressive tax has no impact on profit in SMEs.

Null Hypothesis: Progressive tax has no impact on productivity in SMEs.

  1.6   Significance of the Study

This study will benefit investors, policy makers and academicians.

For investors, the study will create awareness on the procedure of starting business in capital city of Ogun state (Abeokuta) and various charges and taxes levied by the state government.

For policy makers, the study will reveal the effect of their fiscal policy specifically taxation on small and medium scale businesses in the state.

For academicians, the study will add to the existing stock on study of small and medium scale enterprise and taxation. 

1.7   Limitations

The research is limited to few SMEs in Abeokuta metropolis alone, as it will be difficult to generalize the findings to other states. Another limitation faced by the researcher in the course of carrying out this study was getting accurate information and data.

1.8   Scope of the Study                   

This research work is on the impact of taxation on small and medium scale business enterprises in Abeokuta metropolis. The research look at how the enormous taxes levy on small scale business operators in the state affect the growth of the small and medium scale industry.

1.9 Outline of the chapters

The study is organized into five chapters. Those chapters are organized as below

⦁ Chapter 1 is the introductory part of the research which provides an inclusive overview of the background of the study, followed by the problem statement, research objective, research questions, hypothesis of the study, significance of the study, source of data, limitation of the study, outline of the chapters, operationalization and definition of the terms.

⦁ Chapter 2 contains the review of literature, review of relevant theoretical framework, conceptual framework, and empirical framework.

⦁ Chapter 3 this will cover the research methodology. This chapter includes research method, research design, population of the study, sample and size determinations, sampling techniques, data collection, research instrument, validity of research instrument, reliability of research instrument, and ethical considerations

⦁ Chapter 4 this captures data presentation and data analysis

⦁ Chapter 5 this deals with the summary and findings; conclusions and policy recommendations.

1.10   Operationalization.


X= independent variables

Y= dependent variables

Taxation (X)   Small and Medium scale businesses (Y)

X1 Progressive Tax                                             Y1 Profit

X2 Tax holiday                                                    Y2 Sales

X3 Regressive Tax                                               Y3 Expenses

X4 Proportional Tax                                            Y4 Productivity

X1 Progressive Tax                                                         Y1 Profit

X2 Tax holiday                                                                 Y4 Productivity                                                

1.11     Definition of Terms

In order to clear the air to avoid ambiguity, the following are defined.

a. Tax: This is a compulsory financial charge or other levy upon and individual or legal entity by a state or the functional equivalent of money paid to the government other than for transaction-specific goods and service. It is not a voluntary contribution, payment or donation but rather, it is imposed by government under the name of import duty, exercise, etc.

b. Tax rate: Taxes are most often levied as a percentage. Thus, tax rate is the percentage of income or profit of individual paid as tax.

5 Tax burden or tax base: otherwise called tax incidence is on whom a tax is collected from. Depending on the elasticity of product, a tax imposed on a seller can be ultimately paid by the buyer simply by shifting the burden in form of a higher price.

6 Small scale enterprise: This is sometime called small scale business. It is a business that employs small number of workers and does not have a very high volume of sales.

7 Abeokuta: Abeokuta is the largest city in and the state capital of Ogun state in southwest Nigeria. It is situated on the east bank of the Ogun River, near a group of rocky outcrops in a wooded savanna; 77km(48 mi) north of Lagos by railway, or 130km(81 mi) by water. As of 2016, Abeokuta and the surrounding area had a population of 449,088 (   

8 Excess burden of a tax: In economics, the excess burden of taxation, also known as the deadweight cost or deadweight loss of tax is one of the economic losses that society suffer as the result of taxes or subsidies.

9 Tax holiday: A government incentive program that offers a tax reduction or elimination to businesses. Tax holidays are often used to reduce sales taxes by local governments, but they are also commonly used by governments in developing countries to help stimulate foreign investment

10 Progressive tax: Is a tax in which the tax rate increases as the taxable amount increases. The term ‘progressive’ refers to the way the tax rate progresses from low to high, with the results that a taxpayer’s average tax rate is less than the persons marginal tax rate.



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