Effect of Tax Incentives on MSMEs’ Tax Compliance in Nigeria

Abdulhamid Ellawule1*, Yusuf Maiwada Bashir1, Bala Sulaiman Dalhat1, Naziru Suleiman1

  1. Abubakar Tafawa Balewa University, Bauchi

Journal of Business Management and Accounting 14(2) (2024) · https://doi.org/10.32890/jbma2024.14.2.6

Abstract

Tax incentives have been used as tools to encourage investments and tax compliance from businesses. Little is known about the effect of tax incentives on tax compliance of Micro, Small and Medium Enterprises (MSMEs) in Nigeria. The study, therefore, investigated the effect these tax incentives (the Nigerian government tax exemption to MSMEs with income of a particular threshold and low-interest financing) have on the tax compliance of MSMEs in Nigeria. The study adopted quantitative research and administered questionnaires to MSMEs in Nigeria. Guided by the theories of social influence and slippery slope, the study employed the regression technique for the analysis and concluded that tax incentives have a significant effect on the tax compliance of MSMEs in Nigeria. Also, tax exemption and low-interest financing have a significant effect on the tax compliance of MSMEs in Nigeria. The study has contributed to the body of knowledge by showing the effect the government tax policy of tax exemption to MSMEs has on tax compliance. The different incentives of government are not sufficiently communicated to these businesses to take advantage of. It is, therefore, recommended that government policies especially on incentives to MSMEs should be well broadcast through different social media platforms for them to benefit.

Keywords: Tax incentives, tax compliance, micro, small and medium enterprises.

