THE EFFECT OF TAXATION ON SMALL SCALE BUSINESSES

A CASE STUDY OF SMALL SCALE BUSINESSES IN

NAMUWONGO MARKET, KAMPALA

BY

WERE GODFREY ODERO

BBA/40034/91/DU

A RESEARCH PROPOSAL SUBMITTED TO THE FACULTY OF APPLIED

ECONOMICS AND MANAGEMENT SCIENCE IN PARTIAL FULFILMENT
OF THE REQUIREMENTS FOR THE AWARD OF A DEGREE OF
BACHELOR OF BUSINESS ADMINISTRATION
(ACCOUNTING OPTION) OF KAMPALA
INTERNATIONAL UNIVERSITY

MAY 2012
 DECLARATION

[,Were Godfrey Odero, hereby declare that this is my original research work
and that it has never been presented to any University or any other Institution
of higher learning for any academic award.

Signed by ..············~~········ ,u.?!/.P..~J.2f?J.i- ·

Date . •
WERE GODFREY ODERO
 APPROVAL

This is to certify that Were Godfrey Odero undertook a research work titled
"The effect of Taxation on small scale Businesses" A case study of small scale
businesses in Namuwongo market Kampala, under my supervision and
guidance. This work is now ready for submission with my approval.

Signed by .... ~.':'?"A ...... .

MR. BARASA HENRY

Date .... <JS10.1 ~.~ .~ . .

ii
 DEDICATION

This work is dedicated first of all to the Almighty God who gave me life,
knowledge and health to pursue my study, my Father Wandera David Odero,
Mother Akochi Bena, Brother Oundo Seperia Odero who contributed
generously for my education, Wanyama James, Okumu Godfrey, Sisters
Nabwire Jessica, Ajambo, Gertrude Nyongesa, In-laws Mrs. Eunice Oundo,
Mrs. Annastisha Wanyama, friends Noon J . Deng who supported me more
financially as a parent here in Kampala, Philip Tongo Malek and Mulumba
Tonny.

iii
 ACKNOWLEDGEMENT

It would have been impossible to complete this study without the co-operation
and guidance from various people during the various stages, from proposal
development, field work and preparation of the final report. I am grateful to my
supervisor Mr. Barasa Henry for his guidance and close supervision of the
study work throughout the course of this research.

I would like to make special mention of the entire Staff of Faculty of Applied
Economics and Management Science of Kampala International University who
trained me during my degree in Business Administration Accounting option
(BBA}.

I wish to extend my appreciation to the authorities of Kampala City council

Namuwongo Market who allowed me to carryout research through the
documents of taxation within Namuwongo market.
Finally I would like to thank by Brother Oundo Seperia in a special way and my
dearly wife Nekesa Juliet and all my children.

For extraordinary spiritual, emotion and financial support they gave in running
the studies and research work.

iv
LIST OF ABBREVIATIONS

US$ United States dollar

URA Uganda Revenue Authority

VAT Value Added Tax

GDP Growth Domestic Product

I.E. Tha t is to say

SSB Small Scale Business
UIA Uganda Investment Authority

v
 Table of Content
DECLARATION ......................................................................................... ....... .i
APPROVAL .. ....... ................................................................. ..... ................ ...... .ii
DEDICATION .. ...... .......... .... ............ ......................................................... ...... .iii
ACKNOWLEDGEMENT ................................................................................... iv
LIST OF ABBREVIATIONS ...................................................................................................... v
Table of Content .......... .............................. ............... ............. ...... ............... .... vi
LIST OF TABLES ............................................................................. .... ..... ...... ix
LIST OF FIGURES .................. ............. ... ..... ............ ............ ... ........ .... .. ... ........ x
ABSTRACT ................................................................................................................................... xi

(;~J»1r~Ft ()~~ ......................................................................................... !

