Tax Incentives and the Performance of Small-scale Enterprises in Akwa Ibom State
Chapter One
Research Objective
The general objectives of this study were;
- To determine the tax incentives available growth of small sized enterprises in Uyo, Akwa Ibom state
- To establish the extent to which tax incentives affect the growth of small and medium sized enterprises in Uyo, Akwa Ibom state.
CHAPTER TWO
LITERATURE REVIEW
Introduction
This section presents the data and information related to the purpose of the study from the available theoretical and empirical literature on the topic. The areas discussed in this chapter include the theoretical foundation of the study, tax incentives for SMEs, measures of growth of SMEs, tax incentives and growth of SMEs, empirical review and the conceptual framework.
Theoretical Foundation
This section describes and discusses three theories related to the study namely the Political System Theory, Normative Theory and the resource based view.
Normative theory
The Normative theory was propagated by Cochran (1999). The model explains the how the existence institutional government structures create different incentives and the constraints faced by the governments. The incentives stipulate a clear development path and various governments may transition in different ways some of which might not be effective. Tax administrative reforms and tax policy-making therefore evolve symbiotically and simultaneously. The institutional theory provide an holistic framework which could be used to articulate the development of tax policy administrations across cultures over time.
According to Chua (1995), every incentive is associated with certain merits and demerits and it is thus extremely hard to ascertain the ones that are effective since different economies are faced with different circumstances and challenges.
The proxies for establishing what works for a particular economy include budgetary constraints, the nature of investment being courted, the tax administration’s competence, the extent to which the government stimulates investment, the available tax planning opportunities and the extent of revenue leakages.
Shah and Boadway (1995) postulate that any incentives allocated by politicians and public servants are potentially open to corruption and abuse. Therefore, there exists a strong believe that all potential investors should have access to incentives which is possible through transparent allocation criteria. Conversely, adequate incentives for investment should be availed to firms to promote positive growth. Therefore, each potential investment needs receives incentive specific to the precise situation.
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The Normative theory is useful in illustrating the factors influencing the tax incentives’ efficiency in impacting the growth of firms as well as the benefits and costs of tax incentive in the naton. Despite its contribution to enterprise growth, the theory has been criticized for lack of theoretical foundation (Saez & Stantcheva (2016)). The authors argue that the normative theory does not quickly develop a theoretical foundation since it can be analyzed from various perspectives depending on the context and circumstance. Unless a deeper analysis or reading is undertaken, it is hard to the topic to which the theory is being attributed.
CHAPTER THREE
RESEARCH METHODOLOGY
Introduction
The section represents the techniques, methods and approaches which the investigator employed in data collection to achieve the intended outcome. The research methodology guides and gives direction on the direction to be followed by the investigator to get answers to issues in which he is concerned (Kothari, 2004)
Research Design
Kothari (2004) describes a research design as an outline, system or plan which is employed to seek responses for a research problem. It gives a description of how the study addressed the research’s objectives. To choose a research design, one has to consider the kind of data required, where and how it will be collected and how the data will be analyzed and interpreted. The study employed a descriptive survey design whereby the descriptive perspective is classification as per the analysis method and pertains using variables to understand the phenomenon under study but does not explain why it is so.
Khan (2008) notes that a descriptive research design is utilized where the researcher wants to find out the state of affairs as they exist. Cooper & Schindler (2008) also point out that a research design that is descriptive gives a valid and accurate representation of the variables of the study and this becomes helpful when responding to the research question. Kothari (2004) also informs that a survey design comprises collection of data from a specific population to determine the state of the phenomenon under study according to one or more variables.
Population of the Study
Burns and Burns (2008) defines population as the attribute of interest from which a researcher can draw deductions. According to Kothari (2004), population refers to a group of individuals, things, elements, events, households that are well-defined and which are being examined. A research should have a population onto which the study’s findings are generalized. The population of this study was the 1539 SMEs operating in Uyo Metropolis (Akwa Ibom state Government Licensing Department, 2018)
CHAPTER FOUR
DATA ANALYSIS, RESULTS AND DISCUSSION
Introduction
The research looked into tax incentives and growth of small and mediums sized enterprises in Uyo Metropolis. This section therefore presents findings based on the proposed methodology and procedures. The chapter comprised of the following sections; response rate, background information, tax incentives, growth, regression analysis and discussion of the findings. The findings are presented in terms of tables and figures as shown below;
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATIONS
Introduction
This chapter looks at the summary of findings, conclusion, recommendations, limitations, suggestions for further research and implication of the study to the theories, practice and the government.
