Abstract

The study is titled the Effect of Taxation on the Performance of Small and Medium-Sized Enterprises in Buea Municipality and has an objective to determine the extent to which taxation affects SMEs in Buea, to examine the various types of taxes paid by SMEs in Buea, and to examine the challenges faced by small and medium sized enterprises in paying the taxes.

Taxes play an important role in the growth of small and medium sized enterprises. In the low-income countries like Cameroon, the role of SMEs is critical in pushing the socio-economic development agenda of the countries reward. Therefore, alignment of the tax system to the environment specific SMEs growth needs can be considered an important agenda for political, economic and financial policy makers. This study applied both qualitative and quantitative research designs where questionnaires were used.

Data was collected using primary sources where a structured questionnaire was designed considering a sample size of 30 SMEs. Data was processed and analyzed using frequency tables and regression analysis, to find out the relationship between taxes and performance of small and medium size enterprises and the results show that taxation significantly affects the performance of SMEs.

Thus, the study recommended that tax administration should reduce criminal aspects of tax evasion with well-known tax measures. Further, tax administration should use current tax reform to reduce tax complexity with tax authorities should focus and help taxpayer during filing taxes returns information. However, tax authority provides greater assistance to tax payers. It should create favorable conditions for tax compliance not only tax awareness.

CHAPTER ONE

INTRODUCTION

  1.1 Background Of The Study

Taxes have existed as long as there have been organized by the governments. Since the industrial revolution or evolution of the 19 century, the responsibility of the government has expanded considerably and taxation has gone a long way to be wide recognized as kind of social contract between the government and the governor. The role of taxation has equally and gradually been expanded to keep pace with development and its primary motive to provide funds for the government to finance common project for the benefit of the public. Most government rely on taxation of business and related tax activities as a major resource of income to finance its projects. This means taxation play a far more important role in the societal development especially in the poor countries of the third world.

A tax is levied by public authorities with a tax jurisdiction, of compulsory contribution by thee citizens to defray part of the cost of government activities in providing the needs of society.

Taxation in the developed countries is used more as a tool for economic development and growth. As a Supreme Court in the United State of America explained “ a tax is not an assessment of benefit ; it is a mean of distributing the burden of the cost of government’’. The only benefit to which the tax payers is continually entitled to is that derived from the enjoyment of the privilege of living in an organized societies established and safeguarded by the devotion of taxes for public purposes.

Taxation increases incentives for public participation in the political process and creates pressure for more accountability, better governance and improved efficiency of government spending. Taxation also crates incentives for government to upgrade their institution for tax collection and administration and to provide more public services (Moore 2007). The Cameroon tax system is composed of a number of different taxes. Direct taxes are assessed against income, profit, land, real profit and personal property, which are paid directly to the government such as company tax, on assets income tax and property tax while indirect taxes are assessed against article of consumption such as products or services. Examples of indirect taxes includes value added tax (VAT), custom duties levied on imports, excise duties on production.

Over the years, the world economy has developed tremendously and this has been linked with activities of Small and Medium Sized Enterprises (SMEs), especially in developing countries. Small and Medium size enterprises (SMEs) are widely defined in terms of their characteristics, which include the size of capital investment, the number of employees, the turnover, the management style, the location and the market share (Kasekende and Opondo, 2003). According to World Development Indicators Database Micro, small, and medium-size enterprises are business that may be defined by the number of employees. There is no international standard definition of firm’s size; however, many institution that collect enterprises have 10-49 employees, and medium-size enterprises have 50-249 employees.

Taxation is inseparable from the existence of a state or country. Small and Medium Enterprises have always been considered an important force for economic development and industrialization in smaller economics (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 Arica. 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.

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). 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.

To a very large extent, the development of every nation depends mainly on taxation. A solid revenue base is one of the foundations of every great nation and this includes Cameroon. Revenue gained from taxes is very important in developing every economy. According to the World Bank Report on the finances of government of Ghana in 2011, percentage of tax revenue to GDP in Ghana was measured at 14.87%. Also, according to the Bank of Ghana Monetary Policy Report on fiscal developments, preliminary fiscal data from the ministry of finance and economic planning showed that for the first quarter of 2012, total revenue and grants amounted to GHC 3.5billion, representing 5% of GDP (BOG report, 2012). Tax revenue is thus an important issue of concern in every economy.