INTRODUCTION .................................................................................... .......... 1
1.0 INTRODUCTION .................................... .................................................... 1
1.1 BACKGROUND OF THE STUDY ...... ........... ........ ...... ... .. ..... ... ......... .... ...... .. 1
1.2 PROBLEM STATEMENT ............................................................................. 2
1.3 PURPOSE OF THE STUD¥ ......................................................................... 3
1.4 RESEARCH OBJECTIVES ................. ................................................. ........ 3
1.5 RESEACRH QUESTIONS ........................................................................... 3
1.6 SCOPE OF THE STDUY ............................................................................. 3
1.7 GEOGRAPHICAL SCOPE ...................... .. .. . ............. .. ........... ...... ... ......... .... 4
1.8 TIME SCOPE ............. ....................................................................... .... ..... 4
1.9 SIGNIFICANCE OF THE STDU¥ ....................... ............. ............................ .4
1.10 CONCEPTUAL FRAME WORK ....................................................... .... ... ... . 4

~~~Ft 1r~<> ......................................................................................... «l

LITERATURE REVIEW ......................... ......... .................................... .. ........ ..... 6
2.0 INTRODUCTION ....... ........................... .... ... ................ ................ ... ........ .... 6
2.1 DEFINATION OF THE CONCEPT.................. ............................... ........ ... .... 6
2.1.1 TAX ................................... ........ ... .. ... ....... ....................... ... . .. ... .. ... .... .. ... 7
2.1.2 CLASSIFICATION OF TAXES .... ...... .......... ............................... ........ .. . .... 7

vi
 2.1.3 THEORIES OFTAXATION .......... .. .... .... ....... ... ... ... ... .. .. ... ... ....... ..... .......... 9
2.1.4 THE PURPOSE OF TAXATION .................... .. ................ .. .............. .. ....... 11
2.2 PERFORMANCE OF SMALL SCALE BUSINESS ........................................ 12
2.2.1 SMALL SCALE BUSINESS (SSB) .................... .. ............ .. ................ .. ..... 13
2 .2 .2 TAXES PAID BY SMALL SCALE BUISNESSES IN UGANDA ................... 15
2.2.3 FACTORS AFFECTING THE PERFORMANCE OF SMALL SCALE
BUSINESS .. .... ... ... .... .............. .. .... .............................................. .......... ......... 16
2.2 .3 RELATIONSHIP BETWEEN TAXATION ANT SMALL SCALE BUISNESS
PREFORMANCE ......... ... .... .... ....... . ......... ............................. ..... .......... ... .. ...... 19

~~~Ft 1r~~ ..............................•..............•..................................... ~l

REASAERCH METHODOLOGY ... .. ... .. ....... ..... ....................... ....... ..... ...... ... .... 2 1
3.1 INTRODUCTION ............... .... ...................... ........ ........ .... .. ........ .. ... .... .. ... . 2 1
3.2 RESEARCH DESIGN ........ .... ............................................ ........... .... ......... 21
3. 3 TARGET/RESEARCH STUDY POPULATION . .... .......... .................. .... ....... . 2 1
3. 3 .1 SAMPLE SIZE . ......... ... .... .... .. .. ... ...... .... .. ................. ..... .................. ....... 21
3.3.2 THE SAMPLING TECHNIQUES ................................................ .. ..... .. .. .. 22
3.4 DATA COLLECTION METHODS .................................................... .. .. ....... 22
3.5 INSTRUMENTS OF DATA COLLECTION ............................................ .. .. ... 22
3.5.1 Questionnaires ......... ............ ...................... .............................. .. ... .... ... 23
3.5.2 Interview ........................................ .. ........................................ ...... ... ... 23
3 .5.3 Observation ........ ..... ........................... .... .................................. .... .. .. .... 23
3.6 Sources of Data............................... .. ....... ........................................ ... .. .. 24
3.6.1 Primary sources ......... ..... ........ .................................... ... .............. ... ... .. . 24
3.6.2 Secondary sources ... ............. ....... .... ....... ... .. ... ....... ........ ... ..... .. .. .. ... ...... 24
3.7 DATA PROCESSING .... ... ............. .. ............ ........ .. ...................... .. .. ..... .. .. . 24
3.9 DATA ANALYSIS ....................... .. .................... ....... .................... ........ .. .... 24

(;~~Ft ~()tJFt . ............................................... ... .......... .. ...................... ~f;

PRESENTATION OF FINDINGS, INTERPRETATION AND DISCUSSION OF

SUCH FINDINGS .... ..... .............. ............. ............ ....... ................ ..... ...... .. ..... .. 25
4.0 Introduction ............ ... ... ... .. .. ..... .... .... ......................... ................. ........ .. .. 25
vii
 4 . 1 Response rate ... ... ...... .. ... ........ ..... ..... .. ....... .... .... ...................................... 25
4.1.1 Objective one: The operation of Taxation in Uganda................ .............. 32
4.2 Objective two: The performance of small scale businesses in Uganda .. ..... 33
4.3 Objective three: the relationship between taxation and performance of small
scale businesses ... .............. ......... .. .... ..... .. ... ... ........ ................... .. .... .. ... ........ . 33

(;~~ll ~~....................................................................................... ~!)

