Abstract

This study was aimed at investigating the impact of taxes on the performance of SMEs in the Fako Division case of Buea Municipality. The main objective of this study was to examine the impact of taxes on the performance of SMEs in the Fako Division case of Buea Municipality. This study adopted the descriptive research design and a sample of 50 respondents was used for the study and data was collected through the questionnaire.

Data analysis was process using the SPSS version 21 software to get the linear regression relationship between the dependent and independent variable. The findings from the study revealed that taxes paid by SMEs in Buea Municipality significant affects the performance of SMEs and the results also shows that an increase in the level of business license will lead an increase in performance because, a business license ensures a company is properly protection. From the findings, the study concluded that  having a correct business licence will ensure a business personal assets are protected in case of a lawsuit as well as providing protection for the business if it is damaged.

The study also recommends that tax regulations governing SMEs should be simplified in order to make compliance easier for them. The study also recommends that all SMEs should acquire their business licenses from the government so they could benefits from government grants and protection. A licence will also ensure enterprise employees are protected if they are injured as well as protecting the enterprise customers.

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

In recent times, the world economy has developed tremendously and this has been linked with taxation in Small and Medium Size Enterprises (SMEs), especially in developing countries. Although smaller in size, SMEs are the most important enterprises in the economy due to the fact that when all the individual impacts are aggregated, they surpass that of the larger companies.

The social and economic advantages of small and medium size enterprises cannot be overstated due to lack of tax awareness. Panitchpakdi (2006) viewed SMEs as a source of employment, competition, economic dynamism, and innovation which stimulates the entrepreneurial spirit and the diffusion of skills. Since SMEs enjoy a wider geographical presence than big companies.

According to Adams (2010) an American businessman, tax is a burden in which citizens must bear to sustain their government since the government has certain activities for the benefits of those in it governs. Though taxes may not be the most significant source of revenue to the government in terms of enterprise size, however, taxation is important raising government revenue from the point of view of business certainty but not consistency in performance.

Despite the inherent power of government to impose taxes, identifying the means of taxations has been used to promote fiscal distributions of income, but not identify the problems that militate against the use of taxes as performance in small enterprise.

Tax rates has challenges in business in the country where is it become difficult to identify the purpose of taxation in hindering in business returns (Yitzhaki2002). In Cameroon, over the years, firms derive profits from the business which has been low and no physical financial performance and development actually takes place, thus, the tax administration remains a challenge from non performing business where tax impact is not being felt in small and medium enterprises. Individual tax persons, fraudulent activities in tax collection due to lack of the understanding of the importance of paying taxes that have some problems that affects financial performance.

Therefore, the issue of taxation constitutes the problem of tax awareness, tax administration, tax contributions, tax systems, tax purposes, taxes rates and challenges of tax reforms. Income tax can be regarded as a tool of fiscal policy employed by the government all over the world to influence negatively or positively the nature of economic activities (Okon 2017).

The desire to build a civilized country with a strong and sound economy is the desire of every country, including Cameroon. Tax payment is the demonstration of such desire, although some income earners see it as a means of exploitation by the government.

Tax payment is a voluntarily contribution imposed by the government on personal income earners, companies, investors, exporters, importers etc. Revenue realized from taxation is a major source of revenue to the government of Cameroon, and as such is important tool used in development of Cameroon and her economy (Dennis 2014).

A country’s tax policies and systems are greatly related with the business ventures in the country. An economy that enacts favorable and progressive tax laws and policies will definitely breed successful and finance healthy business organizations.

Once business flourish, the economy flourishes as well, as there is no quicker way of stirring up the matters of economy without help of organizations that move services, goods, money and investments from those with surplus to those with deficit; those with marketable ideas/ output to those who need these ideas and products. In essence, businesses and tax policies greatly depend on one another for survival. If one is greatly affected the other follows suit (Yitzhaki2002).

The Cameroon tax system has undergone significant changes in recent times. With the help of various studies and research done by tax experts, tax laws are being reviewed with the aim of repelling obsolete provisions and simplifying the main ones. Under current Cameroon laws, taxation is enforced by two tiers of the government, i.e National government and county government with each having its sphere clearly spelt out in taxes and levies.

