CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Taxes have existed as long as there have been organized governments. Since the industrial evolution of the 19″ century, the responsibility of the government has expanded considerably and taxation has gone a long way to be widely recognized as kind of social contract between the government and the governor. The role of taxation has equally and gradually been expanded to keep pace with development and its primary motive to provide funds for the government to finance common project for the benefit of the public. Most governments rely on taxation of business and related tax activities as a major source of income to finance its projects. This means taxation plays a far more important role in societal development especially in the poor countries of the third world.

A tax is a levy by public authorities with a tax jurisdiction, of compulsory contribution by thee Citizens to defray part of the cost of government activities in providing the needs of society.

Taxation in the less developed countries is used more as a tool for economic development and growth. As the Supreme Court in the United States of America explained, “a tax is not an assessment of benefit; it is a means of distributing the burden of the cost of government.” The only benefits to which the tax payers is continually entitled to is that derived from the enjoyment of the privilege of living in an organized societies established and safeguarded by the devotion of taxes for public purposes.

Taxation increases incentives for public participation in the political process and creates pressure for more accountability, better governance and improved efficiency of government spending. Taxation also creates incentives for government to upgrade their institution for tax collection and administration and to provide more public services (Moore 2007). The Cameroon tax system is composed of a number of different taxes, which are either direct or indirect taxes. Direct taxes are assessed against income, profit, land or real profit and personal property, which are paid directly to the government such as company tax, on assets income tax and property tax while indirect taxes are assessed against article of consumption such as products or services. Examples of indirect taxes include value added tax (VAT), custom duties levied on imports, excise duties on production.

Over the years, the world economy has developed tremendously and this has been linked with activities of Small and Medium Scale Enterprises (SMEs), especially in developing countries. Small and Medium size Enterprises (SMEs) are widely defined in terms of their characteristics, which include the size of capital investment, the number of employees, the turnover, the management style, the location and the market share (Kasekende and Opondo, 2003). According to World Development Indicators Database Micro, small, and medium-size enterprises are business that may be defined by the number of employees. There is no international standard definition of firm size; however, many institutions that collect information use the following size. Categories micro enterprises have 0-9 employees, small enterprises have 10-49 employees, and medium-size enterprises have 50-249 employees.

Taxation is inseparable from the existence of a state or country. Small and Medium Enterprises have always been considered an important force for economic development and industrialization in smaller economies (Oludele& Emilie, 2012). These small enterprises have increasingly beenrecognized as enterprises that contribute considerably to the creation of jobs, economic growth and eradication of poverty in Africa. According to the 2005 World Development Report, the creating of sustainable jobs and opportunities for smaller entrepreneurs are the key strategies to take people out of poverty. 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). Small and medium enterprises are mostly private enterprises and they face difficulties when dealing with the government in general and the tax administration in particular 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.

To a very large extent, the development of every nation depends mainly on taxation. A solid revenue base is one of the foundations of every great nation and this includes Cameroon. Revenue gained from taxes is very important in developing every economy. According to the World Bank Report on the finances of government of Ghana in 2011, percentage of tax revenue to GDP in Ghana was measured at 14.87%. Also, according to the Bank of Ghana Monetary Policy Report on fiscal developments, preliminary fiscal data from the ministry of finance and economic planning showed that for the first quarter of 2012, total revenue and grants amounted to GHC 3.5billion, representing 5% of GDP (BOG report, 2012). Tax revenue is thus an important issue of concern in every economy.

All countries in the world have tax systems put in place by their governments. Cameroon is not an exception. Cameroon operates a self-declaration tax system, that is, individuals and companies take the initiative to declare their income and pay their taxes. This system helps the government to reduce the cost of tax administration. In Cameroon the first tax law was introduced after independence in 1960 and was harmonized into a general tax code first published in 1973. Since then, taxes have evolved through a number of reforms. The bills focusing on tax laws are usually introduced in parliament alongside with the annual budget. The bill is signed into law by the president of the republic as a public law. A bill passed by the parliament is usually as a finance act that aments the generate tax code.

Using the self-assessment system of taxation, all tax payers do assess their income themselves, declare and pay their taxes. Therefore, a tax payer should know the taxes he is supposed to pay, when they are to be paid, how to calculate the tax (knowing the rates applicable) and where to declare and pay the taxes. According to Vito and Zee, (2001), an ideal tax system in a country like Cameroon should be that which can raise the essential revenue without excessive government borrowing and should do so without discouraging economic activities and without deviating too much from tax systems of other countries.

