Abstract

Contemporary Small and Medium Size Enterprises are faced with the problem of numerous taxes, high taxes, and poor tax assessment systems in Bamenda II. This study sought to investigate the effect of tax expenses on the financial performance of Small and Medium-size Enterprises (SMEs) in some SMEs in Bamenda II.

The study was carried out on a convenience sample of 40 SMEs through the distribution of structured questionnaires. The main hypothesis for this study was stated in the null form at the 5% level of significance as: Tax expenses do not affect the financial performance of SMEs in Bamenda II.  The main research question was: What are the effects of tax expenses on the financial performance of small and medium-size enterprises in some selected SMEs in Bamenda II? For this study, data were collected principally from primary sources.

Data for this study were analyzed using descriptive statistical tools such as frequencies, percentages, and correlation tests. The findings of the study show that tax expenses affect the financial performance of SMEs negatively by slowing growth and limiting expansion. Some of the major recommendations made were that: Taxes should be collected in relation to the sizes and profit of SMEs considering all other factors that can constrain the progress of such SMEs as there is a relationship between SMEs sizes and their ability to pay taxes.

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Small and Medium Enterprises have always been considered an important force for economic development and industrialization in smaller economies (Aryeetey & Ohene, 2004 and Oludele & Emilie, 2012). These small enterprises have increasingly been recognized as enterprises that contribute considerably to the creation of jobs, economic growth, and eradication of poverty in Africa.

According to the 2005 World Development Report, the creating of “sustainable” jobs and opportunities for smaller entrepreneurs are the key strategies to take people out of poverty. Small and medium enterprises are mostly private enterprises and they face difficulties when dealing with the government in general and the tax administration in particular mostly the developing countries. Many of the difficulties with the tax authorities may be deemed as the consequences of poorly conceived tax policies and a lack of certainty regarding future policy changes.

However, it would be rare indeed to not observe complaints about the complication and/or ambiguity of the tax laws as well as high tax rates (Baurer, 2005). If the tax structure is not adequately designed for specific environmental conditions, it may create a greater burden to the tax-paying organizations and eventually affecting the final consumer due to the shifting ability of tax.

According to a study report by Mnewa and Maliti (2008), the majority of small businesses are less likely to attain or maintain their growing profitability due to factors including tax policies. This implies that as a policymaker and regulator, Government must consider the factors that could affect the competitiveness of the small enterprises.

Since the 1960s to date, small and medium-sized enterprises (SMEs) have been given due recognition, especially in the developed nations for playing very important roles towards fostering and accelerated economic growth, development, and stability within several economies (Yitzhak, 2006).

They make up the largest proportion of businesses all over the world and play tremendous roles in employment generation, provision of goods and services, creating a better standard of living, as well immensely and contributing to the gross domestic products of many countries all over the world (OECD,2000).

In most highly developed countries like Britain, the USA, France, small and medium-size enterprises contributes greatly to the GDP of these countries that is they contribute; 50-53%,50-52%,55-62% respectively to the total gross value added of their various countries(Vitality 2003).In essence, this shows that about 50-60% of government revenues depend on small and medium-size enterprises.

Globally, the growth of any economy is dependent on vibrant SMEs and when the reserves seem the case, the entire economy suffers. The stunted growth of the economy has often been blamed on many factors, top of which is the challenge of uncoordinated tax administration that has crippled the production capacity of the SMEs. One of the major impediments to the growth of SMEs is the issue of taxation.

Taxes are a heavy yoke that frustrates existing investors and scares away prospective ones. In Africa, the same attention about the growth and ensuing challenges of SMEs has continued to top discussions among researchers.

Micro and small size enterprises are an important force for economic development and industrialization in poor countries (Hellsing and kolstee 1993; Mclntryre and Dallago2003; mead and Lindholm 1998). It is increasingly recognized that these enterprises contribute substantially to job creation, economic growth, and poverty eradication. The creation of sustainable jobs and opportunities for smaller entrepreneurs is a key strategy to take people out of poverty (World Bank, 2004).

Small and medium-size enterprises play a very important role in the economic development of Cameroon. It is for this reason that the government has recognized their activities as a necessity for meaningful economic growth and has put much effort to promote it by instilling confidence in the population through reorganizing and regulating the activities of small and medium-size enterprises.

As such, the minister in charge of small and medium-size enterprises, Mr. Laurent Serge Etoundi Ngoa is responsible for this role. Small and medium enterprises constitute an enormous proportion of the business sector in Cameroon and Bamenda in particular. These enterprises are taxpayers as justified by the source and residence principle of taxation.

Despite the contribution that taxation can make towards the GDP of the country in general, it is also important for the government of that country to pay attention to the effect of these taxes on SMEs.So far, it has been observed that less attention has been given to the side effects of taxes on small and medium-sized enterprises.

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 companies in Cameroon. 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.

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 the 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 micro-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).

This situation raises a serious concern about the issue of aligning the tax system to the specific requirements of a particular country’s growing need, as it has to balance both the short-term and long-term impact of the policy.

This also triggers the need for an in-depth study of how tax payments affect SME development. In addition, most of the literature and research on the subject matter is mostly foreign and western in nature where the dynamics of SME activities are different from that of developing countries like Cameroon.

Cameroon operates a self-declarative tax system, that is companies and individuals take the initiative, which helps reduce their cost of administration of taxes. Using the self-assessment system of taxation, all taxpayers in Cameroon do assess their income themselves, declare and pay their taxes.

Therefore, a taxpayer should know the taxes he is supposed to pay, when they are to be paid, how to calculate the tax (knowing the rates applicable), and were to declare and pay the taxes. In Cameroon, the government imposes several types of taxes for the purposes of protecting and controlling the operations of small and medium-size enterprises, as well as protecting other home/infant industries (protectionism), and also ensures fair competition among SMEs.

1.2 Statement of the Problem.

Although there is a general perception that taxes are a major source of funds for the development of the economy and provision of social services, there exists a gap between tax expense and the business’s ability to sustain itself and to expand.

SMEs are faced with the problem of high tax rates, multiple taxations, complex tax regulations, and a lack of proper enlightenment or education about tax-related issues. Not minding other challenges that SMEs are facing in other developing countries like Cameroon inadequate capital, poor technical and managerial skills, environmental effects, and government regulations which affect the operation of SMEs in Cameroon.

The issue of tax expenses is a worm that has eaten into the revenues generated by these SMEs for their growth and survival. These have led to increase in the record of debt of Small and Medium-size enterprises (SMEs). The nature of SMEs, as well as their sizes, makes tax compliance a significant problem. This is because many SMEs do not have accessibility to resources and also have insufficient expertise.

Further, measures such as tax malpractices can make SMEs avoid tax payment hence getting into trouble with the authorities, and this poses a great challenge to the SMEs. The high taxation has exposed most of the SMEs to a decline in growth and to a worse extent, some end up closing down. In this regard, the researcher sought to know the effect of tax expenses on the financial performance of SMEs in Cameroon.

1.3 Research Question  

1.3.1 Main research question.

What are the effects of tax expenses on the financial performance of small and medium-sized enterprises in some selected SMEs in Bamenda II?

1.3.2 Specific Research Questions

1. What are the effects of tax expenses on the sustainability of some selected SMEs in Bamenda II?
2. How does the strength of SMEs affect the financial performance of some selected SMEs in Bamenda II?
3. What are the challenges faced by some SMEs in tax compliance?