CHAPTER ONE

INTRODUCTION

1.0 Introduction

This chapter sought to give an overview of the study. It includes a background to the financial performance of small and medium enterprises, the role they play in the economy both globally and in Cameroon, and the subject of tax reforms. It also portrays the general objective of the study which is to analyse the effects of tax reforms on the financial performance of SMEs in Cameroon, and the hypothesis to be tested. It also gives a justification, significance, and scope of the study and definitions of operational terms.

1.1 Background to the study

 Since the 1960s to date, small and medium-sized enterprises (SMEs) have been given due recognition, especially in the developed nations for playing very important roles towards fostering economic growth, development, and stability within several economies. Small and Medium Enterprises have always been considered an important force for economic development and industrialization in smaller economies (Aryeetey, 2004). In most developed countries like the USA and France, they contribute greatly towards the gross domestic product (GDP) of the country, that is they contribute; 50-52% and 55-62% respectively to the total gross value added of their various countries (Oludele, 2012). Globally, the growth of any economy is dependent on vibrant SMEs and when the reverse is true, the economy suffers.

In Africa, the same importance about SMEs have continued to top discussions among researchers and policy makers. It is recognised that these businesses contribute substantially to job creation, economic growth, and poverty alleviation. 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.

In Cameroon, SMEs constitute 95% of the country’s economy and helps in job creation especially among the youths (kum, 2021). These enterprises are taxpayers as justified by the source and residence principles of taxation. It is reasonable to state that SMEs have a crucial role to play in stimulating growth, generating employment, and contributing to poverty alleviation. As major economic agents, the growth and sustainability of SMEs is a major concern for owners and policy makers. The growth and sustainability of any SME is only dependent on her performance.

Globally, the performance of SMEs is a major concern. Sefiani & Bown (2013) observed that performance is the indicator used to measure set goals and objectives. Business owners make performance an utmost priority. The authors further alluded that performance measures market-related items such as sales growth and market share and future positioning of the firm. SMEs financial performance is the major outcome of organisational effectiveness. Accounting-based measures consider profitability in terms of Return on Sales (ROS), Return on Assets (ROA) and Return on Equity (ROE) to measure financial performance. Organizational effectiveness measures tend more towards stakeholders than shareholders.

 As corporations, partnerships, or sole proprietorships which have fewer employees and/or less annual revenue than regular-sized businesses, SMEs face major difficulties that are detrimental to their performance. The general performance of an organization is largely dependent on the right management approach but when it comes to SMEs, it’s a more complex issue. This is because apart from choosing the right strategies to enhance the performance of the enterprise, SMEs are faced with constraints but not limited to limited capital, lack of opportunities and taxation issues. Out of all these constraints, business owners point out taxation as a major constraint in meeting optimal financial performance of enterprises. This is very evident in Cameroon as according to the Ministry of economy, planning and regional development (MINEPAT, 2022), the failure rate of SMEs within the first 5 years stands at 72%.

Many of the difficulties with tax may be deemed as the consequences of poorly conceived tax policies, lack of awareness, and a lack of certainty regarding future policy changes. 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). 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 affecting the final consumer due to the shifting ability of tax.

According to a study report by Mnewa and Maliti (2008), most small businesses are less likely to attain or maintain their growing profitability due to factors including tax policies. This implies that as a policy maker and regulator, Government must consider the factors that could affect the competitiveness of the small enterprises. Small and medium enterprises (SMEs) are considered the backbone of economic growth in all countries. Smaller enterprises represent over 90% of private businesses and they contribute to more than 50% of employment and GDP in most African countries (UNIDO, 2009). Thus, considering their importance, the government seeks to make tax policies that favour the existence and flourishing of these businesses, hence the introduction of tax reforms. 

Tax reform is a process of redefining the way taxes are collected or managed by regimes and usually seeks to enhance tax administration, to provide economic or social benefits, to discourage certain activities and to encourage investments. The quest for reforms is ignited by the need for a sustainable tax system that can generate adequate revenues to meet growing public expenditure demands in addition to solving the inequalities associated with old system. Tax reforms seek to enhance tax administration, increase tax productivity, and control economic distortions brought about by taxes. Besides aiding the government in meeting their expenditure projections, tax reforms are also designed with a motive to check inequalities, facilitate redistribution of wealth for the common good, control cyclical fluctuations, enhance prince stability, boost the economy, and reduce unemployment. Tax reform is a main component of macroeconomic policy. Tax reforms are considered as the most important part of fiscal policy and in agreement with monetary policy (Holban, 2007).

The aim of tax reform is to raise revenue effectively in consistence with each country’s uniqueness and administrative capacity (Kanyinga, 2016). Analysing a country’s situation before employing any tax reform results to a proper functioning tax system. The objective of tax reforms is to reduce the tax burden of SMEs, save collection cost while reducing the revenue loss as well as minimal economic disruption, and less inequity. Mostly, tax reforms seek to improve the efficiency and productivity of taxation and the success of SMEs (Wagacha, 2009). However, mixed findings exist pertaining to the effect of tax reforms on the performance of SMEs.

