AN INVESTIGATION OF VALUE-ADDED TAX AND ITS EFFECTS ON THE SUSTAINABILITY AND PROFITABILITY OF SME'S IN NIGERIA
- Project Research
- 1-5 Chapters
- Quantitative
- Regression
- Abstract : Available
- Table of Content: Available
- Reference Style: APA
- Recommended for : Student Researchers
- NGN 3000
Background of the Study
For a long time, small and medium-sized businesses have been seen as a source of financial development and improvement. As a result of this growing recognition, the World Bank Group has made small and medium-sized firms (SMEs) a major component of its methodology for promoting economic growth, employment, and poverty reduction (Ayifagari, 2007). In 2004, the World Bank Group committed a total of $2.4 billion to small and medium-sized businesses (SMEs) (World Bank, 2001).
In countries where entrepreneurs have a level playing field, economic progress and advancement have become near equivalences to small and medium scale firms (SMEs). SMEs have been characterized as crucial enablers of more complete globalization and growth, as well as a key contributor to financial and social prosperity (Omodero, 2019). According to the OECD (2016) data mentioned in (Omodero, 2019) research, SMEs are the most common type of business in the OECD region, accounting for about 99 percent of all businesses. They are the primary source of employment, accounting for around 70% of all occupations on average, and are significant contributors to value creation, contributing for 50% to 60% of all value generated on average. IFC (2010), referenced in the (Omodero, 2019) research, agrees, claiming that SMEs provide up to 45 percent of total employment and 33 percent of GDP in emerging economies. According to the Small and Medium Enterprises Development Agency of Nigeria (2017) and the National Bureau of Statistics (2017), there were 77,069,519 (Seventy Seven Million, Sixty Nine Thousand, Five Hundred and Nineteen) Micro, Small, and Medium Scale Enterprises in Nigeria as of 2019, employing over 93 percent of the total labor force and contributing 68.47 percent to the Gross Domestic Product (Akhor et al, 2019). (GDP). According to the International Finance Corporation (IFC), 96 percent of firms are small and medium-sized enterprises (SMEs), compared to 53 percent in the United States and 65 percent in Europe (IFC, 2018). (Bazgan et al, 2018). The International Council for Small Business (ICSB) confirms this by stating that MSMEs account for more than 90% of all businesses and account for an average of 50% of GDP in any economy. Given these international recognitions of the importance of SMEs in any economy, including Nigeria's, one would question why Nigerian SMEs struggle to thrive and attain these global goals. The payment of VAT, which is a form of tax on consumables, is one key element that adds to SMEs' struggles in Nigeria (Bazgan et al, 2018).
VAT (Value Added Tax) is an indirect tax placed on all goods and services made or delivered in a nation, with the exception of supply and services that are VAT exempt. VAT is a tax levied on the number of products and services that the end consumer finally receives, and it is collected at each stage of the manufacturing and delivery process. It means that VAT is a consumption tax collected from those who only have a little taxing incidence, allowing those who pay VAT to avoid bearing the full expense of the charge (Oyedokun, 2016). VAT was established in Nigeria with the introduction of the Value Added Tax Act (VATA) 1993, as defined in No. 102 of the VATA 1993, to replace the sales tax, which was then backed by Federal Government Decree No. 7 of 1986. Nigeria's VAT rate has stayed at 5% since its inception in 1993, making it one of the lowest in the world. President Obasanjo's government proposed increasing the VAT from 5% to 10%, however the plan was rejected by the late President Yar'Adua's administration owing to strong public opposition. One of the key changes in Nigerian VAT management is Section 34 of the Finance Act of 2020, which increased the VAT rate from 5% to 7.5 percent. The Finance Bill of 2019 was signed into law by President Buhari on January 13, 2020, and the Finance Act of 2020 took effect on February 1, 2020. (Oyedokun, 2016).
By expanding the list of basic food products that are VAT-free, the new Finance Act 2020 has enhanced the goods and services that are VAT-exempt. Seasonings (honey), dough, mueslis, caterers use oil, gastronomy parsleys, fish, wheat and thickening, and berries are among the other products on the VAT-free list of essential food goods (fresh or dried). Animal protein sources, milk, nuts, throbs, tubers, saline, spuds, H2O, and locally made sterile bath sheets, swabs, or wipes are also on the list. Microfinance bank services, kindergarten instruction, and various levels of schooling are among the additional services free from VAT under the new Finance Act 2020. Businesses having a turnover of less than N25 million are excluded from paying VAT under Section 38 of the Finance Act 2020. (Akande, 2019).
However, this study examines the impact of Value Added Tax on the long-term sustainability and profitability of SMEs in Nigeria, with a focus on the state of Cross Rivers.
