CHAPTER ONE

INTRODUCTION

1.1 Back Ground of the Study

The rapid growth of Small and Medium Sized Enterprises (SMEs) in the world has been shaped by various factors such as globalization, technological advancements, and economic policies.  Overtime, SMEs have been increasingly important contributors to economic growth, innovations, and job creation.  They have adapted to changes in business landscape by leveraging technology for efficiency, exploring international markets for growth opportunities, and advocating for policies that that support their development.  However, challenges such as access to finance, tax regulatory burdens, recent tax changes and competition remain a pertinent issue influencing their evolution Maseko, & Manyani (2016). Overall, SMEs continue to play a crucial role in driving economic development and fostering entrepreneurship globally. They also noted that SMEs accelerate rural development, decrease urban immigration and the problems of congestion in large cities because they have lesser competition by serving dispersed local markets. Moreover they contribute to domestic capital formation; and also play a value-adding role in mobilizing private savings.

Small and Medium Scale Enterprises (SMEs) are recognized for their significant role in economic development. They are frequently characterized as effective and prolific job creators, the foundation of large corporations, and the driving force behind national economic growth Carsamer, (2019). Empirically, studies have shown that, small and medium enterprises make up 97% of most economies.  In addition, Small, and Medium Enterprises (SMEs) significantly impact the economies of many countries, especially those in developing nations, as stated by the World Bank Asian Development Bank, (2020). Most firms globally are categorized as SMEs, which substantially impact employment International Labour Organization (ILO), 2019). SMEs comprise around 90% of all enterprises and contribute to over 50% of total employment. Formal, small, and medium enterprises (SMEs) have the potential to contribute up to forty per cent of the Gross Domestic Product (GDP) in developing nations. The figure might significantly increase if informal SMEs are taken into account. Due to their substantial economic impact and extensive workforce, several governments have prioritized the examination of SMEs. SMEs may preserve their present goods’ market advantage by effectively deploying specialized marketing resources and capabilities in tandem. However, their growth is hindered by challenges in business management, financial management, human resource management as well as compliance with tax regulations.

In 1965, the primary assistance body formed from Franco-Cameroonian Cooperation organized artisan exhibitions and established several cooperatives. In 1968, aiming to promote SMEs, the Cameroonian government enacted the Investment Code, which introduced a special tax regime for SMEs. This regime applied a reduced overall rate of 5% on duties and taxes for importing materials and goods directly essential for exploitation, production, and processing activities. SMEs approved under the Internal Production Tax (TIP) regime were exempt from paying import duties and taxes on raw materials. To further enhance its efforts in promoting SMEs and to progress towards greater autonomy, the Cameroonian government subsequently developed a national support structure for SMEs. By Law No. 70/LF7 of 20 May 1970 Created the National Centre for Assistance to Small and Medium Enterprises (CAPME) which only became operational in August 1973 with the appointment of its first National Director as noted by Zacharie et al. (2023).    In addition, by adopting Decree No. 71/DF/502 of 14 October 1971, the Government established the principle of a Credit Guarantee Fund for Small and Medium-Sized Enterprises Fund for Assistance and Guarantee of Loans to Small and Medium Enterprises (FOGAPE) under the authority of the Cameroon Development Bank (BCD), which had already been operating since 1960. It shows that 30% of SMEs were set up between 1960 and 1975, 56% between 1975 and 1980 and 14% between 1980 and 1985. Since 2010, Cameroon has adopted a law promoting SMEs, thus materializing the desire to regulate this key sector of our economy.

In addition to the definition,  the law set out the support mechanisms for   SMEs, in particular, support for their creation, the        incubation strategy;     their development; support for funding and its consolidation. SMEs are subject to a number of obligations, non-compliance with which is subject to sanctions. Head of Government, in application of the provisions of the 2010 law, signed Decree No. 2020/0301/PM of 22 January 2020 which sets out the procedures for carrying out the missions of small and medium-sized enterprise incubation structures Zacharie  et al. (2023).In line with improvement of business climate  in accordance with , the OHADA treaty and the Cameroonian legislator has, by Law No. 2016/014 of 14  December 2016, set the minimum share capital and the modalities of use of the services of the Notary in the context of the creation of a SARL (MINMPEESA). Thus, the minimum share capital at the creation of a SARL is set at 100,000CFA francs, divided into equal shares whose nominal value may not be less than five thousand (5000) CFA francs.  According to the most recent General Business Census (RGE) by the National Institute of Statistics (NIS), Cameroon has 93,969 companies, with approximately 99% of them being SMEs, as highlighted in the work of Prudence Missoka (2013).     

