ABSTRACT

This study sought to examine the effect of taxation on the performance of small and medium-sized enterprises in Tubah subdivision. The study sought to address the following specific objectives; to determine the effect of Value Added Tax on the performance of small and medium-sized enterprises in Tubah subdivision, to evaluate the effect of Income Tax on the performance of small and medium-sized enterprises in Tubah subdivision and to assess the effect of Excise tax on the performance of small and medium-sized enterprises in Tubah subdivision. The study was anchored on three theories; Ability-To-Pay theory; Benefit Theory of Taxation and Kaleckies Theory of Taxation.

The research adopted cross-sectional research design. The target population of this study comprised of 500 SMEs. Simple random sampling was used to select the sample size of 100 from the different business/activity sectors. This study used questionnaires with fixed choice formats, as well as interviews as the main data collection instruments. Quantitative data were analyzed using SPSS version 20 where relationships between the variables were assessed using correlation and regression analysis. Quantitative data were analyzed using SPSS version 20 where relationships between the variables were assessed using correlation and regression analysis.

The study found out that there was a positive and significant relationship between Value Added Tax and performance of SMEs. Further, the results revealed that there was a positive and significant relationship between Income Tax and performance of SMEs. Lastly, there was a positive and significant relationship between Excise Tax and performance of SMEs. Based on the findings, the study concluded that Value Added Tax, Income Tax and Excise Tax have a positive and significant effect on performance of SMEs. The study recommends that as a broad-based tax on final consumption, VAT regimes must determine whether, or the extent to which, the purchase should be treated as acquired for business purposes or for private consumption. To eliminate the tax burden among SMEs brought about by income tax, policy makers should extend exemption to transactions necessitated by regulatory changes, compulsory government acquisitions and internal restructures considering that such transactions are rarely undertaken for a commercial gain. Excise tax should be developed in such a way that it would stimulate rather than stop the development of enterprises.

CHAPTER ONE

GENERAL INTRODUCTION

1.0   Introduction

Small and Medium Enterprises have always been considered an important force for economic development and industrialization in smaller. These small enterprises have increasingly been recognized as enterprises that contribute considerably to the creation of jobs, economic growth and eradication of poverty in Africa. According to the  World Development Report, 2005, the creating of “sustainable” jobs and opportunities for smaller entrepreneurs are the key strategies to take people out of poverty. Small and medium enterprises are mostly private enterprises and they face difficulties when dealing with the government in general and the tax administration in particular mostly the developing countries. Many of the difficulties with the tax authorities may be deemed as the consequences of poorly conceived tax policies 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. This chapter is made up of the background to the study, statement of the problem, research objectives, questions and hypothesis, significance, justification of the study and the scope of the study.

• Background to the study

Every country, including Cameroon, wants to construct a civilized nation with a powerful and sound economy. Tax payment is the proof of this desire, even though some income earners see it as a means of public exploitation. A tax is a compulsory financial charge or some other type of levy imposed upon a taxpayer (an individual or legal entity) by a governmental organization to fund various public expenditures. Revenue from taxation is a major source of income for Cameroon’s government, and as such is an important tool used in Cameroon and its economy’s development. The tax policies and schemes of a nation are closely linked to the country’s business enterprises (Drake et al., 2019).

Globally, small and medium-sized enterprises (SMEs) play a crucial role in the economic development of the world’s economies. SMEs form the majority of the businesses registered in both developed and developing countries (Cusmano & Koreen, 2017). In the United States of America, small and medium-sized businesses make up 99.7 percent of all firms registered (Flores, Andrés-Rosales, & Villarreal, 2016). A study conducted by the Oladipupo and Obazee (2016) in Nigeria revealed that SMEs make 97 percent of the businesses in the Nigerian economy. 

The situation is not different in the Cameroonian context as surveys showed that SMEs constitute about 92 percent of firms registered. Though SMEs are smaller in size as compare to the larger firms, they are the most important undertakings in the economy given that when all their individual effects are aggregated, they surpass that of larger firms. SMEs are a source of employment, competition, economic dynamism and innovation which stimulate the entrepreneurial spirit and diffusion of skills. As evidenced in the preceding discussions, governments need to institute enabling business environments for SMEs to grow and survive. One such area that needs government intervention is taxation of SMEs.

