CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Taxation is one of the important elements in managing national income. In developed countries it has played an important role in mobilization of national income (Lymer and Oats, 2009). Every nation’s desire is to build a civilized country with a strong and sound economy 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 voluntarily contribution imposed by the government on personal income earners, companies, investors, exporters, importers etc. Revenue realized from taxation is a major source of revenue to the government of Cameroon, and as such it is an important tool used in development of Cameroon’s economy. According to Ariyo (2005), a country’s tax Administration and systems are greatly related with the business ventures in the country (Hansson and Brokelind, 2014). An economy that enacts favorable and progressive tax Administration will definitely breed successful and finance healthy business organizations. Once business flourish, the economy flourishes as well, as there is no quicker way of stirring up the matters of economy without help of organizations that move services, goods, money and investments from those with surplus to those with deficit; those with marketable ideas/ output to those who need these ideas and products. In essence, businesses and tax policies greatly depend on one another for survival. If one is greatly affected the other follows suit.

The Cameroonian 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 provisions and simplifying the main ones. For example the new reforms that have been made in port taxes. Small business enterprises are generally recognized as important drivers of economic success.

In this age of globalization, most developing countries want to become integrated with the international 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 analyze the prevailing conditions in the country and determine the relevant mix of taxes that can raise sufficient revenue for the government and at the same time enhance the growth of Small and Medium size enterprises. Many developing countries, Cameroon inclusive, have increasingly begun to restructure their tax systems for this specific purpose. Despite numerous tax reforms that were intended to improve the economic and social situation by supporting infrastructure and increasing the quality of public goods provided by the government, the situation of taxes in Cameroon remains fragile, and the country remains one with bad climate for business growth.

Small business enterprises are generally recognized as important drivers of economic success. They are key ingredient in the growth a country as they contribute to job creation and to the GDP of the country in diverse fields, like in the agricultural, manufacturing, trade and service provision sectors of the economy. SMEs are a very heterogeneous group of business like no other usually operating in include a wide variety of them ranging from petty trading to medium size enterprises. The diverse nature of the SMEs sector of the economy is accounted for by its competitive and constantly changing nature to meet with the changing nature of the global economy. SMEs some are dynamic and growth oriented enterprises while others constitute necessity entrepreneurship that is just as a temporal source of revenue and employment. SMEs could either exist in formal or informal sector depending on whether it is recognized by the government or not. Within most African economies, a greater part of the SMEs which fall under the informal sector are mostly those of a smaller scale production. This implies those with less resources interns of capital, small labour force perhaps just a single person.

Furthermore, according to Broersma and Gautier (2017), the basic requirement for entrepreneurship and innovative spirit rest is human capital development which has been constantly increase and improved upon in both the developed and developing country specifically subs Saharan Africa. The school enrolment rate or ratio in Africa has constantly increased from 17.6% in 1999 to 2009 (Matsolo et al , 2016).  This is to increase the entrepreneurial spirit within the various economies which will intern lead to a multiplier effect within the economy in the aspect of employment and increases productivity. There has been increasing aspects of school enrolment, girl child education (African context), to a greater extend the educational planning systems of most countries are focused on technical and vocational training rather than general education as was the case of the past decades (UNESCO, 2012).

To a greater extend SMEs are praised for the impressive and dynamic role in promoting grassroots economic growth, ensuring equitable economic growth between various sectors, fields and regions. They are virtually responsible for the socio-economic transformation of any country as SMEs stand at the pivoter point on economic development and poverty reduction schemes as accounted for by its presence in all most all planning schemes or policies. In Cameroon it is the back bone of the 1984 investment code which was out to promote home investment and equal distribution of development benefits, it is also seen in the Poverty reduction strategy paper, and the emergence 2035 plan in which agricultural sector was to be reformed through the SMES existence (Cameroon growth and poverty reduction strategy paper, 2009).

The global recognition of acceptances of SMEs is due to the miraculous benefits of this sector to the economy.  SMEs help in mobilizing the domestic savings for investment, bringing innovation and invention through competitions hence strengthening the economy by encouraging efficient firms to stay in production thus reducing resource misallocation or mismanagement .In most countries, the SMEs has been seen as a tool in restructuring the weak agricultural sector through the Ministry of Agriculture, enhancement of economic development through industrial redistribution, ensuring effective resource utilization and allocation. This is because promoting a strong and competitive SMEs within the agricultural sector helps promote invention, while reducing inefficiency within the sector.

Over the last few years the growth of SMEs employment has exceeded the growth in their contribution to the GDP the reason why the Cameroonian government has been notably supporting them through financial institutions credit lending. 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 enterprises like any other business Cameroon are liable to different types of taxes and these include income tax, corporation tax capital gain tax, sales tax and customs duties that are paid at different stages of the business.

