CHAPTER ONE

INTRODUCTION

 1.1 Background of The Study

Taxation is one of the important elements in managing national income. To build a more modern country with a robust and healthy economy is the desire of every country, 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 contribution levied by the government on personal income earners, companies, investor, exporters, importers etc. Revenue realized from taxation is a major source of revenue to the government of Cameroon, and as such is an important tool for the development of a country, like Cameroon and her economy. A country’s tax policy and system is greatly related to the business ventures in the country. An economy that enacts favorable and progressive tax laws and policies will definitely breed successfully and finance healthy business organizations. The growth of business means, the growth of economy, therefore there is no quicker way of stirring up the growth of an economy without the help of organizations that provide goods and services like, as well as investment which booms the society and bring about the economic expansions and prosperity. In essence, businesses and tax policies greatly depend on one another. If one is greatly affected the other follows suit.

In today’s era of globalization, many developing countries like Cameroon particularly in Bamenda aim to be part of the global 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 analyses the prevailing conditions in the economy and determine the relevant mix of taxes that can raise sufficient revenue for the government and at the same time enhance the growth of SMEs in Cameroon and in Bamenda Despite numerous tax reforms that were intended to enhancing the economic and social situation by supporting infrastructure support  and improving the quality of public goods provided by the government, the situation of taxes in the economy remains fragile, and the country remains one with bad climate for business performance

SMEs are considered the most reliable engine of development for the less Developed Countries (LDCs). This is because they enjoy a wider geographical presence, ensure more equitable income distribution, employ a high number of poor persons, and facilitate diffusion skills (Panitchpakdi 2006). For SMEs to achieve their goals the government has to provide the necessary infrastructure to the sector. One of the ways through which the government generates income is through taxes paid by SMEs.

Oludele 2012 argues that high tax rates and tax complicity discourage the growth of SMEs and this has an economic effect on the growth of the economy. Taxes increase production cost of goods and services and as a result the final consumers suffer from high prices of these commodities. Meanwhile, the revenue collected from taxes represents the major funding source for governmental expenditures (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 affect the final consumer due to shifting tax ability.

Moreover, despite the contribution that tax can make towards the Gross Domestic Product (GDP), the growth of SMEs has to be taken into consideration. This is because SMEs play a crucial role in driving economic growth in both developing and developed countries. The situation raises a serious concern about the issue of aligning the tax-planning system to the specific requirements of a particular country’s growth need, as it has to balance both short-term and long-term impact of the policy. This also triggers need for an in-depth study of the different issues, preventing the development and implementation particularly in the context of SMEs (Njemo C. 2014).

According to Akinsulire (2010). 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. For the protection and control of SMEs operation by the Cameroon government several types of taxes are being imposed which aim in protecting home infant industries (protectionism) and also ensure fair competition among micro enterprises, some of these taxes include: tariffs, import duties, excise tax. to name a few. (Njemo C. 2014).

Tax resources are basically the exclusive responsibility of central government, both in terms of collection and allocation of tax resources. The weakness of local taxation is a consequence of the deficiencies in the process of decentralization, and more particularly in the process of financial decentralisation (Ayyagari 2005).

Taxes are broadly divided into two namely: direct and indirect taxes Lawal (1982). Examples of direct taxes include: income tax, corporation tax, capital gains tax, and inheritance tax. While indirect taxes are usually taxes on commodities or services, examples of indirect taxes include, value added tax, excise duties, import duties, purchase tax. and export duties (AanuOjekal 2012).

Micro enterprises are usually small individually-owned or family managed businesses offering basic goods and services. Microenterprises tend to lack organizational and management structures, and are generally characterised by uncertainty, innovation and evolution. Udechukwu (2003) notes that microenterprises are mostly sole proprietorships and partnerships, and only a few are registered as limited liability companies. Micro enterprises generally have a simple management structure, and in many cases the owner is the manager. With few employees who in most cases lack the appropriate skills and competencies. Given the simple management structure and extensive dependence on the owner, the lifespan of the enterprise is often dependent on the longevity the owner and his/her interest in continuing the business.

1.2 Statement of The Problem

Profit maximisation 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.

It is believed that income tax rates that are charged on SMEs 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 essential to thoroughly examine the effects of direct taxes, such as income and corporate taxes, on the growth of SME’s. Kinyua and Mugo (2019) stress the importance of tax policies in fostering SME growth, suggesting that high direct tax rates may limit SMEs’ ability to reinvest profits for expansion. Therefore, an investigation into the specific effects of direct taxes on SME growth in Bamenda is necessary to inform policymakers and stakeholders about potential adjustments required to stimulate entrepreneurial development.

Indirect taxes, including value-added tax (VAT) and excise duties, affect the operating environment for SMEs in Bamenda. These taxes alter the cost structures, thereby affecting their competitiveness and profitability. Ntui and Etowa (2018) highlight the need to consider the regressive nature of indirect taxes, which could disproportionately burden small businesses and hinder their growth potential. Thus necessitating, an empirical investigation and careful analysis.

1.3) Research Questions

These are the questions that will have to be answered at the end of this research work

1.3.1. Main Research Questions

-To what extent does taxes effect the growth of SMEs in Bamenda

1.3.2. Specific Research Questions

-To what extend does Direct taxes affect the growth of SMEs in Bamenda?

-To what extend does indirect taxes effect the growth of SMEs in Bamenda?

 1.4 Research Objectives

1.4.1. Main Research Objective

 To investigate the effect of tax on the growth of SMEs in Bamenda.

1.4.2. Specific Research Objectives

• To evaluate the effect of direct tax on the growth of SMEs in Bamenda.
• To investigate the effect of indirect taxes on the growth of SMEs in Bamenda

1.5 Research Hypothesis

For the purpose of this study, the following null hypotheses came up:

H₀: Direct tax has no significant effect on the growth of SMEs in Bamenda.

 H₁: Indirect tax has no significant effect on the growth of SMEs in Bamenda.