The effect of tax administration on tax compliance by small and medium size enterprises
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1.1 Background Information
Taxation had ever been an important policy field throughout history and it will stay as a crucial aspect in the future polities since it creates the basis for state to run its affairs. No body likes paying taxes even though everybody knows that taxes are essential to the state. Tax is an obligatory contributions or payment made by individuals or corporate body to enable the government carryout its function without any expected returns irrespective as you have a source of income. In almost every country, the government derives a majority of its revenues to finance public service from taxation. In the same light, taxes have become powerful instrument policy makers around the world to use in attaining economic and societal goals.
The system of taxation in Cameroon and its administration has an effect on almost every business and investment decision that is made in the country. The administration of the tax statutes materially determines their economic effects. A survey of Cameroonian businesses a country seemingly typical of its economic level, demonstrated widespread of how they comply to it. Some do tax erosion with bases paid businesses through exemptions and evasion according to B.Gauthier and M.Gersovitz Journal of public economics (1997) Elsevier. Also, studies explore how small business owners talk about their tax responsibilities especially in non-enabling institutional contexts. It identifies two main types of tax responsibilities discourses among these business owners. The duty based and right based responsibilities, where duty bases sees taxation primarily as the citizens responsibility to governments which should be fulfilled first in order for the government to earn trust of citizens for high tax compliance and anchored on fair common discursive themes, that is, socioeconomic development, legal, moral and philanthropic theme by Kenneth Amaeshi, Bongo Adi and Godson Ikiebey (February).
In Cameroon, tax administration is under the Directorate General of Taxes which at the apex of resource collection. This body also embraces and engages in the tax litigation while encouraging sanctions against tax payers and officers who contravene tax rules. The tax administration may send a pre-completed return of collected revenue or any other taxable item with the tax amount owed to any natural or legal person paying taxes or duties as per laws and regulations in force.
Taxes payable by the employees shall be withheld at source by the employer who is responsible for payment to the tax authority. Personal Income Tax (PIT) shall be paid by the 15th day of the month following the payment of wages/salaries. A regularization of payroll taxes(including PIT) shall be declared and paid by the 15th march following the fiscal year end, when filling the annual tax return. Tax payers naturally owe the duty of paying taxes put at their charge by the tax regulation in force. Failure to comply with the legal regulations or requirements relating thereto may rise to control process exercised by the authorized tax agent (23 January2020). Tax administration in Cameroon as in most economies in the world is divided into two -Individual and Corporate taxes. Since January 2014, Tax administration sends a pre-filled tax return form to legal or natural persons showing the amount of tax owed as stated by the rules and regulations put in place.
- CORPORATE TAX ADMINISTRATION.
Tax payers are expected to submit to the tax administration authority their annual revenue return from businesses carried out during the period serving as tax base on or before march 15th. The tax return during presentation must conform to the requirement of the OHADA accounting system. Tax payment can be paid 2.2% or 5.5% monthly minimum tax on turnover realized during the month and paid to the tax authority on or before the 15th of the following month (Directorate General of Taxes).
Tax compliance in Cameroon according to December 24, 2019 kima and partners firm explains that tax compliance in Cameroon is very important but time-consuming task. It is the duty of companies registered in the Cameroon business books to pay their taxes obtained and thus an adequate tax compliance status.The Cameroon tax system encompasses the tax rates and the tax regime in Cameroon. It is vital for a company operating within the Cameroon economy to engage a specialist tax firm and failure to do so leads to penalty.
The tax rates in Cameroon depends on the nature of the tax. The various tax rates include;
- Corporate tax rate 38.50
- Personal Income tax rate 38.50
- Sales tax rate 19.25
- Social security rate 20.40.
The Cameroon tax regime encompasses the mechanism of tax rates, regulations and the scope that comprise the taxation approach. An understanding of the Cameroon tax regime by an investor will ensure a successful tax compliance in Cameroon. A certificate for tax compliance and clearance is an up to date status (Barr. Agbor, Kima Divine Ngema).
