General Overview of Taxation
There is currently no accepted universal definition for the term Tax, but judicial and literal definitions have been able to provide a sufficient outlook on the subject matter. The National Tax Policy for Nigeria provided that “tax is a monetary charge on a person’s entity or income, property, or transaction, and is usually collected by a defined authority at the federal and state level”.[1] Government and society gain greatly from taxes in many ways, including the creation of revenue, economic growth, price stability, control over the production of certain commodities and services, income redistribution, and regulation of consumption behaviours and patterns.
A tax can be direct or indirect, it may be proportional, progressive, or regressive, it can be levied either on a person (natural or artificial), goods or services, or capital and finally, the rate of the tax can be specific or ad valorem.
SMALL AND MEDIUM ENTERPRISES (SMEs)
Small and Medium-sized businesses (SMEs) form the backbone of the Nigerian economy (SMEs). They contribute significantly to economic dynamism, innovation, competition, and the creation of jobs, all of which help to foster national growth and combat poverty.[2] SMEs account for the majority of businesses worldwide and are important contributors to job creation and global economic development.[3] A 2017 national survey by the Nigeria Bureau of Statistics and the Small and Medium Enterprises Development Agency of Nigeria revealed there are about 41.5m Small and Medium Enterprises (SMEs) in Nigeria. According to PwC, SMEs in Nigeria account for 96% of businesses, and 84% of employment, and contribute 48% of the national GDP.
However, a 2017 survey by Business Day found that 80% of small businesses are not paying regular taxes to the government. While some SMEs pay taxes to local, state, and federal government agencies, many avoid paying structured taxes such as corporate and personal taxes. The result of which is a Treasury deprived of billions of naira per year in revenues.[4]
LEGAL AND REGULATORY FRAMEWORK FOR TAXATION OF SMES IN NIGERIA
SMEs in Nigeria are liable to pay Personal Income Tax, Value Added Tax, and Withholding Tax in Nigeria. Formerly, they were subject to Company Income Tax; however, this has changed due to the amendment from the Finance Act 2019,[5] which exempts small businesses from paying tax. Most SMEs are taxed based on presumptive taxation,[6] due to the difficulty of accessing their income for want of proper documentation. Presumptive taxation permits the authorities to access the taxpayer based on a perceived income.[7] The criteria set for the perceived income are based on the occupation or business activity (standard assessment); net wealth and asset; profession, level of economic activity, location (estimate assessment), and minimum taxes.[8] Presumption taxation is regulated by the Presumptive Tax Regulation 2018. At the state level, SMEs are also subject to presumptive taxation.
At the state level, Lagos State employs presumptive taxation with a fixed minimum tax of ₦8,100 or by the normal method of self-assessment.[9] Such taxes are directly remitted to the government account physically or online with the online system called IBILE Hub.[10] Rivers state established a distinct for SMEs to be paid into specified banks provided by the Rivers State Internal Revenue Service (RIRS).[11] Anambra state enrolled all eligible taxpayers and businesses including SMEs in an online registration system called ‘Anambra Social Service Identity Number’ (ANSSID). To ensure strict compliance, the government-linked registration with government service. This system enables tax authorities to effectively identify and collect taxes. SMEs in Kwara State are also taxed under presumptive taxation. The rates for SMEs are provided in the Presumptive Tax Regulation or they can be assessed based on best judgment, and they are to pay their tax in the Tax Assessment Directorate, a division of the Informal Sector Tax Directorate’.[12] They can also pay online.
THE IMPACT OF TAXATION ON SMALL AND MEDIUM ENTERPRISES IN NIGERIA
Taxes levied on SMEs are proportionate to those levied on companies and big enterprises. Entrepreneurs of SMEs do not make as much as the big enterprises do and feel they should pay less in tax as compared to what is levied on them and this causes them to evade tax. This has caused most SMEs to avoid fulfilling their tax obligations. Furthermore, double taxation, no professional tax consultancy, weak tax planning, and high taxation cost have led to low compliance.[13] In addition, the issue of transparency has discouraged compliance.