The developed economies’ policy is to curb global warming (Cobley, 2019). Nigeria, therefore, needs to change their focus from oil to tax (Solanke et al., 2021). It is on this basis that the government introduced the amnesty programme to increase the tax revenue of the country (“VAIDS and the Trust Deficit”, 2018). This challenge has made the government look for alternative sources of revenue (Oghuma, 2018). To increase tax revenue, the government should implement policies that encourage taxpayers to pay taxes without enforcement (Tijjani et al., 2023). The tax authorities need to consider giving incentives to the taxpayers to know if their tax compliance will improve or not. The offence of non-tax compliance should not be seen as an economic crime alone; authorities may also adopt the ‘stick and carrot’ approach in tax administration (Anyaduba et al., 2012). The psychological tax contract theory, also states that tax compliance is an interaction between economic factors and psychological factors (Areo & Gershon, 2020). Tax incentives are part of the fiscal policies of the government to promote investments and encourage taxpayers to comply with tax laws. This is persuasive and therefore, is different from the other factors like tax rates, audits and penalties that are seen as punitive. Furthermore, Micro, Small and Medium-Sized Enterprises (MSMEs) are important to the economy of Nigeria as such they need tax incentives to survive, especially in the case of start-ups (Bello & Kasztelnik, 2022). Despite the importance of MSMEs in creating jobs, one of their main challenges is that of non-tax compliance (tax evasion or avoidance) occasioned by heavy task burdens or multiple tax regimes (Aladejebi, 2018; Le et al., 2020). Although, SMEs in Nigeria do contribute to economic development, however, there is the prevalence of tax noncompliance amongst them (Tijjani et al., 2023). Statement of the Problem There is a need for governments to improve tax generation to adequately fund the increase in expenditure (Tilahun, 2019). This is important because the 8-point agenda of the government requires sustainable funding. Poor tax policies affect the operations of MSMEs which in turn affect MSMEs’ tax payment ability and this also affects the country’s ability to raise revenue to fund its developmental projects (Forbes, 2023). In developing countries, tax compliance is a big problem (Nguyen, 2022b). For example, an audit report shows that out of 28,237 registered businesses, 11,221 refused to file their yearly tax returns to the relevant tax authority and 545 companies with an amount worth ₦26 billion failed to remit their company income tax (Adegboyega, 2019). Further, contributing to the tax compliance problem in Nigeria is the rate of tax evaders. A study shows that about 41 million people do not pay their taxes in Nigeria (Abdullahi, 2021). Furthermore, some tax policies of the government affect MSMEs’ economic performance (Confidence et al., 2021). When a country is experiencing a tax compliance problem, the revenue of the country will inevitably be greatly affected (Dularif et al., 2019). It is evident that there is a tax compliance problem in Nigeria because of the recorded low tax revenue generation in the country (Oladipupo & Obazee, 2016; Oluyombo & Olayinka, 2018). This low revenue generation has caused the country’s tax-to-GDP ratio at just 6 per cent (Kolade & Ajogbor, 2019). The average ratio of tax-to-GDP in Africa is 15 per cent an average of 34.2 among the Organisation of Economic Cooperation and Development (OECD) members (OECD, 2018). MSMEs are the backbone of Nigeria’s economy by providing job opportunities and contributing to the country’s GDP growth (PwC, 2020). However, some of these businesses hardly survive their first year in business without tax incentives. Bello and Kasztelnik (2022) claimed that without tax incentives MSME start-ups barely survive and when there are no tax incentives they engage in non-compliance activities to survive. Also, Feyitimi et al. (2016) state that there will be a high rate of mortality when MSME start-ups are not granted tax holidays. Hence, the ability of Nigeria to grow as fast as it would have wanted is slowed down because of the lack of a strong MSME subsector (Feyitimi et al., 2016). Further, the ability of MSMEs to compete with large and wellestablished businesses is low, hence MSMEs need tax incentives to survive (Oyedele et al., 2021). From what is written on tax incentives and tax compliance of MSMEs in Nigeria, the authors focused on financial grants as the main tax incentives to MSMEs in Nigeria. Therefore, a gap is created when there is no evidence to show where research has been conducted in the area of the government’s recent policy of tax exemption for small businesses within a certain threshold from paying taxes. Also, low-interest financing of MSMEs by the government is an incentive but is ignored by researchers. This study will, therefore, investigate the effect of low-interest financing on the tax compliance of MSMEs in Nigeria. Also, the study will research on the effect of tax exemption on tax compliance of MSMEs in Nigeria, Significance of the Study The significance of this study is three-fold: its theoretical relevance, actual practice and academic purpose respectively. This study will add to the body of existing knowledge. As documented in the literature, small businesses that attain certain turnover threshold are often exempted from paying taxes provided they comply with tax laws in Nigeria. In terms of policymaking to improve the tax compliance challenges in Nigeria, this study is important. Agencies of government are relevant to tax management such as FIRS, States Internal Revenue Service (SIRSs) and Federal Capital Territory, and Joint Tax Board (JTB) will make use of the recommendations from this study to improve their tax policymaking and implementation, specifically in the area of tax compliance of MSMEs in Nigeria. This work is relevant to these agencies because they would find its findings useful in devising methods and measures to control and make laws that could assist in investigating taxpayers’ compliance behaviour, and also to detect and ensure tax compliance is equally adhered to. In addition, this study will serve as a reference for students and other researchers.

LITERATURE REVIEW

This section reviews relevant and related works of value to the development of the topic in the area of tax compliance and tax incentives The sub-topics to be reviewed are tax compliance, tax incentives and MSMEs. Tax Compliance Tax compliance is as old as taxation itself (Bello & Kasztelnik, 2022). When citizens pay their tax liabilities without being forced it is referred to as tax compliance (Atawodi & Ojeka, 2012). Tax payment is a culture which is imbibed by citizens and this serves as a civil duty and an act of solidarity and patriotism. This voluntary compliance without any enforcement is what tax compliance is termed (Kurniawan & Daito,

