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An Examination of the Effect of VAT on the Profitability of SMEs in Nigeria: A Study of Retail Businesses in Enugu State

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Background of the Study
Value-Added Tax (VAT) is an indirect tax levied on goods and services at each stage of production and distribution. For SMEs, especially retail businesses in Enugu State, VAT represents a significant cost component that affects pricing strategies and profitability. Retail SMEs are essential to the local economy, providing employment and contributing to revenue generation. However, the impact of VAT on their profitability has been a subject of concern (Nnadi & Okechukwu, 2023).

While VAT is a major source of government revenue, its effect on SMEs can be negative due to its regressive nature and the challenge of passing on costs to price-sensitive consumers. Studies have shown that high VAT rates and poor tax administration can erode profit margins, leading to financial stress and potential business closures (Chukwuemeka & Okafor, 2024).

Statement of the Problem
Retail SMEs in Enugu State often struggle with the financial burden imposed by VAT. This tax reduces profitability, particularly for businesses operating in competitive and price-sensitive markets. Despite its importance, limited research has been conducted on the specific impact of VAT on SME profitability in the region, leaving a critical knowledge gap.

Objectives of the Study

  1. To examine the impact of VAT on the profitability of retail SMEs in Enugu State.

  2. To identify the challenges faced by SMEs in managing VAT obligations.

  3. To propose strategies for mitigating the negative effects of VAT on SME profitability.

Research Questions

  1. How does VAT affect the profitability of retail SMEs in Enugu State?

  2. What challenges do SMEs face in managing VAT obligations?

  3. What strategies can mitigate the negative impact of VAT on SMEs?

Research Hypotheses

  1. H₀: VAT does not significantly affect the profitability of retail SMEs in Enugu State.

  2. H₀: VAT management challenges do not significantly hinder SME performance.

  3. H₀: Mitigating strategies do not significantly reduce the negative impact of VAT on SMEs.

Scope and Limitations of the Study
The study focuses on retail SMEs in Enugu State and examines the impact of VAT on profitability. It excludes other types of taxes and businesses outside the retail sector. Limitations include variability in VAT enforcement and reluctance to disclose financial data.

Definitions of Terms

  • Value-Added Tax (VAT): A consumption tax levied on goods and services at each stage of production and distribution.

  • Profitability: The ability of a business to generate profit from its operations.

  • Retail SMEs: Small and medium-sized enterprises involved in the sale of goods directly to consumers.





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