CONCLUSIONS AND RECOMMENDATION .. .............................. ..... .. .. ........... 35

5.0 INTRODUCTION ....... ................................ ......... ... .... ... .... ......... ....... .... .... 35
5.1 Summary of findings ........................................................ ......... ........... ... 35
5.2 Conclusions ................ ... ..... ...... ....... ...... .. ...... ..... ..... .. .... .. ..... ... .. ... ... ... ..... 35
5. 3 Recommendation ... .... .. ...... ....... ....... .. ... ... .... .. ..... ......... ............................ 36
5.4 Areas for further research ................................................... ....... .............. 37
REFERENCES ........................................ .... ....... ... ............ ............... ... ....... .... 38

J\J?J?~Iil>l(;~~--························································· ·································~1
APPENDIX INSTRUMENTS (I) ......... ....................................... .................... .... 40
A. QUESTIONAlRES ........................................................................... .. ..... 40
(B) INTERVIEW GUIDES ............ ....... ......... .... ... ..... ... .... ..... ........ ..... .... .... .... ... 44
APPENDIX (II) TIME FRAME .... .. .. ...... ..... ........... ... ......... ..... ................... .. .... .. 46
APPENDIX (III) ... .. ....... ... ... .... ...... .. ......... ..... ........ ... .... .. .. ........... .. .. ... ........ ...... 47
BUDGET FRAME WORK ........ ........... ........... .. ......... ....................... .......... ... ... 47

viii
 LIST OF TABLES

Table 1: Showing Distribution Of Respondents By Gender .......... ............... .... 25

Table 2: Shows Responses on how the Tax System is related to the Performance
of their Small Scale Businesses .................... .......................................... ....... 26

Table 3: Shows Responses on How Taxes Systems were related to Performance

of the Small Scale Businesses from those who did not working within the
Market they are just Customers ........ .... ..... ........ ... ... ... .......... .... .... ... .. ............ 28

Table 4: Showing the Education Background of Respondents ................ ...... .. 29

Table 5: Show the Ages of Respondents ... ..... .. .. ... ...... .. ...... .... .... ........ ... ......... 30

Table 6: Shows the Marital Status of Respondents ....................... .................. 32

ix
 -
---~

LIST OF FIGURES

Figure 4.1 .................. ... ..... ........ ..... . .... ..... ............. ... ... .... .......... ........... ... ...... 26

Figure 4 .2 ................. ... .. ................................ ...... ...... ............ ..... ... ... ............. 28

Figure 4.3 ....... ................. ... ... .. ..... ........... ........... ... ... ........ .. ........... ....... ......... 29

Figure 4.4 .............. .......... ... ...... ........................ .. ..... ... .... ... .......... ....... .... ....... 30

Figure 4.5 ..... ..... ..... .. ....... ....................... ...... .... ..... .......... ..... ... ... ... ................ 31

X
 ABSTRACT

This study was conducted in Namuwongo Market Kampala. The objective of the
study was to assess the effect of taxation on small scale businesses. The
research adopted the quantitative and qualitative methods of data collection
among the study population consisting of a adolescents and adults between
18-45 above years old.

The research instruments used have been questionnaires, interview,

observation and report documentation containing records of tax authorities
within Namuwongo market for the period of 2010-2012.
The study found out that people's attitude towards the payment of taxes to the
tax authority is low as the return gained from it is not comparable to the
amount of taxes they are being imposed to pay.

xi
 CHAPTER ONE

INTRODUCTION

1.0 INTRODUCTION
This chapter consists of the background of the study, problem statement, and
purpose of the study, research objective, and research question, scope of the
study, significance of the study and the structure of the study.

1.1 BACKGROUND OF THE STUDY

Taxation in Uganda is based on the system that existed in Britain by 1900
when the hut tax regulation and administered under the local government
system and charged on each residential house. It was a simple tax intended to
attract citizens into monetary production. It was followed by the poll tax in
1905, due to cotton growing in Uganda. It was aimed at raising revenue for the
administrative; through promoting Africans voluntary labour necessary in the
production of cash crops and minerals for export. In 1919 the first law
legislation was introduced under Local Authorities Ordinance which later
governed tax collections. In 1925 in Uganda, most people were exempted from
paying income tax because the majority were peasant who relied on coffee and
cotton for their income leaving the initial collection on higher income. In
September 1991, after a period of review, the Uganda Revenue Authority was
established. All taxes include income tax, custom tax and excise duty are
collected by the Authority.