1.2 Statement of Research Problem
Micro, small, and medium-sized enterprises (MSMEs) are critical to Nigeria's economic growth and development because they have the ability to eliminate unemployment, create wealth, and redistribute income. The issues that these SMEs encounter are related to the unfavorable link between taxes and the capacity of the firm to survive and develop (Akande, 2019). Not to mention the numerous obstacles that SMEs face in other developing nations like Nigeria, such as a lack of money, insufficient technical and management skills, environmental repercussions, and government laws, all of which have a significant impact on how SMEs operate in Nigeria.
The FG raised VAT from 5% to 7.5 percent, which is a consumption tax on the "value-added" to a product throughout its manufacturing process.
This reduction will result in a slower-paced economy with fewer disposable income — money left over after taxes and social security contributions, which may be spent or saved as one desires (Oyedokun, 2016). As a result, businesses that are not exempt from the VAT increase and sell directly to final customers, particularly in the fast-moving consumer goods and services sector, will face pressure to remain competitive and may be forced to absorb part or all of the VAT increase in order to keep their prices unchanged. This has contributed to the worm's appetite for a big portion of the income earned by these SMEs in order for them to grow and survive. As a result, the number of Small and Medium Scale Enterprises (SMEs) in Nigeria has increased (Oyedokun, 2016).
As a result, the purpose of this research is to assess the impact of Value Added Tax on the long-term sustainability and profitability of SMEs in Nigeria, using Cross Rivers State as a case study.
1.3 Objectives of the Study
The main objective of this study is to carry out an appraisal of value-added tax on the sustainability and profitability of SME'S in Nigeria using selected SMEs in Cross Rivers state as case study. Specifically, the study seeks to:
- Examine the nature of impact experienced by SMEs in Cross Rivers state during project investment.
- Investigate the effect of VAT inclusion on SMEs consumables
- Investigate the effect of VAT on the profitability of SMEs in Cross Rivers state.
- Examine the possibility of loss accrued to SMEs in a bid to maintain healthy competition for their products and services.
1.4 Research Questions
The following research questions guide this study:
- What kind of effect does payment of VAT have on project investment of SMEs in Cross Rivers State?
- What is the effect of VAT inclusion on SMES consumables?
- What is the effect of VAT on the profitability of SMEs in Cross Rivers state?
What is the effect of VAT on SMEs product or service competition?
1.5 Statement of Research Hypothesis
The following null hypotheses are tested in this study:
H01: VAT does not affect Profitability of SMEs in Cross Rivers State.
H02: VAT does not affect sustainability of SMEs in Cross Rivers State.
1.6 Significance of Study
Theoretically, this study will add to existing literature on this study domain and serve as a reference material to scholars, researchers and students in different levels of education who may want to carry out further research on this topic or related area in the future.
This study on appraisal of Value-Added Tax on the sustainability and profitability of SMEs in Nigeria will serve as a guide to the government and policy makers in making policies and regulations that will create enabling environment for small and medium scale enterprises to strive well in the country.
Also, this study will enable SMEs to identify the problems confronting the development, profitability and sustainability of small and medium scale enterprises in Nigeria.
1.7 Scope of Study
This research project focuses on unveiling the nature of impact experienced by SMEs in Cross Rivers state during project investment. Also, this study will look into the effect of VAT inclusion on SMEs consumables. The study will further examine the effect of VAT on the profitability of SMEs in Cross Rivers state and more so, will tend to discuss the possibility of loss accrued to SMEs in a bid to maintain healthy competition for their products and services.
The findings of this study will be limited to Cross Rivers State Nigeria. Some selected Small and Medium Enterprises in Calabar shall serve as the enrolled participants for this study.
1.8 Definition Terms
Tax: A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer by a governmental organization in order to fund government spending and various public expenditures. A failure to pay, along with evasion of or resistance to taxation, is punishable by law.
VAT: A value-added tax, is a goods and services tax. It is a type of tax that is assessed incrementally. It is levied on the price of a product or service at each stage of production, distribution, or sale to the end consumer.
Profitability: the degree to which a business or activity yields profit or financial gain.
Sustainability: the ability to be maintained at a certain rate or level or the ability to exist constantly in business without shutting down.
Medium Enterprise: Company with total cost including working capital but excluding cost of land is above hundred million Naira (300,000,000) and a staff strength of between seventy-one (71) and two hundred (200) full time workers and with an annual turnover of more than twenty million Naira (20,000,000).
Small Enterprise: An enterprise whose total cost including working capital but excluding cost of land is between ten million Naira (10,000,000) and one hundred million Naira (100,000,000) and workforce between eleven (11) and seventy (70) full time staff and a turnover of not more than ten million Naira (10,000,000) in a year.
Entrepreneur: This means a person who organizes and manages a commercial understanding.
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