Small business enterprises are generally recognized as important drivers of economic success. They are key ingredient in the ecology of firms in healthy economy, as job creators, sales generators and source of tax/ fiscal revenue. In Cameroon, the importance of small business enterprises (SMEs) as a creator of jobs, particularly for those with low skills level, is widely recognized.

SMEs contribute 25% of the country’s gross domestic product (GDP) and employ about 60% 0f the workforce in the private sector. In agriculture, construction and retail sector SMEs employ about 60% of the total workforce (Cioponea 2007).

Over the last few years the growth of SMEs employment has exceeded the growth in their contribution to the GDP the reason why the Cameroon government has been notably supporting them through financial institutions credit lending. Regulations and tax policies are reported to be one of the constraints to the expansion of small businesses in Cameroon and internationally.

Small and medium enterprises (SMEs) are considered the backbone of economic growth in all countries. Smaller enterprises represent over 90% of private businesses and they contribute to more than 50% of employment and GDP in most African countries (UNIDO, 2009).

Small enterprises in Cameroon are said to be a characteristic feature of the production landscape and have been noted to provide about 85% of manufacturing employment in Cameroon (Aryeetey, 2001). SMEs are also believed to contribute about 70% to Cameroon’s GDP and they account for over 90% of businesses in Cameroon. In line with the various statements noted above, it is reasonable to state that SMEs therefore have a crucial role to play in stimulating growth, generating employment and contributing to poverty alleviation, given their economic weight in African countries

However, these enterprises like any other business Cameroon are liable to different types of taxes and these include income tax, corporation tax, capital gain tax, sales tax and customs duties that are paid at different stages of the business. For purposes of this study the emphasis is put on the impact of taxes on the performance of SMEs in Fako division case of Buea Cameroon.

1.2 Statement of the Problem

It is believed that income tax rates that are charged on small and medium enterprises are not accurate since its base on assumptions without assessing the actual turnover of the enterprise, yet at times these enterprises may be making losses. It is alleged that high Income tax rates affect the level of consumption and increase the unit cost.

Profit maximization is the major goal of every small scale enterprise. However, this seems not to be a reality as most of them cannot achieve this goal. Income tax administration plays a pertinent role regarding revenue collection as well as profitability of any business entity. In an effort for the government to increase its tax base, the tax burden for many firm’s increases.

However, the tax administration system is poor as at times, the tax liability computation is based on estimates, records of many small business firms are incomplete, and some miss out completely leading to tax overcharge. In return, this directly affects the growth of the enterprise and may threaten its survival because taxes are paid out of profits. Therefore, failure to have an effective tax administration system adversely affects the performance of small and medium size enterprises.

Despite the contribution that taxation can make towards the Gross Domestic Product (GDP) of a country in general, much attention is also needed to the side effects of tax on the growth of SMEs.

This is because SMEs play a crucial role in driving economic growth in both developing and developed countries. As highlighted previously, as a group, they do not only generate more new jobs than large firms or macro-enterprises but also introduce innovative ideas, products, and business methods. However, literature has not contributed much in exploring the negative effect of tax payment on the financial performance of SMEs in developing countries (Baurer, 2005). Cameroon corporate tax rate is 33%. That is: corporate tax rate of 30% + 10% surcharge. This tax rate is high for start-ups SMEs which usually leads to early closure of the business.

This situation raises a serious concern about the issue of aligning the tax system to the specific requirements of a particular country’s growth need, as it has to balance both short-term and long-term impact of the policy. This also triggers the need for an in-depth study of how business license, global tax and local development tax hinder the performance of SMEs in Buea Municipality.

Research Questions

1. What is the impact of business licenses on the performance of small enterprises in Buea Municipality?
2. What is the impact of a global tax on the performance of small enterprises in Buea Municipality?
3. What is the impact of and local development tax on the performance of small enterprises in Buea Municipality?

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