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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.



1.1 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 (Capella, 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 Research Objectives
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.

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