Chapter One 01
Chapter One 01
By
MBINYUI HELGA
Registration Number: UBa21G0334
SURPERVISOR
Dr. NJANG GLADYS CHE
JULY, 2023
CHAPTER ONE
GENERAL INTRODUCTION
1.1. Background to Study
Small and Medium Enterprises have always been considered an important force for economic
development and industrialization in smaller economies (Aryeetey & Ohene, 2014; Oludele &
Emilie, 2012). The micro enterprises contribute significantly to the creation of employment
opportunities and growth of the economy. 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. World Bank (2015) reported that the creating of
“sustainable” jobs and opportunities for smaller entrepreneurs are the key strategies to take
people out of poverty.
Entrepreneurship that thrives in the SMEs is the main engine of economic growth in Europe.
Good performance of SMEs in 2015 within Europe led to 3.9 trillion Euros being generated by
only 23 million enterprises (European Commission, 2017). 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.
Baurer (2015) also suggested that 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 not to observe complaints about the
complication and/or ambiguity of the tax laws as well as high tax rates. If the tax structure is not
properly 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. 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 (Mnewa &Maliti, 2018).
Africa is set to have a decline in economic growth with less than 3% average growth forecast for
2017. Nevertheless, pockets of countries in Africa, mainly non-resource intensive countries like
Cameroon are foreseen to continue to grow at more than 6%. According to the IMF, growth in
these countries have been supported by infrastructure investment efforts and strong private
consumption. Many African countries are turning to entrepreneurs to support future growth.
With entrepreneurship playing a vital role in the development of a vibrant and formal small
business-sized sector, there is much scope for SMEs to support African growth. (Deloitte 2016)
Taxation practice in Cote D’ivoire became more pronounced and prevalent in the late
1980‘s. This concern was first raised by Foluso (2017) who noted that about 154 taxes had
identified in the country, and expressed doubt whether these taxes could attract serious investors
into the county. According to him, taxation undermines the quest for economic transformation
and it is pushing organizations to retrench staff because of the high cost of doing
business.Gambia, companies pay taxes on more than 100 items imposed by both the state and its
various Local Governments. It has been identified several effects of successful taxation as
economically: counterproductive, destroys investor confidence, raises cost of doing business and
it is one of the major threats to the growth of manufacturing sector in Gambia (Cordes, Hertzfeld
& Vonortas, 2019).
In Cameroon, SMEs play a key role in economic development and job creation. In 2014, 80
percent of jobs created were dominated by these enterprises. Under the OHADA uniform Act
(2014) on commercial companies and economic interest groups which apply to all Cameroon
and other member states in central and west Africa, an SMEs is defined as company that has an
annual turnover of less than or equal to 1billion CFA Francs (Approx. 1.5 million Euros) and
has fewer than 200 employees.
Some studies estimate that informal businesses account for 35-50% of GDP in many
developing countries. Similarly, in Cameroon, the informal sector is quite large, estimated at
34.3% and accounting for 77% of employment statistics. Over 60% of those working in the
informal sector are the youth, aged between 18-35 years, 50% being women (IEA 2012). Most
SMEs fall under the informal sector and by extension, the term informal refers to people in self-
employment or small-scale industries. The informal sector is estimated to constitute 98 percent
of business in Cameroon, contributing 30 percent of jobs and 3 percent of Cameroon’s GDP.
The government recognizes the role of the informal sector and seeks ways to integrate these
businesses into the formal sector. According to the 2017 Doing Business in Cameroon report,
the ease with which businesses can be registered has a bearing on the number of entrepreneurs
who start businesses in the formal sector, leading to jobs and more government revenue.
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).
SMEs 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 SMEs therefore 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 Ghana. 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 III, North West region.
There is a general perception that taxes are an important source of funding for government
operations, projects and programs, development of the economy and the provision of basic and
essential socio-economic services. There is a problem in the area of negative relationship
between taxes and the businesses' ability to sustain and to expand. Small and Medium
Enterprises are faced with the problem of high tax rates, complex tax regulations and lack of
proper education about tax and related issues. In Cameroon, tax rate ranges between 10 and 35%,
depending on yearly income threshold. Those earning more than CFA 5 million per year have to
pay a 35% rate income tax. This 35% tax rate is high for Micro-enterprises earning an annual
revenue of 15million CFA Tax policies has to do with registration processes, time and cost.
Business license and the agreement for the operation of Micro-businesses takes 15 steps with an
average cost of 1094.2% of the GNI per capita (World Bank, 2008). It takes about 654 hours to
comply and make 46 tax payments in Cameroon. These factors have led to increased record of
close-up of Micro Small and Medium Size Enterprise (MSMEs). With this record, Cameroon
occupies the bottom 8th position in Africa Payments consist of 13 of profit, 12 of labor and 19
others (Price water house Coopers 2013). Literature reviews on the Perceptions of tax rates, tax
policies and the different types of taxes for Micro-enterprises are yet to be known coupled to the
fact that limited literature exist to prove such in Bamenda, North West region of Cameroon, such
has motivated the enthusiasm for the research.
What is the perception of taxation on the Performance of Small and Medium Size Enterprise
(SMEs) in Cameroon: case study: North West region (Bamenda III)?
H0: Taxation has no significant effect on the growth of Small and Medium Size Enterprise
(SMEs) in Bamenda, North West region of Cameroon.
H1: Tax rates has no significant effect on the growth of Small and Medium Size Enterprise
(SMEs) in Bamenda, North West region of Cameroon.
H2: Tax policies have no significant effect on the growth of Small and Medium Size Enterprise
(SMEs) in Bamenda, North West region of Cameroon.
H3: Types of taxes has no significant effect on the growth of Small and Medium Size Enterprise
(SMEs) in Bamenda, North West region of Cameroon.
To the taxpayers
This research will enable taxpayers to know why they should pay taxes, to whom and what form
of taxes they are entitled to pay. Moreover, this research will allow taxpayers to understand the
vital role tax plays in the development of the economy. In addition to easing the responsiveness
of Small and Medium Size Enterprise (SMEs) owners to their liabilities
To the Government
This study will enable the government, to revise tax rates downwards and fight corruption
amongst tax collectors and bring out possible solutions which will allow Small and Medium Size
Enterprise (SMEs) to enhance their performance.
To the Researcher
This study is a research project submitted to the Department of Economics in partial fulfilment
of the requirements for the award of a DIPES 1 in Economics.
This research will enable the researcher to learn more about taxes and especially how taxpayers
are being assessed, and the various taxes business operators are entitled to pay. However, to ease
understanding of the interaction of Small and Medium Size Enterprise (SMEs) in Bamenda III.
This study will equally contribute to knowledge acquiring in the same field of study and serve as
a source of reference for other researchers for future study.
This study will create awareness to the general public, to learn that every business has to pay
different forms of taxes. This is because a tax is a necessary operational business expense.
Tax Rate is often defined in terms of the marginal and the average tax rates.
Marginal Tax Rate (MTR): It refers to that proportion of income that is absorbed by taxation as
income increase on charges. In effect, it measures that proportion of the last franc that is paid as
tax when income increases (changes). Average Tax Rate (ATR): This is that proportion of total
income that is taken up by taxes. In effect, it measures the total tax paid expressed as a
proportion of total income at all levels of income. In Cameroon, the personal income tax rate is a
tax collected from individuals and is imposed on different sources of income like labor, pensions,
interest and dividends. The benchmark for tax r-ate used in Cameroon refers to the top marginal
tax rate for individuals Revenues from the personal income tax rate are an important source of
income for the government of Cameroon.
Cameroon, tax rate ranges between 10 and 35%, depending on yearly income threshold.
Note that an additional 10% municipal tax applies to the calculated tax amount
Taxation can be defined as a compulsory or coercive money collection by a levying authority,
usually the government the term "taxation" applies to all kinds of involuntary levies, from
income to capital gains to estate taxes. According to McLure (2015), taxation is a mandatory
financial charge or some other type of levy enforced upon a taxpayer (an individual or other legal
entity) by a governmental organization to fund a number of public expenditures.
Taxation is seen by Agualu (2004), as an obligatory levy by the government through its agencies
on the income, consumption and capital of its subjects. These levies are made on personal
income, such as business profits, salaries, interests, discounts and royalties, dividends. It is also
levied against the company's profits, petroleum profits, capital gains and capital transfer.
According to Adams (2001), taxation is the most vital source of revenue for contemporary
governments, typically accounting for ninety percent or more of their revenue. Tax is a common
source of income cohort for financing government activities. Individuals and organizations are
expected to fulfil their obligations on tax payments as required by law to give the government the
financial power, amongst other aims of taxation Effective taxation, therefore, becomes essential
as it is a source of required economic power for a government to rule its territory.
Taxation is the study of how the government imposes on and collects taxes from, the wealth and
income of individuals and corporations to finance its social and regulatory activities (Cheyo,
2015).