Economic growth in every country is defined by the performance of its production sector. In many highly developed countries a great share of production is manufactured by small and medium enterprises (SMEs) – an important part of their market economies. For instance, the portion of SMEs in GDP of Great Britain is 50-53%; of Germany – 50-54%, of USA – 52-55%; of Italy – 57-60%; of France – 63-67% (Small Business in Ukraine 1997). Consequently, up to 50-60 per cent of government revenues depend on the SME sector (Small Business in Ukraine 1997 41). Thus, the higher is the share of small and medium businesses is in an economy, the higher the productivity that can be potentially realized with the SME sector. The development of small and medium enterprises is greatly affected by the level of taxation, its administration and compliance: the higher the tax rate is, or the greater the efforts to fulfil taxation requirements are, as well as to check how those requirements are met, the lower the initiatives are for SMEs to perform well. Therefore, maintaining the tricky balance between tax rate, compliance costs, tax administrating and economic development should be a main goal of every tax policy.

Small and medium enterprises (SMEs) play an important role in the development of a country. Growth of SMEs is affected by the macroeconomic environment of the country from which they operate just like any other business. Technical definition of SMEs differs from country to country. Usually it is based on employment, assets or a combination of the two (Jasra et al.  , 2011). One of the important roles of SMEs, in this regard, is poverty alleviation through job creation. Both the developed and developing countries derive benefits from SMEs (Chittithaworn, et al. , 2011).

The economic contribution of SMEs to employment creation and poverty alleviation is invaluable. Several scholars conclude that SMEs play a significant role in the economic development process of any country (Carland et al.,1984).

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 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 (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), the majority of 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.

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 (Baurer, 2005). This situation raises a serious concern about the issue of aligning the tax system to the specific requirements of a country’s growth need, as it should 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.

The governments of developed as well as developing countries have acknowledged the reality that Small and Medium Enterprises (SMEs) form the nucleus of any economy. Green (2003), There is a universal agreement on their major participation to the economic growth, employment creation, social cohesion, poverty alleviation and local and regional development. SMEs are the largest group of enterprises in any economy. According to Matlay (2005), “SMEs make significant contributions to the socio-economic and political environment of most developed and developing nations as well as to countries that are in progression from a command economy to market economy”. Healthy and growing SME sector is considered to be important in obtaining sustainable competitive advantage and economic development at local, regional, and national levels. According to United Nations Industrial Development Organization (UNIDO) approximates “SMEs consist of more than 90% of all enterprises in the world and on an average are accountable for 80 to 90% percent of total employment. In the whole of Asia Pacific, more than 95% of companies are in SMEs sector, Japan 99%, Singapore 99.7%, Malaysia 96% etc” (Koshy, (2007). Experts believe that good management, strong leadership, skilled work and innovation are among the major forces that contribute to the success of this vital sector (BlossomChristina, 2014).

Like many economies in the developing world, economic activity in Cameroon operates within two frameworks the formal and informal sectors. Integrated into regional and international markets, the formal sector enables government to easily raise revenues through the traditional means of taxation. This is, however, not the case with the informal sector because the government is limited to the imposition of certain fees. In fact, according to the 2009 General Enterprises Survey conducted by Cameroon’s National Institute of Statistics, the informal sector employs approximately 90% of the total active population and constitutes 89% of small enterprises.

This survey also revealed that more than 50% of Cameroonian entrepreneurs considered the business climate as “not good”. Among the many reasons proffered, taxation was the principal challenge, with corruption and access to credit following in descending order.  Given this situation, the government decided to continue with fiscal reforms, beginning 2004, in order to improve the business climate and to finance industrial development. Worth noting is the fact that the very first set of fiscal reforms in Cameroon took place after 1994, with the devaluation of the Franc CFA. The aim of this initial set of reforms was to increase tax revenues, which had witnessed rapid depletion as a result of falling oil and export commodity prices, as well as the need to comply with the conditions set forth in the World Bank’s Structural Adjustment Program (SAP).

In the beginning of the 1980s, Cameroon witnessed a sustained rate of growth, associated essentially with the boom in the oil sector. Increased budgetary and extra-budgetary resources generated by this sector helped to raise the investment rate in the economy, and to maintain a reasonable level of external indebtedness. But after this period of expansion, the country experienced unfavorable economic development caused by a successive decline in the terms of trade, leading to profound imbalances, notably in public finance and the external account. The government subsequently initiated a series of measures to reform its tax system and to adapt it to national economic realities. An efficient and equitable taxation encourages production and the accumulation of national wealth stimulates saving and investments and hence job creation. Such a tax system could, therefore, ensure sustainable growth and development in Cameroon. The study aims to contribute to a better understanding of the evolution of the tax system in Cameroon. In particular, the paper reviews the chronology of the main tax reforms and the evidence on the distributional aspect of taxation. Investigating the issues involved with tax administration and decentralization in the country and local government finances, it also attempts to explore the problems and successes associated with the implementation of tax reforms. (Fambon, 2006 )

