CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Taxation is one of the most important sources of government revenue. In developed countries it has played an important role in the mobilization of national income (Lymer and Oats, 2009). Every nation desire is to build a civilized country with strong and thriving economy including Cameroon.

Tax payment is a vivid demonstration of that desire. Although, some income earners see it as a means of exploitation by the government, these voluntary contribution imposed on income earners, companies, investors, exporters, importers raise funds for the government. Taxation is an important source of revenue for the economy and as such is used for the development of the economy.

A country’s tax policies and systems are greatly related to the business ventures found in that country. An economy that enacts favourable and progressive tax systems, laws and policies will definitely breed successful and healthy business organizations. Once a country’s business flourishes, her economy flourishes as well. As there is no quicker way to boost up economic growth without the help of organizations that move services, goods, money and investments from those with surplus to those with the deficit, those with marketable ideas/output to those in need of these products and ideas. In essence, businesses and tax policies and systems greatly depend on one another for survival. If one is greatly affected, the other follows suit.

 In this age of globalization, most developing countries want to become integrated with the international economy. However, they face challenges in this pursuit with the tax systems and tax rates they put in place for their businesses. Tax policy makers have to analyse the prevailing conditions in their countries to be able to develop a relevant mix of taxes that can raise sufficient fund for the government but also be able to encourage growth of businesses especially the Small and Medium Size enterprises.

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 businesses like all others in the world, are liable to different types of taxes which include income tax, corporation tax, capital gain tax, custom duties, sales tax that are paid at different stages of the business.

The Cameroon 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 laws and simplifying the main ones in an attempt to encourage the growth of small and medium sized enterprises in its economy.

Though not limited to the below mentioned, the following are some forms of Taxes to be is to be paid to the relevant authority by Small Businesses:

• Company Income Tax: this is payable on the taxable profit made by the business at 30%. The basis of assessment of a company is on preceding year basis. This means tax is charged on profits for the accounting year ending in the preceding year of assessment. The due date a company must file its returns is within six month of the company’s accounting year end for an existing company and for a new company within 18 months from the date of incorporation or 6months after its first accounting period whichever is earlier. Can this tax be settled with other instrument than cash or cash equivalent? Yes, Withholding Tax (WHT) as an advance tax is meant to discharge this; where in excess it doesn’t neither expires nor get outdated.
• Education Tax: this is payable on the assessable income of the company at 2%
• Value Added taxes: this is payable at 5% on all VAT-able goods and services. VAT payment is expected to be filed on the 21^st day of the month following the transaction. Is VAT actually a tax on the company? No. Companies bear VAT, but simply required to remit gross or net input where applicable.
• With Holding Taxes (WHT): the rate of With Holding Taxes varies based on the services performed from as low as 5% to 15%. WHT is an advance payment on income tax deductible at source on specified transaction. In the case of WHT deducted by from companies, remittance is due to Federal Inland Revenue Service (FIRS) within 21 days after the duty to deduct arose while in the case of Individuals and unincorporated bodies entities, remittance is due to the State Internal Revenue Service (SIRS) within 30 days after the duty to deduct arose.
• Personal Income Tax: this is payable on the incomes of individuals including employees, partnerships and unincorporated trust. They are all liable to Personal Income Tax under this act. Personal income tax applies to all residents in Cameroon, including expatriates who are earning from Cameroonian sources of income. These include employees, pensioners, traders, farmers, artisans, landlords and other professionals.

Taxable income sources are the following:

• Wages, pensions and annuities
• Profits received by traders, artisans, farmers and liberal professionals
• Property income, movable capital (whether assimilated or distributed by a corporation to people who are not known to tax authorities).

Tax rates in Cameroon range as follows:

• 10% – CFA 0 to CFA 2,000,000
• 15% – CFA 2,000,001 to CFA 3,000,000
• 25% – CFA 3,000,001 to CFA 5,000,000
• 35% – More than CFA 5 million

Note that an additional 10% municipal tax applies to the calculated tax amount.

Corporate tax

Corporate tax directly applies to all corporate profits over a 12 months period corresponding to the fiscal year. However, if a company has come into operation only six months before the end of the fiscal year, it is allowed to submit its first report 18 months later.