A) Direct Taxes are those levied on the income and property of individuals. The payers of direct
taxes bear the direct burden (incidence of taxation) since they pay directly to the state. Direct
taxes usually fall on income taxes, project taxes, poll taxes and capital taxes. As proposed by
(Lawal, 1982). Also, direct taxes are levied on the income and wealth of individuals and the
profit of companies. The burden of these taxes is allowed by the person or the company
responsible for paying the taxes. Examples of direct taxes are;
1. Income tax: As seen below is the largest source of revenue A certain amount of a person's
income will be tax-free the rest of the amount is known as taxable income. It is taxed at higher
rates as income increases
2. Corporation tax: This is the tax on the profit of all companies’ resident in Cameroon whether
the benefits are earned at home or abroad. This tax is charged after allowance for such things as
interest on loans and depreciation of capital.
3. Capital gains tax: This particular tax is levied on the increase in the value of certain assets for
examples shares between the time of their purchase and the time of their sale. There are notable
exceptions for such things as a personal private residence, private motor cars, and winnings from
gambling and capital gains on-government securities.
4. Inheritance tax: This tax applies to transfers of wealth made on death above a certain amount
It is a proportional tax
5. Other direct taxes are, Pull tax, Stamp duty, Rate, Patent
B) Indirect taxes: are usually taxes on commodities or services such as duties on beer, cement,
petrol, purchase tax on furniture. The incidence of taxation does not fall directly on the payers of
indirect taxes. The wholesaler, manufacturer or the retailer first pay indirect taxes and later on
passes them on to the consumers of commodities in the form of high selling prices When
somebody buys an article on which indirect tax has been levied, he does not know the proportion
of what he spends on the article as a tax Typical examples of indirect taxes are
This is a general sales tax which applies to a wide range of goods and services. The standard rate
of VAT in Cameroon is currently 19.25%. Firms add VAT to the value of their outputs, but they
deduct from this figure the amount of VAT already paid on their input. So they pay VAT only on
the value added by their particular activities. Certain goods and services are given special
treatment; they are either exempted or zero-rated. When products are exempt, the firm does not
charge its customers any tax, but he cannot claim back any VAT, already paid on its inputs.
Exemption form applies to land (including rent), insurance, Postage, bathing and gaming,
finance, education, health services, burial and cremation. Zero-rating means complete relief from
VAT A firm does not charge VAT on the goods it sells, and it can reclaim any VAT which it has
paid on its input Zero-rating applies to exports, food (except meals out) children's clothing's
footwear, books, newspapers, construction, passengers transport drugs medicine on prescription
and certain supplies to charities Since VAT is not levied on export (ie exporters can reclaim any
VAT already paid on the goods) It should provide some incentive for exporters
Excise Duties: These are specific taxes levied mainly on volume Most of the revenue from these
duties comes from three sources which are tobacco, alcoholic drinks and hydrocarbon oil.
Import duties: Also known as Tariffs are taxes levied on goods which are coming into a
country. In West Africa, import duties form a substantial part of government revenue. This is due
to some factors. At this stage of their development, West African countries import a variety of
commodities upon which import duties are levied.
1. Purchase tax: This is imposed on a range of selected consumer durables such as cars,
cameras, radiograms and television sets.
2. Export duties: These are taxes levied on goods which are exported into other countries. Such
taxes are levied on cocoa, palm oil, groundnuts, hides and skin, cotton to mention a few
1. The Progressive Tax System: A tax is progressive when it takes a more significant
percentage of income or wealth from the higher income or wealthier groups. As taxable income
increases, it becomes subject to higher rates of taxation
2. The Proportional Tax System: This tax system imposes the same percentage of taxation on
everyone, regardless of income. The amount of the tax to be paid is obtained by applying a fixed
rate of tax on the assessment base of the tax. The tax rate remains constant whatever the ano of
the assessment base Though favored by the economy.
3. Regressive tax system: Taxes are regressive when they take a more significant percentage of
income or wealth from the poor. Flat rate taxes, such as the excise duties on tobacco, beer and
petrol, act regressively since the amount of tax included in the prices of these goods represents a
higher percentage of the incomes of the poorer groups.
Tax Rate: This is often defined in terms of marginal and average tax rates
4. Marginal (MTR): It refers to that proportion of income that is absorbed by taxation as
income increase on charges. In effect, it measures what portion of the last franc that is paid as a
tax when income increases (changes).
5. Average Tax Rate (ATR): This is the proportion of total income that is taken up by taxes. In
effect, it measures the total tax paid expressed as a proportion of total revenue at all levels of
income.
Total tax
It is given as ATR=
Total taxable income
It should be noted that it is the average tax rate that indicates whether a particular tax system is
progressive, proportional or regressive. An income tax is, therefore:
Canons of taxation describe the basic principles to be followed by government and local
Authorities in formulating then taxation policies so as to optimize their tax system. This is based
on the ideal of harvesting as much as possible taxes, while minimizing the effects of taxes on
individuals and activities.
According to the economist Adam Smith, governments have to observe four principles when
formulating taxation policies
Table 2.1 Principles of Taxation
Canons Description
Equity Equity in taxation expresses the idea that taxes should be fair as one of the
principles that guide tax policy. Equity can be either, vertical or horizontal.
"Horizontal Equity addresses questions of whether or not a tax system makes
arbitrary distinctions among taxpayers, or distinctions based on irrelevant
criteria. For example, it violates the principle of horizontal equity if one
person buys an item in a local store and must pay sales tax, while another
person buys the same item over the Internet, and does not pay sales tax.
Vertical Equity addresses questions of how people at different income levels
should be tax, taking into account their relative abilities to pay with vertical
equity it is expected that high income earners pay a larger percentage of their
income in taxes than lower income earners.
Certainty Tax payers should know how much tax they have to pay, when it must be
paid and how much must be paid. They should be able to assess their tax
ability from information provided and should not be subject to tax demands
made in an arbitrary fashion
Convenience Taxes should be convenient for tax payers to pay and for the government to
collect. Taxes should be easy to pay and the timing of their payment should
also be appropriate.
Economy The cost of tax collection and administration should be small in relation to the
total revenue for both the government and tax payers.
Source: Author's processing data
From class lectures the following where obtain; flexibility, efficiency, unharmful to effort,
acceptable, adjustable and automatic stabilizer
The Cameroonian idea of income taxation is the same as in industrialized countries. There are
two main income taxation systems, one for people and the other for entities.
The turnover is also subject to taxation: the turnover tax (Taxes sur les Chiffre d'Affaires), is
exhibited by the final consumer, with a variable rate (general rate: 17%, reduced rate: 8%, ad
valorem excise duties: 25%).
Two questions must be answered about foreign individuals: the initial question is the liability and
the second is the rate.
A) LIABILITY
Three rules determine whether an individual is a Cameroonian tax resident. According to these
rules, one is liable to individual income tax if:
• One's principal income comes from an entity subject to company income taxation in Cameroon
• An individual subject to tax income spends more than 183 days yearly in Cameroon
These rules apply when there is no double taxation treaty otherwise applicable. Cameroon has
such agreements with, Canada, United States, and France
B) REGULATION
1. CLASSIFICATION
There are two kinds of individual income taxes: proportional tax (taxes proportionelle sur les
traitements et salaires) and Progressive overtax (surtaxes Progressive).
• The proportional tax is based on the overall gross sum of paid salaries and awarded material
advantages subtracted by 20% for professional expenses.
The net taxable income is established on the salaries used as a basis for the proportional
tax, subtracted by certain expenses
The net taxable income is split into a certain number of shares while taking into account
the taxpayer's family
Each share of income is subject to taxation according to a progressive scale varying from
0% to 60%
The progressive overtaxes owed by the taxpayer is equivalent to the tax produced by the
scale and the amount of parts.
The progressive overtax cannot fall under 3,000 FCFA
Company income tax must be financed by the Sociétés de Capitaux (limited companies) and by
Sociétés Civiles (civil partnerships), either when they have preferred the corporation tax
administration or when at least one of their partners is a corporation. Only profits produced in
Cameroon by way of industrial or commercial activity are subject to taxation. This also refers to
foreign companies unless there is a tax treaty between their country and Cameroon dodging
double taxation. Taxation is established based on profits made during the former fiscal year
closing on June 30th
I. A proportional tax on income floating capital (PTOFC)-taxe proportionnelle sur les revenus de
capitaux mobiliers (TPRCM)
1. A Proportional Tax On Income Floating Capital (PTOFC)- taxe proportionnelle sur les
revenus de capitaux mobiliers (TPRCM)
There are four types of income that are subject to proportional tax on income floating capital
When these companies do not gain from a bilateral treaty with Cameroon, profits are considered
as distributed to foreign persons.
a) Company income taxes: the unified UDEAC tax and the internal production tax
The Unified Custom Union of Central African States (UDEAC) tax is paid by industrial
companies whose duties extend to other UDEAC countries. This tax is paid only once at the final
stage of production
The domestic production tax is paid by industrial companies which are of particular interest to
Cameroon's development
b) Specific taxes on certain products, the rates of which are independent of the company's
income
Several authors have defined the term revenue in different ways. Adam (2006) defined revenue
as the fund needed by the government to finance its activities. These funds are generated from
various sources such as taxes, borrowing, fine, fees etc. It is also defined as the overall amount of
income that accrues to an organization (public or private) within a specified period (Hamid 2008)
States revenue consist of receipt from taxation including those which are not the gains of
taxation, but of either the fruition from the sale of government properties or other interests and
returns from loans and investment earning Bhatia (2001) claims that revenue receipt includes
"routine" and "earned income. For these reasons, according to him, revenue does not include
borrowing and recovery of loans from other parties, but it provides tax receipts, grants,
donations, fees and fines and so on.
