Abstract

This research work titled “Taxation of Small and Medium Size Enterprises. The Perspective of the Anglophone Crisis” was out to assess the taxes paid by small and medium-sized enterprises, the level of tax compliance within small and medium-sized enterprises, and how the Anglophone crisis has affected tax compliance.

The Optimal taxation theory and the Ability to pay theory were used due to their pertinent importance. In order to achieve these objectives, data was collected using questionnaires which were administered to 50 respondents. Data were analyzed with SPSS using descriptive statistics.

Findings show that businesses majority of the businesses are still willing to pay n their taxes during this period of crisis if only it is considerate. This research work recommends that every business owner should strive to know more about taxation using the General Tax Code (GTC), the Ministry of Taxation in collaboration with the Ministry of Finance should initiate educative programs on issues concerning taxes.

Government should show a degree of accountability and honesty on the revenue collected to make SMEs understand the connection between tax revenue and expenditure and for the government to make the tax policies clear and understandable to all taxpayers.

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

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 voluntary 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 an important tool used in the development of Cameroon and her economy. A country’s tax system and policies are greatly related to 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 the economy without the help of organizations that move services, goods, money, and investments from those with surplus to those with the 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 follow suit.

The existence of small size businesses in our society today cannot be underrated especially with regard to the creation of employment, innovation, uplifting the people’s standard of living, and financial contribution to the growth of the country’s GDP. Growth in small-size businesses can be measured in terms of contribution and number of employment opportunities they provide, an increase in sales, income, profit problems arising.

The growth of these businesses is generally hindered by the challenges of lack of financial resources to expand, the entrepreneur managerial skills, unskilled labour, production of poor quality goods, lack of market for their products, infrastructures, poor management, and above all taxation which does not favour their growth potential.

Tax payment in Cameroon can be traced right back to the period of the 18th century when European nations started scrambling for territories in Africa. But before this period, the natives of Cameroon used to practice a form of taxation whereby families were to provide certain portions of their harvest to the chiefs. These could be seen in the form of crops, sales, labour etc.

Until 1994, the Cameroon government relied heavily on selective tax and tariff exemptions to promote the country’s economic and industrial development. This tax regime dated from 1960, the year when the country became independent and an investment code was introduced to attract foreign capital to encourage the promotion of import-substituting industries.

The tax code was revised and extended many times to become subsequently one of the most complex and inequitable tax regimes in Sub- Saharan Africa. With this, Cameroon gained an upper hand during the treaty of Brazzaville signed by the UDEAC member countries.

Before 1994, any firm in Cameroon that did not benefit from UDEAC or from any of Cameroon‘s special programs was subjected to the following direct and indirect taxes: Domestic Turnover Tax levied at the rate of 10% of sales value, Industrial and Commercial Tax, Business License Tax, Special Corporate Tax, Lump Sum Minimum Tax, Import and Customs Duties, Veterinary Tax, Special Fuel Tax, and many others.

Cameroon initiated trade and fiscal reforms in 1994. The overall objective was to improve the yield of tax revenue. The reforms aimed to eliminate anti-trade biases by increasing the share of domestic tax revenues, and reducing tariffs. In addition, the reforms aimed to reduce inequality, distortion and eliminate tax evasion through the harmonization of tax regimes and general tax reductions.

In sum, tariff reductions have mitigated the negative effects of the 1994 CFA Franc devaluation for firms producing goods that were not competitive with imported goods. In January 1994, decrees were issued to implement tax and trade reforms in Cameroon. This period saw the introduction of the following type of taxes; turnover tax (TT), a quasi-value-added tax (VAT) applicable to domestic production, imported inputs, and intermediary products to replace sales and production taxes (increased from 12.5% to 15% and 1 January 1995 and to 17% in 1996). This tax reform went operational in February 1994.

From 1994 to 1995 until 2001, when both the turnover tax and the value-added tax were being applied, the share of turnover taxes (including VAT) in non-oil tax revenue was continually increasing, thus contributing to the rise in revenue of goods and services.

The analysis of direct and indirect taxes shows that direct taxes (levies on goods and services) contributed a large share of tax revenue, with value-added taxes being prominent, particularly after VAT was introduced from1998/1999 onwards. During the period 1992/1993 to 2001/2001, the share of indirect taxation on non-oil tax revenue stood at 33%. In Cameroon, direct taxes are on levied personal income and corporate profits. The share of income taxes in non-oil revenue, dominated by personal and corporate income taxes, was on average 25% between 1992/1993 and 2000/2001.

In Cameroon, local taxation remains embryonic and tax resources are still basically the exclusive responsibility of the central government, both in terms of collection and allocation of tax resources. Because of the policy of decentralization, a percentage of taxes (10%) in Cameroon are paid to the local council and the rest to the start treasury. Local council tax comprises the business license fee, license tax, livestock tax, firearm tax and taxes on the certificate of vehicles and other machines, direct municipal taxes, and royalties levied on forestry exploitation.

Up till this moment, the taxation system of Cameroon still witnesses changes so as to make it more reliable for all taxpayers, of which the recent change was in 2015 where the GTC witness another tax reform with revisions in the following areas; the reduction of the corporate income tax rate from 35% to 30%, increase of the advance corporate income tax rate from 1 to 2%, the removal of the VAT fees on commissions charged by travel agencies on international flights.

The non-deduction of VAT credits generated from transactions made in cash, the collection of airport stamp duties of airlines companies, the introduction of an electronic follow up for all companies VAT taxable invoices, the extension of the deadline to inform the taxpayer from 8 to 15 days, the removal of the 10% deposit requirements as part of the conditions needed to contest tax advice and the use of the ‘‘ tax clearance certificate’’ as the only official document for the follow up of administrative procedure. (Finance Law, 2015)

This search is carried out mainly on small and medium scale businesses because of the patterning problem of taxation in this sector of business in society. Although they are aware of the fact that they are to pay obligatory contributions to the state, the most at times the wrong type and amount of taxes ignorantly thus laying the blames on the government for setting high tax rates, which in reality they do not know the rate at which they are to pay their taxes.

