Abstract

Taxes play an important role in the growth of small and medium-sized enterprises. In low-income countries like Cameroon, the role of small and medium-sized enterprises (SMEs) is critical in pushing the socio-economic development agenda of the country forward.

Therefore, alignment of the tax system to the environment-specific SME’s growth needs can be considered an important agenda for the political, economic, and financial policymakers.

This study applied both qualitative and quantitative research designs where interviews and questionnaires were used. Data were collected from both primary and secondary sources.

Data were processed and analyzed using frequency tables and narrative text, to find out the relationship between taxes and the performance of small and medium-sized enterprises. A total of 100 respondents were considered in Buea municipality, going from Mile 17 to Buea Town.

The findings indicated that the performance of small and medium-sized enterprises is highly affected by the tax burden imposed by the tax authorities.

Most business owners are aware of the taxes to be paid, some are usually uncertain or ignorant of the mode of assessment to be used and there is considerable assistance with regards to tax awareness.

Also, the taxpayers at different activity levels complained about the mode of assessment and the tax burden imposed on them.

Recommendations on the impact of taxes included: organization of seminars for the constant education of students and taxpayers on the changing provisions of the Cameroon General Tax Code; responsibility of tax authorities to impose taxes on taxpayers based on their ability to pay.

CHAPTER ONE

GENERAL INTRODUCTION

1.1 Background to the study

Small and medium enterprises form the core of the majority of the world’s economies. A study carried out by the Federal Office of Statistics shows that in Nigeria, small and medium enterprises make up 97% of the economy (Ariyo, 2005).

Although smaller in size, they are the most important enterprises in the economy because when all the individual effects are aggregated, they surpass that of the larger companies. The social and economic advantages of small and medium enterprises cannot be overstated.

Panitchpakdi (2006) sees small and medium-size enterprises as a source of employment, competition, economic dynamism, and innovation which stimulate the entrepreneurial spirit and the diffusion of skills.

Because they enjoy a wider geographical presence than big companies, small and medium-sized enterprises also contribute to better income distribution.

Small and medium scale enterprises have undoubtedly improved the standard of living of so many people especially those in the rural areas. However, the mortality rate of these small firms is very high.

According to the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN) Nigeria, 80% of small and medium-sized enterprises die before their 5th anniversary. Among the factors responsible for these untimely close-ups are tax-related issues, ranging from multiple taxations to enormous tax burdens.

In many government policies, small and medium enterprises are usually viewed and treated in the same light as large corporations. However, their size and nature make them unique.

Therefore, in dealing with small and medium enterprises, these unique qualities need to be considered. In levying of taxes for these enterprises, in particular, issues that need to be considered are how these tax policies can be designed to bolster the growth of small and medium-sized enterprises and the most effective ways to administer them. The importance of small and medium-sized enterprises as a mechanism of economic growth and development is often ignored.

They are perceived as minute establishments that have minimal effect on the state of the economy. However, if a conducive environment is created for these small and medium-sized enterprises to grow through proper regulation, the small and medium-sized enterprise sector has the highest propensity to transform our economy.

In the same light, taxes are important for the government as they are the major source of funds for government expenditure.

Income obtained from taxation of individuals and businesses is used to run governments as well as provide infrastructures such as good roads, water supply, and electricity which are essential for the smooth running of these businesses that are mainly manufacturing companies and as such rely on these commodities to survive.

Small and Medium Enterprises have always been considered an important force for economic development and industrialization in smaller economies (Aryeetey & Ohene, 2004 and Oludele & Emilie, 2012).

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 2005 World Development Report, 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 (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 policymaker and regulator, the 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).

Small enterprises in Ghana are said to be a characteristic feature of the production landscape and have been noted to provide about 85% of manufacturing employment in Ghana (Aryeetey, 2001). Small and medium-sized enterprises are also believed to contribute about 70% to Ghana’s GDP and they account for over 90% of businesses in Ghana (Aryeetey, 20001).

In line with the various statements noted above, it is reasonable to state that small and medium-sized enterprises, therefore, have a crucial role to play in stimulating growth, generating employment, and contributing to poverty alleviation, given their economic weight in African countries.

Holban (2007) posited that taxation can contribute to the development and welfare through three sources; It must be able to generate sufficient funds for financing public services and social transfers at a high level of quality, it should offer an incentive for more employment and efficient and lasting use of natural resources, finally, it should be able to reallocate income.

But in the case of small and medium-sized enterprises, the tax must be done in such a way that puts their income and need for survival into consideration.

It is expedient that enough profit is allowed to expand their businesses. The tax policy must be one that will not encourage small and medium-sized enterprises to remain in the informal sector or to evade or avoid tax payments.

More so, many small firms in Africa, including Cameroon, choose to remain in the informal sector because the perceived benefits outweigh the perceived costs. Firms rarely see their tax contributions at work and the compliance costs are high, thus discouraging compliance.

The government is also discouraged from collecting taxes from small firms, because the cost of monitoring and collecting tax from small businesses by revenue authorities, whose resources are usually scarce, sometimes outweighs the revenues generated by small businesses (Stern and Barbour 2005).

1.2 Statement of the Problem

Although there is a general perception that tax is an important source of funds for the development of the economy and provision of social services, the problems faced are in the area of a negative relationship between taxes and the business’ ability to sustain itself and to expand.

Small and medium-sized enterprises are faced with the problem of high tax rates, multiple taxations, complex tax regulations, and lack of proper enlightenment or education about tax-related issues.

Not minding other challenges that small and medium-sized enterprises are facing in other developing countries like Cameroon; inadequate capital, poor technical and managerial skills, environmental effects, and the government regulations which are mostly affecting the operation of small and medium-sized enterprises in Cameroon especially this issue of multiple taxations which is a worm eating deeply and the large chunk of revenues generated by these small and medium-size enterprises for their growth and survival.

These have led to an increase in the record of the death of Small and Medium Scale Enterprise (SMEs). Taxation in general increases the costs of operation of running small and medium enterprises.

To compensate for the increased costs of operation, prices on goods are raised thus causing the amounts of sales to diminish. The effects of reduced sales are reduced profits, reduced capital base, and slow creation of employment resulting in slow growth.

1.4 Research Questions of the study

1.4.1General Question of the study

What is The impact of taxation on the growth of small and medium-sized enterprises in the Buea municipality?

1.4.2 Specific Questions of the study

• What are the different types of Taxation levied by the government?

• What is the relationship between tax policy and the growth of small and medium-sized enterprises?

• What are the factors that encourage non-compliance with tax obligations by small and medium-sized enterprises?

1.5 Objective of the study

1.5.1 General Objective of the study

To investigate the impact of taxation on the growth of small and medium-sized enterprises in the Buea municipality.

1.5.2 Specific Objective of the study

• To identify the Different Types of Taxation levied by the government.

• To establish the relationship between tax policy and the growth of SMEs.

• To evaluate the factors that encourage non-compliance with tax obligations by SMEs.