EFFECT OF CAPITAL ALLOWANCES ON THE PERFORMANCE OF SMALL AND MEDIUM SCALE ENTERPRISES

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 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 the 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 an emphasis on selected small-scale industries in Nigeria, using Rivers State as a case study. The modern-day taxation and its use as 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 in a reduction in total earnings, shortage of funds in the private sector and reduced income per capital with the 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 the 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 a 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 the 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 – policymakers 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 a disincentive to investment.  It will also benefit other researchers, forming a basis for further research on the subject in the 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 the 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 machinery, and how they affect the 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 the 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: This refers 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.

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