Taxation is one of the major sources of government revenue. The government

uses the realized revenue to carry out its ongoing activities to regulate the
economy. To make social and services available. Therefore, with the aim to
widen and increase on revenue, the government levies different forms of taxes

1
on the economic activities of its nationals of which small scale business
dominate the larger part of the informal sector.
The taxes collected are of various classifications such as; Direct taxes are those
that affect individual of firm directly through a deduction, such as wealth tax
and turnover tax. Indirect taxes are those paid to government by an
intermediary then passed on consumer by including the tax in the final price,
such as value added tax custom duty turnover tax. Proportional tax is one
where the liability increases with the increase in income. Progressive tax is
when the tax rate and absolute tax amount increase with the increase in
revenue. Regressive tax, this is a tax whose tax liability falls with increase in
income. Digressive tax, this is a tax where high income earners pay less or low
tax for the extra income earned.
In Uganda, there exist several small scale business undertakings, such as
capital employed, according to Kawabiblah ( 1995), employing 5-50 workers.
Sales turnover; According to Sejjaka (1997), a small scale business is any
business pay VAT of US$ 20,000 as an agreed threshold.
The government of Uganda through the ministry of finance, planning and
economic development consider business with capital investment of less than
US$ 5000000 both for public and private, URA.(2001). Tax payer Guide. Small
scale business contribution about 30% to GDP. Due to taxation, many small
scale businesses today are coming out of operations; the owners claim that
high taxes are disincentives for growth. Hence may be seen to affect the
performance of these small scale businesses.

1.2 PROBLEM STATEMENT

The performance of small scale business is popularly becoming an important
point to a large number of people as self employment in generation of mcome
for their survival.
They play a vital role in the development of the economy with each employing
5-50 people and contribution 30% to GDP. The government has put incentive

2
like initial allowance of 50% to encourage their development of located in
prescribed areas of Kampala, Namanve, Entebbe, Jinja and Njeru. Despite the
efforts by the government many of the small scale business can't leave beyond
the first birthday. This may be attributed to the many taxes imposed on them.
The high taxes have affected the performance of the small scale business
leaving them with little or 'no revenue for their operation. (New Vision, July 11,
2003). The researcher will try to establish how tax policies affect the
performance of small scale business.

1.3 PURPOSE OF THE STUDY

Purpose of the study will be to establish the relationship between taxation and
the performance of small scale businesses in terms of their profitability and
survival in the short and long run of operations.

1.4 RESEARCH OBJECTIVES

I. To evaluate the operation of taxation in Uganda.
II. To assess the performance of small scale business in Uganda.
III. To establish the relationship between taxation and performance of small
scale businesses.

1.5 RESEACRH QUESTIONS

I. How does taxation operate in Uganda?
II. What is the performance of small scale businesses in Uganda?
III. What is the relationship between taxation and small scale businesses?

1.6 SCOPE OF THE STDUY

The study will be limited to the effect of taxation on the performance of small
scale businesses.
And the research will be confined to URA which is located in Nakawa Kampala
District.

3
1. 7 GEOGRAPHICAL SCOPE
The geographical scope of the study will be focused in Namuwogo market;
Kampala.

1.8 TIME SCOPE

Time scope of the research will be between one to two month so that all
information of the research should be collected and processed to make the
study complete.

1. 9 SIGNIFICANCE OF THE STDUY

By the end of this study it is hoped that;
I. The study will help add additional literature of Kampala International
University business school on existing ones.
II. The study will provide a support for promoting future research hence
making Uganda a better place for businesses.
III. It is partial fulfillment of requirement for the award of degree in Bachelor of
Business Administration of Kampala International University.

1.10 CONCEPTUAL FRAME WORK

The research study will contain five chapters explaining different issues
concerning taxation on the performance of small scale businesses. Where one
is introduction of the study, background, problem statement purpose of the
study.
Research objective, research question, scope of the study, and significance of
the study, chapter two is about literature review, chapter three covers the
research methodology, chapter four is a bout interpretation and discussion of
findings and chapter five will cover conclusion and recommendation Positive
impacts Better services delivery Good performance of the business.

