Abstract

This current study objective is to examine “The effect of taxes on the growth of small medium sized enterprises in Buea“. The study measured taxes using value added taxes, global taxes and business license while performance is measured using profitability and return on sales of these enterprises. A descriptive research design is adopted and a sample of 30 SMEs will be surveyed. A substantial aspect of the study will involve collecting primary data through the instrumentation of self-administered questionnaires so as to collect the required data.

The data collected was classified and analyzed using descriptive statistics (mean, standard deviation, frequencies and percentages) and the multiple regression analysis to establish the relationship between the variables with the help of Statistical Package for Social Sciences (SPSS) software  and the results revealed that there is a strong positive relationship between the variables (r = 0.717).

This result showed that taxation enhances growth of SMEs hence, the null hypotheses were rejected and the alternative hypotheses accepted which states that Value added tax, global tax and Business License has a significant impact on the growth of small and medium sized enterprises. Therefore, the study thus recommends that for every policy measure taken by SMEs to minimize the taxes paid, VAT, global tax regime and business license should be taken into consideration because failure to do so will lead to detrimental effect on their performance or growth.

Also, Small and medium sized enterprises should always seek the assistance of tax experts who will help reduce their tax liabilities for VAT, global tax regime and business license to the minimum amount and educate them on what to do and what not to do since there is a legal approach through tax avoidance rather than to practice tax evasion.

CHAPTER ONE

INTRODUCTION

 1.1 Background to the Study

Small and medium size enterprises are usually individually owned or family managed businesses offering basic goods and services. Microenterprises tend to lack organizational and management structures, and are generally characterized by uncertainty, innovation and evolution. Udechukwu (2003) notes that micro/small enterprises are mostly constituted of sole proprietorships and partnerships, and only a few are registered as limited liability companies.

Micro enterprises generally have a simple management structure, and in many cases the owner is the manager. With few employees who in most cases lack the appropriate skills and competencies. Given the simple management structure and extensive dependence on the owner, the lifespan of the enterprise is often dependent on the longevity the owner and his/her interest in continuing the business.

According to Akinsulire (2010), SMEs accelerate rural development, decrease urban immigration and the problems of congestion in large cities because they have lesser competition by serving dispersed local markets. Moreover, they contribute to domestic capital formation; and play a valueadding role in mobilizing private savings.

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. (Talam C. 2014). The importance of small business enterprises 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% of the workforce in the private sector. In agriculture, construction and retail sector SMEs employ more than 75% of the total workforce.

Over the last few years, the growth of SMEs employment has exceeded the growth in their contribution to the GDP the reason why most developing nations have notably been supporting them through financial institutions credit lending, sponsorships, and other financial aids (Cynthia J. 2014).

Taxes have existed virtually as long as there have been organized governments. The first tax law legislation was introduced in 1919 (Campsy K, 1997) and ever since then taxes have evolved through a number of reforms. The South African government in an attempt to widen the tax base and collect more revenue has had to levy several taxes especially on business enterprises in which constitute a large part of the formal sector. The taxes charged on business enterprises include; corporation tax, value added tax, presumption tax and exercise duty (Musa T.1992) . The Income Tax Act was made in Kenya (1991), this was to give guidance in assessment and computation of taxes (Campsy K, 1997).

Tax is a compulsory and non-refundable contribution executed by government for public purposes and payment cannot be avoided without attracting a punishment and in return of which no gain/quid pro-quo is promised by the government to the taxpayer. Payment is not followed by concurrent benefit in return (Balunywa, 1988).

This revenue gotten helps the state perform many obligations like provision of national security, road construction, allocation of resources, payment of salaries, execution of state budget, payment of national and international debts and much other governmental expenditure. So, taxes just help the state meet up its revenue and expenditure as well.  Emphasis is particularly laid on small and medium size enterprises because they are one of the smallest in terms of capital and level of activities.

The African community has made some recommendable efforts to promote development through taxation since the inception of the current taxation laws for purposes of promoting development. The main objective of taxation has always been to mobilize resources needed to meet the aspiration of government. This is because for any government to be effective, strong, competent and capable of spearheading development, resources must be readily available in its treasury to be in position to provide goods and services to the people adequately. The government has as duty to always had to ensure proper resource mobilization (Musa T, 1992).

