This topic was aimed at assessing the effect of taxes on the growth of small and medium size enterprises. This study made use of primary and secondary data and a sample of 395 respondents from various SME’s were used for the study. The objectives of the study were to evaluate the effects of tax policies on SMEs in Limbe municipality, to assess the effects of tax rates on SMEs in Limbe municipality and to ascertain tax collection methods and how they affect SMEs in Limbe municipality. Data for this study was collected with the help of questionnaires. A total of 400 questionnaires were distributed, 395 were filled and returned while 5 got missing. Data was analysed with SPSS and findings show that there exists a significant relationship between taxes and the growth of SME’s in Limbe. Again certain recommendations were made at the end of the study which include; Tax systems should be fair and equitable to tax payers, Increase in taxes impedes the growth of SMEs so the study therefore recommend that the government stops increasing taxes. Tax payers should comply with their taxes in time to avoid sanctions from the government. The government of Cameroon should also adopt e-system in the administration of taxes (payment and collection of taxes).
1.1 Background of the Study
Taxation is one of the important elements in managing national income. In developed countries it has played an important role in mobilization of national income (Lymer and Oats, 2009). Every nation’s desire is to build a civilized country with a strong and sound economy including Cameroon. Tax payment is the demonstration of such desire, although some income earners see it as a means of exploitation by the government. Tax payment is a voluntarily contribution imposed by the government on personal income earners, companies, investors, exporters, importers etc. Revenue realized from taxation is a major source of revenue to the government of Cameroon, and as such it is an important tool used in development of Cameroon’s economy. A country’s tax policies and systems are greatly related with the business ventures in the country. An economy that enacts favorable and progressive tax laws and policies will definitely breed successful and finance healthy business organizations. Once business flourish, the economy flourishes as well, as there is no quicker way of stirring up the matters of economy without help of organizations that move services, goods, money and investments from those with surplus to those with deficit; those with marketable ideas/ output to those who need these ideas and products. In essence, businesses and tax policies greatly depend on one another for survival. If one is greatly affected the other follows suit.
The Cameroonian tax system has undergone significant changes in recent times. With the help of various studies and research done by tax experts, tax laws are being reviewed with the aim of repelling obsolete provisions and simplifying the main ones. For example the new reforms that have been made in port taxes. Small business enterprises are generally recognized as important drivers of economic success.
In this age of globalization, most developing countries want to become integrated with the international economy. However, they face significant challenges in this pursuit, with the tax systems they put in place and the tax rates they set for their businesses. Hence tax policy makers have to analyze the prevailing conditions in the country and determine the relevant mix of taxes that can raise sufficient revenue for the government and at the same time enhance the growth of Small and Medium size enterprises. Many developing countries, Cameroon inclusive, have increasingly begun to restructure their tax systems for this specific purpose. Despite numerous tax reforms that were intended to improve the economic and social situation by supporting infrastructure and increasing the quality of public goods provided by the government, the situation of taxes in Cameroon remains fragile, and the country remains one with bad climate for business growth.
Small business enterprises are generally recognized as important drivers of economic success. They are key ingredient in the growth a country as they contribute to job creation and to the GDP of the country. Over the last few years the growth of SMEs employment has exceeded the growth in their contribution to the 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 small and medium sized enterprises in Cameroon and internationally. However, these enterprises like any other business 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.
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 small and medium enterprises (SMEs) – an important part of their market economies. For instance, the portion of SMEs in GDP of Great Britain is 50-53%; of Germany – 50-54%, of USA – 52-55%; of Italy – 57-60%; of France – 63-67% (Small Business in Ukraine 1997). Consequently, up to 50-60 per cent of government revenues depend on the SME sector (Small Business in Ukraine 1997 41). Thus, the higher is the share of small and medium businesses is in an economy, the higher the productivity that can be potentially realized with the SME sector. The development of small and medium 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 fulfil taxation requirements are, as well as to check how those 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.
Small and medium enterprises (SMEs) play an important role in the development of a country. Growth of SMEs is affected by the macroeconomic environment of the country from which they operate just like any other business. Technical definition of SMEs differs from country to country. Usually it is based on employment, assets or a combination of the two (Jasra, et al. 2011). One of the important roles of SMEs, in this regard, is poverty alleviation through job creation. Both the developed and developing countries derive benefits from SMEs (Chittithaworn, et al. 2011).
The economic contribution of SMEs to employment 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).
According to the World Development Report (2005), the creating of “sustainable” jobs and opportunities for smaller entrepreneurs are the key strategies to take people out of poverty. Small and medium enterprises are mostly private enterprises and they face difficulties when dealing with the government in general and the tax administration mostly the developing countries. Many of the difficulties with the tax authorities may be deemed as the consequences of poorly conceived tax policies and a lack of certainty regarding future policy changes. However, it would be rare indeed to not observe complaints about the complication and/or ambiguity of the tax laws as well as high tax rates (Baurer, 2005). If the tax structure is not adequately designed to the specific environmental conditions, it may create a greater burden to the tax-paying organizations and eventually affecting the final consumer due to the shifting ability of tax. According to a study report by Mnewa and Maliti (2008), the majority of small businesses are less likely to attain or maintain their growing profitability due to factors including tax policies. This implies that as a policy maker and regulator, Government must consider the factors that could affect the competitiveness of the small enterprises.
