CHARPTER ONE

INTRODUCTION

1.1Background of the Study

Taxation is inseparable from the existence of the state or country. The history of taxation can be traced back in the early days of Egypt where Pharaoh asked the population for proceeds to build market and pyramids.

More so, it can even be revealed in the bible in the story of Jesus and the tax collector (Luke 19v1-10). Taxation refers to the practice whereby the government imposes charges on its citizens and corporate bodies with the objective to raise funds for the provision of public services or facilities such as national defense and security, public health, road construction and maintenance, courts, schools, libraries and parks.

The government also uses taxation as a medium to redistribute wealth. Through taxation, the government can encourage or discourage the consumption of certain goods or services. Tax evasion by informal sectors is one of the main social problems hindering the government revenue generation in Buea municipality thereby reducing the level of welfare

Tax evasion is a situation when tax payers deliberately hide their incomes from the tax authorities in order to reduce tax liability, Devarajappa (2017). Tax evasion involves the deliberate act of noncompliance to tax legislation and the disregard of tax payment from the citizens, Drogalas etal. (2018).

Tax evasion is an illegal activity in which a person or entity deliberately avoids paying a true tax liability; those caught evading taxes are generally subject to criminal charges and substantial penalties.

Tax evasion often entails tax payers deliberately misrepresenting the true state of their affairs to the tax authorities to reduce their tax liability, and it includes dishonest tax reporting, such as declaring less income, profit or gain than the amounts actually earned or overstated deductions.

One measure extend of tax evasion is the amount of unreported income, which is the difference between the amount of income that should be reported to the tax payers. Also, evasion of  custom duty, by under voicing and miss declaration of quantity and product description .when there is advoleram duty the tax base can be reduce through  under-voicing.

Value added tax is evaded through producers collecting tax from consumers, may evade tax by underreporting the amount of sales the sold has no broad based consumption tax at the federal level.

Cameroon using the declarative tax system is a system which tax payers are allowed to come declare at the tax office, thereby some tax payers will always reduce their turnover for that month and also reduces the monthly salary of their works to make them to paid low taxers which really hinder the development of Cameroon and the tax agents responsible in the process of tax collections in Cameroon are most those who are from ENAM.

The Nigerian uses the decentralized tax system and each tax is responsible to its own affairs of taxation the tax agent involve in this are the federal inland revenue service this body is not only use by Nigerian but also by many countries like America in the assessment of taxes.

Tanzi and Zee, (2001) described taxation as the only practical means to raise revenue to finance government spending on the provision of public goods. Cameroon operates a self-declaration tax system, that is individuals and companies take the initiative to declare their income and pay their taxes. This system helps the government of Cameroon to reduce the cost of tax administration.

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 taxes 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 can raise the essential revenue without excessive government borrowing and should do so without discouraging economic activities and without deviating too much from tax systems of other countries.

The Organization for Economic Cooperation and Development (OECD) describes tax evasion as an illegal arrangement where tax liabilities are either hidden or ignored. That is, the tax payer pays less than he\she is legally obliged to pay. In addition, low tax compliance is a serious issue in Cameroon, limiting the capacity for the government to raise revenue for development purposes. The factors contributing to this low compliance may include; weak legal system, high marginal tax rate, unreliable accounting system and ineffective tax administration (chartered institute of Taxation of Nigeria Website). Never the less, it has never been an easy task to persuade tax payers to comply with their various requirements of tax system.

Evasion hinders development and balanced growth, and undermines the overall sense of fairness on which the tax system should be based (Carrasco, 2010).

According to Carrasco, efforts to estimate evasion are important not only because such estimates assist in designing an economic system that guarantees a minimum level of well-being to its citizens, but also because the data obtained serve as a fundamental input for tax administration by reducing the amount of taxes collected by the State, evasion reduces the available fiscal space, giving the State fewer resources to carry out its customary functions of fiscal policy: stabilization, provision of public goods and income redistribution

A tax system with high levels of evasion also undermines the intended impact of the system, not only with regard to equity, but also in terms of fostering social cohesion, since evasion corrodes the society’s confidence in the State and reduces the likelihood of achieving the “fiscal covenant” so necessary in the region.

In this respect, many of the tax policies examined in the foregoing section take evasion as a given in all of Latin America and, more important still, demonstrate the difficulties that tax administrations face in dealing with the problem.

In Cameroon, the public sector accounting and finance is managed by the Ministry of Finance (MINFI). It ensures the preparation, approval and implementation of the government budgets, and the preparation of public sector financial reports for auditing and publication.

It undertakes strict measures regarding detection of “concealed” income. In a circular No. 001/C/MINFI of 2nd January 2018, the Minister of Finance issued instructions relating to the execution of finance laws, the monitoring and control of the execution of the budget of the state, public corporations and public establishments, regional and local authorities and other subsidized bodies for the 2018 financial year.

This proves that tax evasion has become a common practice; they carried out certain measures relating to the fight against tax fraud and evasions.

