THE EFFECT OF TAXATION OF SMALL AND MEDIUM SIZE ENTERPRISES IN BUEA MUNICIPALITY

CHAPTER ONE

INTRODUCTION

1.0 Introduction

This chapter covers the background of the study, problem statement, objective of the study, hypothesis, significance of the study, scope of the study, and the limitations of the study

1.1 Background of study

Since the 1960s to date, small and medium sized enterprises (SMEs) have been given due recognitions especially in the developed nations for playing very important roles towards fostering and accelerated economic growth, development and stability within several economies (Yitzhak, 2006). They make-up the largest proportion of businesses all over the world and play tremendous roles in employment generation, provision of goods and services, creating a better standard of living, as well as immensely and contributing to the gross domestic products (GDPs) of many countries all over the world(OECD,2000).In most highly developed countries like Britain, USA, France,  small and  medium size enterprises contributes  greatly to the GDP  of the country ,that is they contribute ; 50-53%,  50-52%, 55-62% respectively to the total gross value added of their various countries  (Vitaliy, 2003) . In essence this shows that about 50-60% of government revenues depend on small and medium size enterprises.

Globally, the growth of any economy is dependent on vibrant SMEs and when the reverse seems the case, the entire economy suffers. The stunted growth of the economy has often been blamed on many factors, top of which is the challenge of uncoordinated tax administration that has crippled production capacity of the SMEs (Yitzhaki, 2006). One of the major impediments to the growth of SMEs is the issue of taxation. Taxes are a heavy yoke that frustrates existing investors, and scares away prospective ones (Thuronyi, 2009).

In Africa, the same attention about the growth and ensuing challenges of SMEs has continued to top discussions among researchers. Micro and small size enterprises are an important force for economic development and industrialisation in poor countries (Helmsing and kolstee 1993; McIntyre and Dallago 2003; mead and liedholm 1998). It is increasingly recognised that in these enterprises contributes substantially to job creation, economic growth and poverty eradication. The creation of sustainable jobs and opportunities for smaller entrepreneurs is a key strategy to take people out of poverty (World Bank, 2004).

Small and medium size enterprises play a very important role in the economic development of Cameroon. It is for this reason that the government ha recognized their activities as a necessity for meaningful economic growth and has put much effort to promote it by instilling confidence in the population through reorganizing and regulating the activities of small and medium size enterprises. As such, the minister in charge of small and medium size enterprises, Mr. Laurent Serge Etoundi Ngoa is responsible for this role.

Small and medium size enterprises constitute an enormous proportion of the business sector in Cameroon   and Buea in particular. These enterprises are tax payers as justified by the source and residence principles of taxation. These principles explain that the country which provides the opportunity to generate income should have the right to tax it. Also that people and firms should contribute to public services provided for them by the country where they live.

Taxation is the process or machinery by which communities or groups of persons or corporations are made to contribute in some agreed quantum and method for the purpose of the administration and development of the society. Whendel Holmes (1984) defined taxation as the price we pay for living in a civilized society. It can be looked at as an income redistribution policy by the government. Thus, the payment of taxes by natural and artificial persons is very important for the smooth functioning of government. Taxation is unlike extraction because it is not arbitrary. It has at its roots, as Brennan and Buchanan (1980) discuss at length, specific notions of bases and rates. This legal dimension means that those who pay a tax have clear expectations about consistency of its application.

Cameroon operates a self-declarative tax system, that is companies and individuals take the initiative, which help reduce their cost of administration of taxes. Using the self-assessment system of taxation, all tax payers in Cameroon do assess their income themselves, declare and pay their taxes. Therefore, a tax payer should know the taxes he is supposed to pay, when they are to be paid, how to calculate the tax (knowing the rates applicable) and where to declare and pay the taxes. In Cameroon, the government imposes several types of taxes for the purposes of protecting and controlling the operations of small and medium size enterprises, as well as protecting other home/infant industries (protectionism) and also ensures fair competition among SMEs.

High tax rates and tax complicity discourages the growth of small and medium size enterprises (Oludele and Emilie, 2012). This has the economic impact to the growth of the economy in the given country. From economic point of view, taxes increase production; cost of goods/services which would eventually lead to higher prices of goods/services to the final consumer. Also, if the tax structure is not adequately designed to the specific environmental conditions, it may create a greater burden to the taxpaying organisations.

