Introduction
Taxation is the primary instrument through which governments fund public services and pursue economic policy objectives. In Nigeria, a nation striving to diversify its economy away from an over-reliance on oil revenues, an effective and efficient tax system is of paramount importance. Small and Medium Enterprises (SMEs) are widely recognised as the engine of economic growth, contributing significantly to employment and Gross Domestic Product (GDP). Consequently, the manner in which the tax regime impacts these entities is a critical area of legal and economic inquiry. Recent years have seen a raft of tax reforms, primarily through successive Finance Acts, aimed at modernising the system and expanding the tax base.
This essay will appraise the impact of these tax reforms and their administration on SMEs in Nigeria. It will do so through the jurisprudential lenses of legal positivism and natural law theory. This essay argues that while the Nigerian tax system is constructed on a fundamentally positivist framework, where the validity of tax is derived from statute, the practical challenges faced by SMEs highlight the importance of natural law principles of fairness and justice. It will be contended that for the tax regime to be considered legitimate and effective in fostering voluntary compliance among SMEs, it must move beyond mere statutory authority and embrace a more equitable approach.
The Nigerian Tax Regime and its Impact on SMEs
The Nigerian tax landscape is governed by a framework of federal and state laws. Key legislation applicable to companies includes the Companies Income Tax Act (CITA), the Value Added Tax (VAT) Act, and the Tertiary Education Trust Fund (Establishment, etc.) Act. For unincorporated businesses, the Personal Income Tax Act (PITA) is central. Administrative authority is predominantly vested in the Federal Inland Revenue Service (FIRS) for federal taxes and State Boards of Internal Revenue for state-level taxes.
The introduction of annual Finance Acts since 2019 has been the primary vehicle for tax reform. These reforms have had a mixed impact on SMEs. On one hand, the Finance Act 2019 introduced a significant and laudable change by exempting ‘small companies’ (those with a gross turnover of less than N25 million) from paying Companies Income Tax (CIT) entirely. It also introduced a lower CIT rate of 20% for ‘medium-sized companies’ (turnover between N25 million and N100 million), a reduction from the standard 30% rate (Finance Act 2019, s.16). These measures were intended to ease the financial burden on smaller businesses and encourage their growth and formalisation.
However, despite these positive statutory reforms, SMEs continue to face considerable challenges in their interaction with the tax system. A major issue is the persistence of multiple taxation, where businesses are subjected to numerous levies and charges from federal, state, and local government agencies, many of which are of questionable legal origin (Olaoye et al., 2021). This creates a high cost of compliance and an unpredictable business environment. Furthermore, the administrative practices of tax authorities are often described as aggressive, with a strong focus on enforcement and penalties, which can be intimidating for small business owners who lack sophisticated tax advisory support. The complexity of tax laws and the administrative burden of filing returns and maintaining records also represent a significant non-financial cost that disproportionately affects SMEs compared to larger corporations (Ademola, 2020). These practical realities often negate the benefits of legislative concessions.
A Positivist Appraisal of the Tax Regime
Legal positivism is a school of jurisprudence which holds that the existence and validity of law depend on its social sources, not its moral merits. As famously articulated by John Austin, law is a command of the sovereign backed by a sanction (Austin, 1832). In a modern context, this means a law is valid if it has been created through the recognised procedures of the state, regardless of whether it is considered fair or just.
From a positivist perspective, the Nigerian tax system is straightforward and legitimate. Tax laws such as CITA and the Finance Acts are valid because they have been duly passed by the National Assembly and assented to by the President, the constitutionally recognised legislative authorities. The duty of a company or individual to pay tax therefore arises not from a sense of moral duty or fairness, but from the clear instruction of the statute. The Nigerian courts have consistently upheld this positivist view. In Federal Board of Inland Revenue v Joseph Rezcallah & Sons Ltd [1962] 1 All NLR 1, the court affirmed the principle that tax liability is a creature of statute. Therefore, if the statute imposes a tax, the taxpayer is bound to pay it, and the courts are bound to enforce it as written.
Under this view, the challenges faced by SMEs, such as the complexity of the laws or the administrative burden of compliance, do not invalidate the laws themselves. The FIRS, as the administrative body, is simply carrying out the mandate given to it by the law. The positivist would argue that the solution to any perceived harshness lies not in disobeying the law or questioning its legitimacy, but in seeking its amendment through the same legislative process by which it was created. The reforms in the Finance Acts, such as the SME exemption, can be seen as a perfect example of the positivist system at work: a problem was identified, and the sovereign legislature responded by amending the law.