Despite the contribution that taxation can make towards the Gross Domestic Product (GDP) of a country in general, much attention is also needed to the side effects of tax on the growth of SMEs. This is because SMEs play a crucial role in driving economic growth in both developing and developed countries. As highlighted previously, as a group, they do not only generate more new jobs than large firms or macro-enterprises but also introduce innovative ideas, products, and business methods. However, literature has not contributed much in exploring the negative effect of tax payment on the financial performance of SMEs in developing countries (Baurer, 2005). This situation raises a serious concern about the issue of aligning the tax system to the specific requirements of a country’s growth need, as it should balance both short-term and long-term impact of the policy. This also triggers the need for an in-depth study of how tax payments affect SME development.
The governments of developed as well as developing countries have acknowledged the reality that Small and Medium Enterprises (SMEs) form the nucleus of any economy. Green, (2003). There is a universal agreement on their major participation to the economic growth, employment creation, social cohesion, poverty alleviation and local and regional development. SMEs are the largest group of enterprises in any economy. According to Matlay, H Westhead, P, (2005), “SMEs make significant contributions to the socio-economic and political environment of most developed and developing nations as well as to countries that are in progression from a command economy to market economy”. Healthy and growing SME sector is considered to be important in obtaining sustainable competitive advantage and economic development at local, regional, and national levels. According to United Nations Industrial Development Organization (UNIDO) approximates “SMEs consist of more than 90% of all enterprises in the world and on an average are accountable for 80 to 90% percent of total employment. In the whole of Asia Pacific, more than 95% of companies are in SMEs sector, Japan 99%, Singapore 99.7%, Malaysia 96% etc” Koshy,P, (2007). Experts believe that good management, strong leadership, skilled work and innovation are among the major forces that contribute to the success of this vital sector (BlossomChristina, 2014)
Like many economies in the developing world, economic activity in Cameroon operates within two frameworks the formal and informal sectors. Integrated into regional and international markets, the formal sector enables government to easily raise revenues through the traditional means of taxation. This is, however, not the case with the informal sector because the government is limited to the imposition of certain fees. In fact, according to the 2009 General Enterprises Survey conducted by Cameroon’s National Institute of Statistics, the informal sector employs approximately 90% of the total active population and constitutes 89% of small enterprises.
This survey also revealed that more than 50% of Cameroonian entrepreneurs considered the business climate as “not good”. Among the many reasons proffered, taxation was the principal challenge, with corruption and access to credit following in descending order. Given this situation, the government decided to continue with fiscal reforms, beginning 2004, in order to improve the business climate and to finance industrial development. Worth noting is the fact that the very first set of fiscal reforms in Cameroon took place after 1994, with the devaluation of the Franc CFA. The aim of this initial set of reforms was to increase tax revenues, which had witnessed rapid depletion as a result of falling oil and export commodity prices, as well as the need to comply with the conditions set forth in the World Bank’s Structural Adjustment Program (SAP).
1.2 Problem Statement
Taxes are raised by the government to generate revenue used to provide services to the public such as; Health centers, telecommunication, roads, schools and electricity and this have helped to improve on the performance of small scale business enterprises. Although with the general perception of tax being an important source of fund for development of the economy and provision of social services, the problems faced are in negative relationship between taxes and the business’ ability to sustain itself and to expand, SMEs are faced with the problem of high tax rates, multiple taxation, complex tax regulations and policies and lack of proper enlightenment or education about tax related issues. It is alleged that despite the services provided, small scale business enterprise’s performance in Cameroon is still poor 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 small-scale business enterprises.
According to the 2016, World Bank Enterprise Survey tax administration and tax rates are not the significant obstacles to SMEs performance in Cameroon. In fact, in 2016, only 7% of formal entrepreneurs considered taxation as a barrier to the development of their activities. Informal competitors, access to finance, access to electricity and corruption are currently the top constraints. This may appear paradoxical but it indicates that Cameroonian SMEs prefer to remain small rather than grow and have to deal with the taxation burden. In the same way, the real annual sales growth of Cameroonian SMEs increased in 2016 by about 4%, compared to the average in sub-Saharan Africa, which was less than 1%. Also, the annual employment growth in 2016 (6%) is greater than that of 2009 (4%). (KAMDEM, 2018)
1.3 Objectives of the Study
1.3.1 Main Objective:
To assess the impact of taxes on small and medium-sized enterprises.
1.3.2 Specific Objectives:
To evaluate the effects of tax policies on SMEs in Limbe municipalityTo assess the effects of tax rates on SMEs in Limbe municipalityTo ascertain tax collection methods and how it affects SMEs in Limbe municipality
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