Impact of Tax Policies on Investment of SMEs in Karu, Nasarawa State

Abstract

This study examines the impact of tax policies specifically tax rates, tax incentives and reliefs, and tax compliance requirements on the investment decisions of Small and Medium Enterprises (SMEs) in Karu, Nasarawa State. Employing a survey research design, data was collected from a sample of SMEs through structured questionnaires and analyzed using the Ordinary Least Squares (OLS) regression technique. The results reveal a statistically significant positive relationship between tax rates and investment, suggesting that higher tax rates, when accompanied by visible public benefits, can foster SME investment. Similarly, tax incentives and reliefs were found to have a significant positive effect on investment, highlighting their critical role in reducing financial constraints and encouraging reinvestment. Conversely, while the relationship between tax compliance requirements and investment was negative, it was not statistically significant, indicating that compliance challenges may not directly deter investment decisions within the study's context. These findings have profound implications for policymakers and tax administrators. The study recommends that tax revenues from SMEs should be transparently reinvested into infrastructure and public services to justify higher tax rates and enhance business confidence. Additionally, tax incentives should be tailored to the specific needs of SMEs, focusing on accessibility and relevance to high-growth sectors. Simplifying tax compliance requirements is essential to minimize administrative burdens and foster a supportive business environment. By aligning tax policies with SME needs, governments can stimulate sustainable investment, foster economic growth, and support the development of SMEs in Karu, Nasarawa State, and similar contexts.