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PROJECT TOPIC: EFFECT OF TAXATION ON SMALL AND MEDIUM SCALE BUSINESSES IN AKWA IBOM STATE (A STUDY OF UYO METROPOLIS)

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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 Akwa Ibom 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 effect of taxation on small scale businesses in Akwa Ibom State.

1.2   Statement of Problem

        There is a sweeping and effective revenue mobilization drive in Akwa Ibom 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.


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