 Like many economies in the developing world, economic activity in Cameroon operates within two frameworks the formal and informal sectors. Integrated into regional and international markets, the formal sector enables government to easily raise revenues through the traditional means of taxation. This is, however, not the case with the informal sector because the government is limited to the imposition of certain fees. In fact, according to the 2009 General Enterprises Survey conducted by Cameroon’s National Institute of Statistics, the informal sector employs approximately 90% of the total active population and constitutes 89% of small enterprises. This survey also revealed that more than 50% of Cameroonian entrepreneurs considered the business climate as “not good”. Among the many reasons proffered, taxation was the principal challenge, with corruption and access to credit following in descending order. Given this situation, the government decided to continue with fiscal reforms, beginning 2004, in order to improve the business climate and to finance industrial development. Worth noting is the fact that the very first set of fiscal reforms in Cameroon took place after 1994, with the devaluation of the Franc CFA. The aim of this initial set of reforms was to increase tax revenues, which had witnessed rapid depletion as a result of falling oil and export commodity prices, as well as the need to comply with the conditions set forth in the World Bank’s Structural Adjustment Program (SAP).What therefore, is the effect of the recent fiscal reforms on the general level performance of Cameroon’s SMEs from 2009 to 2017, (KAMDEM, 2018).

1.2 Statement of the problem

Although there is a general perception that tax is an important source of fund for development of the economy and provision of social services, the problems faced are in the area of negative relationship between taxes and the business’ ability to sustain itself and to expand. (Gbetnkom, 1999). Tanzi & Davoodi ( 1997), Small scale businesses are faced with the problem of high tax rates, multiple taxation, complex tax regulations and lack of proper enlightenment or education about tax related issues. According to 2018 Doing Business in Cameroon the effective tax rate stands at 57.7%. Other government taxation policies include a corporate tax levied at a rate of 30% plus a 10% municipal tax.

 However, to Solve this problems affecting   SMEs at level  of taxes various measures have been designed by the Cameroon government such as Cameroon’s Growth and Employment Strategy( GESP) for Creating  opportunities for inclusive growth and poverty reduction in SMEs  in Cameroon In 2013 Cameroon government in action to solve this problems inhibiting the growth\survival of the key catalyst to economic growth (SMEs), took measures which are associated with provision of ways to reduce the impact of taxes on SMEs.

Among the main measures implemented during the period, we can mention in particular the creation of a service responsible for managing the taxation matters of major taxpayers and large enterprises, the creation of Tax Management Centres put in place by the Finance Ministry, where SMEs receive tax advice to better play their part in the development of the Cameroonian economy the provision of the ministry of SMEs, social economy and handicraft in December 2004, the creation of the investment promotion agency CIPA, the creation of the SMEs promotion agency (APME created in 2013) and most importantly the creation of the National SMEs Bank (BCPME) created in in 2013 which when operational in 2014 with 10billion CFA. All these efforts by the Cameroon government is or was to promote, enhance the growth and survival of the SMEs sector with each agency or institution targeting each constraint most especially access to finance at their own level. These efforts are to reduce the impacts of the various constraints on some and medium size enterprises in Cameroon in spite all the measures put in place by government the problem of high taxes and multi taxes Rate still prevail and affect SMEs because of corruption Corruption increases the cost of transaction as well as uncertainty in SMEs Mauro (1998), and it imposes a particularly heavy but regressive tax on commercial activities and services of small-scale enterprises. Corruption jeopardizes the legitimacy of the state Gray and Kaufmann( 1998), the problem persist in Cameroon because, proponents of “efficient corruption” in government ministries claimed that bribery may allow firms to get things done in an economy plagued by bureaucratic holdups3. Moreover, it has also been argued that a system built on bribery will lead to an efficient process for allocating licenses and government contracts, since the most efficient firms will be able to afford to pay the highest bribes Lui(1985). Leff (1964), argued that corruption is likely to have beneficial effects in developing countries suffering from high levels of state intervention and monopolies. First, corruption corrects the detrimental effects of the indifference and hostility of a government or redirect government priorities toward the business sector to entrepreneurs, thereby offering them a more propitious environment for business.

1.3 Research Questions

1.3.1 Main Research Question

 What are THE EFFECTS OF TAXES ON THE PERFORMANCE ON GROWTH OF SMALL AND MEDIUM-SIZED ENTERPRISES IN CAMEROON?

1.3.2 Specific Research Questions

1. What is the effect of tax Administration on growth SMEs in Cameroon?
2. What is the effect of tax rate on the growth of SMEs in Cameroon?
3. What is the effect of age of firm on the growth of SMEs in Cameroon?