4
 Positive impacts of taxation

Better services delivery

Good performance of the

business

High profitability to the business.

INDEPENDENT 1 . - - - - - - - - - ----.J DEPENDENT

VARIABLES VARIAliLE S
Performance of small scale

business.

• Profitability of business
·ax system
'regressive tax • Documentary evidence of

Jon oppressive tax profit.

:ase to • Provision of supportive
ollect/administer
services. (markets,
Negative impacts of taxation
security, infrastructure.)
-poor management of the small

scale business.

-poor planning

-poor services delivery Corruption,

embezzlement, fraud.

5
 -·

CHAPTER TWO

LITERATURE REVIEW

2.0 INTRODUCTION
This chapter looks at the taxation in relation to performance of small scale
businesses. It consists of existing literature on taxation by scholars and
research studies, form textbooks, journals, newspapers and magazine.

The chapter covers definitions classification of taxes, theories of taxation and

business performance, the purpose of taxation and performance, compared
and contrasted the information to come up with similarities or differences
issues that emerged and the possible relationship.

2.1 DEFINATION OF THE CONCEPT

Tumuhimbise, (2000), defined taxation as means of administration and
collection of taxes. In Uganda, it is the responsibility of Uganda Revenue
Authority. On the other hand Bhatia, (2002), argued that, taxation is a process
of tax administration that involves enumeration, assessment, collection and
control. In addition, Balunyrwa,(1998), said that taxation is a compulsory levy
imposed upon the tax assess who may be individuals, groups of individuals or
other legal entities. This agrees with Bahemuka (2001) argument that taxation
is based on economic theory, such as the process leakage from the circular
flow of income into the public with exception of loans transaction and indirect
payment for publicly produced goods and services. Therefore according to
Tusubira. (1994). Taxation is a compulsory and non- contribution exacted by
government for public purpose. This payment is not followed by a concurrent
benefit in return. Basing on the d efinitions of various scholars above, taxation

I
is legally compulsory transfer of money from public to the government mainly
as a source of government revenue.

2.1.1 TAX
Balunyrwa in his book ( 1998) defined tax as a compulsory and unrefundable
contribution executed by government for public purposes. Payment is not
followed by a concurrent benefit in return the law institute the charge. Bhatia
(2000) on the other hand argued that tax is a compulsory levy, those who are
taxed to pay the sums irrespective of any corresponding return of goods and
services by the government. In agreement Manasseh (2000) said that, tax is
paid without a corresponding retum in terms of goods and services to
government and hence it is referred to as non-quid-proquo payment.

Basing on the definition of various scholars above research opinion, taxation is

a process of administering and collection of taxes through tax assessments,
collection and control.

2.1.2 CLASSIFICATION OF TAXES

The income tax Act (1997) classifies taxes as:

DIRECT Vs INDIRECT TAXES; the distinction between these two has not
always been satisfactory and consistent. However the basis of distinction
includes: Incidence of tax: where the incidence of the tax rests upon the person
paying the tax, then it is regarded as direct tax. Otherwise the tax is deemed to
be indirect when the burden falls on another person, rather than the person
paying their tax.

7
Tax based or activity: activity tax on this basis taxes levied on production
income are generally direct taxes while those levied on consumption and
expenditure are in direct.
The relationship between taxpayer and tax authority- where the tax authority
deals direct with a taxpayer such a tax is direct, while if the taxpayers deal
with a tax authority through an intermediary the such tax is referred to as an
indirect tax.
Mode of assessment- on this basis of distinction the liability in respect of a
direct tax is determined directly with reference to the tax paying ability of
taxpayer.
However, for indirect taxes the tax liability is assessed directly; i.e. there is no
prior contact with the taxpayer to assess his/her ability to pay.

PROPORTIONAL Vs PROGRESSIVE TAXES

Progressive tax; are those where with increasing income or tax bases activity
the tax liability not only increase in absolute terms but in proportion to the
increase in the income, for example pay as you earn, presumptive.

Sometimes also progressive taxes are defined as taxes in which the marginal
tax rate rise as income rise. Whereas proportional tax is one where the tax
liability increases with the increases in income.