Tax systems have varied considerably across jurisdictions and time. In most modern systems, taxation occurs on both physical assets, such as property and specific events, such as a sales transaction. The formulation of tax policies is one of the most critical and contentious issues in modern politics. (Investopedia, 2017). Tax payment is a voluntarily contribution imposed by the government on personal income earners, companies, investors, exporters, importers etc. (Talam, 2014).

A country’s tax policies and systems are greatly related with the business ventures in the country. An economy with a well-designed tax policy and properly managed tax administration will breed successful operations and finance healthy business activities. Once businesses flourish, the economy flourishes as well, as there is no quicker way of stirring up the matters of economy without help of SMEs 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.

Oludele 2012 argues that high tax rates and tax complicity discourage the growth of SMEs, and this has an economic effect on the growth of the economy. Taxes increase production cost of goods and services and as a result the final consumers suffer from high prices of these commodities. Meanwhile, the revenue collected from taxes represents the major funding source for governmental expenditures (Baurer, 2005). If the tax structure is not adequately designed to the specific environmental conditions, it may create a greater burden to the taxpaying organizations and eventually affect the final consumer due to shifting tax ability.

For the protection and control of Small and medium size operation by the Cameroonian government, several types of taxes are being imposed which aim in protecting home and infant industries (protectionism) and also ensure fair competition among micro enterprises, some of these taxes include; tariffs, import duties, excise tax, to name a few. (Njemo C. 2014)

1.2 Statement of the Problem

Even though there is a general perception that taxes are an important source of fund for the development of the economy and the provision of social services, the problem faced are in the area of a negative relationship between taxes and the business ability to sustain itself and to expand. It is believed that small and medium size enterprises are faced with the problem of high tax rates, multiple taxation and complex tax regulations and also lack of proper orientation or education about tax related issues.

Other challenges assumed to be faced by small and medium size enterprises in less developed countries like Cameroon apart from taxes are; inadequate capital, poor technical and managerial skills, government regulations.

Research has proven that taxation has an impact on the growth and development of small and medium size enterprises. A study conducted by Shome (2004), in collaboration with the Washington, United States-based Centre for International Private Enterprise exposed the actual extent of the burden of multiple taxation on SMEs in South America.

According to Thuronyi (2009), Taxation in general increases the costs of operation of running small and medium enterprises. Small and medium size enterprises on the other hand in other to compensate for the increased costs of operation, prices on goods are rose thus causing the amounts of sales to go down.

And the effects of reduced sales are reduced profits, reduced capital base and slow creation of employment resulting to slow growth. Since small and medium size enterprises are very important to the growth and development of the economy as a whole, if they experience a low level of growth; this will have an adverse impact on the economy as a whole.

Taxes affect growth of small and medium sized enterprises both in a positive and negative way. While tax avoidance and evasion from SMEs affect tax revenue of the state too as well. Growth of small and medium sized enterprises has received considerable interest over the past four decades. 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 firms 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 over charge. 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 profitability of small-scale businesses. (Talam C. 2014).

Taxes are raised by the government to generate revenue used to provide services to the public such as; Health centers, telecommunication, roads, schools and electricity and this have helped to improve on the performance of small scale business enterprises. (Gordon and Dawson, 1987) Despite the services provided, small scale business enterprise’s performance is still poor. This could be due to the increasing tax burden brought about by tax rates which are revised annually. These rates seem to be taking an upward trend which has led to winding up and decline in the growth of some small-scale business enterprises. (Gross Archive, 2008).

Despite the Cameroon people’s effort to start businesses as SMEs due to lack of jobs in the public and private sector, there has been a concern that the tax policies are still not favorable for the growth and development of SMEs (Chisala, 2008).It is further observed that a number of SMEs close up business due to paying proportionally higher taxes than their larger competitors. There can be no doubt that compared to big business and SME’s in other countries these problems have not been sufficiently addressed.

The constrained relate, among others to legal and regulatory environment confronting SME’s, acquisition of management skills and tax burden. 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 firms 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 over charge.

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 profitability of small-scale businesses. Due to this ignorance about tax codes, the welfare of many tax payers and growth of SMEs in particular seem to be in shambles with respect to taxes. In order to address the problem, this study seeks to answer the following questions

1.3 Research Questions

1.3.1 Main Research Questions

What is the effect of taxes on the growth of SMEs in Buea?

1.3.2 Specific Research Questions

1. To what extent does value added tax affect the growth of small and medium sized enterprises in Buea?
2. What is the effect of global tax (patent) on the growth of small and medium sized enterprises in Buea?
3. What is the effect of business license on the growth of small and medium sized enterprises in Buea?

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