CHAPTER ONE

INTRODUCTION

1.1 Background to the study

Value-added Tax (VAT) is a consumption Tax that is levied on the value added to goods and services at each stage of production or distribution. The VAT system has been adopted by many countries worldwide as a means of generating revenue for the government. The introduction of Vat has had a significant impact on businesses, particularly small enterprises. Small enterprises often lack the resources and expertise to deal with the complexities of the VAT system, which can result in compliance costs and reduces profits.

Value Added Tax was introduced in 1918 in replacement of the turnover tax by a German economist, Von Siemens. His initiative came as a result of the financial crises that hit the German economy after Word War 1. Historically VAT  did not originate in Cameroon, it only saw the light of the day in Cameroon following July 1st 1998 ordinance No. 98/009 in the finance law of the republic of Cameroon of 1998/1999 fiscal years. It was enforced as from January 1st 1999 and became bounded on businesses on the same date with a VAT rate of 18.7%.

VAT was enforced in order to replace the sales tax which was a single-stage collection tax system resulting in the great loss of tax revenue to the government due to great tax evasion an avoidance, as it did not provide rebates for the taxes paid at each stage. The Value Added Tax is a consumption tax which represents tax on the value added to a product throughout its production process. VAT is currently pegged at 19.25% for goods and services.

Value Added Tax (VAT) is a multistep tax obtained in various steps of importing, production and distribution based on some percent of added value of the sold goods in each step (Mohammed Alizadeh, 2015).

On the other hand, VAT takes into consideration the various stages of production from the primary producer, manufacturer, wholesaler, retailer as well as final consumers who then suffer the VAT burden. This is to say that VAT is at every point of the production process whenever the goods change hands. However, settlement in each step of import, production and distribution chain transferred to the chain next step element so that finally paid by the consumer (Central Bank balance sheet, 2008).

Essentially Vat is collected by the registered businesses on the value added by them in each stage of production carried out by them and later paid by them to the tax department of their respective tax jurisdiction. It can also be seen as a multi-stage tax that is imposed at a flat rate upon the annual sales proceeds of a firm less all its purchases from other businesses. In fact, VAT is administered and collected on consumption or expenditure in the domestic economy, rather than on production or output of the domestic economy.

Small size businesses are instrumental in ensuring economic growth that may lead to job creation. In the developing countries, Small and Medium Enterprises (SMEs) represents over 95% of enterprises that generate over 50% of private sector employment.

Despite Small and Medium Enterprises being an important vehicle to address the challenges of job creation and economic growth, a marginal tax rate lowers an investor wiliness to invest by lowering the returns on his investment ( Palacio & Harischandra,2008).  The SMEs sector is faced with multiple challenges among them financing and heavy tax burden like the Value Added Tax (VAT) and other taxes.

Small and medium size enterprises have undoubtedly improved the standard of living for so many people especially those in rural areas ( Ariyo 2005). The social economic advantages of small and medium size scale enterprises cannot be over rated, they are the most important enterprises in the company due to the fact that when all the individual effects aggregated, surpass that of large companies. Panitchipakdi (2006) sees SMEs as source of employments, competition dynamism, and innovation which stimulates entrepreneur spirit and diffusion of skills.

Small size businesses are considered the most reliable engine of development for the less developed countries (LDCs). This is because they enjoy a wider geographical presence, ensure more equitable income distribution, employ a high number of poor persons, and facilitate diffusion skills (Panitchpakdi 2006).

VAT is globally championed tax although it may be a new concept in some countries and very aceint in others ( Safia, 2019). As early as 2005, the first international tax dialogue was held in Rome that addresses how countries  should deal with VAT as much as,  Vat was introduced in France over 150yrs earlier in France (Carter, 2013).

Also, the actual amount of tax borne by many businesses is less than was the case under the sales tax system, and owing to the fact that a business may have to pay VAT on a broader range of goods and services. However, it deducts the tax paid (input VAT) from the VAT collected (output VAT) and only pay the net balance to the tax authority. This implies that VAT incidence is borne by the final consumer since it is a consumption tax.

1.2 The Problem Statement

There is a general perception that VAT is an important source of funding for government operations, projects and programs, development of the economy and the provision of basic and essential social-economic services.

The problematic here is in the area of negative relationship between VAT and businesses, which is the ability to sustain and expand. Medium Size Enterprises are faced with the problem of high VAT rate, complex tax regulations and lack of proper education about the VAT tax and related issues.

However, researchers observed that SMEs cry foul on the burden of taxes imposed on them and how they affect business operations (Gift, 2020). Some researchers also showed that some SMEs operators were not knowledgeable on the ways in which some tax systems operated, hence creating problems with authorities affecting businesses.

Among such tax systems is of VAT collection. SMEs are mostly not in the position of maximizing on claiming VAT thereby living them exposed to paying more tax liabilities.This research therefore seeks to find out the extent to which the VAT system has affected the operation of SMEs in Limbe, Fako Division.

1.3 Research Questions

1.3.1 Main Research Questions

What is the effect of VAT on the growth of Small and Medium Size Enterprises: Case study Limbe Municipality?

1.3.2    Specific Research Questions

1. What is the level of VAT Compliance on the growth on small and medium-sized enterprises?
2. What is the effect of tax payer’s perception of VAT on small and medium-sized enterprises?
3. To what extent does penalty affect VAT Compliance on the growth of small and medium-size enterprises?

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