Likewise, Pearce (1986) defined government revenue as all the money received other than from
the issue of debt, bankruptcy of investments. Government revenue includes tax collections,
diverse revenues, charges, utility and insurance trust revenue for all funds and agencies of a
government. Public revenue according to Stephen and Osagie (1985) is concerned with several
ways in which the government increases revenue From the above definitions, it can be said that
revenue is the total amount of income ensuing to a state from several sources within a stated
period. The state government, as the second rank of government, has sources and uses of revenue
Osisami (1994) claims that two types of revenue ensue to state governments. These are internally
generated revenue and revenue allocated from the State Account.
Internally generated revenue are those revenues that are gotten within the state from multiple
sources such as taxes (pay as you earn, direct assessment, capital gain taxes, etc.) and motor
vehicle license, among others. While the statutory allocation from Federation Account, Value
Added Tax constitute the external source. Most states of the federation get the majority of their
revenue in the form of authorized distribution from the federation account to finance their
expenditure programmes (Mukhtar, 1996; Isyaku, 1997; Abdulkadir, 1998, Ibrahim, 2002, Ishaq,
2002 and Hamid, 2008). State governments as the second rank of government in Nigeria gets her
revenue from diverse sources. Nevertheless, it should be noted that sources of revenue are by no
means identical among the states. States make out their revenue depending on the resources
available to them; (Anyafo, 1996; Daniel, 1999; and Adam, 2006). The share of federation
account to states forms 57.97% in 2002 of the total revenue plus grant, and this rose to 65.82% in
2006; while local revenue dropped from 13.38% in 2002 to 8.11% in 2006 (CBN,2006).
Revenue is one of the sources of income generation. Hassan (2001) defined revenue as tolls,
taxes, penalties, rates, fees, rents, dues, penalties and other receipts of government from
whatever source arising over which legislature has the power of seizure including earnings of
loans raised. Section 160 (9) of the 1989 Federal constitution and section 5, 162 (10) of 1999 law
defined revenue as any income or returns ensuing to, or gotten by the government from any
property belonging to the government, any return by way of interest on loans dividends in
respect of shares or interest reserved by the government, in any company or legal body
unexpected sources resulting from a particular environment, tolerant sources from normal
operations and legal sources recognized by the Nigerian constitution. For an effective revenue
generation, revenue control mechanism is put in place to guarantee timely collection of
government revenue, and guaranteeing that amount due is collected as well as ensure that
revenue generated is paid to the coffers of government.
The government raises its revenue from various sources by using different mechanisms. Taxes
constitute a vital source of government revenue. Taxes include income taxes on persons and
companies, domestic taxes on goods and services, wealth and property, and external trade taxes
A substantial share of total revenue is non-tax revenue such as income from agricultural
marketing boards, mineral sources and oil revenue, as well as other sources in Cameroon
Government total revenue is equal to tax revenue plus non-tax revenue and other sources. Import
duties seem to be a significant source of government's revenue in Cameroon, much more than
export taxes.
Since the 1960s more than 60% of government revenues have been fiscal revenue with much less
than 40% from other sources in Cameroon. But the fiscal revenues include direct taxes,
registration fees, stamp duty and customs duties.
An increase in revenue over time may reflect greater coverage and the inclusion of some oil
revenue. Recently the government is trying to increase its tax revenue by broadening the tax base
and improving tax administration Customs services are being restructured to improve their
effectiveness, tolls are being levied on some major roads, and tax exemptions are being reduced
Tax collection is being computerized for better management and detection of non-compliance of
tax laws But with growth in income and trade liberalization, foreign trade tax revenue would
tend to decline over time. (Cameroon's Fiscal Policy and Economic Growth, RP 85, November
1998).
As it is commonly defined fiscal policy is the use of public spending and taxes to stimulate
economic activity towards more expansion or retrenchment depending on the situation. All along
history of economics, views and theories on the efficiency of fiscal policies have been most of
the time opposing.
The choice to public finances as a tool to stimulate economic activity properly began during the
great depression in 1929. Beforehand, the budget had no economic role it was only assigned to
prevalent spending of the central administration Definitely during the 1930's"depression" some
governments have started considering the budget as an economic policy tool The examination
from the British economist John Maynard Keynes has given a theoretical base for such policies,
showing that public spending and tax revenues are an efficient tool to regulate economic cycles
In 1929 the recession was very severe, for instance in 1933 one American worker in every four
was unemployed. Additional to that, 25 unemployment rates, 20% of New York City school
children were underweight and malnourished. In this context, the public intervention was quasi-
compulsory and necessary. The US government announced a comprehensive economic plan, the
New Deal, to address these issues. In the first years, the plan was concerned with relief (food and
shelter for millions of indigents and unemployed). Then the policy shifted towards recovery
(creation of state agencies such as the National Recovery Act in 1933, and the National Industrial
Recovery Act).
Several arguments have been advanced to justify the use of fiscal policy as an economic policy
tool. The first of these arguments has been the direct Keynesians ideas and their extensions
J. M. Keynes, in his General Theory (1935), has identified two channels through which
government budget could be considered as an economic policy tool. The first role for fiscal
authorities is to ensure a better distribution of income. Greater income equality puts more money
into the hand of people with higher marginal propensity to consume (MPC) leading to increased
consumption (Pressman, 1997). The second aspect of this theory argues that public spending was
the principal mean available to protect the economy against fluctuations through the
multiplicative effect. During the great depression and even after, the two Keynesian principles
guided significant public policies in the developed world and new countries as well. For instance,
in the UK public spending jumped from 25% of GNP during the pre-war period to more than
50% during the mid-1970s On the same vein, developing countries" public finances have also
been characterized by a high level of spending (weak fiscal revenues) and deficits since the
1960s. but unfortunately, the expected results have not always been obtained
On straight line with traditional Keynesian ideas, other authors developed arguments that are
related to the important short-term social waste associated with business cycles. For such authors
(eg.Gali, 2005) business cycles induce significant costs in terms of economic efficiency and
output volatility. Going even further, it has been shown that the effects on the real economy of
crises are not only limited to the short-term, but there exist negative impacts even on the
medium- term prospects (IMF, 2009) An empirical investigation from past major (financial and
economic) crises demonstrated that after a downturn, there is little chance for the economy to
retrieve its pre-crisis growth trend (in WEO Chapter4, IMF 2009), The changes in factors of
production (capital and labor) and changes in their use (total factor productivity) explain mainly
the shift in medium-term output dynamics. Therefore to allow the economy to quickly recover
from the recession and mitigate the mid-term loss in output dynamic, short-run demand
management policies are to be implemented at the early stages of the downturn To answer such
inefficiencies and loss of mid-term output strong discretionary fiscal measures accompanied by
accommodative monetary are advised.
Finally, our last argument in favor of fiscal policy especially applies to developing countries
where households cannot smooth their consumption due to liquidity constraints. In such situation
business cycles reinforce the already high volatility of final private expenditures (Ozbilgın,
2010)
Throughout the period 1999/2000-2001/02, fiscal policy will verge at strengthening progress
made in recent years toward fiscal sustainability and at increasing non-oil revenue in the face of
the falling trend in oil revenues while reorienting expenditures toward the social sectors and
infrastructure. To this effect, with a primary surplus (excluding foreign-financed investment)
calculated to average 53 percent of GDP and government investment growing by some 2
percentage points of GDP during the period, the government's goal will be to contain the overall
deficit on a commitment basis below 3½ percent of GDP, bringing into account the need to
increase social spending over time. These goals would be accomplished on the revenue side
through the rise of ongoing tax reforms (global income tax and property tax) and the
implementation of measures to broaden the tax base, including the simplification of
administrative procedures to raise the competence of the tax and customs administrations. As a
result, non-oil revenue should rise to 14.8 percent of GDP in 2001/02 from 13 percent of GDP in
1998/99, oil revenue is estimated to rise to an average of 3.3 percent of GDP in 1999/2000-
2000/01 (2½ percent in 1998/99), only to dropped to 2.4 percent of GDP in 2001/02, like with
the estimated decline in production and exports. On the expenditure side, measures will aim at
raising out laws in the social and infrastructure sectors (with noninterest expenditures targeted to
increase by 1½ percent of GDP between 1998/99 and 2001/02), some development and
decompression of wages to improve incentives, reinforce expenditure management and controls,
and continuing progress to modernize the civil service
On non-oil revenue, the government's priority will be to increase revenue collections and support
and renew the tax and customs directorates. To improve forestry revenues, new procedures of
administration and collection of forestry taxes defined in the forestry revenue security program
(PSRF) will be applied to improve forestry revenue yields.