Revenue mobilized from taxation constitutes one of the major sources of revenue to the government of Cameroon, and as such is pertinent in the development of the Cameroonian economy. Tax policies and systems in a country are greatly related to the business ventures in the country. A country that enacts favourable and progressive tax laws and policies have the potential to breed successful and financially healthy business enterprises. Petersen and Schoof (2015) opined that taxation can have important effects on many parts of the economy, comprising impacts on firm creation, and the development of SME growth (Drake et al., 2019).   Furthermore, SMEs in Cameroon are liable to different types of taxes and these include income tax, corporation tax, capital gain tax, custom duties and value-added tax that are paid at different stages of the business. All these taxes eat into the profit of SMEs which could have been ploughed back into their operations. The high tax rate charged tax compliance cost and the challenges taxpayers faced in honouring their tax obligations have been impacting on the growth and development of SMEs in Cameroon. High taxes can affect the size and strength of SMEs population through the reduction in the number of business births, by discouraging those who might otherwise form a new business, slow down the rate at which SMEs can grow by making it more difficult for them to finance rapid expansion.

Despite the contribution that taxation can make towards the Gross Domestic Product (GDP) of a country in general, much attention is also needed to the side effects of tax on the growth of SMEs. This is because SMEs play a crucial role in driving economic growth in both developing and developed countries. As highlighted previously, as a group, they do not only generate more new jobs than large firms or macro-enterprises but also introduce innovative ideas, products, and business methods. However, literature has not contributed much in exploring the negative effect of tax payment on the financial performance of SMEs in developing countries. This situation raises a serious concern about the issue of aligning the tax 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 the need for an in-depth study of how tax payments affect SME development (Drake et al., 2019). In addition, most of the literature and research on the subject matter are mostly foreign and western in nature where the dynamics of SME activities are different from that of developing countries like Cameroon. This study therefore seeks to examine the effect of the tax system on the performance of Small and Medium Enterprises in Cameroon focusing on those in Bamenda, Tubah Subdivision.

• Statement of the problem

The taxation of SMEs is a pertinent issue given their importance to the economies of countries globally. SMEs formed the majority of business ventures and contribute significantly to the employment and economic emancipation of both developed and developing economies (Barungi, 2018). Despite the enormous contribution of SMEs to the country’s economic development, they are faced with challenges of high tax rates, unfavourable tax policies that tend to affect profits generated by SMEs adversely and high tax compliance costs that accompany the filing of tax returns to revenue authorities. Barungi (2018) postulates that a careful design of government programs for SMEs, including special tax laws can go a long way in addressing market failures and excessively high compliance burdens hanging on the neck of SMEs.

In Cameroon, SMEs have a high mortality rate especially a few years after their establishment due to unfavourable tax policy regimes and exorbitant tax rates imposed on their activities which cut across various stages of production and service. The situation is not different in the case of SMEs in Tubah subdivision, Bamenda. Preliminary investigation revealed that myriad enterprises collapse and some at the verge of collapse which was linked to taxation related issues such as high tax rate, tax compliance cost and tax policies instituted by the government. Kumar and Rao (2015) observed that the tax systems as it exists in Cameroon now disproportionately affect SMEs relative to larger firms, since to some extent larger firms and SMEs treat profits and losses unequally, and larger firms having the advantage to secure debts relative to SMEs. This help firms to reduce their tax burden (i.e. loan interest is tax-deductible), while SMEs are faced with relatively high compliance cost on SMEs due to the inability to finance major business activities through debt. The high tax rate charged tax compliance cost and the challenges taxpayers faced in honouring their tax obligations have been impacting on the growth of SMEs in Cameroon. Keith (2012) posits that high taxes can affect the size and strength of SMEs population through a reduction in the number of business births, by discouraging those who might otherwise form a new business, slow down the rate at which SMEs can grow by making it more difficult for them to finance rapid growth. 

However, to the best knowledge of the researcher, little research has been done to establish the relationship between taxation and SMEs’ growth in the Northwest Region of Cameroon. The current study, therefore, seeks to examine the impact of taxation on SMEs’ performance in Cameroon focusing on the Northwest Region, Tubah subdivision as a study area by exploring the effect of value added tax income tax and excise tax on the performance of SMEs in Tubah subdivision.

• Research Objectives     

What are the effects of taxation on the performance of SMEs in Tubah subdivision.

More specifically, the study had specific questions which included the following;

1. To determine the effect of Value Added Tax on the performance of small and medium-sized enterprises in Tubah subdivision.
2. To evaluate the effect of Income Tax on the performance of small and medium- sized enterprises in Tubah subdivision.

• To assess the effect of Excise tax on the performance of small and medium-sized enterprises in Tubah subdivision.

1.4 Research Questions

1. What is the effect of Value Added Tax on the performance of small and medium- sized enterprises in Tubah subdivision?
2. What is the effect of Income Tax on the performance of small and medium-sized enterprises in Tubah subdivision?

• What is the effect of Excise tax on the performance of small and medium-sized enterprises in Tubah subdivision?