Abstract

This project is designed to examine the impact of Value Added Tax on the growth of small and medium-sized businesses in Buea. Depending on the large size of the country, I decided to base my study in Buea after which I made use of inductive method of reasoning which require us to make valid generalization of our population based on the information contained in the sample we had studied.

I employed both descriptive and analytical techniques of research and was able to make a conclusion as to the problem of our research. I further used a variety of interesting methodologies and sources of collecting and analyzing data thereon.

Finally, I was able to conclude that VAT has no significant impact on the growth of small and medium-sized businesses in Buea. looking at the numerous problems faced by small and medium-sized businesses, in this endeavor some essential recommendations are made to help reduce some of these negative ideologies of taxpayers in Cameroon and to also help reduce the rate of illiteracy of some of these taxpayers on taxation.

CHAPTER ONE

INTRODUCTION

1.1 Background To The Study

The introduction of VAT has been one of the most important tax reforms over the last decades, especially in Africa. It derives its name from the concept of value addition. It is a tax levied on goods and services in the economy. Value-added tax (VAT) was enacted to the law in Cameroon on the 1st of January 1999 in order to replace the sales tax or the turnover 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 and avoidance, as it did not provide rebates for the taxes paid at each stage. The turnover tax (TOT) also suffered from a narrow base as compared to VAT with a broad tax base as it was imposed only at the retail level, it only recognizes tax when the goods reach the final consumer.

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.

Essentially VAT is collected by 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.

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, it, however, deducts the tax it has paid (  input VAT) from the VAT it has collected (output VAT) and only pays the net balance to the tax authority. This implies that VAT incidence is borne by the final consumer since it is a consumption tax. Intermediate collectors only act as temporary agents and they only bear the burden as long as they have not sold the goods, but this is depending on the demand elasticity of the said goods. This is due to the fact the taxes paid at the intermediary stages are only input taxes which are claimed when the goods are sold to the final consumers and the output tax is collected. The output and input VAT is then offset.

Currently, according to the Cameroon finance law of 2012, certain amendments are made on VAT. These amendments or exemptions as will be seen in subsequent chapters are usually placed worldwide on certain commodities for the interest of the entire society like basic health, education as well as financial services.

Historical Background Of Vat In The World

VAT 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 crisis that hit the German economy after world war I.

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 the same date with a VAT rate of 18.7%.

The introduction of VAT marks one of the most significant tax development   ever in Cameroon. The tax system was enacted as an amendment to the sales or turnover tax as a result of it demerits to the Cameroon government. However, the enactment of the tax did not mark its birth in Cameroon since it had already been operating in other western economies.

VAT originated in France, and was fast adopted within the European economy community (EEC) and its adoption became requirement for the members of that organization (EEC). Precisely France adopted VAT on 1st January 1948.

VAT was introduced in UK in April 1973 following its general acceptance in some western European countries in subsequent years, with the growth of the EEC the tax is slowly but steadily being accepted in the developing countries. It should be noted that the acceptance of VAT in most developing countries has been rather more philosophical than practical as it practice has proven rather difficult. Other developing countries precisely in the CEMAC region who adopted VAT include Equatorial Guinea in 2004, Gabon on 24th February 1995, Congo on the 12th of May 1997, Chad on the 1st January 2000, Central Africa republic in 2001, not forgetting Cameroon on January 1st, 1999 just to name a few.

Furthermore, as far as the Asian continent is a concern, South Korea was the first Asian country to implement VAT in 1977 the assistance from the international monetary fund (IMF). While 1987 to 1997, VAT was introduced in other Asian countries and the Eastern European countries with VAT rates ranging from 5% to 26%.

Traditionally VAT had a limited coverage that is, only on manufacturers and importers but as time evolved, VAT became a broad base tax with broad coverage that is extended to retailers and services. Also, the several positive rates it had in the past years was modified to a single positive rate and also a high threshold as opposed to a low threshold in the past. The threshold is the level at which the registration of VAT becomes compulsory, this is a very critical choice in the design and implementation of the VAT. In the past, many countries set their threshold too low putting themselves in considerable difficulty when their tax administration is found insufficiently developed to administer a large VAT population. The main reason why Ghana and Malta failed in the implementation of VAT in 1995 and Ghana only reintroduced it in 1998.

The original concept of VAT involves a single tax rate but in practice, it developed multiple rates and exemptions which added to it complexity. By single rate, we mean that of the sale tax. By multiple-stage rate, we mean that the application at different points and at different stages as stipulated in professor Ngotho W.K (text on the fundamentals of taxation in Cameroon).

1.2 Problem Statement  

The acceptance of VAT in many developing countries has been rather more philosophical than practical as it practice proves rather difficult, this is a result of the many problems which are commonly encountered in trying to administer the VAT. This problem ranges from the degree of literacy, size of the monetary economy, nature, and size of trade and industrial establishment, adequacy of record-keeping, and attitude towards taxation and tax administration services. This is usually due to the fact that the ability of any country to introduce and administer VAT depends on its level of economic development.

In addition, the broad tax base associated with VAT implies that the range of activities to which it applies is largely leading to a   slow down in its administration. There is also a high level of no compliance due to the high   tax rate especially by most retailers as they argued that some of the goods they purchase are perfectly elastic in demand and this makes it difficult for them to shift the tax burden to the final consumers in the form of high prices hence, most at times, they end up making losses. VAT has also been proven to be very complex tax to administer which reduces its efficiency.

Summarily, the main problems include the introduction of complex VAT loss by the government, too many exemptions on the tax, many rates, and multiple stages. Therefore, one may be forced to ask the following questions

1.3 Research Questions

1. Does VAT have any impact on small and medium enterprises (SMSE)?
2. Is the accounting system in small and medium-size enterprises adequate enough to permit them to administer and collect VAT?
3. Can they properly carry out their self-assessment obligations?
4. Does elasticity of demand has any relationship of the revenues of these enterprises?

From the above, the problem statement for this study can be that:

VAT has an adverse effect on small and medium-size enterprises.

This problem statement is broad out because of the following reasons:

1. Complaints from SMSE in Cameroon of the increased cost of input due to the introduction of  VAT.
2. The problem of record-keeping and small turnovers poses many questions such as “ should  SMSE be exempted from the administration and collection of VAT”?

• The collapse and closure of many SMSE as a result of the fact that some of the tax commodities have perfectly elastic demand hence making it difficult for them to shift the burden to the consumers in the form of high prices.

1. Huge penalties meted out on those who default the tax payment.
2. Ignorant on the notion of self-assessment procedures as most of them either prepare incorrect records, do not pay on time leading to penalties.
3. The constant and persistent closure of business premises by tax officials.

• The problem of a tax credit refund. This occurs when input VAT is more than output VAT. Most of the time, the refund process is very slow.

1.4 Objectives of the Study

The main objective of the study is to examine the impact of VAT on the growth of SMEs.

The specific objectives include:

1. To examine the accounting treatment of VAT.
2. To identify the problems and effects in the administration and collection of VAT by SMSE.
3. To examine the relationship between VAT and elasticity of demand of the tax good.
4. To assess the accounting systems or record-keeping procedures of SMSE for VAT purposes.
5. Lastly to bring out possible recommendations on VAT administration and collection.

1.5 The Research Hypothesis

The research hypothesis for the study is as follows:

Ho: VAT has no significant impact on the growth of SMEs.