Tax rate
Types of tax
Figure 1: Conceptual Framework
2.2.1 Concept of Business Enterprise
A business enterprise is any type of operation that is involved in providing goods or services
with the anticipated outcome of earning a profit. Its broad nature permits the term to be applied
to any company or firm that is geared towards generating revenue by selling goods of any type.
The terms; company, firm, and business enterprise are sometimes used interchangeably. While
some think of a business enterprise as being a big corporation or conglomerate, any for-profit
operation that comprise sales to consumers can be rightly referred to using this word. A child
who involves in the task of setting up a roadside lemonade stand, and has the aim of earning a
profit from that endeavor, can be said to be operating an enterprise. So too can a person who
opens a small Bookshop with the plan of selling books to make profit.
Along with the sale of goods, a business can also be engaged in the transaction of various types
of services. Companies that offer telecommunications services are part of this category. Local
companies that provide outsourcing services, such as accounting or janitorial support, are also
considered to be business or commercial enterprises. Courier services also regarded as an
enterprise of this type (Source: https://www.wisegeek.com/what-is-a-business-enterprise.htm).
2.2.2 Size categorization of Micro Enterprises
The majority of activities categorized as MSEs are tiny, most consist of only one person working
alone. Self-employment is thus a central characteristic of the MSEs world. If one defines the
MSEs universe as being made up of those firms with 1-50 workers, the larger end of the tail-
those with ten or more workers constitute less than 2 percent of the businesses in virtually all the
countries in Africa covered by the surveys. The Dominican Republic stands out in this regard,
with its substantially smaller share of one-person enterprises and much larger numbers at the
upper end of the small-enterprise spectrum. (Source: Small enterprises and Economic
Development, Carl Liedholm and Donald C. Mead).
2.2.3.3. Concepts of Enterprise Growth Indicators as per the Objectives of the Study
The purpose of the existence of Micro enterprises is to make profit and business sustainability. A
firm is an administrative organization whose legal entity or framework may expand in time with
the assembling of both physical resources, tangible or resources that are human (Penrose, 1995).
The term growth in this context can be defined as a rise in size or other objects that can be
quantified or a process of variations or developments, also the firm size is the result of firm
expansion over a period of time and it should be noted that firm growth is a process while firm
size is a state (Penrose, 1995). The growth of a firm can be determined by the stock of capital,
appropriate management, labor, and opportunities for investments that are lucrative.
The determining factor for a firm's growth is the readiness of resources to the firm (Ghoshal,
Halm and Moran, 2002). One of the major barriers to the progress of Micro and Small
Enterprises is access to credit. These enterprises vary in the level in which they are, and the
products and services offered to them by the MFIs. The Micro small and medium-sized
enterprises need to be financed differently, and the financing is determined by whether the firm
is in the start-up phase or present one and also whether it is stable, unstable, or developing.
Stable survivors are those who profit in having access to the financial services provided by MFIs
to meet up with their production and consumption needs. Unsteady survivors are groups that are
considered not creditworthy for financial services to be presented. Sustainable and Growth
enterprises are Micro and Small Enterprises with a high likelihood to grow. In identifying the
market, MFIs consider whether to focus on already existing entrepreneurs or on potential
entrepreneurs pursuing funds to start up a business project. Working capital is the major
difficulty in the development of already existing Micro enterprises and to meet up, they borrow
finance typically from informal financial services which have high-interest rates and services
offered by the formal sector or not provided by these informal financial services. The business
activity of Micro small and medium-sized enterprises is equally as important as the level of
business development. There are three main primary sectors where an enterprise may be
classified; production, agriculture and services. Each of these sectors has its own risk and
financing needs that are specific to that sector.
Growth
Profitability and growth are the key variables in the economic analysis of a firm's performance
Growth can occur in many different aspects of a firm's operations such as its cash flow, net
income, customer base, sales and market share (Murphy et al., 1996). To examine the growth of
Micro small and medium-sized British firms, Robson and Bennett, (2000) in their study observed
a positive relationship between both profitability and sales growth. Better growing firms increase
their profitability. If there is an increase in total assets, it means it has high growth, and it tends
to be more profitable. We will measure growth as a percentage increase in total assets. Thus, we
expect a positive relationship between the growth rate and profitability of the firm (Nousheen
and Arshad, 2003).
Profitability
Profitability is the primary goal of all business ventures. Without profitability, the business will
not survive in the long run. Profitability results from the excess of income over expenses. A
highly profitable firm can reward its owners with a substantial return on investment (Hovakimian
et al., 2004). Firms facing financial constraints are unlikely to meet their investment obligations.
The firm may be paying out more than it is receiving and more likely to go bankrupt (Stewart,
2011). This implies that in the long run the chances of survival of the firm are low and this would
yield a lower valuation. On the contrary, firms with adequate cash flow are likely to meet their
financial obligations on time and hence improved performance.
There are several reasons why studying tax compliance of micro enterprises is essential. First,
microenterprises are less tax compliant in comparison to large businesses (Giles and Caragata,
1999). They collect employment and value-added taxes on behalf of the government. Therefore,
Micro operators tax compliance affects the amount of tax revenue collected which affects the
government's ability to fulfil its fiscal, economic and social objectives (Alley et al 2004;
Chittenden, kauser, and Poutziousris, 2003). Second, MSMEs are known to contribute in the
cash economy due to the more significant opportunity offered to them (Ashby and Webley 2008;
Bajada 2002; Morse, Karlinsky, and Bankman 2009, Noble 2000). They have unregistered
income with no third-party reporting (Gerxhani and Schram, 2006), and as a result, they are
considered the 'hard to tax group from the informal sector (McGee, Ho, and L1 2008) Value
Added Tax gaps have been put at 50-60% in some emerging nations, compared to 7-13% in
advanced nations. About three percent (2.79% of the Rwf3.75 billion) collected in 2011 was
spent in the course of accumulating income tax from small taxpayers in Uganda (Rwahigi, 2012).
Entrepreneurship, unlike wage work, offers an uncertain return. A system of differential taxation
across sectors can make an investment in the risky sector more or less attractive. In most nations,
business income is taxed contrarily from wage earnings on a paid job. Several business expenses
are usually tax deductible and often consist of the costs of items such as vehicles and housing
that provide non-business consumption benefits: Consequently, taxation issues affect MSMEs
operators' decisions on the subject of business structures, wages paid, charitable contributions
made, and profits declared for the period. Taxation issues makeup one of their main concerns
(Massey and Quin 2001), and researchers find that business failures are related with poor record
keeping for taxation purposes (Evans, Carlon, and Massey 2005; Prescott and Hooper, 2009).
Brautigam, Fjeldstad, and Moore (2006) find that regulations, such as permits, licenses, high
taxes, as well as corruption, are the third, fourth and sixth most critical constraints facing
MSMEs. Corruption indicators are highly associated with low revenue (indeed corruption
functions like a tax itself, and is likely to be a mainly regressive and ineffective form of
taxation). Also, taxpayers may be reluctant to pay taxes, because they see that officials
themselves may be corrupt, that governments constantly misuse public funds and that
expenditure outlines may not reflect their wishes. Everest-Phillips (2009) reports that in Nigeria,
the federal government projected in 2004 that it collected only around 10% of taxes due, and half
the revenue raised is believed to be then lost or misused. Corruption increases the costs of doing
business and levies a tax on entrepreneurial activity. Svensson (2003) finds that a majority of
Ugandan firms pay bribes, and the sums are on average large (8% of total costs), depending on
the extent to which a firm has to deal with public officials. Everest-Phillips (2009) reports that
evidence from taxpayer surveys indicate that bribe ranges between 25%-40% of the total
assessed tax amount and that paying a bribe can lower the tax assessment by 50%
Liedholm and Mead (1999), find that licenses considerably more constrain business start-ups and
registration requirements than more mature firms are. They see that taxes and access to inputs,
by business location, are more significant problems for firms in secondary cities than for those
located in major cities Regulation in general and transport are more significant problems for
firms in major cities. Brautigam, Fjeldstad, and Moore (2006), find that taxes are consistently
rated as more essential constraints as the education of the business owner increases, and
corruption follows the same pattern. The impact of regulations varies according to the type of
rules License and permit requirement is perceived to be more of constraint by owners with
primary and secondary education.
