CHAPTER ONE GENERAL INTRODUCTION

1.1 Background of the Study

This study emphasizes the critical role of Small and Medium-sized Enterprises (SMEs) in the economic growth and development of countries, with a specific focus on Cameroon. SMEs are central to the economies of most countries, including Cameroon, and are crucial for employment, competition, economic dynamism, and innovation. Their widespread geographical presence contributes to more equitable income distribution.

The importance of SMEs in economic development is multi-faceted. They are significant for job creation, economic growth, and poverty eradication, particularly in less developed countries (LDCs) like Cameroon. In these regions, SMEs constitute a majority of businesses, playing an integral role in economic stability and development. The World Bank highlights the creation of sustainable jobs and opportunities for smaller entrepreneurs as a key strategy for poverty alleviation.

SMEs in Cameroon, as in many other countries, often engage in the production of goods and services with the primary goal of generating employment and income. These enterprises are typically found in traditional economic sectors, using low technology and relying on social networks and inter-firm cooperation. They are mostly oriented towards local and less affluent market segments. Many SMEs operate on a small scale, often as family-run businesses, and cover a range of activities including trading, simple manufacturing, and service-related businesses.

The study aims to explore the impact of tax influence on the growth of the SME sector in the Buea Municipality of Cameroon. Tax policies are a crucial area where governments can offer special treatment to SMEs, influencing their growth potential. The Cameroon tax system plays a significant role in the development of the country’s economy, with revenue from taxation being a major source of government revenue.

SMEs are vital for the economic success of a country. They serve as job creators, sales generators, and sources of tax/fiscal revenue. In Cameroon, SMEs contribute significantly to the country’s GDP and employ a large portion of the private sector workforce. The growth of SME employment has outpaced their contribution to GDP, highlighting their importance in the economy. The government of Cameroon recognizes this and supports SMEs through financial institutions and credit lending. However, regulations and tax policies are often seen as constraints to the expansion of small businesses.

The study will focus on income tax levied on the incomes of all Cameroon residents, examining its impact on SMEs. This research is essential for understanding the relationship between tax policies and the growth of SMEs in Cameroon, and by extension, their contribution to the country’s economic development.

1.2 Statement of the Problem 

Even though there is a general perception that taxes are an important source of fund for the development of the economy and the provision of social services, the problem faced are in the area of a negative relationship between taxes and the business ability to sustain itself and to expand. It is believed that small and medium size enterprises are faced with the problem of high tax rates, multiple taxation and complex tax regulations and also lack of proper orientation or education about tax related issues. Other challenges assumed to be faced by small and medium size enterprises in less developed countries like Cameroon apart from taxes are; inadequate capital, poor technical and managerial skills, government regulations.

Research has proven that taxation has an impact on the growth and development of small and medium size enterprises. A study conducted by Shome (2004), in collaboration with the Washington, United States-based Centre for International Private Enterprise exposed the actual extent of the burden of multiple taxation on SMEs in South America. According to Shome, the Jamaican business environment is being suffocated by too many taxes from the national, federal and local governments. Also, a study carried out by Thuronyi (2009) has also proven that Taxation in general increases the costs of operation of running small and medium enterprises. Small and medium size enterprises on the other hand in other to compensate for the increased costs of operation, prices on goods are rose thus causing the amounts of sales to go down. And the effects of reduced sales are reduced profits, reduced capital base and slow creation of employment resulting to slow growth. Since small and medium size enterprises are very important to the growth and development of the economy as a whole, if they experience a low level of growth; this will have an adverse impact on the economy as a whole.

Existing empirical evidence clearly proves that small and medium size enterprises are affected disproportionately by taxation costs. When these costs are scaled by sales or assets, the compliance costs of small and medium size enterprises are higher than for those of large businesses (weichenrieder, 2007). Among the factors militating against small and medium size enterprises tax compliance with is: high tax rates, low efficiency, high collecting charges, waste of time for taxpayers. Taxation is the blood of the government, as it provides the revenues which go a long way towards ensuring that government is able to fulfill its role maintaining law and order and facilitating trade and among other duties. SMEs and taxation are not mutually exclusive by any means. Yet it has been noted, in previous studies (Tomlin, 2008) that SMEs sacrifice funds to pay taxes, which could otherwise be invested in business growth. Assessing the impact of tax on SMEs is not simply a matter of looking at tax rates.