REGRESSIVE Vs DIGRESSIVE TAX

Regressive tax is tax whose tax liability within increase in income taxable
activity. The burden falls more on the poor than the rich. Most turnover taxes
are regressive . While digressive tax is that whose earns pay less or low tax for
the extra income earned.

8
2.1.3 THEORIES OF TAXATION
Hatred for tax by the taxpayers is a well-establish fact world over and is as old
as man. Strong statements from taxpayer like: "A tax collector leads those
people going to stay on the moon so as to make this earth a better place to live
in ... " are a confirmation that imposition of taxes can create great unrest in
society said by (Okello).

Therefore efforts have to be made to ensure that there is justice in taxation in

order to avoid disaster. In this regard, six theories have been advanced to help
achieve justice in taxation.(Okello,2006). These theories are examined below,

Practicability theory
This theory asserts that the choice of various tax proposals, the authorities
need not consider various economic and social objectives or the effect of the tax
system. The authorities would on general want to pluck the goose where the
feathers are thickest and there is a minimum amount of squawking.

Sociopolitical theory
Theory is creation of Adolph Wagner, a German scholar. He asserted that in
contrast to the practicability theory, the social and political objective should be
the cornerstones in a tax system. Wagner argued in his theory that a society
consisted of individual member. He further said that society had an existence
and entity of its own which needed and taking care of. in this regard, a tax
system should not be designed to serve the needs of the individual member but
should be used to cure the ills of the society in so far as is possible. Wagner
was specifically in favors of using taxation for reduction of income inequalities,
and so to achieve this objective, he advocated for small income to exempt from
taxation.

9
Benefit Received theory
This theory traces its origin from the contracts theory of the state, where the
state provides various goods and services to the member of the state and they
contribute to the cost of these supplies in proportion of the benefits received.
Normally, income is sometimes used as an indicator of the benefits r eceived. In
this case it is assumed that without the protection of the state the economy
cannot exist and accordingly it may be inferred that benefits each member of
society derives from the state are in proportion to his income. Such an
inference would lead to policy recommendation for proportion taxation.
Cost of service theory
This theory implies that the citizens are not entitled to any benefits from the
state and if they any, they must pay cost thereof. The theory emphasizes the
semi-commercial relationship between the state and the citizens to a greater
extent. The theory can notes a budget policy since it require the state to give up
its basic protection and welfare function and embark on receiving the costs of
services provided. This would leave neither benefits nor surplus in the
economy.
Ability-to-pay theory
The theory suggests that citizen is to pay taxes because he can and his relative
share in the total tax burden is to be determined by his relative paying
capacity.
The theory emphasizes that the burden of taxation should be shared amongst
the members of society so as to conform to the principle of justice and equity,
and that this equity criterion will be satisfied if the tax burden is apportioned
according to the relative ability to The theory of ability to pay is combined with
the objective of maximum welfare of the society. The index of paying ability is
translated in terms of equal-marginal sacrifice such that society undergoes the
least aggregate sacrifice in meeting the tax liability. Therefore the to pay is not
an absolute quantity. It is related, indices are available for determine the
relative ability to pay of the taxpayer; it could be income, wealth property or
consumption expenditure.
10
The theory of equal sacrifice
This theory is closely related to the ability to pay theory. It has its meaning
derived from two angles namely, the equity and the welfare view. The equity
approach presupposed that each taxpayer should be made to undergo amount
of sacrifice irrespective of his income. It should therefore be envisaged that
equal sacrifice admits of different interpretation and one tallies with the welfare
consideration.

2.1.4 THE PURPOSE OF TAXATION

According to the Uganda Economic Journal. (1973) on taxation and economic
development the main purpose of taxation is to reduce the quantity of
resources consumed by the private sector. It further shows that in stressing
the consumption reducing aspect, by the taxation may be there for other
objectives such as to charge the distribution of income, to reduce consumption
of particular commodities which may be harmful such as cigarettes and help
stabilize the economy. On the other hand Tumuhimbise,(1996) argued that
taxation is both important source of government revenue and also important
economic tool for government. In addition Balunywa,(1988)said that the failure
of the market mechanism for taxation, several scholars have argued that
government has to three functions outlined below:

Allocation of function: that is based on the premises that certain goods

cannot be efficiently provided by the market. In those circumstance if we leave
provision of all goods and services to private sector will lead to market failure.
Therefore government must step in to provide these goods.
Distributive function: this function concerned with creating equity among
members of society. Distribution is concerned with systems that will lea d to
equitable distribution of wealth and income. The distribution of income and

11
wealth are initially dependent on factors endowments because of differing
factor endowments and abilities differ.