2021). Effective tax systems and administration help the government generate enough funds for its projects (Oladele et al., 2019). Nontax compliance greatly affects government activities which is one of the reasons that slow down economic development (Sritharan et al., 2023). To encourage taxpayers to pay taxes voluntarily, most tax administrators have provided the option of manual or electronic tax filing (Soon et al., 2020). Furthermore, before compliance is said to have been achieved, four basic rules must be adhered to. These four basic rules are to report the actual tax base to the tax authorities; the tax liabilities should be correctly computed; file tax returns at the right time; and ensure the liabilities are paid when due (Batrancea et al., 2012). The measurement of this tax compliance can be difficult. However, James and Alley (2009) opine that tax compliance can be measured through what they call the tax gap. The authors describe the tax gap as the difference between the amount of tax collected and what ought to have been collected from the taxpayers. Tax Incentives To manage the economy, the Nigerian government usually embarks on some fiscal policies that alter the incidence of tax burden on the income of taxpayers (Aguolu, 2014). Tax incentives are the government’s plan to encourage and persuade new investors to bring investments into the country and equally reduce the tax burden of existing investors (Oriakhi & Osemwnengie, 2013). The authors concluded that tax incentives are measures put in place by the government to stimulate taxpayers to respond favourably to tax obligations. The National Tax Policy (2017) asserts that any government tax policy should ensure it is all-inclusive and open to avoid bias. These measures implied here are reliefs, allowances, tax rate reductions or rebates etc., to corporate bodies and individuals to encourage tax compliance and make tax evasion and avoidance unattractive. It is in this light that section 23(1) (i) of CITA 2004 was amended by the 2019 Finance Act to exempt small companies from paying taxes only if they comply with tax registration, the timing of tax return filing stipulations of this Act, penalties for breach of any tax laws therein. According to Aguolu (2014), some of these fiscal policies, that is, tax incentives are minimum tax, tax relief, tax allowances, interest-free loans and tax holidays. Furthermore, one of the tax incentives was government policy on tax credit. The federal government introduced Executive Order 007 to enable eligible companies to construct infrastructure and get issued tax credits for the costs incurred (Presidential Executive Order No.007, 2019). Micro Small and Medium Enterprises (MSMEs) The importance of MSMEs contribution to the economic development of a country cannot be overemphasized. According to The World Bank (2023), MSMEs represent 90 per cent of businesses and contribute to 50 per cent and 40 per cent of employment and GDP of developing countries respectively. The report also states that MSMEs are entities that find it difficult to obtain loans from the bank, hence they source finances from friends and families to start operations. Small businesses are exempted from paying company taxes provided they comply with the tax laws of Nigeria (Section 40 (a) CITA, 2004 as amended). Also, vatable persons whose worth of taxable supplies is less than ₦25,000,000 are exempted from paying VAT (Section 15, VAT, 2004 as amended). SMEDAN national policy adopts dual criteria for the definition of MSMEs in Nigeria; employment and assets excluding land and building. SMEDAN described small businesses as businesses with a turnover of less than ₦100,000,000 and employees of between 10 to 49. Nigerian government established financial institutions that provide loans to MSMEs at low interest rates. For example, the Bank of Industry (BOI) is a development institution established to support and provide financing to large, medium, small and micro enterprises at a single interest rate (BOI, 2023). The BOI disbursed loans worth ₦969.7 billion to over 3 million MSMEs and 653 large businesses between 2015 and 2020 (Ugbodaga, 2021). Also, the Nigerian government through the Central Bank of Nigeria (CBN) established the Nigerian Incentive-Based Risk Sharing System for Agricultural Lending (NIRSAL) to support and provide affordable financing to agri-businesses. The CBN through the participating banks disbursed over ₦1 trillion to over 4.8 million farmers between 2015 and 2021 (Punch Editorial Board, 2022). The Small Medium Enterprises Development Agency of Nigeria (SMEDAN) national policy adopts dual criteria for the definition of MSMEs in Nigeria; employment and assets excluding land and building.