All countries in the world have tax system put in place by their government. Cameroon is not an exception. Cameroon operates a self-declaration tax system, this is, individuals and companies that the initiative to declare their income and pay their taxes. This system helps the government to reduce the cost of tax administration. In Cameroon the first tax law was introduce after independence in 1960 and was harmonized into a general tax code first published in 1973. Since then, taxes have evolved through a number of reforms. The bills focusing on tax law are usually introduce in parliament alongside with the annual budget. The bill is signed into law by the president of the republic as a public law. A bill passed by the parliament is usually as a finance act that aments the generate tax code.

Using the self-assessment system of taxation, all tax payers do assess their income themselves, declare and pay their taxes. Therefore, a tax payer should know the tax he is supposed to pay, when they are to be paid, how to calculate the tax (knowing the rates applicable) and where to declare and pay the taxes. According to Vito and Zee, (2001), an ideal tax system in a country like Cameroon should be that which and raise the essential revenue without excessive government borrowing and should do so without discouraging economic activities and without deviating too much from tax system of other countries.

Taxation generally is an aspect of accounting. Accounting can be referred to as the systematic process of analyzing, recording, classifying, summarizing and reporting economic transaction and events, so as to communicate such information to its users. Accounting originated from the needs of the environment. Civilization made it necessary for people to develop book keeping technique to keep record of economic transactions. The need for book keeping was also increased by the fact that, SMEs as well as inhabitants of a society or nation have as duty to assess their income and pay their taxes to their governments. Industrial development also led to the increased need for accounting as it was necessary for calculating and recording of cost (production costs, worker’s wages, profit, taxable profits and tax amounts, etc.).

In Cameroon SMEs are about 90% of the economies. Though small in size they are the most important enterprises in the economy due to the fact that they contribute high to the Gross Domestic Product (GDP) when aggregated with large enterprises. Therefore, developing countries like Cameroon need to encourage the growth of SMEs, by creating favourable environment. The many SMEs in Cameroon, the choice to pay tax remain in the informal sector is simple. Most firms will choose to stay in the informal sector if they cannot see their tax contribution at work in the form of government services and their perceived benefits outweigh the perceived costs. This is because if compliance costs (both financial and time) are added into a firm’s cost-benefit analysis of paying taxes, the disincentive to comply with tax requirements becomes even stronger (Stem and Barbour,2005).

It is a well-known fact that the revenue generated from taxation of small and medium sized businesses is an important stream of income to the government. This gives a clear and direct link between the tax administration (government) and SMEs. This link can be seen through tax jurisdiction. The government has the jurisdiction to tax any individual or corporate body that permanently reside in or have investments in Cameroon, and SMEs are one of those. Most often, SMEs decline from the payment of these taxes through tax evasion which becomes a challenge to the tax administration.

Moreover, despite significant contribution SMEs make to economic growth, SMEs across the World and Cameroon in particular are still faced with number of tax challenges that inhibit entrepreneurial growth. The focus of this study, therefore, is to examine the effect of taxation on SMEs in Buea.

1.2 Statement of Problem and Justification of the Study

“In this world, nothing is certain but the fact that will one-day die and the payment of taxes” (US State man, Benjamin Franklin 1989). One of the main avenues through which the government is able to generate funds to finance its developmental projects in order to enhance the welfare of its citizens it through taxation.

Over the years, the assessment and collection of tax from taxable individuals has been difficult in the various region in Cameroon. There is apathy not only on the part of the educated but also the uneducated (Kiabel and Nwokah, 2009). The illiterate refuse to pay tax because they are unaware of the purpose of taxation and therefore regard the tax collector or tax officer as an instrument of oppression; the rich ones refuse to pay tax because they are not encouraged, not only by the government but also by tax officials who live above their means. Also, it has been noticed that most businesses in the developing nations like Cameroon are found in the informal sector and are made up of small and medium scale enterprises (SMEs).

