the effect of taxation on the growth of small and medium size enterprise in the Buea municipality
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The study was conducted to ascertain the impact of taxation on the growth of small and medium size enterprise in the Buea municipality based on the following objectives; to identify the effect of taxes on the performance and profitability of small and medium size enterprises, to identify how taxes, affect the provision of services by small size enterprises, to identify the methods in which the tax system deals with the interest of taxpayers and make recommendations on how to solve the above problems, to evaluate the general desirability of the firms and individuals for investment purposes as a result of taxation, to evaluate how the rate of taxation effects the rate of investment in the country, to assess the impact of taxation on Small and Medium Size Enterprises, to find out if tax payers are aware of all their tax obligations and policies, to find out problems affecting tax payers and their businesses. The researcher adopted a descriptive research design and qualitative data analysis. Random sampling was used to determine the sample size. A sample size of 30 was considered, primary data was collected by the use of questionnaires. Secondary data was collected from journal reports and internet which are in relation to the study objective. Data entered in excel was presented by the use of frequency tables. Data analyzed by statistical packages for social sciences (SPSS), which revealed the impacts of taxation on the growth of small and medium size enterprises. The study found there is no significant relation between taxes and the performance of small and medium size enterprises (0.389 sign, 0.008 adjusted R2 ). This implies on 0.8% of variation in SMEs growth is influence by taxation. As such the null hypothesis that states that taxation has no significant impact on the growth of small and medium size enterprises was accepted over the alternative hypothesis.
1.1 Background of the Study
Small and Medium sized enterprises 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).
In recent times, the world’s economy has developed tremendously and this has been linked with the activities of small and medium sized enterprises especially in developing countries. A study carried out by the Nigerian Federal office of statistics shows that in Nigeria, small and medium sized enterprises make up 97% of the productive units of the economy (Ariyo 2005). Although smaller in size, they are the most important enterprises in the economy due to the fact that when all the individual effects are aggregated, they surpass that of the larger companies. Panitchparkdi (2006) sees SMEs as a source of employment, competition, economic dynamism, and innovation which stimulates the entrepreneurial spirit and the diffusion of skills. Because they enjoy a wider Geographical presence than big companies, SMEs also contributes to better income distribution.
The successive development plans of Cameroon have laid emphasis on the attainment of self-reliance and actualization. The need for this national objective is because much is expected from individuals from the viewpoint of “providing employment opportunities, self-reliance in basic food and material production, high per capital income, foreign exchange earnings, and the production of industrial raw materials”.
It is generally agreed by many that the way out of the problem of economic development from many developing countries is to devote a lot of energy to the development of small business enterprises; In modern economist’s small business development as a necessary step for rapid growth. But in Cameroon small scale businesses are still struggling to climb the ladder of growth despite the so-called priority given to this sector. Indicating that small scale businesses still face depression because of increase tax levied by the authorities, and other external as well as internal factors which is not our focus. In developing countries in particular, it is now realized that large business has played, and cannot alone, be expected to play the dynamic role that they are supposed to play in the rapid growth and development of the country.
Business growth is the process of improving some measure of an enterprise’s success. Business growth can be achieved either by boosting the top line or revenue of the business with greater product sales or service income, or profitability of the operation by minimizing cost.
In Cameroon, as well as many other developing countries, there is a dearth of financial institution which cater for long and medium term credit needs of business operations in the economy. Small scale enterprises are not in exception to these and they suffer a great deal for want of capital for development and expansion. It is becoming evident that small business, which had been neglected, could play the aforementioned roles, as well, if not better than the large business establishment.
However, many countries are what they are today because they adopted the strategy of developing their small business outfits, which has gone a long way to improve and increase government revenue for the provision of public goods. The transformation of Japan from a relatively backward trading nation into a modern industrial giant was a result of the development of highly efficient small business concerns. But Cameroon and other under developed African countries still struggle to improve on the strategy of developing their small scale businesses.