On the other hand, the revenue collected from these taxes represents the major funding source for the government expenditure. Therefore, it is the duty of the state to ensure that all citizens respect their obligations by paying taxes that is both the individuals, large enterprises and small and medium size enterprises (Baurer, 2005).

Despite the contribution that taxation can make towards the GDP of a country in general, it is also important for the government of that country to pay attention to the effects of these taxes on those paying the taxes, especially small businesses. So far it has been observed that less attention has been given to the site effects of taxes on small and medium size enterprises. This study will examine the effect of taxation on these small and medium size enterprises.

1.2 Problem Statement

Research has proven that taxation has an impact on the growth and development of small and medium size enterprises. A study conducted by Shome (2004), in collaboration with the Washington, United States-based Centre for International Private Enterprise exposed the actual extent of the burden of multiple taxation on SMEs in South America. According to Shome, the Jamaican business environment is being suffocated by too many taxes from the national, federal and local governments.

A research carried out by Thuronyi (2009) has also proven that Taxation in general increases the costs of operation of running small and medium enterprises. Small and medium size enterprises on the other hand in other to compensate for the increased costs of operation, prices on goods are rose thus causing the amounts of sales to go down. And the effects of reduced sales are reduced profits, reduced capital base and slow creation of employment resulting to slow growth. Since small and medium size enterprises are very important to the growth and development of the economy as a whole, if they experience a low level of growth, this will have an adverse impact on the economy as a whole.

Existing empirical evidence clearly proves that small and medium size enterprises are affected disproportionately by taxation costs. When these costs are scaled by sales or assets, the compliance costs of small and medium size enterprises are higher than for those of large businesses (weichenrieder, 2007). Among the factors militating against small and medium size enterprises tax compliance with is: high tax rates, low efficiency, high collecting charges, waste of time for taxpayers.

Taxation is the lifeblood of the government, as it provides the revenues which go a long way towards ensuring that government is able to fulfil its role maintaining law and order and facilitating trade and among other duties. SMEs and taxation are not mutually exclusive by any means. Yet it has been noted, in previous studies (Tomlin, 2008) that SMEs sacrifice funds to pay taxes, which could otherwise be invested in business growth. Assessing the impact of tax on SMEs is not simply a matter of looking at tax rates.

Tax systems play an important role in encouraging growth, innovation, investment and facilitating international trade and mobility. For SMEs, key considerations are to minimize administrative burden while ensuring compliance, including considering the drivers and impact of operating in the informal economy (ITD, 2007). Kolstad et al, (2006) indicated that taxes are perceived to be a major problem for both the young and old firms.

The main problem of this study is that taxation is seen as a hindrance to the growth of small and medium size enterprises. This is so because it is believed that tax rates charged on SMEs in Cameroon are not accurate since they are based on assumptions, without assessing the actual turnover of the enterprise. This is also due to the fact that many entrepreneurs and tax payers do not understand the tax codes and as such there is ambiguity in tax computation. Also, there are inadequate tax personnel who could educate and sensitise the tax payers on the tax code and importance of taxes to the government and the entire nation. Due to this ignorance about tax codes, the welfare of many tax payers and growth of SMEs in particular seem to be in so many shambles with respect to taxes.

In order to address the research, this study will seek to answer the following questions

1.3 Research Questions

1. What are the effects of taxation on the growth and profitability of small and medium size enterprises in Buea?
2. What are the problems faced by small and medium size enterprises in the payment of their taxes in Buea?
3. How are taxes perceived by owners of small and medium size enterprises in Buea?

1.4 Objectives Of The Study

In order to answer the above questions, this study will seek to meet the following objectives;

1.4.1 Main objective 

To assess the effect of taxation of small and medium size enterprises in Buea municipality

1.4.2 Specific Objectives

1. To investigate the problems affecting the payment of taxes by small and medium size enterprises in Buea.
2. To investigate the perception of taxes by small and medium size enterprise in Buea
3. To make recommendation based on the findings of this project.