Table 1. Classification of Enterprises in Nigeria
EnterpriseEmployeeTurnover ₦’ M
Nano/Homestead1-2< 3
Micro3-93-25
Small10-4925-100
Medium50-199100m-1b

Nigeria has added Nano/Homestead to the existing Micro, Small and Medium Enterprises thereby reclassifying and definition of enterprises in Nigeria. Nano/Homestead enterprises are enterprises with 1 to 2 employees and less than ₦3million turnover; while Microenterprises are businesses with 3 to 9 employees and between ₦3 million to ₦25 million turnovers; Small enterprises are businesses with 10 and 49 employees and between ₦25 million to ₦100 million turnover, and Medium enterprises are businesses with employees between 50 and 199 and between ₦100 million and ₦1 billion turnover. Theoretical Framework Theory of Social Influence The theory of social influence was developed by Herbert Kelmen and was propounded to explain how certain individuals are influenced by others (Theoryhub, n.d.). According to Theoryhub (n.d.), the theory identifies three social influences: compliance, identification and internalization. Agreeing with other people has two motives – accepting information from other people as evidence of reality (informational influence) and conforming to positive expectations or values (normative influence) (Wood, 2000). The study opined that public attitudes are influenced by normative pressure. In a social environment, individual opinions can change owing to the influence of others (Friedkin & Johnsen, 1990). Further, in social influence, compliance is agreeing in public but privately not agreeing; internalization is changing behaviour and agreeing both publicly and privately; while identification is conforming to demands as requested by society (Mcleod, 2023). This theory has shown that when the government adopts a policy of giving tax incentives to individuals and MSMEs rather than using punitive actions, they may change the behaviour of the taxpayers hence making them comply with tax laws. Slippery Slope Theory The slippery slope theory is an argument to define and illustrate logic, first put forward by Alfred Sidgwick (Walton, 2015). It is believed to have been first used in 1951. The slippery slope argument classifies tax compliance into two: the coercive and persuasive instruments in the hands of the tax authorities (Prinz et al., 2013). The study believes in the “carrot and stick approach” popularized by Jeremy Bentham, which means the two groups can help improve tax generation through the implementation of policies to deter taxpayers from evasion and the provision of tax incentives to improve trust between the taxpayers and the government. Also, the slippery theory assumes that the tax authorities have the economic factors that can help in tax compliance (Benk & Budak, 2012). The theory has a causal effect where one step leads to taking another step. The government policies that promote trust between the taxpayers and the government improve tax compliance (Kirchler et al., 2008). The underpinning theory of this study is the theory of social influence. Empirical Review Mohamad and Ali (2017) researched the factors that affect the tax compliance of SMEs and concluded that tax incentives have a significant effect on tax compliance. his means tax compliance with tax obligations is dependent on tax incentives. The authors did not state how they arrived at the sample size and it is limited in scope. The study, therefore, advised that it should not be generalized hence they recommended expansion of the scope. Also, Fan and Liu (2020), in a study showed that effective tax incentives improve tax compliance. Sadjiarto et al. (2020) opined that resistance and game-playing affected tax compliance in 2019; commitment affected the perception of tax compliance in 2020; tax incentives moderated commitment towards the perception of tax compliance in 2020. In the same vein, Supriyati (2021), tested the role of tax incentives on the relationship between tax knowledge and tax compliance. The study concluded that tax incentives mediate the relationship between tax knowledge and tax compliance. Further, Sari et al. (2021) in a study found that tax amnesty has a positive and significant effect on individual taxpayers’ compliance. Tax incentives were also tested in this study but the focus is on tax compliance of MSMEs, not individual taxpayers. Using both primary and secondary data for their analysis Meiryani et al. (2022) stated that tax incentives have a significant effect on tax compliance of MSMEs. Furthermore, Sari et al. (2022) stated that tax incentives have a positive and significant effect on tax compliance of MSMEs. Naitili et al. (2022) investigated the effect of tax incentives on taxpayer compliance of MSMEs during Covid 19 and found that tax incentives have a positive effect on taxpayer compliance. Budiman et al. (2022) investigated the influence tax incentives have in boosting MSMEs’ tax compliance during Covid-19. The authors employed a purposive sampling technique and moderated regression analysis for the analysis. They split tax incentives into knowledge of tax incentives and the use of tax incentives and the study concluded that knowledge of tax incentives has a significant influence on tax compliance of MSMEs. However, the use of tax incentives does not have a significant influence on the tax compliance of MSMEs. This study equally measured the effect of tax incentives on the compliance of MSME owners in Nigeria but not as a moderating variable. Apriadi et al. (2022) researched the effect of tax incentives on corporate taxpayers during Covid-19 and concluded that tax incentives have a significant effect on corporate taxpayers’ compliance. This study also conducted research on tax incentives and tax compliance but on MSMEs and not on corporate taxpayers. Similarly, Safiq and Bhisri (2022) investigated the role of tax incentives in the relationship between tax socialization and tax compliance. They employed the SmartPLS technique and found that tax incentives moderate the relationship between tax socialization and tax compliance. This study, however, employed SPSS in measuring the effect of tax incentives and tax compliance and was not used as a moderation variable. To also investigate the effect of tax incentives on tax compliance during Covid-19, Subandi and Tjaraka (2023) emphasized the importance of tax incentives in relieving MSMEs in Indonesia. The study, just like the study by Safiq and Bhisri (2022) employed tax incentives as a moderating variable. Irmayani et al. (2023) stated that tax incentives have a significant influence on tax compliance. Nwokoye et al. (2023)

