THE EFFECTS OF TAX EXPENSES ON THE FINANCIAL PERFORMANCE OF SMALL AND MEDIUM SIZE ENTERPRISES
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Abstract In Bamenda II, small and medium-sized enterprises (SMEs) are confronted with the dilemma of a plethora of taxes, excessive levies, and inefficient tax assessment procedures. SMEs in Bamenda II were selected to participate in this study, which attempted to determine the impact of tax charges on the financial performance of small and medium-sized enterprises (SMEs).
The research was carried out on a convenience sample of 40 SMEs using standardized questionnaires that were distributed to the participants. When tested at the 5% level of significance, the main hypothesis for this study was presented in the null form as follows: Tax expenses have no impact on the financial performance of SMEs in Bamenda II. The primary study question was: What are the consequences of tax expenses on the financial performance of small and medium-sized firms in some selected SMEs in Bamenda II? The secondary research question was: The majority of the information for this study was gathered from primary sources.
The descriptive statistical tools used in this study, such as frequencies, percentages, and correlation tests, were used to examine the data collected. According to the findings of the study, tax charges have a detrimental impact on the financial performance of SMEs by reducing growth and limiting expansion. Taxes should be collected in proportion to the sizes and profits of SMEs, taking into account all other variables that can impede the expansion of such SMEs, because there is a relationship between the size of SMEs and their ability to pay taxes, according to the primary proposals made:
CHAPTERS ONE AND TWO
1.1 Historical Context of the Research
Small and medium-sized enterprises (SMEs) have long been recognized as a significant driver of economic development and industrialization in developing and emerging markets (Aryeetey & Ohene, 2004 and Oludele & Emilie, 2012). These small businesses are increasingly being recognized as enterprises that make significant contributions to the creation of jobs, the expansion of the economy, and the eradication of poverty throughout Africa.
It is stated in the 2005 World Development Report that the creation of “sustainable” jobs and chances for small and medium-sized businesses are the most important tactics for lifting people out of poverty. In the majority of cases, small and medium-sized organizations are privately held businesses that encounter issues when interacting with the government in general and the tax administration in particular, particularly in developing countries. Many of the issues that taxpayers are having with the tax authorities can be attributed to poorly thought-out tax policies and a lack of certainty about future policy changes.
However, it would be quite odd to not hear comments about the difficulty and/or ambiguity of the tax regulations, as well as about the high tax rates (Baurer, 2005). Because of the shifting ability of tax, if the tax structure is not properly built for certain environmental conditions, it may result in a greater burden being placed on tax-paying organizations, which in turn may have a negative impact on the final consumer.
Several issues, including tax policy, have been identified as contributing to the failure of the majority of small firms to achieve or maintain growing profitability, according to a study report by Mnewa and Maliti (2008). Therefore, as a policymaker and regulator, the government must take into account the elements that could have an impact on the competitiveness of small businesses.
Since the 1960s to the present, small and medium-sized firms (SMEs) have received proper attention, particularly in industrialized countries, for their significant contributions to the promotion and acceleration of economic growth, development, and stability in a variety of economies (Yitzhak, 2006).
They account for the vast majority of businesses throughout the world, and they play critical roles in the creation of jobs, the provision of goods and services, the improvement of living standards, as well as significantly contributing to the gross domestic product of many countries throughout the world (OECD,2000).
Small and medium-sized enterprises (SMEs) contribute significantly to the gross domestic product (GDP) of most highly developed countries, such as the United Kingdom, the United States, and France, by contributing 50-53 percent, 50-52 percent, and 55-62 percent, respectively, to the total gross value added of their respective countries (Vitality 2003).
In essence, this demonstrates that small and medium-sized businesses account for approximately 50-60 percent of total government revenues.
Globally, the growth of any economy is contingent on the success of its small and medium-sized enterprises (SMEs), and when these enterprises fail, the entire economy suffers. The economy’s stifled growth has been attributed to a variety of issues, the most prominent of which is the challenge of disorganized tax administration, which has crippled the production capacity of small and medium-sized enterprises. The issue of taxation is one of the most significant hurdles to the expansion of SMEs.
Taxes are a shackle that burdens existing investors and deters potential ones from investing in the first place. For researchers in Africa, the same level of attention has been paid to the growth of SMEs and the issues that have arisen as a result of this growth.
Micro and small-scale enterprises (MSEs) are a powerful force for economic development and industrialization in developing countries, particularly in developing countries (Hellsing and kolstee 1993; Mclntryre and Dallago2003; mead and Lindholm 1998). In recent years, it has become increasingly apparent that these firms make significant contributions to job creation, economic growth, and poverty reduction. The establishment of long-term jobs and possibilities for small and medium-sized businesses is a critical method for lifting people out of poverty (World Bank, 2004).
In Cameroon’s economic development, small and medium-sized enterprises (SMEs) play an extremely vital role. Therefore, the government has recognized that their activities are necessary for real economic progress and has made significant efforts to encourage it by establishing trust among the populace through the reorganization and regulation of the activities of small and medium-sized firms.