Taxation generally is an aspect of accounting. Accounting can be referred to as the systematic process of analyzing, recording, classifying, summarizing and reporting economic transaction and events, so as to communicate such information to its users. Accounting originated from the needs of the environment. Civilization made it necessary for people to develop book keeping technique to keep record of economic transactions. The need for book keeping was also increased by the fact that, SMEs as well as inhabitants of a society or nation have as duty to assess their incomes and pay their taxes to their governments. Industrial development also led to the increased need for accounting as it was necessary for calculation and recording of cost (production costs, workers’ wages, profits, taxable profits and tax amounts, etc.).

In Cameroon SMEs are about 90% of the economies. Though small in size they are the most important enterprises in the economy due to the fact that they contribute high to the Gross Domestic Product (GDP) when aggregated with large enterprises. Therefore, developing countries like Cameroon need to encourage the growth of SMEs, by creating favourable environment. For many SMEs in Cameroon, the choice to pay tax or remain in the informal sector is simple. Most firms will choose to stay in the informal sector if they cannot see their tax contributions at work in the form of government services and their perceived benefits outweigh the perceived costs. This is because if compliance costs (both financial and time) are added into a firm’s cost-benefit analysis of paying taxes, the disincentive to comply with tax requirements becomes even stronger (Stem and Barbour, 2005).

It is a well-known fact that the revenue generated from taxation of small and medium sized businesses is an important stream of income to the government. This gives a clear and direct link between the tax administration (government) and SMEs. This link can be seen through tax jurisdiction. The government has the jurisdiction to tax any individual or corporate body that permanently reside in or have investments in Cameroon, and SMEs are one of those. Most often, SMEs decline from the payment of these taxes through tax evasion which becomes a challenge to the tax administration.

Moreover, despite the significant contribution SMEs make to economic growth, SMEs across the world and Cameroon in particular are still faced with a number of tax challenges that inhibit entrepreneurial growth. The focus of this study, therefore, is to examine the effect of taxation on SMEs in Buea.

1.4 Hypothesis of the Study

The research hypothesis of this study is:

• Null (H_O): Taxation does not have a significant effect on SMEs in Buea.
• Null (Ho):there are no challenges faced by small and medium size enterprises in paying taxes.

1.5 Significance of the Study

Having in mind that this study is based on Small and Medium Size Enterprises which are grouped as volatile establishments that need special treatment by the government in order to enable them grow, it is going to help the government, tax payers, stakeholders, readers, international bodies regulating tax laws and other researchers.

The government could use this work to know how much tax to levy on SMEs given that they are not the same like other business sectors in the economy and need different rates and bases to be levied on them. This study will also enable the government to bring out possible solutions which will enable small and medium size enterprises enhance on their growth. The tax authority and government would benefit since the study would provide suggestion that may guide them in adjusting tax policies so that they understand the requirements of small scale enterprises. Furthermore, the outcome of the study may become a very resourceful material to stakeholders in the economy. In addition, the study will help readers in general, interested in gaining more knowledge about the effect of taxation on the performance of SMEs.

The study will also be of help to traders who pay taxes in that they will learn their duties as tax payers. Taxes being one of the operational costs of business and must be paid. Being aware of taxes and being able to estimate how much to pay makes businesses more likely to survive the challenges that taxation bring to them

The study will also very well help the legislature Assembly (Parliament) in that the recommendations of the study would suggest how they can amend parts of the Tax code which are unfair to small scale traders.

This research will enable tax payers to know the important role taxes play in the development of the economy. Being aware of and enjoying the benefits of taxes that may come in the form of infrastructural development and provision of social amenities, would encourage the taxpayer to be willing to pay and comply with all appropriate regulations.

The general public would also benefit from this study in that they will learn that every business has to pay different forms of taxes and thus be ready to comply. This is because a tax is a compulsory operational business expense.

The international bodies drafting tax laws will use this research to amend their rules and regulations applicable to SMEs tax payment in order to encourage tax payment alongside growth and development of these SMEs.

Finally, in the academic world, it will add knowledge to the existing one (literature) and give room for literature review in future work. It will also serve as a springboard for further research through its suggestions for further study.