Because of such witnesses on their part, they are highly exploited by the unscrupulous tax officials who take their ignorant situation for granted and make them pay high amounts of taxes and even, the ones they are not supposed to pay, hence, reducing their available resources for reinvestment and subsequent growth of their businesses. It is therefore very important on the part of the researcher to call on the attention of these small scale business owners to come out of their ignorant situation, learn more about the taxation system of the economy, so as to avoid paying taxes ignorantly to the detriment of the growth of their businesses.

Among the existing theories of taxation, two were selected based on their pertinence with the subject matter. These two theories include the Optimal Taxation Theory and the Ability to Pay Theory.

The standard theory of optimal taxation posits that a tax system should be chosen to maximize the social welfare function subject to a set of constraints. The literature on optimal taxation typically treats the social planner as a utilitarian. That is, the social welfare function is based on the utilities of the individuals of the society. A number of scholars have contributed in one way or the other to bring out the concept of this theory and include scholars like Frank Ramsey (1927) and James Mirrlees (1976).

According to this theory, every taxpayer is given the opportunity to choose his or her regime of taxation and to pay in relation to the earned. This theory serves as a neutral tax system. A neutral tax is one that avoids any distortion and inefficiency completely. Looking at the situation of small-scale businesses, and taxation in Cameroon, they don’t even know of such rights entrusted to them by the government to choose their own form of the tax regime to belong to and thus ignorant of the type and amount to pay.

The Ability-to- Pay Theory is one of the main theories of taxation and was postulated by Pigou in 1947. According to the theory, taxes should be based upon the number of money people earned. For example, people who earn more money are expected to pay a higher rate of taxes, which means a higher portion of their income, than people who earn less money.

Remember, governments impose taxes to pay for their services, like public schools, roads, police, and governance. The ability-to-pay theory of taxation does not take into consideration the amount of these services that taxpayers actually use. This means that no taxpayer should pay an amount of tax higher than its income earned. In the case of small businesses in Cameroon, they are made to pay even much higher amounts than they are supposed to pay, hence, increasing their expenses, reducing their capital, and plow back profit for reinvestment, limiting their growth and even forcing most of them out of business.

1.2 Problem Statement

Small business enterprises are generally recognized as important drivers of economic success. They are key ingredients in the ecology of firms in healthy economies, as job creators, sales generators, and sources of tax/ fiscal revenue. However, these enterprises like any other business in Cameroon are liable to different types of taxes and these include income tax, corporation tax, capital gain tax, employee tax, turnover tax, value-added tax (VAT), and customs duties that are paid at different stages of the business.

It is believed that 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. These losses may be as a result of poor managerial decisions, mismanagement of funds, economic and political crisis affecting all businesses like in the case of the Anglophone crisis disrupting businesses in the Northwest and Southwest Regions of the country.

It is alleged that high tax rates affect the level of consumption and increase the unit cost of firms. For small businesses operating in the crisis within these regions of Cameroon, meeting up with their tax requirements has been a big challenge due to the fact that business activities in the regions have been on a downturn.

The crises have caused many businesses to either shut down or relocate while those that are still operating are making efforts to meet up with their tax obligations, knowing well that it is a challenging thing to comply with. This study is designed to determine taxation of small and medium-sized enterprises, the perspective of the Anglophone crisis.

Taxation has been identified as a major threat to the growth of small and medium-sized enterprises not only in highly industrialized countries such as the USA but also in less industrialized countries; Cameroon in particular (Burke & Jarratt, 2004). For instance, in Cameroon, the stunted growth of SMEs has been blamed largely on the challenge of taxation (Gaskill, Auken& Manning, 1993).

Taxation in general increases the cost of small and medium-sized enterprises. To compensate for the increase of operation, prices on goods are raised 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 in slow growth (Thuronyi, 2009). A question that appears to generate surprisingly little debate in Cameroon is the scope for legally mitigating taxes by individuals and SMEs. It is within this backdrop that the current study is established.

An entrepreneur is about change (Richard Cantillon, 1730 as quoted in Baer, 1993) and since entrepreneurs are innovators, they should devise ways and means of coping with the adverse and threatening effects of taxation in order to survive, grow and sustain their businesses. How then does taxation affect the performance of small scales businesses? What are the problems associated with the administration of taxation in Cameroon? What is the level (rate) of compliance to taxation by SMEs? The current research will seek to answer these research questions.

1.3 Research Questions

The general question of this study is to know how small and medium-sized businesses have been affected by taxation from the perspective of the Anglophone crisis. Below are the specific questions.

1. What are the taxes paid by small and medium-sized businesses in Cameroon?
2. What is the level of tax compliance within small and medium-size businesses?
3. How has the Anglophone crisis-affected tax compliance?

1.4 Objective of the Study

The general objective of this study was to assess the taxation of small and medium-sized businesses from the perspective of the Anglophone crisis. Specifically, the research will seek to assess:

1. To analyze the taxes paid by small and medium-sized businesses in Cameroon.
2. To investigate the level of tax compliance within small and medium-sized businesses.
3. To assess how the Anglophone crisis has affected tax compliance.

Further Readings

THE IMPACT OF TAXATION ON THE GROWTH OF SMALL AND MEDIUM SIZE ENTERPRISES IN BUEA MUNICIPALITY: CASE STUDY SMES IN MOLYKO