Performance are measures that can be adopted independently by any business, and they include sales, employees, assets, profits, and equity. If an enterprise can make good sales, keep her employees, or make profits, she is said to be performant. However, literature has not contributed much to exploring the effect of tax reforms on the performance of SMEs in Cameroon. This situation raises a serious concern about the issue of the effectiveness of the current tax reforms and if the specific objective for their implementation is being achieved. This also triggers the need for an in-depth study of how tax payments affect SME development. In addition, most of the literature and research on the subject matter are mostly foreign.

1.2 Statement of the Problem

According to the Ministry of economy, planning and regional development (MINEPAT), the failure rate of SMEs in Cameroon within the first 5 years stands at 72%. SMEs continue to struggle to stay in business and can hardly compete locally or internationally. Performance is a leading concern for SMEs in Cameroon who face many challenges. According to 2016 statistics from the National Institute of Statistics in Cameroon (INS), economic operators pinpoint taxation as the leading obstacle to their struggle and failure with a representation of 53.5% of opinions, administrative formalities and tracasséries with an opinion rate of 14.2%, financing problems with an opinion rate of 12.7%, lack of opportunities representing an opinion rate 7.1%, corruption with an opinion rate of 6.4% and insufficient energy and water with an opinion rate of 6.1% (Nkafu Policy, 2019). It remains unclear whether the wide range of tax reforms introduced have helped in improving the state of performance among SMEs.

Tax reforms are meant to integrate the tax collection procedure, increasing revenue collection to the government while at the same time reducing bottlenecks in business. Uwaume and Ordu (2014), advocated for alignment of government tax policies to increase performance. The effective tax system is healthy for the prosperity and growth of businesses. In Cameroon, one of the main sources of revenue for government expenditure and infrastructural development is taxation. Hence, the importance of harmonizing the tax system to achieve the objectives of revenue collection and at the same time favouring the performance of SMEs. The harmonisation of the tax system is an entire process of administrative, technological and policy reforms. The good performance of SMEs relates to technological innovations which includes I-tax. In addition, the industrial prosperity and financial sustainability has been associated with compliance which translates to increased performance (Maithya, 2020).

In order to tackle the problem of performance, the government has over the years instituted a number of tax reforms. Nevertheless, it has not yet been concretely established as to whether the said reforms have achieved targeted increase in performance and sustainability by SMEs as envisaged or not. The effect of various tax reforms such as the reduction of the Company Income Tax from 30% to 25%, introduction of the OTP service, introduction of management centres, exemption of newly created businesses from paying license taxes to name a few among SMEs remains evidently unexplored in Cameroon. Furthermore, there exist no concrete literature tackling the problem of the effects of tax reforms on the performance of SMEs in Cameroon. Scanty foreign literature shows there exist mixed findings on concepts such as compliance and revenue collection.

Mukuri (2022) analysed the effects of technological tax reforms on the financial performance of SMEs in Kenya. The study delved into the effects of technological tax reforms which are useful undertakings in the elimination of manual operations, replacing with digitalised or computerised platforms in tax filing and payment to increase adherence to tax policies on the financial performance of SMEs in Kenya. The study ended by instantiating a positive association between technological tax reforms and the performance of SMEs. Mathenge (2021) analysed tax reforms versus tax compliance in Kenya. The study also revealed a positive and significant relationship between tax reforms and tax compliance. However, Livoi (2017) carried out a study on the effects of tax reforms on corporate tax compliance to Kenyan Revenue Authority and found that iTAX system had no significant effect on tax compliance among SMEs.

The review of existing literature has proven varying contexts, techniques, concepts, and results. Mukuri’s study concentrated just on technological tax reforms leaving out administrative and policy reforms which are as important thereby leaving a conceptual gap. The other authors concentrated on the concept of tax compliance which also poses a problem of gaps.  The almost inexistent empirical information on the effects of tax reforms on the performance of SMEs and the loopholes spanning from the contextual and empirical gaps makes the study of the effects tax reforms on the performance of SMEs necessary. To address this problem, this study will seek to answer the following questions.

1.3 Research Questions

1.3.1 Main Question

The main research question of this study is: what is the effect of tax reforms on the performance of small and medium-size enterprises in Cameroon?

1.3.2 Specific Research Questions

1. What is the effect of administrative tax reforms on the performance of small and medium-size enterprises in Cameroon?
2. What is the effect of technological tax reforms on the performance of small and medium-size enterprises in Cameroon?

• What is the effect of policy tax reforms on the performance of small and medium-size enterprises in Cameron?

1.4 Research Objectives

1.4.1 General Objective

The general objective of the research is to assess the effects of tax reforms on the performance of small and medium-size enterprises in Cameroon.

1.4.2 Specific Research Objectives

1. To assess the effects of administrative tax reforms on the performance of small and medium-sized enterprises in Cameroon.
2. To assess the effects of technological tax reforms on the performance of small and medium-sized enterprises in Cameroon.
3. To assess the effects of policy tax reforms on the performance of small and medium-sized enterprises in Cameroon.