concluded that tax incentives influence firms in industrial clusters. The tax incentives tested in this study are tax incentives to MSMEs and not industries. Hypothesis Development The hypothesis is developed from the literature reviewed and based on the concepts in the adopted theoretical framework of the study. The social influence theory believes business owners can be influenced by the government’s policies. This means incentives rather than punitive measures can make business owners comply with tax laws. Also, the slippery slope theory believes instruments of compliance can be both coercion and persuasion. This means employing tax incentives to persuade the business owners can improve tax compliance. The following hypotheses are developed. H01: Tax incentives do not have a significant effect on tax compliance of MSMEs in Nigeria. H01a: Tax exemption does not affect tax compliance of MSMEs in Nigeria. H01b: Low-interest financing does not affect tax compliance in Nigeria. METHODOLOGY Introduction This chapter explains the research design, the techniques used to select sample size and the tools employed for the analysis. The research design and the tools adopted will help the researcher in achieving the research objectives. Research Design of the Study This study uses primary data and the data generation was through a survey as such the design of the study is Survey design. Quantitative design involves the ways social phenomena are investigated using numerical data (Watson, 2015). Quantitative design means the study is measurable and can also be verified. This was done by determining the population of this study and then adopting a sampling technique for the selection of the participants.

Population of the Study

The population of this study is the total number of registered MSMEs in Nigeria. This study focuses on MSMEs because, despite their contribution to national development, they have a prevalence of tax compliance issues (Aladejebi, 2018). MSMEs are also described as the engine room of Nigerian economic development (Kale, 2019). In 2007, the Nigerian Bureau of Statistics (NBS) together with SMEDAN carried out a survey and found that there are 41,543,028 MSMEs in Nigeria. The MSMEs in Nigeria have an umbrella body called the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN).

Table 2. Registered Businesses in Nigeria
EnterpriseEmployeeTurnover ₦’ M
Micro41,469,94799.8
Small71,2880.17
Medium1,7930.004

Sample Size of the Study

The target population is large as such this study was unable to administer the questionnaire to all the MSMEs. As such, a suitable method for selecting the sample size, the Taro Yamane (1967) formula was employed in selecting the sample size for this study. The formula is: Ss = N̸ [1+N(e)2] Where: Ss = Sample size N = Population e = level of significance or margin of error, which is 0.05 1 = unity = 41,543,028 [1+41,543,028(0.05)2] = 400. The sample size was increased to 500, that is, an increase of 25 per cent and this is because of response bias. It is equally recommended that 30 per cent can be added to the sample size because of the low response rate (Israel, 1992).