A Naturalistic Appraisal of the Tax Regime
In contrast, natural law theory posits that for a law to be valid, it must align with a higher moral law, often grounded in reason, justice, or divine principles. A key tenet is encapsulated in the maxim lex iniusta non est lex (an unjust law is not a true law). While modern natural lawyers like John Finnis do not suggest that one can simply disobey any law one finds unjust, they argue that such laws lack the moral authority to command full obedience and create a system that is fundamentally flawed (Finnis, 2011).
Applying a natural law lens to the Nigerian tax regime reveals significant deficiencies, particularly concerning SMEs. While a tax law might be procedurally valid (positivist legitimacy), a naturalist would question its moral legitimacy if its effect is to stifle the very businesses it is supposed to support. The principles of a good tax system, as first articulated by Adam Smith, include equity (taxpayers should pay according to their ability), certainty, and convenience of payment (Smith, 1776). These principles align closely with natural law ideals of fairness and justice.
When Nigerian SMEs are confronted with multiple layers of taxation, aggressive and sometimes arbitrary enforcement, and a high compliance burden, the system can be seen as failing the test of equity and fairness. A naturalist would argue that such a system is unjust. This perception of injustice has a direct impact on taxpayer behaviour. Widespread tax evasion and the reluctance of businesses in the informal sector to formalise can be interpreted not merely as criminal acts, but as a rational response to a system perceived as predatory and unfair (Appah and Hounakey, 2017). Furthermore, the social contract, which underpins the moral obligation to pay tax, is weakened when citizens do not see a corresponding provision of public goods and services from the revenue collected. When taxpayers perceive that their money is being mismanaged or embezzled, the moral compulsion to comply is severely eroded, a classic natural law argument based on reciprocity and justice.
Conclusion
In appraising the impact of Nigeria’s tax regime on SMEs, it is clear that both positivist and naturalist perspectives offer valuable insights. The system is undeniably positivist in its formal structure; tax laws are valid because they are enacted by the proper authority. However, to focus solely on this formal validity is to ignore the practical realities and the functional legitimacy of the system. The challenges of multiple taxation, administrative aggression, and high compliance costs create a system that many SMEs perceive as unjust, thereby failing the standards of natural law.
This tension explains both the problems and the progress within the Nigerian tax system. The high rates of non-compliance and the large informal economy can be seen as a popular rejection of a system that is perceived as unfair. Conversely, the reforms introduced through the Finance Acts, particularly the exemption for small companies, can be viewed as the legislative sovereign tacitly acknowledging these natural law concerns. These reforms are a positivist action driven by a desire to make the system more equitable and, therefore, more effective.
Ultimately, a purely positivist approach is insufficient for building a sustainable tax culture in Nigeria. While laws must be certain and enforced, their legitimacy in the eyes of the populace, especially the vital SME sector, depends on their alignment with principles of fairness, equity, and justice. Therefore, for Nigerian tax reforms to be truly successful, they must continue to bridge the gap between what is legally mandated and what is perceived as just. Future reforms must not only amend statutes but must also address the administrative injustices that undermine the moral foundation of the tax regime.
References
Ademola, A. (2020) ‘An Assessment of the Impact of Tax Administration on the Growth of Small and Medium Enterprises in Nigeria’, International Journal of Research and Innovation in Social Science, 4(9), pp. 58-66.
Appah, E. and Hounakey, A. (2017) ‘The Nigerian tax system and the challenges of compliance: A survey of the perceptions of tax payers’, Journal of Accounting and Taxation, 9(7), pp. 84-93.
Austin, J. (1832) The Province of Jurisprudence Determined. John Murray.
Federal Board of Inland Revenue v Joseph Rezcallah & Sons Ltd [1962] 1 All NLR 1.
Finance Act 2019 (Nigeria).
Finnis, J. (2011) Natural Law and Natural Rights. 2nd edn. Oxford: Oxford University Press.
Olaoye, C. O., Adejare, A. T. and Adejare, M. S. (2021) ‘Multiple taxation and performance of small and medium scale enterprises in Nigeria: A study of selected SMEs in Oyo state’, European Journal of Business and Management Research, 6(3), pp. 248-253.
Smith, A. (1776) An Inquiry into the Nature and Causes of the Wealth of Nations. W. Strahan and T. Cadell.
