CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Taxes are the most important source of government revenue for most countries in the world. Taxation refers to imposition of compulsory levies on individuals or entities by government. From income tax to goods and services tax.  Taxation applies to all levels. Taxes are levied in almost every country of the world, primarily to raise revenue for government expenditures; although they serve other purposes as well (Ojede & Yamarik, 2012). Tax revenue account for well over 75% of Cameroon’s total revenue generation, and this clearly indicates that it is in tax that the governments’ comparative advantage lies in terms of revenue generation capacity. Taxes differ from other sources of revenue in that they are compulsory levies and are unrequited that is, they are generally not paid in exchange for some specific thing, such as particular public service, the sale of public property, or the issuance of public debt. Taxes are commonly classified as either direct or indirect, an example of the former type being the income tax and f the later the sales tax. Economic performance refers to economic development, labor productivity and welfare of the people (Khramov & Lee, 2013).

Taxation is related to economic development of a country. The structure and financing of a tax are critical to achieving economic development. However, there has been an ongoing theoretical debate on whether or not taxation stimulates growth. Since independence in Cameroon, correlation between taxation and economic development has existed as the most important issue in economies. Notably, tax is a compulsory payment that citizens of Cameroon should pay to the authorities to allow the government to provide public goods, deliver merit goods and services such as education and healthcare, promote economic development and broad based development, and to stabilize the economy. As observed by Musgrave (1997), every country imposes taxes to citizens and institutions with the aim of achieving long term objectives such as meeting development activities and promoting economic development. Tax and country output linkages do exist, and fiscal authorities have relied on this to spur economic development and development (Ojede & Yamarik, 2012). Both direct and indirect taxes have been used to realize this goal. The former forms the backbone of this study. Although direct taxes have been in existence in Cameroon since pre-independence, there have been various reforms to improve productivity of various types of direct taxes.

Despite that direct tax revenue has a direct relation to economic development; mixed thoughts exist to this proposition. Some scholars argue that an objective to raise sufficient tax revenue will bolster the much-needed economic development and development. Contrary to this, some argue that tax is a burden on their well-earned fortunes while to others; tax is seen as a necessary evil to support the state and its activities. Depending on the side one is, this all depends on the benefit one derives from the tax system that is the net of tax payments over the respective benefits earned. Just like other many emerging economies Cameroon has revealed its aim of rapid economic development and broad-based economic development that would bring a growth rate of at least 8%.

These are broad objectives of Cameroon Vision 2030. Broad based on economic development and development is indeed important, but not if the country can generate enough internal revenues which would then deliver on these. Currently, Cameroon government relies on the donor support in terms of bilateral and multilateral funding to achieve this rapid progress. For example the ongoing project of Low Emission and Climate Resilient Development in Cameroon. According to BMI these mega construction projects helps boost growth of the country’s construction industry by 8.7% and remain steady up until 2026. The level of taxation is assumed to affect the level of country’s GDP. Economic development cannot take place without proper prioritization of development projects as per the ability of the economy to finance them.

1.2 Statement of the Problem

Tax evasion is a complex multidimensional problem and this accounts for the reasons why in Cameroon, Tax Revenue – GDP Ratio is only 12.8% in country’s gross domestic product and Income tax to GDP 5.7%. This clearly indicates a narrow tax base. Less than 5% of the total population in Cameroon pays taxes. Tendency to deliberately remain outside the tax threshold is predominant. The low number of tax assessment in comparison to the number of registered taxpayers indicates inefficiency of administration. The tax collection is also associated with low tax payer morale, corruption and weak governance. The low level of trust among tax payers and tax authority has weakened the tax administration of Cameroon making it harder to comply with tax laws. (Revenue Statistics in Africa, 2020). It is upon observation made by the various studies and government officials that the researchers embarked on this research study as a way of investigating the reasons for evasion of the payment of income taxes by the traders and its effects on the economy.

1.3 Research Questions

1.3.1 Main Research Question

• What are the causes of tax evasion in Douala?

1.3.2 Specific Research Questions

• What are the effects of tax evasion on economic development in Douala?
• What are the strategies to overcome tax evasion in Douala?

1.4 Research Objectives

1.4.1 Main Objective

• To examine the causes of tax evasion in Douala

1.4.2 Specific Objectives

• To evaluate the effects of tax evasion on economic development in Douala?
• To suggest ways of overcoming tax evasion in Douala