NIGERIANS are known to be resilient, demystifying odds to grow businesses even in the most unfavourable climates. Though some businesses have risen and fallen, Nigerian entrepreneurs have had a fair share of successes anchored either on their sheer industriousness or a dint of luck.
In recent years, however, the travails of entrepreneurs have been compounded by a renewed drive by governments to rev up revenue generation, and a resort to leverage taxation in shoring falling income from other sectors of the economy.
Consequently, these efforts have caused many, including small business owners, to demand equitable use of revenue in reviving moribund infrastructure necessary for business growth and expansion.
But as governments devise novel means to get businesses to pay tax, exorbitant rates, bank charges and a high cost of compliance are weighing heavily on entrepreneurs, forcing some to close shop and leaving very little profit for others.
In a study titled Tax Compliance Costs of Small and Medium Scale Enterprises in Nigeria by Emmanuel Eragbhe and Kenedy Modugu (2014), in the International Journal of Accounting and Taxation, it was observed that Nigerian SMEs bear considerably high tax compliance cost, which reduces their innovation and growth.
According to the study, “Our analyses revealed that on the average, the SMEs overall Tax Compliance Cost (TCC) in Nigeria is about N108, 594 per annum and the values range from N14, 500 to N725, 000 per annum. Smaller SMEs were found to have an average TCC of N219, 601 per annum as against N123, 047 TCC per annum for larger SMEs, which implies the existence of tax compliance costs regression in Nigeria.
“It was also discovered that Value Added Tax (VAT) has the highest TCC, accounting for about 33 per cent of the total average tax compliance costs. Further, the study shows that SMEs in manufacturing industry have the highest relative average tax compliance cost, while those in business services have the lowest average tax compliance cost. Exporting SMEs in Nigeria bear higher tax compliance cost burden than non-exporting ones.”
So, the analysts are saying there is need to reduce the compliance cost of start-ups so as to shrink the size of the shadow economy and encourage non-complying small businesses.
An entrepreneur, who pleaded anonymity because of the sensitivity of the matter, said he has been burdened by the need to pay taxes because of the exorbitant rate and an overwhelming compliance cost, noting that he can barely break even and that he had been forced to part with his meagre earnings.
“For Information Technology (IT) companies, FIRS charges 23 per cent income tax on profits,” he said. “I am a software developer, who builds portals for schools. The schools make rollover payments; services delivered for a term are paid for in the following term. It is difficult to save money with such an arrangement. And because one is just starting up, one would want to put in one’s best in the projects.
“Sometimes, we don’t really get anything in return, but the tax agency expects an entrepreneur to pay 23 per cent tax from his earnings. It is a big problem. There is no job in the country and we are only trying to build something from the scratch. I employ three people. If more people take off two or three people from the labour market, we would be growing the economy and reducing unemployment.”
Noting that companies that are unable to pay up would be locked up; he said “I have to hire an accountant to handle my tax issues, which is another cost. And the most worrisome bit is that they peg the tax to a certain amount, if it is difficult to trace expenses. They don’t care whether you are making money or not.
“I know a school in Ikorodu that doesn’t have too many pupils and as a result, is almost running into debts. But they fixed the school on a N50, 000 tax per year.
I spend N1, 000 on fuel daily. We barely have stable electricity supply at the office. That is a huge challenge. There is barely profit for me in the business.”
He, however, said he is not going to back down regardless of all this, as he is encouraged by the fact that his solutions are solving problems.
“Though this has been hectic, but the joy of our work is that even if it is not generating much revenue, it gives us confidence that tomorrow is going to be okay. Sometimes, I walk into a school, which might be owing me N100, 000 to N200, 000, but when I open their browser and see that my software is in use in almost all the systems in the premises, that means there is a future for the business,” he said.
Explaining that the same cannot be said of other entrepreneurs around him, he said although risk-taking is an integral part of entrepreneurship, many Nigerian youths are shying away from the challenges of starting small businesses.
“Some friends with whom I graduated from school in 2012 are riding big cars now. But those of us who took to entrepreneurship are getting peanuts. In a year, after deducting expenses, the turnover might not be up to N200, 000. I am a graduate living on such meagre income. I try to augment the income by developing applications for doctoral and Master’s degree students.”
On his advice to government regarding the challenge with taxation, he said, “If a business turnover is not up to N5m annually, I would advise government not to tax its operations. N5m divided by 12 is not big money. If you can’t support, then don’t discourage them. We don’t benefit anything from government. I have entrepreneur friends that have run back to paid employment because they could not cope. Some of them were weighed down by bank charges, as well as taxation and because they have responsibilities, they would rather want to keep off the risky path. Some of them, who operate the businesses alongside paid employment, have had it really tough.”
But, Associate Professor of Economics at the University of Lagos (UNILAG), Femi Saibu, argues that the drop in government revenue is fueling the aggressive drive for taxes, noting that government’s operational efficiency may be responsible for some of the costs borne by entrepreneurs.
“The problem with SMEs in Nigeria is not tax, but cost of doing business. Tax is the output not the input. Taxation is in order, but people would always complain. In every economy, there is need for businesses to pay tax. Many people pay tithe in churches. If they pay 10 per cent tithe to religious organisations, they should also pay tax to government that provides physical infrastructure and gives them opportunity to do business. This is a statement of our commitment to our nation and patriotism. We not only make demands from government, we should also try to contribute to government. If there are issues with government’s operational inefficiency, that should be addressed. But that does not absolve us of our responsibility to government,” he said.
Noting that Nigeria’s tax system is still investment friendly, compared to South Africa and some other countries, he said the slide in oil revenue has forced government to implement tax laws it has long overlooked.
“Government has to make money and one of the few options is through taxation. What the citizens are expected to do is to task government to use this money to their benefit. In public finance parlance, we say there are only two things that are constant in life — you pay tax and you die. It is permanent. We can only pressurise government to make judicious use of the tax generated to better the country,” he said.
He advised entrepreneurs to ask for cuts in bills that reduce their baseline costs, not tax.
“For instance, they should be asking for good roads for ease of movement, reasonable energy supply and charges, as well as other critical infrastructure. This would reduce their cost and they would make more profit, and at the same time, pay statutory tax.
They should ask government to build necessary infrastructure.
“If they don’t pay tax, and the infrastructure for them to work is not available, they may not even make profit in the first instance. Tax is not the problem, but lack of basic infrastructure is. If cost of production is low, it would be fair to remove your margin and that of government.”