Special Features: How Multiple Taxation Is Killing Small Businesses In Nigeria

By Giovanni Emephia

More than ever before, small and medium enterprises in Nigeria, as in most parts of the world, form the backbone of the country’s economic strength.

Latest report from the Small Medium Enterprises Development Agency of Nigeria, SMEDAN, and the National Bureau of Statistics indicate that small and medium enterprises “contribute nearly 50% of the country’s Gross Domestic Product, GDP, and account for over 80% of employment in the country. This sector is therefore critical to Nigeria’s growth, as well as reducing poverty.”

In an earlier 2013 survey carried out by SMEDAN, and the National Bureau of Statistics, the importance of Micro, Small and Medium Enterprises, MSME, in the acceleration of economic growth and development in different sectors of the Nigerian economy were copiously highlighted.

The general perspective of the survey was that MSMEs are perceived as vehicles that “accelerate the attainment of broad socioeconomic objectives, including poverty reduction, employment generation, and wealth creation, amongst others.”

Experts agree that these micro, small and medium enterprises are the economic backbones of any country, growing as most do from being one person ownership, to family businesses, employers of labour and sometimes transforming into big corporations that employ hundreds of thousands of persons and impact on millions of lives and families.

Though less organized like most formal businesses, the local provisions store, market shops, restaurants, waste management service providers, business centres, mechanic workshops and the hundreds of other small and medium scale businesses that cut across all sectors of the economy, are part of this huge informal sector of the economy that provides employment and sustenance to millions of Nigerians who undertake personal initiatives and invest in their ideas to improve their living standards and that of those who depend on them, either as employees, family members or part of the extensive business value chain.

However, the mortality rate of these small businesses is very high indeed. Studies have shown that most SMEs in Nigeria collapse within the first five years of their operation. While acknowledging the combined effect of a number of factors ranging from insufficient capital, irregular power supply that forces these small firms to spend much needed funds for power generating sets rather than invest it for growth and sustenance of their business, lack of proper bookkeeping, etc, one key area that has also been fingered as a critical ingredient in pushing these MSMEs to a premature grave is multiple taxation.

At the first Abuja SME Conference and Exhibition organized by the Abuja Chamber of Commerce and Industry, ACCI, on August 17, 2021 with the theme: “Solution Strategies for Resolving Tax, Regulatory and Logistic Challenges facing Nigerian SMEs, then Vice President Yemi Osibanjo stated that “a large number of SMEs in Nigeria collapse due to the payment of multiple tax.”

According to him, the high rate at which small businesses were shutting down was mainly because of tax related problems. In his words: “some of the specific challenges related to taxation are multiple taxation at the national and subnational levels, no clarity on the procedure and amount to pay and non-friendly tax administrators.”

According to the national tax policy document, multiple taxation occurs where the tax, fee or rate is imposed on the same person in respect of the same liability by more than one state or local government council.

In a study titled “Effect of Multiple Taxation on the Financial Performance of SMEs in Benue State,” carried out by Zayol, P.I., Duenya, I. Moses and Gberindeye, C. Abraham, all of the Department of Accounting and Finance, Federal University of Agriculture, Makurdi, it was found out that “duplication of Business Premises Registration Tax, Development Levy and Market Taxes have a significant effect on financial performance of SMEs and as a result, affect their profitability negatively.”

The study therefore recommended that “government should ensure that activities of touts in collecting illegal taxes from SMEs is stopped, and also government should desist from collecting similar taxes under different names, and collapse all taxes of such nature into one form of tax. Finally, the government should ensure that only the amount stipulated by law is collected as tax and a clear jurisdiction of each tax should be expressly stated.”

Though the quoted study focused on SMEs in Benue State, the findings also resonate with other states, including Delta, where local government council agents mostly embarrass and intimidate small business owners with all manner of levies.

The study mentioned earlier speaks to the “negative relationship between taxes and business’ ability to operate at a profit and sustain itself as a result and consequently expand.”

It goes on to posit that ‘SMEs are faced with the problem of high tax rates, multiple taxation, complex tax regulations and lack of proper enlightenment or education about tax related issues.”

It is the general consensus then that multiple taxation is the death knell of SMEs because it eats deep into their already inadequate capital and any profit that would have been ploughed back to grow and sustain the business. This results in the high mortality rate of small businesses earlier mentioned, where only a very tiny percentage of SMEs thrive and blossom to maturity.

The multiplicity of taxes is usually manifested in the so-called revenue committees of local government councils and ministries, departments and agencies of state governments who bully taxpayers by intimidating them into parting with monies that are most times unreceipted, undocumented and frankly, which goes into private pockets.

There is, then, the critical need to nurture small businesses by taking deliberate steps to protect them from the many vagaries of the Nigerian business environment, chief of which is multiple taxation.

At the Federal level, former Vice President Osibanjo, at the event earlier referenced, stated that “the issue of multiple taxation plaguing SMEs was tackled in the Finance Act, 2019 and 2020, with the amendment of various tax and fiscal legislation to bring Nigeria up to speed in the world ease of doing business index.” One of such amendments, according to Osibanjo, was the categorization of companies into small, medium and large companies based on annual gross turnover as seen in the Finance Act 2019.”

At the subnational levels, state and local government councils need to do much more to harmonize their taxes, rates and levies to create a more conducive environment for small businesses to thrive in the states. The critical roles SMEs play as the bedrock of the economy can only be enhanced when state governments work with local government councils to take deliberate steps to enthrone equity and sanity in the tax system.

They must work to enthrone an equitable tax policy that takes cognizance of the ability of these SMEs to pay the various taxes, levies and rates thrown at them by the different levels of governmental authority and still remain in business in this unstable business environment.

The “Ability to Pay” is the most equitable tax system and is the basis of ‘progressive tax’, as the tax rate increases by the increase of the taxable amount. Also, experts have warned that “multiple taxation depletes returns on investment, erodes the capital base of MSMEs and subsequently triggers business collapse.”

Luckily in Delta State, one of the commendable steps already taken by the state government to ensure that businesses are not unduly harassed out of the business space, with its attendant negative effect on the economy of the state, is the harmonization of fees, rates and levies payable by taxpayers into a single demand notice.

The Delta State Internal Revenue Service Law 2020 makes it illegal for any ministry, department and agency of the state government to, on their own, pursue revenue generation activities without recourse to the supervisory role of the Revenue Service as the sole authority with the exclusive powers to “control, administer, impose and collect different taxes and levies and other forms of revenue within the state as provided by the law.” Section 4[2] of that law also states that ‘the collection of all taxes, levies, fees and rates collectable by MDAs is delegated by the Service.”

The Revenue Service has already taken steps to inform the tax paying public and businesses to disregard any form of demand notice for payment of any tax emanating from the MDAs, which demand notice has not been endorsed by the Chairman of the Revenue Service, who is the chief tax officer of the state.

Before now it was bedlam as different MDAs, together with their various revenue consultants made life unbearable for MSMEs, a good number of which had to close shop as a result of the incessant demand for one form of levy or the other. Though it is not yet Uhuru, it is the hope that there would be greater collaboration between states and local government councils to harmonize their tax operations and aid the growth, sustenance and maturity of small businesses.

It would be a positive thing for the economy if small businesses are able to survive to maturity and begin to pay their fair share of taxes. When the business environment becomes free of uncoordinated multiple taxes, and other avoidable encumbrances, micro, small and medium enterprises would eventually become the goldmine of tax collection in the state, as tax receipts from this informal sector group is currently abysmally low.