Sampling Technique of the Study

This study adopted cluster (probability sampling) and purposive (nonprobability) sampling techniques in the data collection methods. It is advantageous to group the whole population when the participants cover a large land mass (Taherdoost, 2016). Nigeria was grouped into clusters (zones) because of the large land mass. A purposive sampling technique was then adopted to select the States based on their concentration according to the SMEDAN report. A set of questionnaires was administered to the respondents to collect the data. Data Collection Instrument The questionnaire was in two parts; the first part contains information about the respondents while the second section contains questions on determinants of tax compliance and taxpayers’ compliance. Tax compliance is measured with three tax incentives with 4 indicators and tax exemption and low-interest financing to measure tax compliance of MSMEs. It is closed-ended questions and this method is preferred because it is good for quantitative research and also helps the study in designing and applying measuring instruments for the questionnaire (Jonker & Pennink, 2010). Jonker and Pennink (2010) opine that a closed-ended question is a type of measurement that presents the respondents with a fixed set of questions and unlike the open-ended question, the respondents are not given the possibility of presenting their personal opinions. Also, the closed-ended questions are easier to process and reduce coder variability (Bradburn, et al., 2004). The questionnaire adopted the 5-point Likert Scale validity and reliability which have been tested and are found to be useful. The study equally noted that the human attention span peaks at six items at a time – hence the 5-point Likert Scale does not make respondents lose interest in the adoption of this study. The importance of a 5-point Likert Scale in measuring attitude is confirmed by a study by Likert (1932) where it was described as having a distribution with a semblance of a normal distribution. Also, Park and Park (2019) confirmed that the scale is equally useful for individuals with intellectual disabilities. The questionnaire for this study is adapted from Oriakhi and Osemwnengie (2013); and Nam and Minh (2021). Methods of Data Analysis One of the analyses that was used was the quantitative analysis of the questionnaire items. Also, the use of a simple regression technique was employed for the analysis using the statistical package for the social sciences (SPSS). Regression analysis is chosen for this study because it is a technique most widely used in every business decision-making analysis (Hair, et al., 2014) and SPSS helps in analysing critical data in simple steps and using some techniques in transforming and changing the characteristic pattern between different data variables (Noels, 2018). Regression Analysis The main aim of regression is to measure the causal relationship that exists between a dependent variable and either one or more independent variables (Hair et al., 2014), it is a simple regression if the relationship is between one dependent variable and one independent variable. The basic function of a simple regression is: Y= ᵦ0 + ᵦ 1X + ɛ Where: Y = dependent variable of the study, that is, the variable being explained; X = independent variable of the study; it is the predictor and potential explanatory variable of the dependent variable; ᵦ0 and ᵦ1 = the regression coefficient; and ɛ = unobservable error. Before any regression analysis is performed it is important to satisfy all regression assumptions (Hair, et al., 2010), and the assumptions to be met are to ensure the normal distribution of the data, linearity between the IVs and the DV, and an adequate sample size of the data (Coakes & Ong, 2011). Meyers et al. (2006) state that the result of any analysis could be distorted if the regression assumptions are violated. Also, important is the data cleaning (errors and unengaged response, missing value, reverse coding and outliers), and the reliability.

DATA PRESENTATION AND DISCUSSION

In analysing the data, the study carried out the cleansing; missing items and outliers of the data to avoid incorrect analysis. Also, before the regression analysis, the study checked to ensure the regression assumptions were not violated.

