EFFECT OF CAPITAL ALLOWANCES ON THE PERFORMANCE OF
SMALL AND MEDIUM SCALE ENTERPRISES
(A CASE STUDY OF SELECTED CONSTRUCTION COMPANIES IN
NIGERIA)
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Historically, Nigeria’s
experience of taxation predates the colonial period. The Hausas of Northern
Nigeria were paying taxes, though in kind, to the Emir in return for security
and common services. However, with the advent of the colonialists, direct taxation
was introduced in 1904 by Sir Lord Lugard, the then British appointed Governor.
Its implementation started first in the North and later in the Southern and
Eastern regions.
According to Ezejelue and
Ihendinihu (2006) taxation can be defined as the demand made by the government
of a country for a compulsory payment of money by the citizens of the country
with the objective of raising revenue, satisfy collective wants of the people
and regulate economic and social policies.
Aguolu (1999:17) defined capital
allowance as expenditures deducted from profits before taxation to reduce the
effect of taxation and thus encourage savings and investment. These capital
allowances can come in form of expenses on assets, investments and other
noncurrent assets/activities of the organization.
These capital allowances are
however backed by various Government legislations. They are granted to enhance
the growth and development of industries as well as empowering individuals and
corporate taxpayers economically. This work will therefore focus on Capital
allowances and their effect on small-scale industries with emphasis on selected
small-scale industries in Nigeria, using Rivers State as a case study.
The modern day taxation and its
use as a fiscal policy could be traced to 1926, which was a year of economic
depression in Great Britain. During this period, Britain witnessed an
unprecedented decline in her overall economic activities resulting to reduction
in total earnings, shortage of fund in the private sector and reduced income
per capital with attendant low standard of living. The effect of this
depression was felt not only in Britain but almost the world over. Governments
at this time were trying to revive, rehabilitate and mobilize enough capital to
provide for economic and social expenses and to raise the standard of living of
its populace. In doing this, various fiscal policies were formulated which
include taxation.
According to Aguolu (1999: 1);
taxation may be defined as a compulsory levy by Government through its agencies
on the income, consumption and capital of its subjects. These levies are made
on personal income such as salaries, business profits, interests, dividends,
discounts and royalties. They are used to provide security, social amenities
and create conditions for the economic well being of the society. The main
purpose of taxation according to Ola (1998:14) is to raise funds to meet
Government’s expenditure and to redistribute wealth and management of the
economy.
1.2
STATEMENT OF THE PROBLEM
The objective of granting capital
allowances and incentives to small and medium scale enterprises is to enhance
their growth and development, thus contributing to the overall economic
development of the country. But the objective cannot be achieved in a situation
where the would-be beneficiaries are not even aware of the existence of such
incentives. Moreover, the few who are aware of these incentives do not even
bother to apply for them due to the poor and inefficient tax administration.
Therefore, there is the need to proffer solutions to these problems to ensure
the growth and development of our economy.
1.3 OBJECTIVE OF THE
STUDY
The
main objective of this study is to examine the effect of capital allowances on
the performance of small and medium scale businesses in Nigeria. Specific
objectives of the study are:
1. To
identify capital allowances available to SMEs in Nigeria.
2. To
examine the level of taxpayers’ awareness of the existence of capital
allowances.
3. To
examine the effect of capital allowances on the profit after tax of small and
medium scale businesses in Nigeria.
4. To
determine the relationship between capital allowances and growth of small and
medium scale enterprises in Nigeria.
1.4 RESEARCH
QUESTIONS
The following research questions
will be considered in this study:
1) What are the Capital allowances available to
small scale enterprises in Nigeria?
2) What is the level of taxpayers’ awareness of
the existence of these incentives?
3) What
effects do Capital allowances have on after tax profits of small scale
enterprises?
4) Is there any relationship between Capital
allowances and the growth of small scale enterprises in Nigeria?
1.5 RESEARCH
HYPOTHESES
In
order to ascertain the effect of Capital allowances on the performance of
small-scale enterprises, the following hypotheses have been formulated:
Ho1: Capital allowances do not have any significant effect on the after
tax profits of small-scale industries.
Ho2: Capital allowances do not enhance the growth of small scale
enterprises.
1.6 SIGNIFICANCE OF THE STUDY
The
research will be of benefit to the government – policy makers and tax revenue
authorities. It will provide a framework for the critical evaluation of tax
policies, provides a basis for the modification of tax incentive design and
identify loopholes in the present tax system that serves as disincentive to
investment.
It
will also benefit other researchers, forming a basis for further research on
the subject in future. The study also gives a clear insight into the various
ways in which tax policies in Nigeria can be executed efficiently to still
favor small businesses and how some taxation policies in Nigeria can be
properly tackled. The study also gives a clear insight into the various causes
of why small businesses fail in Nigeria as well as the challenges of the tax
policies in Nigeria. The findings and recommendations of the researcher will
help in building a strong and better tax policy system in Nigeria, if taken
seriously by government and the general public. The challenges of taxation in
Nigeria are outlined in-order for drastic measures to be taken to tackle these
challenges and meet the prospects of the general public so that revenue from
tax policy to the government can be increased.
1.7 SCOPE OF THE
STUDY
The
study covers various capital allowances in assets such as buildings, vehicles,
plants and machineries, and how they affect performance of small and medium
scale enterprises in Nigeria, using selected small and medium businesses in Rivers
state.
1.8 LIMITATION OF THE
STUDY
The
only limitation faced by the researcher in the course of carrying out this
study was the delay in getting data from the various respondents. Most
respondents were reluctant in filling questionnaires administered to them due
to their busy schedules and nature of their work. The researcher found it
difficult to collect responses from the various respondents, and this almost
hampered the success of this study.
1.9 DEFINITION OF
TERMS
Capital Allowance: Thisrefers to sums of
money a business can deduct from the overall corporate or income tax on its
profits. These sums derive from certain purchases or investments etc.
SME: Small and Medium Scale Enterprise
Performance: The accomplishment of
a given task
measured against preset known standards of accuracy,
completeness, cost,
and speed. In a contract,
performance is deemed
to be the fulfillment
of an obligation,
in a manner that releases
the performer from all liabilities
under the contract