With the supportive role of the government, small scale businesses are capable of pulling Cameroon out of the economic breakdown and less taxes, especially if the land materials are locally sourced. Many Cameroonians are being called upon to invest in small scale business. To backup this determination, the government has established some agencies to advice and co-ordinate the efforts of small business entrepreneurs.
Taxation, according to the business dictionary, is a means by which government finance their expenditure by imposing charges on citizens and corporate entities. Government use taxation to encourage or discourage certain economic decisions. For example, reduction in taxable personal (or household) income by the amount paid as interest on home mortgage loans results in greater construction activity, and generates more jobs. Whendel Holmes (1984) defined taxation as the price we pay for living in a civilized society. It can be looked at as an income redistribution policy by the government. A classical economist Adam Smith (1776, THE WEALTH OF NATIONS) argues that governments should be market free they should only allocate resources; taxes should be for services such as defense, justice and maintenance of government services. According to Manasseh (2000), a tax is generally referred to as a compulsory levy imposed by government upon various categories of assets and taxation is a compulsory and nonrefundable contribution imposed by government for public purposes.
As countries or societies develop, the method and procedures of record keeping changes in response to the evolution. Many countries in Africa for example are now adopting the OHADA system of accounting for the easy recording and analysis of economic transaction. Luca Pacioli wrote the first book on double entry book keeping in 1494 and he’s referred to as the father of accounting. Accounting as such, seeks to satisfy the need of the society. The period of the industrial revolution brought in an increase in factory production and economic activities.
In Cameroon like other countries in the world, taxes constitute the main source of revenue to the government. The Cameroon tax system is design in such a way as to raise revenue for the government. In order to achieve this goal, it’s the responsibility of the state to ensure that all citizens respect their obligations by paying taxes. It’s therefore the duty of tax officials to put at the disposal of taxpayers any information necessary for their understanding of the tax system and techniques of evaluation, assessment, declaration and payment. Using the self-assessment method of taxation, it’s possible that taxpayer can understate their revenue so as to reduce their tax liability. As a result, the tax department has the responsibility to carry out checks to ensure that proper assessment has been made by the taxpayer.
The population of Cameroon and more particularly the town of Buea rely heavily on small businesses for their many activities. Even though the volume of transactions in terms of monetary value is far less than those provided by larger businesses, they are still very important to the economy of Cameroon. This is explained by the fact that, the volume of individual transactions carried out by its customers are relatively small.
Small and medium size enterprises make up a large scale of business in the entire economy and they serve as the source of employment generation, innovation, competition, economic dynamism and most importantly serves as a form of government generating income which ultimately leads to national growth as the government with these income helps to provide public goods and services.
Constituting an enormous proportion of the business sector in the country, these enterprises are taxpayers as justified by the source and residence principles of taxation. These principles explain that, the country which provides the opportunity to generate income should have the right to tax it. Also that, people and firms that is, individuals and group should contribute towards public services provided for them by the country where they live on all incomes. Taxation can help small business to get a high profit target bearing in mind that they will pay tax from the profits they make.
Regulations and tax policies are reported to be one of the constraints to the expansion of small businesses in Cameroon and internationally. However, these enterprises like any other business in Cameroon are liable to different types of taxes and these include income tax, corporation tax capital gain tax, sales tax and customs duties that are paid at different stages of the business. For purposes of this study the emphasis is put on income tax which is levied on the incomes of all Cameroonian residents.
From the above assertion, it is obvious that taxation has some impacts on the establishment of small and medium scale business. This research will go a long way to provide suggestive methods that may be effective to assist small and medium size businesses by the tax administration. Thus a research study on the impact of taxation on small and medium size enterprises in Cameroon and more particularly the town of Buea.
Taxation increases incentives for public participation in the political process and creates pressure for more accountability, better governance, and improved efficiency of government spending. It also creates incentives for governments to upgrade their institutions for tax collection and administration and to provide more public services (Moore, 2007).
