CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Historically, Nigeria’s experience of taxation predates the colonial period. The Hausas of Northern Nigeria were paying taxes, though in kind, to the Emir in return for security and common services. However, with the advent of the colonialists, direct taxation was introduced in 1904 by Sir Lord Lugard, the then British appointed Governor. Its implementation started first in the North and later in the Southern and Eastern regions. According to Ezejelue and Ihendinihu (2006) taxation can be defined as the demand made by the government of a country for a compulsory payment of money by the citizens of the country with the objective of raising revenue, satisfy collective wants of the people and regulate economic and social policies. Aguolu (1999:17) defined capital allowance as expenditures deducted from profits before taxation to reduce the effect of taxation and thus encourage savings and investment.
These capital allowances can come in form of expenses on assets, investments and other non-current assets/activities of the organization. These capital allowances are however backed by various Government legislations. They are granted to enhance the growth and development of industries as well as empowering individuals and corporate taxpayers economically. This work will therefore focus on Capital allowances and their effect on small-scale industries with emphasis on selected small-scale industries in Nigeria, using Rivers State as a case study. The modern day taxation and its use as a fiscal policy could be traced to 1926, which was a year of economic depression in Great Britain. During this period, Britain witnessed an unprecedented decline in her overall economic activities resulting to reduction in total earnings, shortage of fund in the private sector and reduced income per capital with attendant low standard of living.
The effect of this depression was felt not only in Britain but almost the world over. Governments at this time were trying to revive, rehabilitate and mobilize enough capital to provide for economic and social expenses and to raise the standard of living of its populace. In doing this, various fiscal policies were formulated which include taxation. According to Aguolu (1999: 1); taxation may be defined as a compulsory levy by Government through its agencies on the income, consumption and capital of its subjects. These levies are made on personal income such as salaries, business profits, interests, dividends, discounts and royalties. They are used to provide security, social amenities and create conditions for the economic well being of the society. The main purpose of taxation according to Ola (1998:14) is to raise funds to meet Government’s expenditure and to redistribute wealth and management of the economy.
1.2 STATEMENT OF THE PROBLEM
The objective of granting capital allowances and incentives to small and medium scale enterprises is to enhance their growth and development, thus contributing to the overall economic development of the country. But the objective cannot be achieved in a situation where the would-be beneficiaries are not even aware of the existence of such incentives. Moreover, the few who are aware of these incentives do not even bother to apply for them due to the poor and inefficient tax administration. Therefore, there is the need to proffer solutions to these problems to ensure the growth and development of our economy.
1.3 OBJECTIVE OF THE STUDY
The main objective of this study is to examine the effect of capital allowances on the performance of small and medium scale businesses in Nigeria. Specific objectives of the study are: 1. To identify capital allowances available to SMEs in Nigeria. 2. To examine the level of taxpayers’ awareness of the existence of capital allowances. 3. To examine the effect of capital allowances on the profit after tax of small and medium scale businesses in Nigeria. 4. To determine the relationship between capital allowances and growth of small and medium scale enterprises in Nigeria.