As a result, Mr. Laurent Serge Etoundi Ngoa, the minister in charge of small and medium-sized enterprises, is responsible for this function. Micro, small, and medium-sized enterprises (SMEs) account for a significant component of the business sector in Cameroon, and specifically in Bamenda. Because the source and residency principles of taxation are in effect, these businesses are considered taxpayers.
Despite the potential contribution that taxing can make to a country’s GDP in general, it is critical for the government of that country to pay close attention to the impact that these taxes have on SMEs.
Small and medium-sized firms (SMEs) have been found to be more vulnerable to the negative consequences of taxation, which has been documented so far.
Small and medium-sized enterprises (SMEs) are often regarded as the foundation of economic development in all countries. Smaller businesses account for more than 90 percent of all private businesses in Africa, and they account for more than half of all employment and GDP in the majority of African countries (UNIDO, 2009).
Small businesses in Cameroon are claimed to be a distinguishing element of the country’s manufacturing environment, accounting for around 85 percent of the country’s manufacturing companies. Small and medium-sized enterprises (SMEs) are also estimated to generate over 70% of Cameroon’s gross domestic product (GDP), and they account for more than 90% of all firms in the country. It is plausible to conclude, in accordance with the many comments made above, that SMEs have a critical role to play in promoting growth, creating employment, and contributing to poverty reduction in African countries, considering their economic weight in the region.
Despite the positive contribution that taxation can make to a country’s Gross Domestic Product (GDP) in general, much more emphasis must be paid to the negative consequences of taxation on the growth of SMEs in particular. This is due to the fact that small and medium-sized enterprises (SMEs) are critical drivers of economic growth in both emerging and developed countries.
As previously said, small and medium-sized organizations (SMEs) not only create more new jobs than major corporations or micro-enterprises, but they also introduce creative ideas, products, and business techniques. However, there has been little progress in understanding the detrimental impact of taxation on the financial performance of SMEs in developing countries, according to the literature (Baurer, 2005).
Since it is necessary to balance both short- and long-term consequences of a policy, this circumstance presents severe concerns regarding the issue of matching the tax system to specific requirements of a given country’s rising demand.
This also highlights the need for a more in-depth investigation of how tax payments affect the development of SMEs. Furthermore, the majority of the literature and study on the subject is primarily international and western in nature, reflecting the fact that the dynamics of SME activities in developed nations such as Cameroon differ from those in developing countries such as Cameroon.
Cameroon has a self-declarative tax system, which means that businesses and individuals must take the initiative to file their taxes, which helps to decrease the country’s tax administration costs. All taxpayers in Cameroon are subject to the self-assessment system of taxation, which requires individuals to determine their own income, declare it, and pay their taxes.
An individual taxpayer should understand the taxes he is responsible for paying, when those taxes are due, how taxes are calculated (including knowing the rates that apply), and where to file and pay the taxes in question. Several types of taxes are levied by the government in Cameroon with the goal of protecting and controlling the activities of small and medium-sized firms (SMEs), protecting other domestic and infant industries (protectionism), and ensuring fair competition among SMEs.
1.2 The Problem is formally stated.
Despite the widespread belief that taxes are a major source of cash for the development of the economy and the provision of social services, there is a misalignment between the amount of money spent on taxes and the ability of businesses to survive and grow.
Small and medium-sized enterprises (SMEs) are confronted with the challenges of high tax rates, multiple taxes, complex tax legislation, and a lack of adequate information or education about tax-related issues. Not to mention the numerous obstacles that SMEs face in other developing nations, such as Cameroon, such as a lack of available capital, a lack of technical and management skills, environmental consequences, and government restrictions that interfere with the operation of SMEs in the country.
It is the issue of tax expenditures that has eaten away at the revenues earned by small and medium-sized enterprises (SMEs) that are essential to their growth and survival. Small and medium-sized firms (SMEs) have seen an increase in their debt records as a result of these developments (SMEs). Small and medium-sized enterprises (SMEs) face substantial challenges in terms of tax compliance due to their nature and size. This is due to the fact that many small and medium-sized enterprises (SMEs) lack access to resources as well as insufficient knowledge.
Furthermore, methods such as tax fraud might cause SMEs to avoid tax payment, resulting in them getting into issue with the authorities, posing a significant obstacle to the aforementioned SMEs. Because of the high taxation, most SMEs have experienced a fall in growth, and in some cases, they have even been forced to close their doors. In this context, the researcher aimed to determine the impact of tax charges on the financial performance of small and medium-sized enterprises (SMEs) in Cameroon.
1.3 Research Question
1.3.1 Main research question.
What are the effects of tax expenses on the financial performance of small and medium-size enterprises in some selected SMEs in Bamenda II?
1.3.2 Specific Research Questions
- What are the effects of tax expenses on the sustainability of some selected SMEs in Bamenda II?
- How does the strength of SMEs affect the financial performance of some selected SMEs in Bamenda II?
- What are the challenges faced by some SMEs in tax compliance?