In analysing the data, the study carried out the cleansing; missing items and outlier incorrect analysis. Also,and before the Vol. regression study checked to e Journal of Business Management Accounting, 14, Number 2analysis, (July) 2024,the 339-365 assumptions were not violated. Normality Normality

The distribution distribution line line that that runs runs diagonally diagonally through through the the normality normality plot plot showed that The distributed. When the data is normally distributed, the measure of central tendency showed that the data is normally distributed. When the data is normally and the residuals will also not be affected. distributed, the measure of central tendency will not be affected and the residuals will also not be affected.

Figure 1. Figure 1 Test of Normality Test of Normality
The figure itself is in the PDF version.

dependent and independent variables were linear. Analysis should linear. Analysis should be discontinued when there is no existence existence of linearity between the variables (Tabachnick & Fidell, 2007). The com of between variables (Tabachnick & Fidell, 2007). The of linearity the data will not betheaffected since the variables are linear. computation and analysis of the data will not be affected since the variables are linear.

Figure 1. Figure 2 Linearity Test Linearity Test
The figure itself is in the PDF version.

requirement is not violated and has equally confirmed the consistency of Table the instrument. Reliability Table Variables Reliability Tax Compliance (TC)

Variables Tax Incentives (TI) No of Items Tax Compliance (TC) Source: Researcher Analysis (2023) Tax Incentives (TI)

No of Items

Cronbach's Alpha

Cronbach’s Alpha 0.789 0.817 0.789

Source: Researcher Analysis (2023)

Hypothesis Hypothesis H01: Tax incentives do not have a significant effect on tax compliance of MSMEs

H01: Tax incentives do not have a significant effect on tax compliance The objective is to examine the effect of tax incentives on tax compliance of MSM of MSMEs in Nigeria.

The hypothesis tested if tax incentives have a significant effect on taxpayers’ com The objective is to examine the effect of tax incentives on tax regression analysis, tax incentives do have a significant effect on taxpayers’ comp compliance of MSMEs in Nigeria. 45.659, p < 0.05 and this means tax incentives can play a significant role in taxpay 354to comply or not with tax laws in Nigeria. It shows that 13 per cent of the variabili compliance is accounted for by the model.

Also, with a t-value of -6.757 < 1.96, it indicates that tax incentives are statistically si

The hypothesis tested if tax incentives have a significant effect on taxpayers’ compliance. From the regression analysis, tax incentives do have a significant effect on taxpayers’ compliance, F(1, 302) = 45.659, p < 0.05 and this means tax incentives can play a significant role in taxpayers’ decision either to comply or not with tax laws in Nigeria. It shows that 13 per cent of the variability in the taxpayers’ compliance is accounted for by the model. Also, with a t-value of -6.757 < 1.96, it indicates that tax incentives are statistically significant, although, with unstandardized coefficient B of -0.469, it shows that for every unit of increase in tax incentives, there is a 47 per cent change in tax compliance of MSMEs in Nigeria. The relationship between tax incentives and tax compliance of MSMEs in Nigeria is negatively related.

Table 4. Influence of TI on TC
VariableStandardized Coefficient Betat-valuep-value
TI
R20.131
Adjusted R20.128
F-value-0.362-6.7570.00045.659
Table 5. Summary of Regression Results
HypothesisResults
H1Tax incentives do not have a significant effect on the tax compliance of MSMEs in Nigeria.Not supported

H1 Tax incentives do not have a significant effect on the tax compliance of MSMEs in Nigeria.

Results Not supported

Source: SPSS Analysis by Researcher (2023)

H01a: Tax exemption does not affect tax compliance of MSMEs in Nigeria. The objective is to investigate how exempting small businesses from paying tax affects tax compliance of MSMEs in Nigeria.

