THE EFFECTS AND IMPLICATIONS OF TAXATION ON ENTREPRENEURSHIP AND INNOVATION

CHAPTER ONE

1.6              INTRODUCTION

In theory, taxation, which includes personal income tax, capital gains tax and companies’ income tax etc., often leave individual entrepreneurs with less expendable capital to reinvest in their respective businesses. It is generally supposed that the higher the tax rates, the more capital is taken out of the hands of the entrepreneur and into the hands of the government. The two primary objectives of every business are profitability and solvency. Profitability is the ability of a business to make profit, while solvency is the ability of a business to fulfill its various financial obligations, including the payment of debts as at when due. However, the achievement of these objectives requires efficient management of resources, including the efficient management of liabilities under which category the payment of taxes lie. Therefore, the background upon which this research work is predicated is one that seeks to establish the various understudied links and correlations between the concept of taxation, its implementation and its impacts on entrepreneurship. This chapter covers the background of the study, statement of the problem, scope of the study, objectives of the study, statement of hypotheses, significance of the study, scope of the study, limitations of the study and references.

1.7              BACKGROUND OF THE STUDY

Entrepreneurship makes up the core of majority of the world’s economy. A study carried out by the Federal Office of statistics shows that in Nigeria, Entrepreneurial enterprises constitute 80% of the Nigerian economy (Ariyo, 2005). Although entrepreneurs often operate small and medium enterprises, the entrepreneurship sector remains the most important sector in the economy due to the fact that when all the individual effects are aggregated, they surpass that of the larger corporations and multinationals. The social and economic advantages of Entrepreneurship cannot be underestimated. Nzotta (2006) sees Entrepreneurship as a source of employment generation, competition, economic dynamism, and innovation which stimulate entrepreneurial spirit and the diffusion of skills. Because they enjoy a wider geographical presence than big companies, entrepreneurship also facilitates better income distribution.

Over the years, Entrepreneurship has been an avenue for job creation and empowerment of Nigerian citizens by providing about 50% of all jobs in Nigeria. Entrepreneurship has undoubtedly improved the standard of living of so many people especially those in the developing areas. Sadly, however, while this sector has been a major catalyst for socio-economic development, it has become apparent that majority of our national stakeholders have failed to recognize the pivotal role played by this sector in relation to the long-term socio-economic development of the nation. This skewed perception results in undue interference in the operations of entrepreneurs by various stakeholders of the society and particularly agencies of government. Predominantly, this sector has witnessed many unfavorable interventions and actions from various Ministries, Departments and Agencies (MDAs) of governments (at the three tiers) who see the imposition of sundry taxes and levies on entrepreneurs as an opportunity to generate revenue for government.

Innovation and entrepreneurship play a pivotal role in sustained economic growth and improved standards of living through engendering lower prices for products which is made possible by achieving cost efficiencies in the production/marketing processes and taking advantage of economies of scale; this in turn makes increases in revenues and higher wages achievable. Entrepreneurship also often advances new ways of manufacturing, novel methods of providing services and innovative modes of doing business. There are many factors involved in bringing an idea to the market and successfully executing said idea, but we know surprisingly little about the role of government, and taxation specifically, in attracting or motivating entrepreneurs and spurring or repressing indigenous innovation.

Taxation is a major source via which a country’s government generates revenue. Tax is generally used to pursue the various objectives and to fulfill the sundry obligations of a government. The tax structure or combination of tax policies being implemented in a given economy at a particular time is known to reflect the future aspiration of that economy. Like in many other developing countries, there exists in Nigeria a variety of taxes which are paid by companies, business firms and self-employed individuals. Among these are consumption taxes like VAT, companies’ income tax, capital gain taxes, personal income tax, petroleum profit tax, etc.