Project – Impact of Multiple Taxation on Compliance Behaviour among Small and Medium Scale Businesses in Nigeria

CHAPTER ONE

INTRODUCTION

• Background to the Study

The concept of multiple taxation refers to the imposition of more than one tax on the same income, property, or financial transaction by different governmental jurisdictions. This has become a prevalent challenge for Small and Medium Enterprises (SMEs), especially in developing economies. According to Fagbemi, Uadiale, and Noah (2010), multiple taxation significantly increases the cost of doing business and discourages voluntary tax compliance. SMEs, often operating with limited financial and administrative capacity, view these taxes as excessive burdens, which in turn influences their willingness to comply with tax regulations.

Empirical studies have revealed a strong negative relationship between multiple taxation and tax compliance behaviour among SMEs. For instance, Ebiringa and Emeh (2012) found that the proliferation of taxes—ranging from local levies to state and federal taxes—creates confusion and inefficiency, discouraging SMEs from fulfilling their tax obligations. Many business owners perceive the tax system as unfair and overly complex, leading to deliberate tax evasion. The cumulative effect of numerous taxes often results in a reduction of profit margins, which diminishes the perceived benefits of compliance.

Another significant dimension of the issue is the administrative burden caused by multiple taxation. Aspospori, Pantelidis, and Galanaki (2015) emphasized that SMEs typically lack the administrative resources to manage complex tax requirements. Compliance costs, including time spent on paperwork, professional fees, and legal consultations, are disproportionately higher for small firms compared to large corporations. These burdens push many SMEs into the informal sector, where they attempt to avoid taxation altogether, further complicating revenue mobilization efforts by governments.

From a behavioural economics perspective, perceived fairness and trust in the tax system play vital roles in determining compliance. Kirchler, Hoelzl, and Wahl (2008) argued that when taxpayers perceive the tax system as exploitative or corrupt—often due to multiple overlapping taxes—they are more likely to rationalize non-compliance. In environments where there is limited visibility of government services funded by taxes, SMEs are further disincentivized from paying their dues. This erosion of tax morale weakens the overall tax compliance culture.

Government policy and regulatory clarity also influence the impact of multiple taxation on SMEs. Mpapalika and Mung’ong’o (2017) found that harmonization of tax policies and simplification of tax procedures can significantly improve compliance rates. In countries where tax harmonization has been pursued, businesses report higher satisfaction and increased willingness to comply. Tax reforms that reduce the number and frequency of tax payments have proven effective in reducing the informal economy and enhancing transparency.

The literature demonstrates that multiple taxation adversely affects compliance behaviour among SMEs by increasing operational costs, administrative burdens, and reducing perceptions of fairness. These impacts collectively foster a culture of tax evasion and informality. Policymakers must therefore consider reforms aimed at tax simplification, harmonization, and improved transparency to encourage compliance and support the growth of SMEs.

1.2  Statement of the Problem

Small and Medium Scale Enterprises (SMEs) are vital to the economic development of many countries, especially in emerging economies. They play a crucial role in employment generation, poverty alleviation, and the stimulation of economic growth. However, one of the most persistent challenges facing SMEs is the complex and often burdensome tax environment in which they operate. A key element of this burden is the issue of multiple taxation, where businesses are subject to numerous taxes from local, state, and federal authorities. This overlapping tax structure often imposes a disproportionate financial and administrative load on SMEs, threatening their survival and growth.

Despite government efforts to improve tax systems and enhance revenue generation, multiple taxation continues to undermine these goals by discouraging compliance among SMEs. Business owners frequently express frustration over the number of taxes they are required to pay, many of which are perceived as duplicative or unjustified. This perception creates a disincentive for voluntary compliance, leading many SMEs to either underreport income, evade taxes entirely, or operate informally. The result is a loss of public revenue and a weakening of the formal business environment.

Furthermore, the lack of transparency and clarity in tax regulations contributes to the problem. Many SME operators are unaware of their exact tax obligations due to the complex and sometimes contradictory tax laws. This uncertainty fosters distrust in tax authorities and increases the likelihood of non-compliance. Additionally, the poor coordination among different levels of government leads to double taxation and arbitrary levies, which create an unpredictable business environment and hinder planning and investment.

The administrative burden imposed by multiple taxation also places SMEs at a disadvantage compared to larger firms. Unlike big corporations that can afford to hire tax consultants and accountants, most SMEs lack the technical expertise and resources to navigate complex tax requirements. This often results in unintentional non-compliance, for which they may be penalized. Such penalties can be crippling for small businesses with limited cash flow, further discouraging compliance and pushing them toward informality.

Another critical issue is the perceived absence of value for money in tax payments. SMEs are more likely to comply with tax regulations when they see tangible returns in the form of infrastructure, security, and support services. However, in many regions, taxes collected from SMEs do not translate into visible development outcomes, leading to questions about the legitimacy and fairness of the tax system. This erodes tax morale and reinforces the belief that compliance is more harmful than beneficial.

In light of these challenges, there is a clear need for a deeper understanding of how multiple taxation affects the compliance behaviour of SMEs. Without addressing this problem, efforts to broaden the tax base and formalize the informal sector will remain ineffective. Identifying the specific ways in which multiple taxation impedes compliance can inform targeted policy interventions aimed at simplifying the tax regime, reducing administrative burdens, and building trust between tax authorities and small business owners.

