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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.

A well-functioning internal revenue system, which comprises chiefly of tax systems, structures and policies, is a necessary condition for strong, sustained and inclusive economic development. However, the revenue systems in most developing countries, like Nigeria, have fundamental shortcomings

Numerous, and often conflicting, principles guide the design of a tax system and its structure. One of the major principles underlying the choice of any taxation structure or policy is that it should promote growth, or at least should hamper growth as little as possible. Because innovation has been shown to be an important engine of long term growth and development, and because innovation often takes place in settings where entrepreneurship is vibrant, a successful implementation of that principle requires that the impact of the tax system or structure on entrepreneurship be taken into account.

In Nigeria, for instance, with the reality of ever decreasing revenue from crude oil, it has become imperative, now more than ever before, for the Government of Nigeria to seek out other viable, albeit sustainable, means of revenue generation. Unfortunately, the tax system in Nigeria has remained inherently flawed for decades with subsequent governments having to face and grapple with much the same challenges with regards to tax policies, effective policy implementation, efficient tax administration and collection.

Nigeria, being an import-dependent and majorly trade-driven country, has a great deal of potential if and only if her tax system and tax institutions become structured in such a way that harnesses the tax revenue generation capacity of her commerce-based economy, without necessarily hampering or negatively impacting entrepreneurial drive.

 Tax administration, in the Nigerian context, is a hydra-headed monster, often manifesting in multiple folds via which taxpayers are fleeced multiple times by government Ministries, Departments and Agencies (MDAs). The high level and compliance costs have significant implications for Nigerian enterprises by reducing incentives to expand production thereby leading to higher prices of products and distorting factor incomes, as enterprises take investment decision based on long run returns to capital. The cost of taxation reduces the size of the capital stock and discourages investment in productivity. This ultimately leads to lower return to human capital and lower incentive to innovate.

The failure of the entrepreneurship sector to submit to the IGR demands of government often result in disruptive enforcement actions carried out by these MDAs (Michael, 2013). Entrepreneurship continues to witness harassment from MDAs such as forceful sealing of business premises or removing of components of site installations in their bid to compel compliance. This continued intervention in this sector by MDAs results in disruption of services, reduction in quality quantity of products/services, increase in operating costs and the general cost of carrying out business in Nigeria. While it is true that the untoward consequences of taxation and illegitimate taxes is not born solely by the Entrepreneurship sector alone, it is cogent to believe that the critical nature of services provided by the Entrepreneurship sector imply that urgent actions are needed to address these challenges before a total collapse of this sector is witnessed.

The importance of this sector to the development of the Nigerian economy has motivated this study of assessing the effects of taxation on the performance of Entrepreneurship and innovation the third world countries, with the bubbling entrepreneurship environment of Lagos state serving as a case study.


There are lots of problems facing Entrepreneurship and innovation globally. Although some of these problems are peculiar to many countries, the challenges faced by Entrepreneurship in different countries and geopolitical divisions are basically the same. A study carried out by the Federal Office of Statistics shows that in Nigeria, Entrepreneurship makes up 80% of the economy (Ariyo, 2005). In spite of this importance, the mortality rate of entrepreneurship ventures is very high as stated in Small and Medium Enterprise Development Agency of Nigeria (SMEDAN). SMEDAN has reported that about 80% of Small and Medium scale Enterprises (SMEs) in Nigeria die before their 5th anniversary. Among the factors responsible for these untimely shut-down are tax-related issues which are: (1) Multiple taxation (2) High tax rates (3) Low Efficiency of tax collection bodies (4) High collection charges (5) Inarticulate tax policies and structures (6) Low profitability etc.

Furthermore, owing to the compulsion of taxation as a charge against income, capital investments and properties of individuals, partnerships, Entrepreneurship and corporate bodies in the country, there has been an ample quest by the Nigerian government to increase the rate of some of the existing taxes as a means of generating additional revenue. This mostly affects SMEs that are struggling to stay afloat in the business environment who still have to pay tax out of the little profit they make.

1.9              OBJECTIVES OF THE STUDY

The broad objective of the study is to examine the implications of taxation on the performance of Entrepreneurship in Lagos State.

The specific objectives include:

1.            To ascertain whether there is a significant correlation between taxation and the profitability of Entrepreneurship.

2.            To determine if there is a relationship between taxation and the reinvestment rate of Entrepreneurs.

3.            To ascertain whether there is a relationship between taxation and the growth of Entrepreneurship.

4.            To determine if there is a relationship between taxation and the productivity of Entrepreneurship.


For the purpose of this research, the following research questions were formulated and addressed:

1.      How does taxation affect the profitability of entrepreneurship?

2.      What is the relationship between taxation and the reinvestment rate of entrepreneurship?

3.      What is the relationship between taxation and entrepreneurial growth?

4.      What is the relationship between taxation and the productivity of entrepreneurship?


In order to carry out this study; the following research hypotheses were formulated. These hypotheses were structured in both null and alternative forms as follows:

Ho1There is no significant relationship between taxation and the profitability of Entrepreneurship.

HA1There is a significant relationship between taxation and the profitability of Entrepreneurship.

H02:    There is no significant relationship between taxation and the reinvestment rate of Entrepreneurship.

HA2:   There is a significant relationship between taxation and the reinvestment rate of Entrepreneurship

H03:    There is no significant relationship between taxation and the growth of Entrepreneurship.

HA3:   There is a significant relationship between taxation and the growth of Entrepreneurship.

Ho4: There is no significant relationship between taxation and the productivity of Entrepreneurship.

HA4: There is a significant relationship between taxation and the productivity of Entrepreneurship.


            The findings from this study will be of good benefit to the general Nigerian populace and the business community as it will help the tax payers to have a deep understanding of their obligations and the need to meet such duties on tax liabilities. Government and its agencies on their own part will equally see the need for effective planning, administration and collection of taxes and also providing incentive for tax payers so as to limit the problem of tax avoidance and evasion hence, achieving the overall macro-economic goals of the country.

                  Finally, it could serve as a possible benchmark for other further advanced studies in this regard.


For the purpose of achieving acceptable and realistic results, this study is primarily focused on Entrepreneurship in Lagos State. The study central objective centres on identifying the effects and implications of taxation on entrepreneurial undertakings.


Taxation: The most dependable and reliable definition of taxation was given by Hugh Dalton who defined a tax as “a compulsory contribution imposed by a public authority, irrespective of the exact amount of services rendered to the taxpayer in return, and not imposed as a penalty for any legal offence”.   Imposition of a tax, therefore, creates a tax liability upon those liable to pay the imposed tax. A tax liability is always expressed in monetary terms, and it is worth noting here that any monetary liability creates a burden. In other words imposition of a tax creates a tax burden on taxpayers. 

EntrepeneurshipEntrepreneurship is the process of using private initiative to transform a business concept into a new venture or to grow and diversify an existing venture or enterprise into one with high growth, through innovative practices (UNDP, 2010).

Entrepreneur: An entrepreneur is a person who makes money by starting or running a business, especially when this involves taking financial risks ( Hornby, 2006).


Ariyo D. (2005), Small firms are the Backbone of the Nigeria Economy, Retrieved from  

Michael, A.J. (2013). Survey on the taxation of small and medium-sized enterprises: draft report on responses to the questionnaire. 

This material content is developed to serve as a GUIDE for students to conduct academic research

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