The growth of organizations and Tax Policies greatly depend on each other to survive present changes tax laws are being checked with the aid of Studies and research carried out by tax specialists. In Cameroon, Tax assessment is authorized by the state’s tax authorities in charge of the taxation department. Economic growth in every country is defined by the performance of Its production sector. In many highly developed countries, a great share of production is manufactured by SMEs where it is an important part of their market economies. The desire to have a sound economy is a fantasy in most nations such as Cameroon.
The imposition of tax is for the betterment of the economy though some income workers view it as a technique for power abuse. Tax payment is a required duty forced by the organization on singular wage laborers, associations, money related authorities, exporters and merchants (Murphy, 2005). A country’s approaches and framework are immensely related with the business sector.
When business thrives, the economy prospers. Also, there is no speedier method of for mixing up the issues of the economy without the help of associations that move administrations, merchandise cash ventures from those with products (Baurer, 2005). Basically, Small and Medium Size enterprises are perceived as imperative drivers of monetary achievement.
In this sphere, this research shall be governed by lots of theories such as the ability to pay approach theory, the benefit approach theory, the theory of equal sacrifice and cost of purchase theory. The Benefit Approach Theory of taxation was developed by Knut Wicksell in the year 1896. It states that individuals should pay taxes according to the benefits they get from them. This theory therefore advocates that each citizen should pay for whatever services he uses. It maintains that justice in taxation is secured by taxing each citizen in proportion to the benefits he derives from the activity of the state. It is also known as the insurance theory of taxation. The theory is idealistically fair in that it appeals to those who believe that unless one pays for certain services, then one should not be given them. The Ability to Pay Approach Theory is another theory that governs this research work. The theory suggests that those who are able to pay should do so and that taxes should be a function of one’s wealth. It further advocates that those who are not able to pay taxes because of financial inability should not be denied the use of the facilities paid for through tax. This is for example, in the case of health services where poor people would require treatment even if they cannot afford. This is a more practical approach and more socialistic in nature. It denounces the concept of turning the state into private market for selling services and also takes into consideration the citizen’s needs and abilities. Also, the Cost of Service or Purchase which was the first and the simplest principle for the distribution of taxation would be to treat it as a payment for public services and a payment equal to the cost of the service rendered. The idea of purchase and sale between the citizen and the state leads to untenable conclusions respecting the nature of the state. And lastly the theory of equal sacrifice also served as a base to this research work. To it, another suggestion to make a tax satisfy the principles of justice is that we should take into considerations the sacrifice entailed by the tax payer. The state should see that the tax subjects the tax payer to an equal sacrifice. This aim is realized by introducing the principle of progression in the tax system. It is also suggested that the tax should impose very heavy taxes on a few rich people and leave the general public entirely free from taxes. For purposes of this work, the researcher shall be governed by the benefit Approach Theory of taxation. This is because it is the core of this research as it accord that individuals should pay taxes according to the benefits they get from them.
In Buea, the significance of small ventures as job creators, especially for those with low skill level, is broadly perceived. SMEs contribute about 45% of Gross Domestic Product (GDP) and uses around 98% of the workforce in the private sector. Taxation is the key source of revenue in an economy that every government uses to provide public services to its citizens.
1.2 Statement of Research problem
Small scale enterprises like any other business cannot be dived into extensively unless funds are available for maintenance and procurement of equipment and necessary input. According to Teriba (1978) taxation when applied excessively on the income of corporate bodies discourages industrial growth and so brings about an increase unemployment in the economy. It is also believed that income tax rates that are charged on small and medium enterprises are not accurate since its base on assumptions without assessing the actual turnover of the enterprise, yet at times these enterprises maybe making losses.