In every Nation, taxes contribute to development through three sources; it must be able to generate sufficient funds for financing public services and social transfers at a high level of quality; it should offer incentive for more employment and for an efficient and lasting use of natural resources; finally, it should be able to reallocate income. But in the case of SMEs, tax authorities must take into consideration their income and need for survival in imposing the taxes. Operationally, it is expedient that enough profit is allowed them for the purpose of expanding their businesses. The tax policy must be one that will not encourage SMEs to remain in the informal sector or to evade or avoid tax payments as noted in the work of Holban (2017). Significantly, 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 fulfill taxation requirements are, as well as to check how those requirements are met, the lower the initiatives are for SMEs to perform well and off course the need for tax consultancy services.  Therefore, maintaining the balance between tax rate, non-compliance, tax administrating and economic development should be a main goal of every tax policy Stem & Barbour, (2015). Small and Medium Enterprises’ (SMEs) ability to grow depends highly on their potential to invest in innovation.

Tax revenue is powerful resource in the world to finance the public expenditures of developed, developing and underdeveloped countries. But the amount of revenue to be generated by a government from taxes for its expenditure program depends on the willingness of the taxpayers to comply with tax laws of a country; Fjeldstad et al (2012).   Moreover, in developing countries many problems like poor administration, failing to collect sufficient tax revenues, tax structures where tax horizontal and vertical equity considerations are not integrated, lack of government and economic stability Tesfaye (2015).  Cameroon, like any other developing countries, faces difficulty in raising revenue to the level required for the promotion of economic growth through making different tax reforms for improving revenue generation, enhancing the efficiency of tax administration and improving equity in the tax system.  To this effect, Study done by (Belay, 2015) on determinants of tax revenue from time series of (1992-2013) declared that the trend of tax collection in developing countries is inconsistent, changing upward and downward due to non-compliance.

Taxation is deeply rooted in history, records of taxation date back in an antiquity to the times of the earliest civilization, evidence of taxation can be found on an inscription and ancient Sumerian tablet from the city of Lagash (located in what is now Iraq) which: you can have Lord, you can have a king, but the man to fear is the tax collector.  Taxation also featured in the times of ancient Egyptians and Greeks. For instance, Scribes of the Pharoah collected tax on cooking oil, while the Athenian imposes taxes on slaves and foreigners. Also, during the Roman Empire, customs duties, land taxes, farming taxes and sales taxes all featured prominently.  In England feudal property and inheritance taxes were levied by kings and landlords Lawal (1982). The famous Domesday Book 1086 was the first recorded survey of property holding in England undertaken for the purpose of taxes.

In Cameroon, during the period 1980/1 to 1985/6, Cameroon’s economy witnessed a sustained growth rate of 7.5 per cent in real terms, associated essentially with the boom in the oil sector. Increased budgetary and extra-budgetary resources generated from the oil sector helped to raise the investment rate in the economy, and to maintain a reasonable level of external indebtedness. After this period of sustained expansion, Cameroon experienced unfavourable economic development caused by a successive decline in the terms of trade that reached more than 65 per cent in the years World Bank (1994). This led to profound imbalances, notably in public finance and the external account. Faced with the unprecedented economic and financial crisis that ensued, the government initiated a series of reforms organized in the context of the structural adjustment programmes (SAPs) supported, in particular, by the IMF and the World Bank. A major component of these programmes was budgetary adjustment. Indeed, one of the conditions necessary for achieving rapid, equitable and sustainable economic growth in Cameroon and elsewhere was to introduce tax as healthy public finance system.. From this perspective, the level of tax revenue must be adequate to avoid public finance imbalances so that the spending necessary for development can be covered therefore, every government and stake holders of taxation must upheld relevant strategies to increase the rate of compliance of tax payers.

Tax noncompliance is a substantive universal phenomenon that transcends cultural and political boundaries and takes place in all societies and economic systems. There are many studies that explain the behavior of tax compliance in a more realistic situation. They focus on the determinants of tax compliance, respectively on economic and noneconomic factors Nicoleta, 2011). Tax compliance and non-compliance is an area of concern for all government and tax authorities, and it continues to be an important issue that must be addressed. Regardless of time and place, the main issue faced by all tax authorities is that it has never been easy to persuade all taxpayers to comply with the regulations of a tax system Mararia (2014). In contrast to the majority of employed people whom in many countries are paid net salaries with taxes being deducted at source SMEs often need to self-assess and self-report their income and pay taxes “out of their pocket.

SMEs not only pay their income tax but need to take account of various types of business taxes such as corporate tax, property taxes, and payroll taxes; they need to collect sales taxes such as VAT; and they need to withhold taxes such as personal income taxes in the case of having at least one employee Djankov et al. (2010). While previous studies on tax compliance have focused on the general factors affecting tax compliance, the focus of this study is on the determinants affecting tax compliance in the SME sector in Bamenda. The study specifically seeks to determine the relationship between tax compliance cost, perception of government spending, and tax knowledge and  tax compliance of SME in Bamenda. 

1.2 Problem Statement

Taxation is the bedrock on which a society is built as many developing countries are now re-focusing on taxation to reduce over-dependency on aid or one source of revenue for development. As stated by Alabede et al. (2021), “The amount of tax generated by the government to meet her spending depends largely on the degree of compliance and the effectiveness of the enforcement tools”. The importance of taxation in the activities of any government cannot be overemphasized. The world over, taxes is one major source of government revenue, however, not every national government have been able to effectively exploit this great opportunity of revenue generation. The willingness to pay tax, which may depend on the other aforementioned issues in tax-revenue generation, remains a key taxation-challenge in Bamenda.