Despite the Cameroon people’s effort to start businesses as SMEs due to lack of jobs in the public and private sector, there has been a concern that the tax policies are still not favorable for the growth and development of SMEs (Chisala, 2008).It is further observed that a number of SMEs close up business due to paying proportionally higher taxes than their larger competitors, There can be no doubt that compared to big business and SME’s in other countries these problems have not been sufficiently addressed. The constrained relate, among others to legal and regulatory environment confronting SME’s, acquisition of management skills and tax burden. It is 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 may be making losses. It is alleged that high Income tax rates affect the level of consumption and increase the unit cost. Profit maximization is the major goal of every small scale enterprise. However, this seems not to be a reality as most of them cannot achieve this goal. Income tax administration plays a pertinent role regarding revenue collection as well as profitability of any business entity. In an effort for the government to increase its tax base, the tax burden for many firms increases. However, the tax administration system is poor as at times, the tax liability computation is based on estimates, records of many small business firms are incomplete, and some miss out completely leading to tax over charge. In return, this directly affects the growth of the enterprise and may threaten its survival because taxes are paid out of profits. Therefore, failure to have an effective tax administration system adversely affects the profitability of small-scale businesses. Due to this ignorance about tax codes, the welfare of many tax payers and growth of SMEs in particular seem to be in shambles with respect to taxes. In order to address the problem, this study will seek to answer the following questions

1.3 Research Questions

The main research question in this study is; what is the impact of taxation on the growth of SMEs in Buea? The specific research questions include:

1. What is the impact of global tax regime (patent) on the growth of small and medium size enterprises in the municipality of Buea?
2. What is the impact of business license on the growth of small and medium size enterprises in the municipality of Buea?

1.4 Objectives of the Study

To provide answers to the above research questions, we are guided by the research objectives.

1.4.1 Main Objective

The main objective for this study is to examine the t impact of taxation on the growth of small and medium size enterprises in Buea Municipality. 

1.4.2 Specific Objectives

In order to answer the question, the following specific objectives will be considered:

1. To evaluate the impact of global tax regime (patent) on the growth of small and medium size enterprises in the municipality of Buea.
2. To examine the impact of business license on the growth of small and medium size enterprises in the municipality of Buea.

1.5 Hypotheses of the Study

H₀₁: Global tax regime (patent) does not have a significant impact on the growth of SMEs in Buea.

H₀₂: Business license does not have a significant impact on the growth of SMEs in Buea.

1.6 Significant of the Study

This study is important because the growth of SMEs have a great impact on the economy of every country, Cameroon not being an exception. Here there are various parties involved and the importance of this study to them is as follows:

The study can help Local Governments, specifically Buea district Local Government to comprehend the effects of tax collection on SME growth. And to the policy makers like government agencies the findings and results of this study provides insights and more reliable guide to monitor, the public relation of SMES in the Buea municipality. It also serves as a yardstick for measuring partly their respective policy goals and objectives.

To the management of SMES in the Buea municipality the findings and results in this study provide a more reliable scientific measure and perspective for describing and evaluating the level of their public relations. The study would provide useful information to business owners and tax authorities on the relationship between taxation and the growth of Small and Medium size Enterprises. The findings of the research would also benefit the regulatory authorities and policy makers in understanding the specific issues, especially in the modification of various rules, laws and regulations, relating to this milieu.

This research will enable taxpayers to know the important role taxes plays in the development of the economy. This study will enable the government to bring out possible solutions which will enable small and medium size enterprises enhance on their growth. To the rest of the public the result of this study will create an awareness of the milieu of taxation relating to the growth of SMEs in Cameroon.

The output of this study contributes to knowledge and literature in the study under investigation. It is immensely useful as a sources of reference to researchers, academics, students, policy makers, marketing professionals and other stakeholders interested in how public relations affects performance of SMES in the Buea municipality and finally these study will help me attain my Bsc degree in accounting Which will be a stepping stone to a successful career and a prosperous future.

1.7 Organization of the Study

This study comprises five chapters. Chapter one unveils the problem which informs the study and its context. It provides the justification for the study. Chapter two presents a review of relevant literature, synthesis and research gap to the study. Chapter three describes the research methodology and procedures of data collection and analysis. Chapter four entails data presentation, analysis and discussions, while chapter five provides the summary, conclusions and recommendations of the study. References and appendices cover the last part of the study.