The hypothesis tested if exempting small businesses from paying tax has a significant effect on taxpayers’ compliance. From the regression analysis, exempting small businesses from paying tax does have a significant effect on taxpayers’ compliance, F(1, 302) = 26.430, p < 0.05 meaning tax rates can play a significant role in taxpayers’ decisions either to comply or not with tax laws in Nigeria. Also, a t-value of -4.461 > 1.96 indicates that tax rates are statistically significant. However, the coefficient table, shows that for every unit of increase in tax rates, there is a -23.0 per cent change in tax compliance of MSMEs in Nigeria. This shows that 6.2 per cent of the variability in the taxpayers’ compliance is accounted for by the model. H01b: Low-interest financing does not affect tax compliance in Nigeria. The objective is to investigate how low-interest financing by the government affects tax compliance of MSMEs in Nigeria. The hypothesis tested if low-interest financing by the government has a significant effect on taxpayers’ compliance. From the regression analysis, low-interest financing by the government does have a significant effect on taxpayers’ compliance, F(1, 302) = 8.678, p < 0.05 meaning tax rates can play a significant role in taxpayers’ decision either to comply or not with tax laws in Nigeria. Also, a t-value of -2.946 > 1.96 indicates that tax rates are statistically significant. However, the coefficient table, shows that for every unit of increase in tax rates, there is a -17.7 per cent change in tax compliance of MSMEs in Nigeria. This shows that 2.8 per cent of the variability in the taxpayers’ compliance is accounted for by the model. It is proven that individuals’ opinions can be influenced by others. For the study to confirm that tax incentives have a significant effect on tax compliance of MSMEs in Nigeria, it shows that compliance is not just only by deterrent alone but persuasion can equally influence taxpayers’ attitudes in complying with tax laws. The theory of the slippery slope believes the power to change the attitudes and opinions of taxpayers lies in the hands of the authorities. This power must not be penalties alone but tax incentives. Further, the theory of social influence has shown that taxpayers can be persuaded to conform, internalize and identify with government policies. This power is, giving tax incentives to individuals and MSMEs to improve tax compliance in the country.

The findings of the study support the theories adopted for the study. The findings of the study also agree with the study by Fan and Liu (2020) which stated that tax incentives have a significant effect on tax compliance. This study implies that Nigerian tax authorities such as the FIRS, SIRS and the local government revenue committees can improve the tax compliance of individuals and businesses if persuasion is embraced rather than punitive measures which have not yielded much results. Also, this study has added to the body of knowledge literature on tax incentives and tax compliance thereby filling a knowledge gap. This, therefore, helps other researchers interested in the area of tax compliance. The study is limited to four zones in Nigeria because of the crises of armed banditries in other parts of Nigeria. CONCLUSION AND RECOMMENDATIONS MSMEs in developing economies find it difficult to survive, especially in the first year of their establishment. The government often come to their aid to enable them to survive. Sometimes the government provides some palliatives or grants to make them key into the programme of government. Also, tax incentives have been used as tools to encourage investments and tax compliance of businesses. One of the policies of government is the exemption from paying taxes by small businesses from paying taxes to enable them to comply with the tax laws of the country. The study, therefore, investigated the effect these tax incentives have on tax compliance of MSMEs in Nigeria. Cluster and purposive sampling techniques were adopted. The study adopted a quantitative research design and administered questionnaires to 500 MSMEs in Nigeria. Guided by the Psychology-Based theory, the study employed the regression technique for the analysis and concluded that tax incentives have a significant effect on tax compliance of MSMEs in Nigeria. Also, tax exemption and low-interest financing have a significant effect on the tax compliance of MSMEs in Nigeria. Different governments come with different tax policies to encourage businesses. However, the different incentives of government are not sufficiently communicated to these businesses to take advantage. It is, therefore, advised that government policies especially on incentives to MSMEs should be well broadcast through different social media platforms in addition to the traditional media for them to benefit. Also, to avoid ambiguity, the purpose of the tax incentives should be communicated to these businesses. For further study, the study recommends that research should be conducted to find the impact of tax incentives on the revenue generation of MSMEs in Nigeria. ACKNOWLEDGEMENT This work was supported by the Tertiary Education Trust Fund (TETFund), Nigeria.

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