The literature suggests that MSMEs evade VAT or Goods and Services Tax (GST) in France and
Netherlands (Agha and Haughton 1996), the United Kingdom (Adams and Webley2001), the
United States (Joulfaian and Rider, 1998) New Zealand (Noble2000) and Australia
(Bajada2002). They also evade income taxes from cash jobs in the hairdressing industry (Ashby
and Webley 2008), the building industry (Sigala, Burgoyne, and Webley, 1999), home
maintenance, home- based services, teaching, and entertainment (Noble 2000) and in the food
industry (Adams and Webley 2001). In Tanzania, micro and small business represent 69% of all
private sector taxpayers but pay only 0.28% of taxes raised (Tanzania Revenue Authority2009).
Fischer, Wartick, and Mark (1992) categorize tax compliance determinants into four groups: (1)
tax system structure (tax rate, penalty, and probability of detection, complexity of tax system),
(2) attitude and perception (fairness, ethics, and peer influence); (3) non-compliance opportunity
(income level, income sources and occupation) and demographic factors (age, gender and
education)
Taxpayers are less yielding when they notice the tax system is unfair (Spicer and Baker 1980)
Older taxpayers are recounted to be reluctant to take risks and are more sensitive to sanctions.
Female taxpayers are posited to be more conforming, conservative and bound by moral restraints
(Jackson and Jaouen 1989). Some tax regimes may systematically, even if unintentionally,
certain disadvantaged groups in society, predominantly women Unintentional gender bias may
arise from generally accepted tax exemptions made available to owners of businesses or
properties who are time and again men than women (Organization for Economic Cooperation
and Development 2009). Also, if the government fails to make available essential public goods
and services or offers them insufficiently, citizens may not be willing to pay taxes (Brautigam
Fjeldstad, and Moore, 2008).
High compliance costs, ie, the costs the taxpayer has to bear to gather the essential information,
fill out tax forms etc., can be an additional reason for tax evasion and avoidance. The difficulty
of procedures required to pay taxes and the rates applied to businesses may be a proxy for formal
enterprises incentive to undervalue business transactions. The number of payments to be made
by Micro Small enterprises can also affect their administrative burden. It takes about 654 hours
to comply and make 46 tax payments in Cameroon. With this record, Cameroon occupies the
bottom 8th position in Africa. Payments consist of 13 of profit, 12 of labor and 19 others
(Pricewaterhouse Coopers, 2013) Doing Business (2008) suggest that overall taxes in the
Gambia, Central African Republic, the Democratic Republic of Congo, and Sierra Leone would
sum up to over 200% of a company's profits. With such high-priced tax rates, companies have a
high incentive to do business unfairly as operating in line with regulations can make it
challenging to survive.
Small and medium sized enterprises (SMEs), in particular, suffer from high compliance costs,
with value-added tax (VAT) being perceived as the most challenging in South Africa. As a
surviving strategy in South Africa, about 18 percent of SMEs merely try to avoid or evade taxes
(Small Business Project 2005). The main motives for high tax compliance costs of small
businesses are: (1) Recurrent changes of tax laws; (2) Complexity of tax systems (tax systems
are more geared to large enterprises); (3) Existence of diverse tax administrations; (4)
Incomprehensible language of tax laws, as well as incomprehensible forms; (5) Short and
inflexible time limit for tax payments (resulting in cash flow problems), (6) Costs of tax
consultants; (7) Registration procedures (European Commission 2007).
Also, tax laws in many emerging nations, change speedily, thus producing instability and low
transparency of the tax code. As a result, complicated tax legislation and continuing changes of
the tax code confuse tax administrators and taxpayers alike. This produces many opportunities
for tax avoidance (Mo, 2003).
The review Studies on the effects of taxation in Cameroon are somewhat rare. To our
knowledge, the only empirical study on this topic is that of Emini (2000). Using a computable
general equilibrium model, Emini evaluates the impact of an imperfect value-added tax
regarding that applied in Cameroon. This evaluation is based made on the allocation of labor
between sectors of activity, on public finance, and household welfare. Simulation results show
how an imperfect VAT can generate effects opposite to those of a perfect one, especially
concerning resource allocation. This model also helps to verify certain theoretical assumptions
such as the fact that substituting a complete VAT for cascading taxes, for example, induces a
relatively higher demand for productive factors in activities whose tax burden was more
substantial in the cascading system. The simulations also show that despite its imperfect nature,
VAT implemented in Cameroon is economically more desirable than the ex-ante tax status quo
because it generates a substantial increase in tax revenue, improves the budget deficit, and
stimulates investment But these positive effects are diminished by the subsequent deterioration
of household welfare Nevertheless, this deterioration may only be transitory to the extent that the
increase in investment may give rise with a time lag to an improvement in household welfare. In
sum, the tax system will be more favorable to the economy as a whole as long as VAT becomes
more neutral.
According to Cuccia (1994), taxpayer compliance has been primarily viewed from three
theoretical perspectives: the general deterrence theory, economic deterrence models and fiscal
psychology. Deterrence theory is concerned with the effects of sanction threats on criminal and
undesirable behavior. However, this had problems of identifying sanctions, determining how
much influence and specifying the mechanism by which the effect occurs. On the other hand, the
economic deterrence model smoothened out the problems of deterrence theory for instance by
the use of a practical approach to measuring-sanction threats. From the personal consequence
perspective, income tax compliance is viewed as an income maximizing decision balancing the
net gain of underreporting income or over claiming against the added risk of detection and
penalization (McGraw and Scholz, 1991).
According to Plumley (1996), voluntary tax compliance is explained by dimensions like timely
filing of any needed return, accurate reporting of income and tax liability and timely payment of
all tax obligations. On the other hand, according to Terkper (2003), many small and medium
taxpayers do not register freely, while those who do register time and again fail to keep adequate
records, file tax returns, and settle their tax liabilities on time. Hence in the microenterprise
context, opportunities for evasion are high, and resources are often scarce for field auditing.
Even when high investments are created in auditing, uncovering "hidden cash" is never going to
be an easy task without enough audit trail (Ahmed & Braithwaite, 2005).
In emerging nations, the income tax compliance has been constrained by the significant number
of changes to the tax laws, that are now so complex and only a handful of tax experts can
comprehend them. This creates additional difficulties for compliance by taxpayers who do not
have access to sophisticated tax specialists (Oberholzer, 2008). Moreover, the implementation of
these laws cannot reduce non-compliance among taxpayers because some tax measures put
Micro or Small and Medium sized enterprise taxpayers under severe liquidity pressure, forcing
many to fold in the informal sector (Terkper, 2003). Schwellnus and Arnold (2008), investigate
the impact of corporation taxes on growth at the firm level. They indicate that corporate taxes
reduce productivity and investment at the firm level, especially the case for firms who are
catching up to the technological frontier. The effect of taxes also plays a role in reducing
investment for firms who can embody technological progress to increase productivity (Roinn,
2014).
In national research, Conefrey & Fitzgerald (2011), estimate the impact of corporation tax rates
on an economy in the 1990s and early 2000s. Their analysis focuses on the reduction in the rate
of corporation tax in the business and financial services sector from 40% in 1994 to 12.5% by
2003. This policy change provides a useful natural experiment allowing the authors to derive an
estimate of the broader macro-economic impact of this tax change using the Hermes
macroeconomic model of the Irish economy. Using this model, the policy change was shown to
have increased the level of GNP by 3.7% in 2005 over what it would otherwise have been.
(Roinn, 2014).
Desai, Foley, and Hines (2007), use aggregate data on multinationals about 50 countries in 1989-
2004. The state that the overall corporate tax burden is shared between workers and capital
owners; they find that labor bears 45% to 75% of the tax burden. Forcing the shares of the tax
borne by capital owners and workers, to sum up to unity, however, neither allows for excess
burden of taxation nor for consumers to bear part of the tax through higher prices. This might
result in an under or overestimation of the corporate tax burden borne by labor.
Fuest, Peichl, and Siegloch (2012), exploit variation in statutory local tax rates across German
municipalities between 1998 and 2008 to identify tax incidence. Municipalities set collection
rates locally, and as a result, because the statutory local tax rates to vary, Fuest et al. (2009) state
that an increase in the marginal corporate tax rate by 1% reduces monthly wages by 0.18%, on
average. In a similar approach, Bauer, Kasten, and Siemers (2012) find an elasticity estimate of
daily wages concerning the marginal business tax rate of -0.28 and -0.46. The study by
Arulampalam et al. (2012), exploits substantial and time-specific variation in effective corporate
tax rates to identify direct incidence. Suggest that about half of a tax increase is passed on to
wages in the long run from their estimates form the immediate effect of taxation on labor. This
estimate is for the wage effect only, adjustments in employment in response to changes in the
wage rate are neglected.