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 is, or the greater the efforts to fulfill taxation requirements as well as to check how those requirements are met. The lower the initiatives are for SME’s to perform well. Hence maintaining the tricky balance between tax rates, compliance and administration should be their main goal of tax policy. In this age of globalization, most developing countries wants to become integrated with the international economy. However, they face significant challenges in their pursuit, with the tax system they have put in place and the tax rates they set for their businesses. Thus, tax policy makers have to analyze the prevailing conditions in the country and determine the relevant mix of taxes they can raise sufficient revenue for the government and at the same time enhance the growth of small and medium size enterprises.
Small business enterprises are generally recognized as an important driver of the economic success. They are key ingredient in the growth of a country as they contribute to job creation and to the Gross Domestic Product(GDP) of the country.
Over the past or last few years the growth of SMEs employment has exceeded the growth in their contribution to GDP the reason why the Cameroonian government has been notably supporting them through financial institutions, credit lending. Tax regulations, tax policies and tax administration are reported to be the most constraints to the expansion of SMEs in Cameroon and internationally.
However, these enterprises like any other business in Cameroon are liable to different types of taxes like the sales tax, income tax, corporate tax, capital gain tax, custom duty that are paid at different stages of the business.
Economic contribution of SMEs to development creation and poverty alleviation is invaluable. Several scholars conclude that SMEs play a significant role in the economic development process of any country (Carland et al, 1984, Joubert and Akinnusi, 1993, Trevisan, 1997).
1.2 Problem Statement
Due to general perception that tax is important source of fund for economy development and provision of social services, the problems faced are in the area of negative relationship between tax administration in Cameroon and the ability of businesses to comply to it. Small and medium size enterprises (SMEs) are faced with problems of taxes, multiple taxation and lack of proper enlightenment or education about tax SMEs are facing in other developing countries like, Cameroon; inadequate capital, managerial skills, government regulations which is most affecting the operation of SMEs in Cameroon especially.
This issue of tax administration by the government, direct or indirect taxes and the kind of system they choice to use, is a worm eating SMEs deeply on how to comply with these measures. This has led to an increase in the number of businesses evading tax and declaring false information to the tax authorities. Thus, a question most people ask which makes a problem is the extend to which tax administration affects tax compliance by SMEs. Among the many problems confronting tax administration is how to ensure compliance on the part of the tax payers. Tax being a commodity nobody wants to buy; the tax man is hardly liked by the tax payers.
Tax administration in Cameroon is complex and difficult for the common taxpayers to understand. Lack of confidence and mutual distrust in government represented by the tax collector, laziness of some tax officials, unaware of the existence of certain taxes, all these give rise to compliance difficulties.
Tax compliance is the manner or way to which business or individuals respond to tax administered. That is, if tax payers act according to the tax administration. Thus, the reason why we need to know the effect of administering tax on how business and individuals respond or react towards it
As a gap that needs to be closed, it is very important to know how tax is administered and how businesses respond to it. This is because it will enable the authority to easily collect their taxes if the reason or purpose of administering tax is well understood. This will also enable businesses and individuals to be able to know how to comply with the taxes levied on them, equally, understanding of tax administration effects will prevent tax evasion, false or wrongrecords keeping and disclosure of figures to the tax authority. Businesses and individuals need to know how taxes are administered so as to reduce the effects of penalties given to those who default tax payment and there will be an increase in voluntary compliance which leads to an increase in revenue collected by the government to carry out expenditures
In the same light, the gap between how taxes are administered and how tax payers comply to it needs to be filled. Therefore, need to know the effects of tax administration on tax compliance gives rise to research questions like what are the effects of administering tax on compliance? how SMEs respond to it and the challenges faced by SMEs in complying with tax is the research purpose and gaps which needs to be filled. Thus, this study seeks to know how administering tax will affect SMEs compliance to it and some challenges faced.
1.3 Research questions
- What are the effects of tax administration on tax compliance by SMEs?
- How does SMEs respond to tax administration due to its effects on them?
- What are the challenges of tax compliance faced by SMEs?
1.4 Objectives of the study
- To examine the effect of tax administration on tax compliance by small and medium size enterprises.
- To know how SMEs respond to tax administration due to its effects.
- To identify the challenges of tax administration on tax compliance by SMEs.