However, in Cameroon, it is known that the informal sector accounts for a major source of employment. There is no gainsaying the fact that most informal sector operators are self-employed and they often operate from homes, whiles some others use any public space available.

Thus, with table and a chair one could easily start up his/her own business with family assistance (Farrell et al, 2000). How to tax the informal sector remains a pressing issue.

The informal sector is an obvious focus of attention as it forms a significant and growing proportion of the economy in the developing countries, yet pays little in the form of taxes (Anuradha and Ayee, 2002).

The Minister of Finance and Economic Planning expressed concern that widening the tax net remains one of the main problems that Cameroon is facing. The simple fact that a greater percentage of Cameroonians are all engaged in informal private sector businesses makes the generation of revenue a tedious task. Therefore, this study intends to examine the process of tax evasion by SME and the agents involved in Buea- Cameroon.

 1.2 Statement of the problem

The government of Cameroon just like most countries in the world depends on tax revenue to finance its activities and carryout development projects. As at 30th September 2019, the contributions of Cameroonians to tax revenues reached XAF1426billion, according to the budget execution report of the first nine months of the year.

These contributions comprise both direct and indirect payments. Among the direct components is the personal income tax, which contributed XAF225.7 billion. In addition to personal income tax are the indirect tax revenues which payments are done in through various taxes on consumption and imports.

The contribution segment includes items such as VAT, the amount of which amounted to XAF685.8 billion over the period and other taxes that sum up the amount as above to the state treasury.

Cameroon main source of revenue is through taxes so taxes play an important role when it comes to the GDP  of Cameroon without people evading taxes in Cameroon will make the have an effect in the gross domestic product of Cameroon making the and the revenue of the country and development to be low .

Evasion affects the population’s well-being, in that it can alter the distributive impact sought by tax legislation, thus affecting both horizontal equity (“equal treatment for those in similar circumstances”) and vertical equity (“appropriately disparate treatment for those in differing circumstances”).

With regard to horizontal equity, evasion can mean that individuals with the same capacity to pay face unequal tax burdens, since evaders end up paying less tax that those who meet their tax obligations.

In terms of vertical equity, people with greater capacity to contribute to the system generally have more opportunities to benefit from professional advice, and thus develop strategies to avoid taxes or to reduce the risks of non-compliance.

A tax system with high levels of evasion also undermines the intended impact of the system, not only with regard to equity, but also in terms of fostering social cohesion, since evasion corrodes the society’s confidence in the State and reduces the likelihood of achieving the “fiscal covenant” so necessary in the region.

Traditionally, the orthodox schools of thought have attributed tax compliance to the taxpayer’s fear of being caught and punished by the authorities (Allingham and Sandmo, 1972). However, these explanations fail to account for the paradoxical case of countries in which, while the likelihood of audits and sanctions is very low, compliance levels are very high.

Thus, tax compliance is a phenomenon which, though largely dependent on the taxing capacity of the State, is also influenced by numerous other factors, including subjective ones. The evasion of taxes will have the following effects to the Cameroon economy.

It reduces the GDP and public funds of the country which will lower the economic growth of the country.

Also with tax evasion will lower development and also reduces the rate at which the government is to provide public and merit goods since taxes have a very important role in the economy.

Tax evasion are basically known to reduce the revenue of the government although in the other part  increase the   profits of the business people but if evaded, it makes the government budget to be low also since the budget of the year is based on what the government is supposed to do for that year and if evaded , the budget will be low thereby making the economy to operate in e negative way. And if there is low level of development in the country it reduces the rate of unemployment.

On the other hand the positive effects of tax evasion is mostly on the tax payers since the are there to declare taxes that don’t reflect their through turnover so it will increase their profit of the companies and also if the profit is retain back it will lead to the expansion of the business there by making the companies to grow at a faster rate since the they pay less taxes and due to expansion it will lead to employment also because the companies will need more workers to work at the company.

This study therefore seeks to identify the process of tax evasion, its agents and therefore contribute to our understanding of tax evasion in Cameroon.

1.3 Research Questions

The main research question of this study is “what is the process of tax evasion by SME and what is the role played by the different agents involved in tax evasion”? Specific research questions include:

1. What is the process of tax evasion?
2. Who are the agents involved in the tax evasion process?
3. What is the role played by the different agents in the tax evasion process?

1.4 Research Objectives

The main objective of this study is to establish the process of tax evasion by SME and the agents involved in Cameroon.

The following specific objectives are important in achieving the main objective of this study,

1. To assess the process of tax evasion.
2. To identify the agents in the tax evasion process.
3. To evaluate the role of different agents in the tax evasion process.

1.5 Hypothesis of the Study

The research hypothesis of this study is;

Null Hypothesis (Ho): The process of tax evasion and agents involved has no significant effect on small and medium size enterprises in Buea.

Alternative Hypothesis (H1): The process of tax evasion and agents involved has a significant effect on small and medium size enterprises in Buea.

Read Also: The Effect Of Taxation Of Small And Medium Size Enterprises In Buea Municipality