CHAPTER ONE

INTRODUCTION

BACKGROUND TO THE STUDY

Taxation plays a crucial role in promoting economic growth and development. Through taxation, government ensures revenue generated are channeled towards development of important projects in the society.

Tax is a compulsory fee imposed by the public government on the income of an individual, companies and various business organizations, and it forms a major source of government’s revenue. 

Taxation serve as pivotal tool for strengthening the domestic resource mobilization of the country,it is also considered a veritable source of revenue for financing societal developmental projects, provisions of basic infrastructures for the citizens, as well as people oriented programs in any country, irrespective of whether they are classified as developed or developing economies.

A good tax possesses the following qualities: fairness, convenience, simplicity, and minimum cost of collection and minimum distortions. Musgrave (1980) noted that taxes should be chosen so as to minimize interference with economic decisions in otherwise efficient markets.Governments impose many types of taxes, individuals pay income taxes when they earn money, consumption taxes when they spend it, property taxes when they own a home or land, and in some cases estate taxes when they die, and all other forms of domestic taxes, this means that all compulsory payment made by individuals and institutions to the government are regarded as tax. 

It is an undisputable fact that, taxation has been known to be one of the most important weapons available to any government for marshalling it financial resources (Atta-Mills, 2002: Teidi, 2003 and Oloyede, 2010). However, it is needless to emphasize that the existence of these well defined tax policies alone cannot guarantee the success of domestic tax collection effort from the small scale business sector, therefore there must always exist an efficient and effective tax administration as a sine qua non to successful domestic resource mobilization. Within the last decade or so, the issues of tax policies and modern tax reform have continued to attract considerable attention in many sector of the economy. In the face of unbaiting debt difficulties, coupled with the domestic and external financial imbalances confronting them, it is not surprising that many state governments in Nigeria have been forced to adjust their tax policies in a better and more efficient methods for mobilizing domestic resources with the view to achieving it financial stability thereby promoting economic growth (Kiabel and Nwokah, 2009). 

In Nigeria, Small and medium scale business are faced with the horror stories of multiple taxes,unending random taxes and levy collected daily by domestic tax officials, coupled with the frustration of dealing with many different forms of tax policies and law, the large amount of Income tax to be paid monthly, all of which serves as a major hindrance to running a profitable SMEs business in Nigeria.

In recent time the tremendous change in Nigeria economy has been linked with the activities of Small and Medium Scale Enterprises (SMEs). According to theNational Bureauof Statistics in Nigeria, Small and Medium Scale Enterprises make up 97% of productive units of the economy (Ariyo, 2005). Although smaller in size, they are the most important enterprises in the economy due to the fact that when all the individual effects are aggregated, they surpass that of the larger companies, the social and economic advantages of small and medium scale enterprises cannot be overstated. 

Panitchparkdi (2006) sees SMEs as a source of employment, competition, economic dynamism, and innovation which stimulates the entrepreneurial spirit and the diffusion of skills. Because they enjoy a wider geographical presence than big companies, SMEs also contribute to better income distribution. Over the years, small and medium scale enterprises have been an avenue for job creation and the empowerment of Ni