International Journal of Business and Management
Vol. 7, No. 12; June 2012
Factors That Affect Tax Compliance among Small and Medium Enterprises (SMEs) in North Central Nigeria Ojochogwu Winnie Atawodi1 & Stephen Aanu Ojeka1
Department of Accounting, Covenant University, Ota, Ogun State, Nigeria
Correspondence: Ojochogwu Winnie Atawodi, Ahmadu Bello University, No. 74 Area F, Dodo Mustapha Ring, Zaria, Nigeria. Tel: 234-813-901-8298. E-mail: email@example.com Received: February 27, 2012 Accepted: April 13, 2012 Online Published: June 16, 2012 doi:10.5539/ijbm.v7n12p87 Abstract Tax is an important stream of revenue for government’s development projects. However, tax compliance among SMEs is poor. Therefore, this study was conducted using SMEs in Zaria, North-Central Nigeria to evaluate and rank the factors that encourage non-compliance with tax obligation by SMEs. It was found that high tax rates and complex filing procedures are the most crucial factors causing non-compliance of SMEs. Other factors like multiple taxation and lack of proper enlightenment affect tax compliance among the SMEs surveyed only to a lesser extent. Therefore, it is recommended that SMEs should be levied lower percentage of taxes to allow enough funds for business development and better chances of survival in a competitive market. The government should also consider increasing tax incentives such as exemptions and tax holidays as these will not only encourage voluntary compliance but also attract investors who are potential viable tax payers in the future. Keywords: taxation, developing economy, tax compliance, tax compliance costs, informal economy, SMEs 1. Introduction Most large companies have their roots in small and medium enterprises suggesting that the future large corporations are the SMEs of today that that must be nurtured to ensure their growth. Thus, SMEs are generally perceived to be the seedbed for indigenous entrepreneurship and generate all the many small investments, which would otherwise not have taken place (Aryeetey & Ahene, 2004). Therefore, developing economies like Nigeria needs to further the development of its private sector by creating an environment favorable to the growth of SMEs, strengthening the factors that lead to business success, and addressing the problems threatening the existence and advancement of small and medium enterprises (Chu, Kara & Benzing, 2008), so they can adequately play the role expected of them in economic transformation. Such role includes mobilization of domestic savings for investment, appreciable contribution to gross domestic product, increased harnessing of local raw materials, employment generation, and significant contribution of poverty reduction efforts through sustainable livelihoods and enhancement in personnel income, technological development and export diversification (Smatrakalev, 2006). Furthermore, they have the advantage of reaching the farthest corners of the country unlike the larger establishments. For this reason, an ideal tax policy needs to be adopted in order to ensure voluntary compliance, economic growth and proper utilization of resources rather than suffocating the entrepreneur initiative they are out to cater for. It is a well known fact that the revenue generated from the taxation of individuals and businesses is an important stream of income for government. In an economy like ours that is struggling to remain afloat, it is even more important. Tax revenue is the source of funds used for development projects such as provision of infrastructure like good roads, stable power supply, stable water supply etc. All of which combine to create an enabling environment for businesses –and in turn the economy at large- to grow. Small and Medium Enterprises being profit generating establishments are also expected to pay their dues. The important question however is “how much tax should they be levied”. Small and medium enterprises are...