Gravelle and Smetters 2006; Randolph 2006, Harberger 1995, 2006 analyze the incidence of a
corporate tax in an open economy. These models show that the share of the corporate tax burden
falling on labor depends on factor mobility, factor substitution, relative capital intensities of the
sectors, international product substitution, and the size of the country introducing the tax. Labor
in these studies is found to bear virtually none or more than 100% of the corporate tax.
The role that can be played by Micro small and medium sized enterprises in the development of
an average African economy is a subject that has raised considerable research interest in the last
couple of decades. This interest has been demonstrated by significant development organizations
such as the World Bank and national governments through funded research imitative. This
interest could, on the one hand, be explained by the fact that Micro small and medium sized
enterprises are perceived as potential engines for growth and development, through the creation
of employment and the promotion of technology transfer and diffusion. On the other hand, with
the failure of the public sector in providing needed employment and economic opportunities,
MSMEs are considered a reliable alternative to state-led economic development approaches.
Furthermore, a key factor explaining these developments is the increasing concerns in recent
years about countries growth performances and high levels of structural unemployment, and the
realization of the significant role MSMEs play in the economies of the OECD and APEC
countries (Harvie & Lee, 2001:2). MSMEs thus have important attributes which make them able
to survive different economic changes. Their entrepreneurship flexibility and responsiveness to
change are an essential driving force of economic development. MSMEs are often more labor-
intensive than larger firms and therefore have lower capital costs associated with the creation of
jobs. They consequently play an essential role in fostering income stability, growth and
employment. The employment opportunities they create improve the livelihood of millions of
poor people and indirectly contribute to the attainment of higher economic growth and hence,
poverty reduction. Classical economic theory suggests that investment plays a significant role in
the promotion of economic growth. With the mainstreaming of the concept of globalization,
developed and developing countries have stepped up their efforts in attracting foreign direct
investments (FDI) to supplement domestic resources in the pursuit of development objectives.
The recent development experience of East Asian economies seems to justify the place of
prominence given to FDI in the current development discourse. Further, the increasing
competitiveness of large economies such as China and India has rendered the global competition
for FDI inflows much more intense. As such, many developing countries have come under
immense pressure to reform their investment regulations and make their business environments
more attractive to foreign investors. This pressure sometimes translates into investment climate
reforms aimed at addressing specific constraints that hinder capital inflows.
The World Bank (2005), defines the investment climate as a set of location-specific factors
shaping the opportunities and incentives for firms to invest productively, create jobs, and expand
(including stability and security, regulation and taxation, finance and infrastructure, and workers
and labor markets) Reforms to the investment climate can be logically understood to mean a set
of policy adjustments aimed at improving the location-specific factors shaping the opportunities
and incentives for firms to invest productively, expand and create jobs. The specific sets of
elements to be adjusted are often identified through systematic and standardized assessments of
the investment climates prevalent in different countries
According to the World Bank Investment Climate Surveys, the main objective of Investment.
Climate Assessment (ICA) is to develop a better understanding of the constraints to investment
and of the key elements that affect sustained productivity growth in a given country. There is
now near unanimity on the fact that a sound investment climate is critical for active private
sector participation in economic growth and poverty reduction. This is so because, an
accommodating business environment enhances the efficiency, innovative abilities and
productivity of firms, which in turn, expands employment opportunities thereby helping to lift
people out of poverty. Furthermore, a favorable environment for private sector activity
necessarily generates more taxes for public investment in health, education and social services
that contribute to bettering the welfare of the poorest of the poor. In contrast, a weak business
environment increases the obstacles to private enterprise development, thereby decreasing a
country's prospects of reaching its full potential in terms of employment, production and welfare,
(Katja, 2005).
Although there is unanimity on the importance of a good investment climate and business
environment in enhancing the private sector's role in development, the immense diversity of
private sector players operating in any given economy present significant challenges to policy
formulation aimed at reforming the investment climate. The potential private sector role players
in a typical African economy include large multinational companies, large domestic companies,
small and medium sized enterprises (SMEs), microenterprises and businesses operating in the
informal sector. Different constraints of the business environment affect different players in
different ways. For instance, significant players in the market (whether foreign or domestic) may
be better equipped to deal with issues of corruption than SMEs, while access to finance might be
more problematic to the latter than to the former. This diversity of private sector role players
makes a compelling case for a detailed and differentiated study of the challenges and constraints
facing business actors in developing countries, notably MSMEs in Africa.
The majority of the firms surveyed in Cameroon operate in the services and commerce sector.
This is counter-intuitive for an economy at the level of development like the Cameroonian
economy but suggests that there is some uniqueness about the Cameroonian economy that is
worth examining further. While the distribution of MSMEs in Cameroon in the various sectors is
relatively reflective of the structure of the economy, it is worth highlighting here that the
classification of the operators as members of the service and commerce sector includes trade and
small service providers. These are small businesses that link up with agricultural suppliers and
make up the linkup between the informal and formal economies, and they are representative of
visible elements that would likely be recipients of government action. The surprising aspect of
this result is the relatively small percentage of MSMEs in the agricultural sector which is a
typical of a country like Cameroon. The picture as presented indicates possible directions for
policy actions that will see the state investing in an area of its obvious comparative advantage,
which will entail supporting the development of MSMEs in the agricultural sector while
including them in broader scale plans for expanded industrialization (plans to expand the
manufacturing industry).
As can be expected in a typical African country like Cameroon, there are common challenges
facing businesses across the three provinces as well as peculiar challenges to each province. In
the North West, the results suggest that the rate of taxation and the lack of business support
services, as well as instability of electricity supply, are the three significant challenges MSMEs
face. As far as the Centre region is concerned, tax rate, inadequate access to government support
services, and lack of access to credit were identified as the significant challenges MSMEs face.
As for the South West and Littoral regions, the tax rates are the major challenge alongside tax
administration with access to finance having the same impact as electricity effects
The rate of taxation was identified as the major obstacle across all three regions in Cameroon
This suggests that the business environment is not adequately conducive for the growth and
expansion of MSMEs and is an added indication that the efforts at reforming the investment
climate in Cameroon have not yet sufficiently translated to creating a suitable business
environment for MSMEs. Some region-specific challenges worth highlighting include the
problem of electricity and lack of business support services being more acute in the North West
Region than in other areas. Lack of access to government support services and the lack of access
to credit seems to be more critical in the Centre region (administrative capital) than in the other
sampled regions, while access to finance and tax administration were the two challenges peculiar
to the littoral and South West regions (economic capital)
The results from the administrative capital seem to be counter-intuitive and differ from the
experience in South Africa for example in that access to government support services seem to be
better in the regions bordering the government departments that provide these services. This may
be the result of the effect of too much centralization of government support services that result in
added bureaucracy and reduction in access from potential beneficiaries. This alongside other
possible explanations like corruption and inefficiency of the service providers may also explain
why this is seen as a significant problem, especially if one considers that with centralization
many potential beneficiaries need to travel to the administrative capital to lobby for some of
these government services. On the other hand, the challenge of access to finance and tax
administration in the littoral province can be expected because it hosts the economic capital and
has a more significant concentration of business activities It consequently receives attention from
tax authorities who may provide an added layer of difficulty in the administration of the taxes.
These elements all contribute to creating a challenging business environment that may be hostile
for investment and challenging for MSMEs. Martinez Peria (2009 6) has observed that "60
percent of banks in Africa point to the state of the economy as constraining their involvement
with these businesses". There is an obvious case for policy action to focus on a more conducive
and less hostile business environment for all businesses in Cameroon but particularly for
MSMEs.
The results presented from Nigeria will include the characteristics of the business environment in
which they operate, including their access to start and growth finances, the range of challenges in
the setting of operation and their perception about the use and effectiveness of the support
programs aimed at the promotion of MSMEs. In characterizing the businesses by sector, the data
revealed that about 5.1% of MSMEs in Nigeria operate in the agricultural sector, 25.3% in the
manufacturing sector while the service and commerce sectors shared the majority of respondents
with 51% and 15% respectively.