1.3  Aim and Objectives of the Study

The aim of the study is to examine the Impact of Multiple Taxation on Compliance Behaviour among Small and Medium Scale Businesses in Nigeria. The specific objectives are:

1. To assess the level of awareness among small and medium scale businesses in Nigeria regarding the various taxes they are required to pay.
2. To examine the extent to which multiple taxation influences compliance behavior among small and medium scale businesses in Nigeria.
3. To identify the challenges faced by small and medium scale businesses in meeting their tax obligations due to multiple taxation.
4. To explore the strategies adopted by small and medium scale businesses to cope with the burden of multiple taxation and maintain compliance.

1.4  Research Questions

The research questions are buttressed below:

1. What is the level of awareness among small and medium scale businesses in Nigeria regarding the various taxes they are required to pay?
2. How does multiple taxation influence compliance behavior among small and medium scale businesses in Nigeria?
3. What are the challenges faced by small and medium scale businesses in meeting their tax obligations due to multiple taxation?
4. What strategies do small and medium scale businesses adopt to cope with the burden of multiple taxation and maintain compliance?

1.5  Research Hypothesis

The hypothetical statement of the study is buttressed below:

Ho: Multiple taxation cannot influence compliance behavior among small and medium scale businesses in Nigeria

H1: Multiple taxation can influence compliance behavior among small and medium scale businesses in Nigeria

1.6  Significance of the Study

This study is significant as it provides a clearer understanding of the effects of multiple taxation on the compliance behaviour of Small and Medium Scale Enterprises (SMEs), a sector that is vital to national economic development. SMEs contribute significantly to employment creation, innovation, and income generation, especially in developing economies. By analyzing the impact of multiple taxation, the study will help policymakers understand how current tax structures may be discouraging compliance and stifling the growth of this important sector.

The findings of this study will benefit tax authorities and government agencies by shedding light on how excessive or overlapping tax demands can lead to non-compliance or tax evasion. With this knowledge, tax administrators can develop more efficient and equitable tax policies that foster higher levels of voluntary compliance. It will also assist in identifying loopholes in the current tax system, particularly those that lead to duplication of taxes or the imposition of arbitrary levies by different levels of government.

This study will also be significant to SME owners and operators, as it highlights the various tax-related challenges they face and provides an evidence-based argument for the need for tax reforms. By articulating the negative effects of multiple taxation on business operations, the study will empower business owners to engage constructively with policymakers and advocate for more favorable tax regimes. It may also encourage business owners to seek better understanding and compliance with streamlined tax processes where reforms have been implemented.

In addition, the study contributes to academic literature by filling existing gaps in research concerning the intersection of tax policy, compliance behavior, and the business environment in the SME sector. While much has been written about tax compliance in general, there is limited research specifically focusing on the role of multiple taxation in influencing SME behavior. This study, therefore, adds value to scholarly discourse and can serve as a reference for future research on taxation and enterprise development.

Development partners, international financial institutions, and donor agencies interested in improving the ease of doing business in developing economies will also find the study relevant. The research provides insights into one of the critical barriers to formalization and compliance, which is essential for designing targeted support programs and policy recommendations. Addressing tax-related constraints will not only improve compliance but also promote sustainable business development and broader economic growth.

Ultimately, the significance of this study lies in its potential to inform tax reform initiatives aimed at simplifying and harmonizing the tax system. By identifying the adverse effects of multiple taxation, the study provides a foundation for creating a more enabling business environment. This, in turn, can improve government revenue collection, reduce informality, and support the long-term viability of small and medium enterprises.

1.7  Scope of the Study

The study examines the Impact of Multiple Taxation on Compliance Behaviour among Small and Medium Scale Businesses in Nigeria. The study is limited to some selected SMEs in Ikorodu LGA, Lagos.

1.8  Operational Definition of Terms

Impact: Impact refers to the effect or influence that one factor has on another. In research, it describes the measurable changes or outcomes caused by a specific variable. In this context, it means the extent to which multiple taxation affects or alters the compliance behavior of small and medium scale businesses.

Multiple Taxation: Multiple taxation is the practice of imposing several taxes on the same individual, income, asset, or business by different authorities—often simultaneously or redundantly. In Nigeria, it often occurs when federal, state, and local governments levy various taxes and fees on the same business entity, creating financial and administrative burdens.

Compliance Behavior: Compliance behavior refers to the actions and attitudes of taxpayers—individuals or businesses—toward fulfilling their tax obligations. It includes whether they file tax returns on time, report income accurately, and pay taxes as required. High compliance indicates adherence to tax laws, while low compliance may involve evasion or avoidance

Small and Medium Scale Businesses (SMEs): Small and Medium Scale Businesses are independent business entities with limited staff size, capital, and revenue, usually defined by national standards. In Nigeria, SMEs are classified by the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN) as businesses with fewer than 200 employees and assets not exceeding ₦500 million (excluding land and buildings). They play a critical role in economic development, employment, and innovation.

Project – Impact of Multiple Taxation on Compliance Behaviour among Small and Medium Scale Businesses in Nigeria