Lots of works have been done on this same topic. For instance, Richard and Eric (2003) conducted a research, on the induction to tax policy design and development ,using co-integration test, unit root test and ordinary least square regression in testing the variables and finds out that globalization and other factors may lead to further convergence of tax system, the evidence to date shows that the size and structure of taxation in most countries will continue to be dominated largely by domestic instead of global factors and the study further recommended that the government should take a proper account of what taxes exist around the world and as well the level and structure of taxes. Again, Jane (2011) carried out research on the impact of tax reform on the general economy of the nation and tested the research variable with the use of ordinary least square regression method and find out that tax reform have not had a significant impact on the macroeconomic stability. It was observe that increase in the tax rate ultimately result in greater burden for the masses through a shift of the tax liability. A review study on tax compliance of small business owners (Kamleitner, Korunka and Kirchler, 2012) also, clearly presents that the three key aspects affecting small business owner’s perceptions of their tax situation includes: perception about non-compliance opportunities; meaning taxation knowledge; their decision frames that render taxes as a painful loss. Though with these related work, there still exist unanswered questions on the topic concern.
The importance of small businesses as a mechanism of economic growth and development is often ignored. They are perceived as minute establishments as they have minimal effect on the state of the economy. Tax burden is another major problem in Cameroon as many business organizations are not favored by the tax system and policies in place. Some businesses are already collapsing while majority are still struggling to meet up with high tax rates to ensure their business still exist. Examples of companies that have collapsed due to heavy tax burden include: Bonga Juice Buea, London Complex, and shopping mall, just to name a few. Taxes are raised by the government to generate revenue used to provide services such; health centers, telecommunication, roads, schools and electricity and this has helped to improve the performance of SMEs. Despite the services provided, SMEs performance is still poor. This could be due to the increasing tax burden brought about by tax rates which are revised annually.
These rates seem to be taking an upward trend (Gordon and Dawson, 1987) which has led to winding up of some SMEs. This made the researcher investigate more about the impact of taxes on SMEs.
Also, there are inadequate tax personnel who could educate and sensitize the taxpayer on the tax code and importance of taxes to the government. Due to the ignorance of the tax code, the welfare of many tax payers and growth of small and medium size enterprises in particular seem to be in shambled with respect to taxes.
Regulations and tax policies have been accounted for as a hindrance of expanding SMEs. Never the less undertakings are obligated to various types of taxes paid at various phases of the businesses. Also, the development of SMEs is greatly affected by the level of taxation, its administration and compliance: the higher the tax rate is or the greater the efforts to fulfil requirements are, as well as to check how the requirements are met, the lower the initiatives are for SMES to perform well. Therefore, maintaining the tricky balance between tax rate, compliance costs, tax administrating and economic development should be a main goal of every tax policy. What are the problems faced by tax payers?
1.3 Objective of the study
Based on the enumerated problems therefore, the main objective of this study is to assess and analyze the impact of tax policy on the growth and profit level of small and medium size enterprises. The carrying on of business activities by all economic operators is taxable by the government as provided in the Cameroon General Tax Code. SME are not excluded from the payment of taxes to the public authorities. The main problem of this study is that, taxation is seen as a hindrance to the growth of small and medium size enterprises.
The purpose of the study is to evaluate the impact of taxes on Small and Medium Size Enterprises. The specific objectives are:
- To identify the effect of taxes on the performance and profitability of small and medium size enterprises.
- To identify how taxes, affect the provision of services by small size enterprises.
- To identify the methods in which the tax system deals with the interest of taxpayers and make recommendations on how to solve the above problems.
- To evaluate the general desirability of the firms and individuals for investment purposes as a result of taxation.
- To evaluate how the rate of taxation effects the rate of investment in the country.
- To assess the impact of taxation on Small and Medium Size Enterprises.
- To find out if tax payers are aware of all their tax obligations and policies.
- To find out problems affecting tax payers and their businesses.
FURTHER READING: PUBLIC ADMINISTRATION PROJECT TOPICS WITH MATERIALS