As has been the case in other countries, MSMEs in Nigeria also found access to finance for start!
un a significant challenge. The majority of the MSMEs surveyed started in their businesses from
informal savings and owner savings. As such, one can conclude that the first significant finding
from the characteristics of MSMEs surveyed is that MSMEs find it difficult to get access to start-
up finance from formalized institutions. A substantial percentage of MSMEs reveal that personal
savings or informal saving schemes raised their start-up through the fund. This finding, however,
supports results from previous studies indicating that MSMEs in sub-Saharan economies face
significant challenges in getting access to credit and loans partly due to lack of credibility
amongst other factors. The pattern of access to start up finance is replicated with growth and
expansion finance as already mentioned earlier. This leads to the significant conclusion that
access to and cost of funding may be a substantial grant to the start-up, growth and expansion of
MSMEs in Nigeria. This was confirmed after an examination of the challenges of the business
environment in which MSMEs operate in Nigeria, as presented below:
The survey requested MSMEs to identify the obstacles in their context of operation and to
classify these according to the level of severity. An analysis of the data from the three regions
surveyed in Nigeria suggests that while all regions identify electricity, and access to finance as
the two significant factors hindering business development, MSMEs in the Lagos region have
other serious factors affecting business development. Factors such as the cost of finance, lack of
business support and corruption were identified as significant constraints to growth. Port
Harcourt also considers the cost of finance and corruption as two more factors severely hindering
business development, while MSMEs in Abuja do not see corruption as a significant hindrance
to business growth. These observations support recent studies (AfDB, 2007; Martinez Peria,
2009) who also contend that access to finance remains a significant concern for MSMEs start-up
and growth in Africa. This is enhanced on the one hand by a lack of trust from financial
institutions towards MSMEs and on the other side high cost for loans and credit by banks and
microfinance institutions.
Access to finance remains the major hindrance to business growth in the three surveyed regions
in Nigeria. Electricity is the next most significant challenge facing all three provinces in Nigeria.
A study by the African Development Bank argues that the lack of maintenance of transformers in
most parts of Africa significantly hampers electricity generation such that "the transmission is
unable to deliver power to major parts of the country and is unreliable because it does not have
adequate capacity and backup lines" (AfDB, 2005).
The results obtained from all three provinces indicate that most of the MSMEs surveyed came
from the Service and Commerce sectors. This is indicative of the structure of the South African
economy as well as suggestive of the sectors in which MSMEs currently operate. The economy
receives the most significant contribution to its GDP from the tertiary sector dominated by the
finance and tourism industries whereas manufacturing comes second and the primary sector
made of mining and agriculture is only the third contributor to GDP. Thus, the distribution of
MSMEs reflect this pattern and suggest that the MSMEs in South Africa fall within the more
active sector of the economy and could hence be seen to be contributing to the growth of the
economy.
There is also evidence that the South African government has recognized the potential
contribution that MSMEs can bring to the economy and has thus moved to enact various policies
for the promotion of MSMEs and set up major programs across the nation. The major MSMEs
support programs at the national level that formed a part of the investigation in this study
included the following:
The data from the three provinces show that more than 70% of all sampled firms started their
business with the support of personal or informal saving schemes. In the Gauteng province, close
to 90% of all firms surveyed started making use of owners' savings. In the Free State province,
the figure is relatively low at nearly 50% of total respondents. However, this is due to the
significant benefit firms have received from the NYDA microloans in the province which has
been comparatively very low in the other two provinces surveyed. Majority of the firms in the
Western Cape started on personal savings (86%) followed by commercial bank loans (11%) The
analysis of the data provides the argument that firms have received minimal financial
support/assistance from support programs. This trend is closely reflected in the expansion and
growth finance analysis where more than 70% of all firms have expanded on personal savings in
the forms of stokvels, and informal support groups.
This trend may be explained by the fact that close to 50% of all firms surveyed are sole
proprietorship businesses. This kind of small companies often does not have the collateral or
necessary credit record of obtaining financing from mainstream financial institutions. And it has
been observed that even where MSMEs support programs do exist which offer financial support
for MSMEs start-up or growth and expansion, these programs often set up requirements that may
not be attainable by the average MSME, hence the low rate of take-up and use of these programs.
Besides the challenge of access to and cost of finance limiting MSMEs growth and development
in South Africa, there are other factors related to the business environment in which these
MSMEs operate that impact upon their existence, growth and development. The cost of finance
remains a significant concern for MSMEs in South Africa. This is mainly in the Free State
province whose business climate can be considered to compare unfavorably with Gauteng and
the Western Cape Province. The data from the Free State province reflects findings by Martinez
Peria (2009) who argues that access to and cost of finance and electricity prices (utility prices)
remain severe obstacles to doing business in low-income countries. Access to finance,
transportation and corrupt business practices were identified as the significant challenges
affecting the industry in the Gauteng MSMEs. There is a significantly high sense of lack of
business support from MSMEs in the Western Cape Province
Access to finance, cost of finance and corruption were identified as the three main obstacles to
MSME growth and development in the Gauteng province, closely followed by utility prices and
cost of transportation. Cost of finance, utility prices, and Crime and theft were the main obstacles
in the Free State Province closely followed by access to finance. Crime and theft, lack of
business support services and access to finance were the three main obstacles in the business
environment in the Western Cape, closely followed by tax rates and utility prices. So whereas
Transportation is a huge problem in Gauteng, it is less of an issue in the other regions. The lack
of business support services emerges as a significant challenge in the Western Cape as opposed
to the other two provinces. The results from South Africa highlight a significant trend, in the first
instance, it suggests that business support services are very abundant in the political capitals that
host the central government departments that promote these programs and less so in far off
provinces (western cape). The concentration of business and administrative activities in the
capital city comes with problems in transportation and corruption which are less of a concern in
the cities further away, which result seems reasonable.
The theoretical review will constitute related vital theories and concepts of taxation and Growth
of Micro enterprises. Under this section, the researchers have analyzed three critical theories
related to the study, namely, the ability to pay theory of taxation and the partnership theory of
taxation. These two theories support the paying of Turn over Tax (TOT) according to ones
paying capacity to support government activities. Finally, the classical approach to tax
compliance (AS Theory) that shows the effect of tax compliance cost which compels the
government to government to deter tax evasion through sanctions and audits of taxpayers.
Taxation delivers a predictable and stable flow of revenue to finance development objectives
This is vital in a country like Cameroon that has severe difficulties with compiling its
development objectives. Micro Small and medium enterprises (MSMEs) are important for
economic growth in the country, contributing as much as about 22 percent of the gross domestic
product. MSMEs generate taxable incomes They also collect employment and value-added taxes
for the government. Taxation, however, enforces a high cost to small businesses MSMEs are less
tax compliant in contrast to bigger companies MSMEs are considered the 'hard to tax group from
the informal sector. As such, the literature proposes that only a fraction of their taxable incomes
is reported to tax authorities. High registration cost and time-consuming processes encourage tax
non-compliance. The perception that the tax system is corrupt discourages registration and filing
compliance. When there are several compliance hurdles, the likelihood of filing compliance is
reduced. Nevertheless, a fair and static system encourages filing and registration compliance. A
clear and reliable tax system helps to file agreement. Authorities that know their responsibilities
and are ready to respond to enquiries during the registration process encourage compliance tax in
general
This theory was advanced by Swiss philosopher Jean (1712 n 1778), the French political
economist Say (1767-1832) and the English economist Mill, (1806-1873). The theory holds that
the taxation should be levied according to an individualist income or ability to pay and is the
basis of progressive tax where tax rate increases by the increase of the taxable amount (Jones et
al, 2011). This theory is indeed the most equitable tax system since people with higher income or
wealth and can afford to pay more taxes should be taxed at a higher rate than people with less
individual income tax and has been widely used in industrial economies. The basic tenet of this
theory is that the members of society should share the burden of taxation on the principles of
justice and equity and that these principles necessitate that the tax burden is apportioned
according to their relative ability to pay. This theory suggests that the taxpayers of TOT should
pay unconditionally and according to their paying capacity (Chigbu, Eze and Ebimobowei, 2012)
Partnership theory of taxation posits that government should share in the profits of the economic
enterprise by way of an income tax. One might call the partnership theory the economic version
of the Benefit theory The partnership theory is based on the notion that the government should
share in national income (or more technically, gross national product), because government, by
supplying infrastructure in the broad sense (physical infrastructure, national and domestic
security, a capitalism- enabling legal system and regulatory structure) earns a share of the GNP.
This theory is especially appealing to some income tax advocates because it seems to
normatively prescribe an income tax in preference to a consumption tax. The government should,
therefore, collect TOT given that it contributes to the general environment enabling the business
to be conducted (Dodge, 2005).
This theory was advanced by Allingham and Sandmo (1972). The AS theory holds that the
government deters tax evasion through a sanction arrangement and audits. A taxpayer will decide
to violate the fiscal laws and evade his or her tax obligations when he or she perceives that the
cost of evading tax is too low, believing he or she is unlikely to be or audited. Taxpayers would
also evade tax when he or she perceives the cost of compliance is high. Tax systems and
procedures that are involving and cumbersome tend to encourage tax evasion. Taxpayers who
feel that the tax rate is high and punitive will evade tax. There is a negative correlation between
tax evasion, the probability of detection, the degree of punishment and high transaction costs
associated with tax laws (Sandmo, 1972).