Stabilization function: it involve of fiscal policy to bring about full

employment and price stability in a market economy. Without public policy
guidance the economy suffers from periodic or cyclical fluctuations that create
unemployment.
Derived from the above functions therefore are three objective for government
to attain using taxation. It raises revenue for government and development
expenditure.
Through recurrent expenditure government is able to fund its day to day
operations like payment of salaries and wages to government employees.
Facilitation of government scholars with scholastic materials and drugs for
hospital.
Encourage development of local industries and protect against foreign
competition with a view to provide employment and saving foreign exchange, by
imposing high duties on competing imports.
To achieve greater equality in the distribution of wealth and income, the
government may impose a progressive tax on the income and wealth of the
rich. The revenue raised is then used to provide social services for the benefit of
the society.
Encourage export of goods and services in order to make the more competitive
in the world market, by reducing or removing tax on exports. (Uganda Revenue
Authority, coping with taxes, 2007) ..

2.2 PERFORMANCE OF SMALL SCALE BUSINESS

Bahemuka (200 1), defined performance in terms of financial analysis. Where
fmancial analysis is the process of identifying the financial strengths and
weakness of the firm by properly establishing relationship between the items of
the balance sheet and the profit and loss account. On the other hand Lipsery

12
(1983) argued that performance is the process by which a business ensures the
achievement of its set objectives by using the available resources. The
objectives include maximization of profits, market share and customer
satisfaction. In addition Druckerjl990)said that profit is the responsibility of an
enterprise to the society that is the first to enterprise in the society to make
profit This agrees with Richard,(1 983) argument that profit is excess of
revenue over all opportunity costs include those of the capital in nature. For
the purpose of the research much emphasis will be put on profit as per
Drucker.

Pandy, (1979) defined performance as the process by which a business ensures

the achievement of its set objective by using the available resources. These
include: maximization of profits, market share, and customer satisfaction in
order to be assure of growth and survival. Performance as being defined m
terms of financial analysis. Where financial analysis is the process of
identifying the financial strength and weakness of the firm by properly
establishing relationship between items of the balance sheet and profit and loss
account. Poor performance administration greatly reduces the efficiency of
taxpayer thereby reducing their ability to work.

This led to less production hence poor performance, the major obstacles the
growth and development of small businesses has been the taxation policies.
Which have serious implication on business profits and liquidity position? This
is because of the unfair tax rates.

2.2.1 SMALL SCALE BUSINESS (SSB)

Zake, (2005), says that the definition of small scale business is quite broad,
ranging from a one person' business or venture to a company registered under
the legal provisions. He says the definition of small scale business often
revolves around such parameters like size, tumover or number of employees.

13
On the other hand Druker (1990) argued that small scale business is applied to
any type of business that is operated by one or few individuals commonly
found in the service and retail fields. This agrees with income tax Act of
Uganda 1997 section 3 argument that small scale business as a business
whose total annual sales turnover doesn't exceed Uganda shillings 50.000.000
million.

In addition Mugerwa (2003) said that small business is basing on some general
features. For instance a business is relatively small with less volume and less
number of employees who are most family members. The location of operation
of business is normally near the resident of the owner and worker comes from
same location. The provision of capital in small business is mainly provided by
the proprietors.
Uganda Manufacturer Association, using the investment code enacted in 1993
groups business in accordance with the people employed and the capital
invested. For instance as micro business employed less than 30 people and
capital investment less than two thousand five hundred dollars($ 2500).
Medium business employs from fifty to two hundred and fifty people and
capital investment is five thousand to ten thousand dollars and above all the
stated are treated as large business. According to the Uganda small scale
Industries Association, a small scale business is one employing between to 25
people and with assets capital not exceeding US $ 100.000. The Ministry of
Finance, Planning and Economic Development defined small business unit
within a capital investment not exceeding $300,000.
According to tax news March, (2003, the private sector foundation defined
small business as that which have an investment of between untied state
dollars five thousand to fifty thousand dollar. This agrees with Bhatia (2002)
argument that small scale enterprises or industry in fixed asset (plant and
machinery). In addition Richard, (1993), said that small scale business is small
undertaking, characterized by small number people and dependence on small

14
market share. Thus small scale businesses are normally located around
markets and trading centers.