A report in 2008 by Christian Aid drawing on a drawing on a research by Raymond Baker estimates that low- income countries, like Cameroon, lose over $22.4 billion in tax revenue annually to tax evasion, which was comparable to the total amount of foreign aid received by these countries. It is estimated according to same report that, with regards to economic activity, the self- employed sector constitutes about 86.3% and these self- employed mostly operate in informal facilities.

Out of the total registered informal sector self-employed operates, a little below 30% are duly registered and are assessed to tax. Although tax payment is compulsory some SMEs are able to evade tax. This is the case of various businesses in the Municipality of Buea. In evading tax payment, the nation loses the revenue it would have earned from them. Although there is a general perception the taxes are an important source of fund for development of an economy and the provision of social services Alkinsulire (2001), the problem faced are in the area of negative relationship between taxes and the business ability to sustain itself and to expand. Microenterprises are faced with the problem of high tax rates, multiple taxation, complex tax regulations and lack of proper orientation or education about tax related issues.

This tax relate disuse couples with other challenges that SMEs  face in developing countries like Cameroon including inadequate capital, poor technical and managerial skills, environmental effects, and government regulations most often affect the operations of SMEs. These factors have led to increase record of close- up of small and medium size enterprises (SMEs).

Despite the contribution that taxation can make towards the GDP in general, taxation has been identified as a major threat to the growth of SMEs not only in highly industrialized countries such as USA, but also less industrialized countries; Cameroon in particular. Much attention is therefore needed to the side effect of 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 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 tax issue of aligning the tax system to the specific requirements of a particular country’s growth need, as it has to balance both short-term and long-term impact of the policy. This also triggers the in-depth study of how tax payment affects SMEs development.

Also, lack of access to credit for small and medium size enterprises is due to high price levels that are brought about by high tax levels which is due to government intervention. This is almost universally indicated as a key problem for micro and small enterprises. This affects technology choice by limiting the number of alternatives that can afford. In some cases, even where credit is available mainly through banks, the entrepreneur may lack freedom of choice because the bank’s lending conditions may force the purchase of heavy, immovable equipment that can serve as collateral for the bank.

Small and Medium Size Enterprises (SMEs) are generally perceived to be platform for indigenous entrepreneurship and generate all the many small investments in the country that always end up as big companies. A developing economy like Cameroon therefore, needs to further the development of its private sector by creating an environment favourable to the performance and growth of small and medium size enterprises, strengthening the factors that lead to business success, and addressing the problems threatening the existence and advancement of these businesses, in order to enable them adequately play that role expected of them in economic transformation.

Taxation has become an important consideration in the planning of SMEs in saving investments and harmonizing it with development strategies and changing economic structure (Holban, 2007). However, the development of small and medium size enterprises is greatly affected by the level of taxation, its administration and compliance. The higher the tax rate or the greater the efforts to fulfill taxation requirement as well as to check how those requirement are met, the lower the initiatives are for SME to perform well. Therefore, maintaining the tricky balance between tax rate compliance costs, tax administrating and economic development should be a goal for every tax policy.

In addition, since small and medium size enterprises are very important in any economy in that they provide and create job, especially during times of recession, they are a source of innovation, flexibility and entrepreneurial spirit, they harness individual creative effort and they create competition and are the seed bed for businesses of the future, they should be regulated by the authorities in charge in such a way that their performance will be affected positively so as to bring a positive impact on the impact on the economy.

However, it seems this is not always the case because as small and medium size enterprises try to spring up to keep the economic booming, so also the governments’ appetite to catch them in her tax net or bracket increases.

Therefore, the present study intends to investigate the effect of taxation on small and medium size enterprises in the Buea Municipality. In order to accomplish its objective, the study aims to address the following research questions:

1.3 Research Questions

1. To what extent does the performance of taxation affect small and medium size enterprises in Buea?
2. What are the various types of taxes paid by SMEs in Buea?
3. What are the challenges faced by SMEs in paying taxes?
4. What are the necessary recommendations to both SMEs and tax authorities?

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