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CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
The development of small 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 requirement
as well as to check how those requirements are met, the lower the initiatives for small 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 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 and
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 the 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 (Cappelea, 2001).
Small scale business or enterprise is of crucial importance in a developing economy as it helps to bridge and
reduce unemployment gap in such economy. Small scale enterprise is vital to the economic growth of Cross
River State as it constitutes nearly 90% of the state’s economy.
The government of Cross River 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 to a slow pace of the
growth of small scale enterprises as high tax rate has a major adverse effect on business decision making through
covering the profit of a firm thereby reducing the amount of after tax profit meant for re-investment and
expansion. Thus, it is a greater worthiness that the researcher is studying the impact of taxation on small scale
enterprises in Cross River State.
1.2 Statement of Problem
There is a sweeping and effective revenue mobilization drive in Cross River 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 Objectives of the Study
The main objective of this research is to ascertain the impact of taxation on small scale enterprises in Cross
River State. The specific objectives include:
(1) To ascertain the extent high tax rate has affected the growth of small scale business enterprises in Cross
River State.
(2) To determine how tax rate has affected the profits and sales turnover of small scale enterprises in the
state.
1.4 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 Cross River State 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 macro-economic
variables in the state.
For academicians, the study will add to the existing stock on study of small scale enterprise and taxation.
1.5 Scope of the Study
This research work is on the impact of taxation on small scale business enterprises in Cross River State. The
research look at how the enormous taxes levied on small scale business operators in the state affect the growth of
the small scale industry.
1.6 Definition of Terms
Tax:This is a compulsory financial charge or other levy upon and individual or legal entity by a state or the
functional equivalent of the state such that failure to pay is punishable by law. It is not a voluntary contribution,
payment or donation but rather, it is imposed by government under t6hthe name of import duty, exercise, etc.
Tax rate: Taxes are most often levied as a percentage. Thus, tax rate is the percentage of income or profit of
individual paid as tax.
Tax burden or tax base: otherwise called tax incidence is on whom a tax is collected. Depending on the
elasticity of product, a tax imposed on a seller can be ultimately paid by the buyer simply by shifting the burden
in form of a higher price.
Small scale enterprise: This is sometime called small scale business. It is a business that employs small number
of workers and does not have a very high volume of sales.
Cross River State: This is a state located in the southern part of Nigeria, one of Nigeria’s 36 states. The state is
bounded by Akwa Ibom, Cameroun, Benue State and Ebonyi state with an estimated population of about2.5
million people and over 25 ethnically diversed people.
Excess burden of a tax: In economics, the excess burden of taxation, also known as the deadweight cost or
deadweight loss of tax is one of the economic losses that society suffer as the result of taxes or subsidies.
1.7 Organization of Study
The study is organized into fiver (5) chapters. Chapter one is the introduction, chapter two is literature review,
theoretical framework and some conceptual issues. Chapter three looks at the research methodology while
chapter four captures data presentation and analysis and chapter five is summary and findings; conclusion and
policy recommendation.
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