The impact of taxes on the performance of small and medium scale enterprises

                                                    Abstract

Small  and  medium  enterprises are essential in  the development  of  the  Cameroon economy. The SMEs sector’s importance in the economic development of any country in recent    years   cannot   be   underrated   especially   with   regard   to   creation   of  employment, innovation, uplifting the people’s standard of living and financial contribution to the growth of the country’s   GDP.   This   sector’s   growth   is  hindered   by   the  challenges   of   lack   of financial   resources   to   expand,   the entrepreneur  managerial skills, unskilled   labour, production of poor quality goods, lack of market for their products, infrastructure and above all taxation policy which  does not favour their growth potential. The study looked at the impact of tax influence on SMEs sector growth in Cameroon. The study employed descriptive design. Primary data was collected on valuables contributing to tax influence and their effect of the growth of SMEs. A total of 25 respondents were considered out of the entire population in  theBuea.  The   study   found   that   there   was   a   significant   correlation between taxation and SMEs sector growth. The study recommends that there be a friendly tax policy for all start up businesses preferably a tax holiday, or an introduction of a growth limit which can be said to be a level stable enough to sustain tax payment. It also recommends that, tax department should  supply  tax  assessment  forms  in  time,  intensify  on  the  sensitization  different  tax rates  and  introduce  a  scheme  that  allows  taxpayers  to  pay  the  tax obligation  in  instalment  to better  the  profitability  of  small-scale  businesses.  There  is  therefore  need  for  more  research  on firms‟  management  techniques,  the  role  of  bookkeeping  and profitability  of  small  and  micro enterprise.

                                                                                CHAPTER ONE

INTRODUCTION

1.1Background of Study

The ability of smaller firms to create jobs is clearly a major attraction for governments in the short term. SMEs must be encouraged and supported to flourish. This is important so that economic objectives (economic growth and development, favorable balance of trade and payment and employment) and social objectives (poverty alleviation and improving standards of living) can be realized. Governments must respond to the needs of SMEs as they form an important component of the economy. As a result 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 Cameroon are said to be a characteristic feature of the production landscape and have been noted to provide a majority of manufacturing employment in Cameroon. SMEs are also believed to contribute about 70% to Cameroon’s GDP and they account for over 50% of businesses in Cameroon. In line with the various statements propagated above, it is reasonable therefore to state that SMEs have a crucial role to play in stimulating growth, generating employment and contributing to poverty alleviation, given their economic weight in African countries. 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 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. 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 under the Buea Divisional tax center.

1.2 Statement of problem

There are a lot of problems that bedevil SMEs and stunt their growth. Although there are some problems peculiar to a particular country, the challenges faced by SMEs in different countries and geopolitical divisions are basically the same. For instance, a survey of Turkish SMEs by Organization for Economic Co-operation and Development (OECD) in 2004 showed that they were suffering the consequences of policy inconsistency, poor access to finance, insufficient know-how and low level of technology, and so many others. The same problems were also registered by other authors concerning other regions like the Philippines, Malaysia and other European states and of course in Central African countries –Cameroon inclusive as shown by different authors on the issue. The research seeks to investigate therefore the effects of taxes on the performance of Small and medium enterprises in Buea.

1.3 Objectives of study

The general objective is to examine the effect of taxes on SMEs performance.

1. To ascertain the relationship between tax payment and SMEs performance
2. To determine whether tax payment affects SMEs performance

1.4 Research Questions

The study was guided by the following research questions;

1. How tax rate affects growth of small-scale business enterprises in Buea?
2. Which tax policy is administered on small-scale business enterprises in the Buea tax?

iii. What is the types of tax that affect the growth of small-scale business enterprises in Buea?

1.5 Hypothesis

The following research hypotheses were developed in order to properly address the problems of the study. These hypotheses were stated in Null forms as follows:

Ho1: There is no significant relationship between taxation and SMEs’ survival.

Ho2: The relationship between SMEs’ size and its ability to pay taxes does not significantly affect their performance.

1.6 Significance of study

The results and recommendations of the study will help the policy makers in decision making and enable them put in place policies guiding operations of the SMEs. The management in both small and large sectors will also understand the effects of taxes on their operations.

The findings will also benefit the different stakeholders as explained below:

1. The traders- they will learn their duties as tax payers. Taxes being one of the operational costs of business and must be paid.
2. The tax department – will amend parts of the Tax laws which are unfair to small scale traders.
3. The Buea Divisional tax centre together with other tax centres will use appropriate trader friendly methods when collecting taxes.