 As noted in the work of Nora Dewi 2013, taxes are viewed in two different sides; from the taxpayer’s point of view, it is a burden that will reduce net income, while from the government side, taxes are one of the essential sources of revenue that will be used to finance state expenditures, both routine expenses, and development expenditures particularly in Bamenda amid the crisis, most businesses see taxation as a burden and off course will non-comply. However, the difference in interests between taxpayers and the government often implements tax payments unable to run correctly. This difference in interests creates a wrong perception that in collecting taxes, the so-called tax authorities will try to impose as much tax as possible. Meanwhile, taxpayers will try to pay taxes as little as possible

Even though tax revenue is the powerful instrument in the hands of the government for transferring purchasing power from individuals to government to finance the public expenditure, most citizens become unwilling to pay their tax obligation in the correct amount, time and place due to presence of negative attitude. Then they take a variety of actions to reduce their tax liability Amina and Saniy (2015). A negative attitude towards tax compliance refers to individuals not fulfilling their tax obligations like in the case may be in Bamenda. This non-compliance is generally classified into several categories: failure to file a tax return, underreporting taxable income, exaggerating tax claims such as deductions and exemptions, and not paying tax liabilities on time. Conversely, a positive attitude towards tax compliance is characterized by taxpayers’ willingness to adhere to tax laws. In this regard, Das Gupta and Chattopadhyay (2002) explained that a compliance attitude with tax laws entails accurately reporting taxable income, correctly calculating tax liabilities, timely filing of tax returns, and promptly paying the due tax obligations. In the context of Cameroon, one of the main restrictions in implementing tax policies and procedures is lack of adequate information flow in terms of methods of accountability, knowledge of tax regulations and taxpayers’ awareness of available sanctions for non-compliance. This has brought about not accomplishing adequate degrees of consistence. Tax compliance is currently a topical policy issue, especially in developing countries, as governments are seeking ways to improve efficiency in tax revenue collection to finance their budgets. SMEs are the majority business taxpayers in most developing countries and as such their compliance levels directly impact on government tax revenue collections. Taxable persons feel the tax burden is high as per the rates, leading high evasion proportions. The question of why low compliance on tax payment and why deprive the government of its revenue is exhibited by many economists, administrators, scholars and the present case of the researcher in Bamenda. 

According to Atawodi & Ojeka, (2012) tax non-compliance among businesses in developing countries is the major cause of revenue collection shortfalls by their tax authorities. They  further asserts that despite these SMEs tax reforms, most developing countries where SMEs sector account for such a significant percentage of GDP continue to be tax non-compliant. There are few researches done on determinants of tax compliance attitude and related issues in developing countries and in Bamenda in particular. For example, the researches done by Kambiro (2018) on the fact Tax compliance attitude is influenced by demographic, individual, social, institutional and economic factors, Chepkurui Chebusit et al. (2014)  identified compliance cost fines and Penalty and attitude as determinants of tax compliance, Hana Paleka (2023) divided such determinants as economic determinant (tax audit, tax rate and tax sanction) and psychological determinant (the complexity of tax laws and the tax system, taxper’s social norms, tax payer’s tax morale and Taxpayers’ fairness perceptions of the tax system), Manchilot and Tilahun (2018) break the determinants into economic factors ( perceptions of government spending, compliance cost, tax rates and extent of penalty) and institutional factors (organizational strength of tax authorities) finally, Josephine. M. Keraro (2017) in her research categorized determinants of tax compliance as tax knowledge and education, fines and penalties, perceived opportunity for tax evasion and compliance cost.

But, this research is different from the above reviewed researches by taking into account some determinants considered in previous researches and specific determinants such as tax compliance cost, perception of government spending, and tax knowledge which best suit the environment of Cameroon particularly in crisis zone like Bamenda. This research therefore has the main objective of investigating on the determinants of tax compliance of small and medium enterprises (SMEs) in Bamenda. 

1.3 Research Questions

1.3.1 Main Question

What are the determinants of tax compliance of Small and Medium Enterprises in Bamenda?

1.3.2 Specific Questions

1) What is the effects of tax compliance cost on tax compliance of Small and Medium Size Enterprise in Bamenda?

2. What is the effects of tax payers’ perception of government spending on Tax compliance of Small and Medium Size Enterprise in Bamenda?
3. What is the effects of tax knowledge on Tax compliance of Small and Medium Size Enterprise in Bamenda?

1.4 Research Objectives

1.4.1 Main objectives

To investigate the determinants of tax compliance in small and medium enterprises in Bamenda

1.4.2 Specific Objectives

1. To examine the effects of tax compliance cost on tax compliance of Small and Medium Size Enterprise in Bamenda
2. To assess the effects of tax payers’ perception of government spending on Tax compliance of Small and Medium Size Enterprise in Bamenda
3. To assess the effects of tax knowledge on Tax compliance of Small and Medium Size Enterprise in Bamenda