It is believed that the low level of trust between business owners and the government, and a byzantine bureaucracy both contribute to SMEs remaining outside the tax net. SMEs think once they pay any money to the government, it will be mismanaged or even stolen. There is also the complex process of paying taxes, even for professionals, it is a headache to go through the process.[14] SMEs in Nigeria also suffer from multiple taxations and this has caused some businesses to shut down prematurely. Little wonder, Vice President Osinbajo opined that the mortality rates of SMEs are very high, and among the factors responsible for this are tax-related issues. He went further to state that some of the specific challenges related to taxation are multiple taxation at the national and sub-national levels, non-clarity on the procedure and amount to pay, and non-friendly tax administrators.[15]
Similarly, according to the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN), 80% of small businesses in Nigeria wind up before their fifth anniversary. One of the reasons for this early wind-up is not because of a lack of business strategy but the problems with taxes, such as having to deal with multiple taxes, heavy tax burdens, and other related problems by governmental bodies.[16] Given that the government treats SMEs as large corporations, it neglects the structure of both businesses and does not take into account the best tax strategy for SMEs
From the aforementioned, it can be summarized that there is a constrained relationship between SMEs and taxation. The mode of taxation and tax system set out for the SMEs in Nigeria have led to lower tax culture and compliance, it has inhibited the success and continued existence of SMEs and is regressive.
CONCLUSION/RECOMMENDATION
Every country desire to build a civilized and economically-sound country and one of the leading ways developed countries have achieved this is through taxation. In Nigeria, it has been shown that SMEs contribute significantly to the GDP of the nation and house the majority of the labour force. Taxation of SMEs also creates additional revenue for the government, propels growth and development for SMEs, and promotes good governance. Thus, it is pertinent that the SMEs should not be left untaxed.
Howbeit, it is also the duty of the government to ensure that the tax policies do not drive them to extinction or cripple their structures. The government is also obliged to ensure that these SMEs see the worth of their money and are given due consideration at the helm of affairs. This can be achieved by ensuring that there are policies that will aid their growth and development, which will in turn boost their profits and give room for higher tax payments.
Effective stakeholder engagement, discussions, and collaboration with the SMEsare necessary, to ensure that there is a balance between the tax system of Nigeria and the steady growth and development of SMEs.
[1] The National Tax Policy 2017, chapter 1
[2]‘Nigeria: Tax Policy On Smes In Nigeria – How Fair?’, (Mondaq, 2018) <https://www.mondaq.com/nigeria/tax-https://www.mondaq.com/nigeria/tax-authorities/667066/tax-policy-on-smes-in-nigeria-how-fair/667066/tax-policy-on-smes-in-nigeria-how-fair> accessed 19 August 2022
[3]World Bank, ‘The World Bank, Small and Medium Enterprises’ (www.worldbank.org) <https://www.worldbank.org/en/topic/smefinance> accessed 20th August,2022
[4] ibid.
[5] Company Income Tax Act (as amended), s 23(1)(o).
[6] Personal Income Tax Act, s 36(6)
[7]OlufemiIdogun, ‘Presumptive Tax in Nigeria’ (Academia.edu) 1 <https://www.academia.edu/32936804/Presumptive_Tax_in_Nigeria_docx> accessed 20 August 2022.
[8]Embuka Anna, ‘Presumptive Tax: Equalizing the Distribution of Tax Burden (II)’ Vanguard (Nigeria, 15 June 2015) <https://www.vanguardngr.com/2015/06/presumptive-tax-equalizing-the distribution-of-tax-burden-ii/amp> accessed 20 August 2022.
[9]Anozi Egole, ‘IBILE Hub Initiative has Simplified Tax Collection System – Coker, LIRS Director’ Punch (Nigeria 13 March 2022) <https://www.google.com/amp/s/punchng.com/we-review-tax-collection-system-to-enhance-growth-coker-lirs-director/%3famp> accessed 20 August 2022.
[10] Ibid.
[11]Vanguard, ‘Rivers Government Rolls out Informal Sector Tax Rates, Modalities’ Vanguard (Nigeria, 30 July 2019)<https://www.vanguardngr.com/2019/07/rivers-govt-rolls-out-informal-sector-tax-rates-modalities/amp/> accessed 20 August 2022.
[12]Ibid.
[13]Yoabin S,‘Tax, Small Business, Growth: Effect of taxation on investment and cross-border trade’(ITD Conference on Taxation of SMEs, October 2007).
[14]Kelechukwu Iruoma, ‘Why do Nigerian SMEs fail to pay their taxes?’ (African Business, March 2021) <https://african.business/2021/03/technology-information/why-do-nigerian-smes-fail-to-pay-their-taxes/> accessed on 20th August, 2022.
[15]Wasilat Azeez, (Thecable.ng, 17th August 2021) <https://www.thecable.ng/multiple-taxation-causing-high-mortality-rate-of-smes-in-nigeria-says-osinbajo/amp> accessed on 20th August, 2022.
[16]Final IPROJECT, ‘IMPACT OF TAXATION ON SMALL AND MEDIUM SCALE BUSINESS IN NIGERIA Taxat…’ (Iproject.com.ng) <https://iproject.com.ng/taxation/impact-of-taxation-on-small-and-medium-scale-business-in-nigeria/index.html> accessed 19 August 2022.
Introduction