Summary of Findings
The study’s objective was to determine the effect tax incentives on growth of small and medium sized enterprises in Uyo, Akwa Ibom state. The study used two theories namely the political systems theory and normative theory. The research employed the descriptive research design. The population was all the 1539 SMEs operating in Uyo Metropolis. Stratified random sampling was used to derive 155 respondents which were used as the sample. Primary data was collected from the respondents by use of self-administered structured questionnaires containing closed ended questions. The study used field data to derive findings. The demographic information results indicated that most employees had worked for their firms for longer periods hence had proper understanding of the tax incentives enjoyed by the business. The findings also indicated that the number of employees had over time increased which was a good indicator of growth. Furthermore, most enterprises were found to have been in existence for between 11-20 years which is a long period thus a good sign of sustainability and growth.
The findings the different attributes of tax exemptions such as the business is exempted from certain taxes tariffs and excise duty on importation of machinery, tax compliance costs of the business have reduced due to tax holidays , most back-end taxes for trade of SME shares are eliminated by the government, the business uses tax free weekend to collect information about their customers which it uses to create loyalty programs, the business receives temporal exemptions for certain activities, most back-end taxes for trade of SME shares are eliminated by the government, the business receives reduces tax obligations during a period of time in the year and the enterprise receives back-end exemptions on capital gains tax produced an aggregate mean of 3.335 implying to some extent, that the government had formulated various tax incentives to promote the growth of small enterprises .
The analysis on investment allowances shows that the government offers special zones for establishment of business enterprises. This was found to have been implanted to the largest extent probably due to the need attract foreign investors or attract individuals to engage in export trade which improves economic growth. Other incentives such as depreciation allowances, reduction of tax on investment and corporate tax incentives were found to have been slightly implemented. The respondents however disagreed that the business receives innovation incentives which can be explained by the fact that innovation is an internal strength of the firm which describes its competitiveness in the market. The regression analysis output produced a R square values of 0.122 and 0.185 for the effect of tax exemptions and investment allowances on growth respectively implying that tax incentives explained a small proportion of growth and was not a major determinant. Also, at 95% confidence level, the models were found to be significant as depicted by a p value of (p=0.000) implying that entrepreneurial tax incentives have a significant impact on growth.
Conclusions
Following the study’s findings it can be said that tax incentives has a positive and significant impact on growth of SMEs as measures by increased number of employees, increased customer satisfaction, increased profitability and penetration into new markets. The study found that although many tax incentives have been documented in policy, their practical applicability remains low. The study found that while tax exemptions such as excise duty exemptions on importation of machinery were highly evident, others such as tax exclusion on funds invested in innovation were not visible. Similarly, the study notes that the government to a large extent offers investment allowances such as the EPZ while ignoring others such as depreciation allowances which might be of benefit to the small business owner. Concerning the effect of tax incentives on growth of SMEs, it was concluded that tax incentives have a statistically significant relationship with growth of SMEs at 0.05 significance level. It was therefore imperative for the government to introduce new tax incentives and fully implement the existing ones so as to accelerate the growth of SMEs in the country.
Recommendations
Based on the study’s results, the study makes the following recommendations; Further policy initiatives by the Nigerian government to accelerate the growth of SMEs should have user and stakeholder input before being concretized in order to mitigate against negative effects on SMEs to facilitate the desired growth trajectory. Therefore, for the government to realize the desired economic growth and even the big four agenda, policy design should be more inclusive and sensitive to the needs of SMEs and more so ensure fairness in gender equality. The policy initiatives must relate to tax incentives, business infrastructure and other regulatory regimes.
The government should also strengthen its partnerships with the private sector, promote higher value added services, increase coordination among various government value adding entities, dealing with SME promotion and set quantifiable targets through frequent monitoring of performance of different policy interventions. This is bound to boost SME growth. The government should also provide frequent trainings on the available incentives which they can leverage on to boost their growth.
Limitations of the Study
Because of confidentiality policy of different firms, it was difficult to obtain all the required information as some of the respondents were seeking approval from their bosses or business owners. This also explains why the researcher was only able to receive back 78% of the questionnaires issued. The research focused one respondent firm leaving aside others which could be more resourceful. This could have left out important information that is vital for the study. The knowledge on the available tax incentives by different enterprises might be varying.
Suggestions for Further Research
Further research should be conducted to test and validate the research findings using the qualitative approach to ascertain if the same findings hold. Further studies should be carried out on more potential predictors of growth since in this study, 87.8 and 81.5% variance in growth for tax exemptions and investment allowances remained unexplained.
The same study can also be cusing a wider population to include firms of all sizes and not only SMEs
Since the study was highly quantitative, a qualitative study with an interview guide would have generated detailed qualitative data that capture opinions, believes and value expressions by respondents. A detailed study of ways to maintain and sustain growth should be carried out
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