Abstract

This study set out to investigate “The Impact of Taxation on the Growth of Small and Medium-size Enterprises” around the Buea Municipality. To achieve this goal, Information and documents were collected from a sample enterprise and it was discovered that taxation has played a role in limiting the growths of enterprises around the Buea Municipality. Some data collected from these enterprises and analyzed prove that they (enterprises) were facing difficulties with growth as they could not meet up with their monthly payment of salaries and tax filing. The recommendation made is that there is a need for tax reduction and better assessment to encourage enterprises growth. This will help reduce and remedy the rate of tax avoidance and encourage tax compliance.

CHAPTER ONE

INTRODUCTION

The Small and Medium Enterprise sector’s importance in the economic development of any country in recent years cannot be underrated especially with regards to the creation of employment, innovation, uplifting the people’s standard of living, and financial contribution to the growth of the country’s Gross Domestic Product (GDP). This sector’s growth is hindered by the challenges of lack of financial resources to expand the entrepreneur managerial skills, unskilled labour, production of poor quality goods, and lack of market for their products, infrastructure, and above all taxation policy which does not favour their growth potential.

1.1 Background of the Study

Since the 1960s to date, Small and Medium Enterprises (SMEs) have been given due recognition, especially in the developed nations. This can be seen from the fact that they play very important roles in fostering accelerated economic growth, development, and stability within several economies (Yitzhaki, 2006).

As a matter of fact, they make up the largest proportion of businesses all over the world and particularly African countries playing a tremendous role in employment, provision of goods and services, creating a better standard of living as well as immensely contributing to the GDP of many countries (OECD, 2000).

Over the last few decades, the contributions of the SMEs sector in the development of the largest economies in the world have beamed the searchlight on the uniqueness of SMEs. As a result, this has succeeded in overruling previously held views that SMEs were only miniature versions of larger companies (Al Shaikh 1998, Gaskill et al, 1993).

Although SMEs have been at the center of the policy debate for quite some time in both developed and developing countries, little analytical work has been undertaken in this area. Therefore, information that exists among researchers on SMEs however provides a sense of how important this sector is for sustainable development in emerging economies (Medina, 2001).

For instance, recent studies carried out by the United Nations Industrial Development Organization (UNIDO) states that SMEs are labour intensive providing more opportunities for low skilled workers, correlated with lower income distribution inequality, necessary for agricultural dependent nations transitioning to an industrial and service-oriented economy, excellent sites for innovation and sustainable initiatives due to their inherent flexibility and risk-taking ability (Patricoff and Sunderland, 2005).

Globally, the growth of any economy is dependent on vibrant SMEs and when the reverse seems 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 SMEs (Yitzahki, 2006).

One of the major impediments to the growth of SMEs is the issue of taxation. The effect of taxes on SMEs ranked second among the factors stunting the growth of the economy in USA (Thuronyi, 2006) where he established that taxes are heavy yokes that frustrates existing investors and scare away prosperous ones.

A study conducted by Shome (2004) in collaboration with Washington, United State base center for international private enterprises exposed the actual burden of taxation on SMEs in South America. According to him, the Jamaican business environment is being suffocated by too many taxes from the national, federal, and local governments.

In this light therefore an indigenous restaurant operator, a barber or a hairdresser, cold store .operator and laundry operator who has to pay taxes to the government in addition to the cost of powering his business through generators and paying staff salaries will find it a very hard task making a profit to keep his business afloat because of high overhead incurred (Terkper, 2003).

In Africa, the same attention about the growth and ensuing challenges of small and medium enterprises has continued to top discussions. According to Terper (2007),an estimate from the manufacturing association of Nigeria, about 1000 SME firms set out to doing business in the country annually end up shutting down due to the unfriendly business environment.

These taxes confront the manufacturing sector in the following ways; import duties, export and excise duties, social responsibilities, sales and VAT, and income taxes. A study conducted on Ivory Coast shows that taxation practice became more pronounced and prevalent in the late 1980s whereby about 154 taxes were identified in the country. This expresses doubt about whether these taxes could attract serious investors into the country.

As pointed out earlier, SMEs is important to almost all the economies in the world, most especially to those in the developing countries like Cameroon whereby they are noted for their enormous contribution to development through job creation which has increased the level of employment thereby reducing unemployment rate as well as improving the standard of living of the citizens.

According to the National Institute of Statistics (INS, 2009), Cameroon has approximately 98000 companies of which 80% are SMEs. The growth and size distribution of firms within a country from the very labor-intensive to the very capital-intensive is of course influenced by taxation behaviors. Therefore, achievement of this growth is more difficult if SME activity, in general, is discouraged by the harsh policy of taxation.

Furthermore, the high levels of taxation of SMEs in Cameroon warrants attention on accelerated research areas aimed at addressing the overall effect of taxation on their growth. Although there are many SMEs in Cameroon, this study will involve itself with only SMEs which make tax returns to the tax administration of Cameroon with a turnover of at least 2 million FCFA. Finally, this study will attempt to identify all the taxes subjected to SMEs and their effects on various levels of operation on the business enterprises.

1..2 Problem Statement

Taxation has been identified as a major threat to the growth of SMEs not only in highly industrialized countries such as the USA but also in less industrialized countries; Cameroon in particular. For instance, in Cameroon, income tax is a direct tax charged on business income as a result there are many methods involves in the collection of income tax which includes PAYE (pay as you earn), withholding tax, installment tax, and advance tax. PAYE therefore can be defined as a method of collecting taxes at source from individuals in gainful employment. Indirect taxation which is equally charge includes VAT, corporation tax, and excise duties.

The stunted growth of SME has often been blamed largely on the challenge of taxation. Taxation in general increases the cost of operation of running SMEs. Therefore, to compensate for the increased cost of operation, prices on goods are raised thus causing the amount of sales to go down. The effects of reduced sales are reduced profit, reduce capital base, and above all slow creation of employment resulting in slow growth. Entrepreneurship is about change 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 business.

1.3 Research Question

1.3.1 Main Research Question

The main questions for this study include:

What effect do taxes have on the growth of SMEs?

1.3.2 Specific Research Questions

The specific questions are:

1. How do direct taxes affect the growth of SMEs?
2. How do indirect taxes affect the growth of SMEs?

1.4 Objectives of the Study

This study will attempt to achieve the following main objective which will further be sub-divided into subsequent specific objectives

1.4.1 Main Objective

The main objective of the study is;

To examine the effect of taxation on the growth of Small and Medium Enterprises.

1.4.2 Specific Research Objectives

The specific objectives are;

1. To assess the effect of direct taxes on SMEs
2. To assess the role indirect taxes play on the activities of SMEs
3. To make necessary recommendations

1.5 Research Hypothesis

The study will test the following hypothesis

Ho: Taxation does not significantly affect the growth of SMEs

H1: Taxation has a significant effect on the growth of SME