Corporate tax payers are legal persons from:

• Corporations, even when it comes to sole traders
• Partnerships, syndicates and civil societies which have opted for corporate tax
• Public institutions, regional and local authorities and public and legal persons who are engaged in gainful activities.

Taxable income is then constituted by operations revenue (regardless of its nature) performed by the company during the fiscal year and after deduction of related expenses.

Furthermore, corporate tax only applies to companies’ whose revenue is generated in Cameroon. The business has to be conducted within an institutional framework or through a representative whose professional profile is indistinguishable from that of the company. Corporate tax is levied at a rate of 35% plus a 10% municipal tax rate. The tax return must be submitted to tax authorities at the latest on the 15th of March of each fiscal year.

Small and medium sized enterprises are generally considered important drivers of economic success. Their aggregate effect to the economy cannot be over stated. They are a key ingredient in the growth of a country as they contribute to job creation and the overall GDP of the economy. Economic growth of every country is defined by the performance of its production sector. In many highly developed countries, a great share of production. For instance, the portion of SMEs in the GDP of Great Britain is -50-53%; France – 63-67%; USA 52-55%; Germany; 50-54% (Small Businesses in Ukraine, 19997). Thus, the higher the share of small and medium sized businesses in an economy the higher the productivity that can be potentially realized with the SME sector.

The development of SMEs is highly and greatly affected by the level of taxation, its administration and compliance. The higher the tax rates, or the higher the greater the efforts to fulfil taxation requirements are, the lower the initiative are for SMEs to start up or perform well. Therefore, maintaining the tricky balance between tax rate, compliance cost, tax administration and economic development should be the main goal of every tax policy.

Small and Medium size enterprises play an important role in the development of a country. According to the World Development Report (2005) the creation of sustainable jobs and opportunity for smaller entrepreneurs are the key strategies to take people out of poverty. Small and medium size enterprises are mostly private and they face a lot of difficulties with the tax authorities. Growth of SMEs is affected by the macroeconomic environment of the country from which they operate just like any other business. Technical definitions of SMEs differ from country to country. Usually, it is based on employment, assets, or a combination of the two (Jasra et al, 2011).

In Cameron, according to law number 2010/001 of April 13^th 2010, SMEs are either very small or small depending on their employing capacity and their annual revenue. Small enterprise employing less than 5 people and with annual revenue of about 15,000,000 FCFA are referred to as Very Small. Meanwhile, firms employing 6-20 people and with a turnover of above 15,000,000FCFA are referred to as Small and Medium. These SMEs involve over 90% of the county’s economic sector while contributing an estimated 36% of the national GDP. They also contribute over 30% of the local government taxes.

 Despite being a major driver in economic growth, infrastructure development and source of employment, SMEs survival rate in Cameroon and across Africa is heavily challenged.

1.2 Statement of the Problem

Taxes are raised by the government to generate revenue used to provide services to the general public such as; Health centres, Telecommunications, roads, schools etc. these services do not only improve the standard of living of the citizens and residents of the country, it also goes a long way to improve the ability for SMEs to properly function. Although taxes are an important source of government funding, they have a negative relationship with SMEs as they struggle to deal with high tax rates, multiple taxations, complex tax regulations, lack of proper education about tax related issues, and their own personal growth.

It is alleged that despite the services provided, small scall business enterprises performance in Cameroon is still poor due to the increasing tax burden brought about by tax rates and tax laws which are revised annually. These rates seem to be taking an upward trend (Gordon and Dawson, 1987) which has led to the closure of many small-scale businesses.

1.3 Research Question

To better understand the nature of the effects of tax on these small and medium size enterprises, the following key questions have to be answered.

1.3.1 Main Research Question

What is the effect of taxes on small and medium size enterprises?

1.3.2 Specific Research Question

1. What is the effect of tax policy on SMEs in Limbe municipality?
2. What is the impact of tax rate on SMEs in Limbe municipality?
3. How is tax collected and how does it affect SMEs in Limbe municipality?

1.4 Objectives of the Study

1.4.1 Main objectives;

To assess the impact of taxes on small and medium size enterprises.

1.4.2 Specific objectives

1. To evaluate the effects of tax policies on SMEs in Limbe municipality.
2. To assess the impact of tax rates on the growth of SMEs in the Limbe municipality.
3. To ascertain tax collection methods and how it affects SMEs in Limbe municipality.