Income tax evasion was pioneered by Allingham and Sandmo (1972). Where a rational and a
moral taxpayer maximizes expected utility, which solely depends on income. When caught, the
agent must pay penalties, imposed on the amount of evaded income. A critical comparative static
result is that when the tax rate goes up, competing for income and substitution effects might lead
to more or less tax compliance. The substitution effect encourages evasion since the marginal
benefit of cheating goes up with the tax rate. On the contrary, the income effect tends to suppress
evasion since a higher tax rate makes the taxpayer with decreasing absolute risk aversion feel
worse- off, and thus decrease risk-taking. Therefore, the net effect is ambiguous.
However, Shlomo (2002) Revealed that when the penalty is levied on the amount of evaded
taxes, as it is under most current tax laws, the substitution outcome disappears. At the first
optimum, the penalty paid on obscured income increases proportionately with the tax rate, and
therefore, there is no substitution effect. The remaining income effect is responsible for
persuading the taxpayer to cheat less. Consequently, the net effect is better compliance, and the
result is possibly the most critical finding in the early tax evasion literature, has encouraged a lot
of notable extensions The MSMEs are prone to tax evasion they face problems in complying
with tax laws. They are expected to meet with strict deadlines, keep proper books of accounts.
This kind of environment ends up tax evasion.
The Gordon growth model, which is also known as the dividend discount model (DDM), is used
to define the intrinsic value of stock based on the future series of dividends that grow at a
constant rate (Myon, 1959). The theory was founded by Gordon Myron in 1959 and holds that
the dividend per share is payable in one year, and assumes that profits grow at a constant rate in
perpetuity the model answers for the present value of the infinite series of dividends. The Gordon
growth model values a corporation's stock using an assumption of constant growth in payments a
corporation makes to its common equity shareholders. The three critical inputs in the model are
dividends per share, the growth rate in dividends per share, and the required rate of return
(Myron, 1959). Dividends per share denote the annual payments a company makes its mutual
equity shareholders, whereas the growth rate in dividends for each share is how much dividends
per share rises from one year to another. The required rate of return is the least rate of return
economic operators are prepared to accept when purchasing a stock of a particular company, and
there are numerous models investors use to estimate this rate. Gordon's Growth Model is
important to this study because it examines the factors that influence the growth of
Microenterprises in Bamenda. On this principle, this theory enables this research to explain what
growth is from a theoretical point of view. In the perspective of Microenterprises, the theory
explains that extension refers to an increase in shareholder returns
The major limitation of the Gordon growth model lies in its supposition of constant growth in
dividends per share (Kaufmann, 2005). It is very rare for companies to show a continuous
increase in their profits due to business stages and unforeseen financial challenges or successes.
Consequently, the model is limited to firms showing constant growth rates. The subsequent issue
has to do with the relationship between the discount factor and the growth rate considered in the
model. In case the required rate of return is smaller than the growth rate of dividends for each
share, the result is a negative value, making the model insignificant. Similarly, if the required
rate of return is the same as the growth rate, the value per share approaches infinity
Goldratt's (1984) Theory of constraints (TOC) claims that any well-regulated system must have
at least one or more restrictive factors that attempt to impede it from achieving its goals. Eliyahu
M Goldratt introduced it in 1984. There is usually at least one limitation, and TOC uses a
focusing process to identify the limitation and reorganize the rest of the organization around it.
On the other hand, systems theory says that to control a system properly you need more
limitations than independent variables. The difference here appears to be limits of outcome due
to the control mechanism and that by accuratels managing the enterprise you can minimize the
resultant process limits that the TOC is concerned about, which are results, not independent
factors that are directly set (Linhares, 2009). This theory is appropriate in the context of this
study because this study assumes that Micro enterprises in Bamenda cannot grow without facing
some limitations. Nonetheless, considering that the theory of limitations states that management
systems are bound to come across one or more limits, this study is also conducted on that
evidence and hence examines the limitations faced by Microenterprises in Bamenda. The first
strength of the theory is that it encourages managers and businesses to identify their limits and
take appropriate measures to stop them from delaying the achievement of their goals. Linhares
(2009) has criticized the theory of limitations including the fact that it borrows ideas and
concepts from many studies and theories, but Goldratt does not admit these contributions to his
theory.
The rational expectation theory holds that the people in the economy make choices based on
their rational viewpoint, the available information they have and past experiences (Snowdon et
al., 1994). The theory was founded by John F. Muth of Indiana University in early 1960 (Muth,
1960). The theory supports the view that the current expectations in the economy are derived
from business owners' perceptions over what the future state of the economy will be. Rational
choices are made by exploring available opportunities in the economy and taking gain from
them. If a company knows that the price for its product will be higher in the future, it will stop or
reduce production until it increases. Because the company declines supply while demand stays
the same, the price will increase. In totality, if the economic operator believes that the price will
increase in the future, he will make a rational decision to reduce production, and this decision
partially affects what happens in the future. Evans and Ramey (2006) have criticized this theory
because rational expectations are estimated values in the mathematical sense. To be able to
calculate estimated values, individuals have to know the true economic model, its factors, and
the nature of the stochastic courses that govern its development If these extreme assumptions are
violated, individuals cannot form rational expectations. This theory is significant because this
study examines the growth of Microenterprises and as a result, it is essential to explore the
opportunities which Microenterprises in Bamenda can exploit to maximize growth.
Taxpayers' morale is the intrinsic motivation of persons to pay taxes (Frey, 1997a) It differs
across countries because taxpayer values are influenced by different cultural norms, with
different societal institutions acting as constraints. Therefore, taxpayers' morale is an important
and integral attitude and a determinant of taxpayer compliance and other forms of behavior.
Also, tax compliance is enhanced when individuals view the paying of taxes as a fair fiscal
exchange and as transparent (Edlund & Åberg, 2002) Taxes paid by individuals can be
interpreted as the price paid for the government's positive actions. Thus, individuals' tax
compliance might be influenced by the benefits received in the form of public goods and services
relative to their price because the individuals might feel cheated if taxes are not spent adequately
(Cummings et al., 2004) The willingness to pay certain types of taxes is closely linked to
perceptions of fairness
Scholars widely agree that the public will not pay taxes unless some public goods and services,
such as education, infrastructure, security and healthcare, are provided in return. Greater trust in
the government increases taxpayers' positive attitude toward the commitment to the tax system
and tax payment, which has a positive effect on tax compliance (Smith & Stalans, 1991) For
most citizens, the connection between tax payments and government spending is a shadow at
best. Although this is a pessimistic perception of the relationship between taxation,
accountability and responsiveness, what is of substance to citizens is the general perception of
government credibility. Thus, if taxpayers trust the government, the legal system, the justice
system, and the public officials, they will be more willing, to be honest in their payment of taxes,
a reflection of high tax morale and tax compliance (Torgler, 2004, 2005; Alm & Torgler, 2006).
This study has not fully identified the perception of tax rates and their impacts on the growth of
micro enterprises, the perception of tax policies and their impacts on the growth of micro
enterprises and lastly how the different types of taxes be used to guarantee free competition
amongst Micro enterprises in Bamenda, Northwest regions of Cameroon. This is due to the fact
that there are rare or no inherent studies to showcase findings on the perceptions of taxation on
micro enterprises in the Northwest region of Cameroon except the literature review: On the
effects of taxation in Cameroon by (Emini, 2000). Therefore, to close the gap on the perception
of taxation on the growth of micro enterprises in Cameroon, an in-depth study must be carried
out in the national spheres of the country especially in Bamenda.
CHAPTER THREE
RESEARCH METHODOLOGY
This research mainly focuses on the effect of taxation upon the performance and development of
Small and Medium Size Enterprise (SMEs) in Cameroon more particularly in Bamenda III,
North West Region. The study only delimits itself on the challenges of the tax rate, tax policies
in Cameroon to Small and Medium Size Enterprise (SMEs) and how it can affect small
businesses.
In this study, the scope of variables comprises of taxation and performance. The study would be
carried to depict how severe tax can be to the performance of Small and Medium Size Enterprise
(SMEs) in the North West region (Bamenda III). Growth will be measured on a Likert scale
process, i.e. Income generation, employment, assets and registration process.
The goal of this model specification is to present how different variables may affect the growth
of Microenterprises in Bamenda III, especially in Tubah District. The model has been developed
based on the literature review to project the relationship between the growth of micro-
enterprises, tax rates, tax policies and the types of taxes
Y = β0 + β 1 X 1 + β 2 X 2 + β 3 X 3 +ε
Where:
Y = Growth of microenterprises
ε =Error term
3.3. Description of Variables in the Model
The dependent variable in this study is the growth of Microenterpries. The growth of macrто
enterprises will be measured in terms of incomes, assets, employment, and the registration study
growth of Microenterprises is a dependent variable because theimpact of taxation will entirely
depend on the determinants of growth
The independent variable of this study is the determinants of taxation on microenterprises These
determinants are,
Tax rates: Tax rates have an impact on the prices of goods and services primarily on the
Growth of Microenterprises
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