2.2.2 TAXES PAID BY SMALL SCALE BUISNESSES IN UGANDA

Income Tax Act1997 section 3 spells out the taxes paid by business as follows:
Corporation Income Tax; this tax is charged on income earned by a person
or companies and trust other than individuals. Like in the case of individual's
tax corpor ate income comprise of income from various sources of taxpayer
corporate income is charged at a r ate of 30%.
Individual Income Tax; this is charged on income earn by an individual for
example a sole trader. The term is more applied to individual is self employed
businesses. However individual tax income is not limited to business income
alone .. It includes income earned by an individual from all sources except that
income which is assessable separately.
Rental income Tax; it is income tax ch arged on rent earn by individual by way
of lettin g property. It is levied differently from other sources of income by the
same person and taxed separately under the rental tax structure.
Presumptive Tax; this tax is c h arged on small scale business whose gross
turnover is less than the shillings 50,000,000 million. The income paid by such
a person is estima ted and varies according to the segm ent of the gross turnover
in which his/ h er sales falls for any given year

15
 THE TURNOVER IS BROKEN INTO DIFFERENT AMOUNTS WITH THEIR
CORRESPONDING RATES AS SHOWN BELOW.
~OSS ANNUAL TURN OVER TAX RATE
ss 5,000,000 Nil
)00,000/= to less than 20,000,000 Nil
xe than 20,000,000/= but lea than 250,000/= or 1% of Gross turnover
1,000,000/= whichever is lower
xe than 30,000,000/= but less than 350,000/= or 1% of Gross turnover
1,000,000/= whichever is lower
xe than 40,000,000/= but less than 450,000/= or 1% of Gross turnover
),000,000/= whichever is lower
Source: Taxes payer Guide (22nd edition).
STYPES OF TAXES AND SOURCES OF INCOME
TYPES OF TAXES SOURCES OF INCOME

Corporation tax Company income

Rental income tax Rental earned

Individual tax Income earned

Presumptive tax Gross turnover

Source: Taxes payer Guide (22nd edition).

2.2.3 FACTORS AFFECTING THE PERFORMANCE OF SMALL SCALE

BUSINESS
Kibera (1997), said that small business have an important role to play in many
economies, he enumerated the factors that affect the small scale business.
These include lack of market opportunity, access to finance, enabling
environment, market information and managerial skills, as explained below;
Lack of market opportunity; in the poor countries, effective demand and
consequently market opportunity is a factor for small business and indeed in

16
business development. This may not be the case on the developed countries.
Consequently, even if is opportunity to exploit, it may be difficult to realize
because of lack of market.
Another aspect is the fragmentation of African market both physically
culturally. For example selling in Uganda with over 40 languages becomes
nightmare for salesman. Whereas in the development countries, the commodity
of culture and language ease the selling process. The level of development itself
imposes additional constraint to small business growth because of usage of low
level technology; small businesses cannot compete with large businesses that
have benefits that arise from economies of scale.

Lack of access to finance; the access to finance as one of the key constraints
to small business growth. This is worsened by the absence of financial market
in the developing countries. Small business owners cannot easily access
finance to expand their business and they are usually faced with problems of
collateral, feasibility studies and the unexplained bank charges. This means
that they cannot access finance to enable them to grow. He makes a detailed
analysis of finance as a constraining factor and includes collateral, interest
rates, inability to evaluate financial proposals and lack of financial skills as
hindrance to small business growth. Under developed financial markets impose
additional constraints. There are no financial instruments and no independent
financial sources that is market driven.

Low level technology; because of their smallness these business end up using
a cheap technology which is usually not top of the range. This result into high
costs of production and un-competitiveness. For instance small business
cannot afford to use computers or even where they have a computer, to
continuously upgrade their equipment. Therefore they cannot compete with
large businesses. This may not be the case in the developed countries where
because of market opportunity and likely success due to environment enabling
factors, it is easier to new technology. Beside, this technology originates from
17
the developed countries and unlike in the developing countries where it must
be imported, it is relatively cheap.

Enabling environment; while many countries have acknowledged that small

businesses have an important role in their economics, not much effort has
been done to facilitate their growth. They have to compete for finance, markets.
Personnel and utilities like any other business unit. In few countries especially
India. There has been affirmative action to promote small business over a long
period. In Uganda the government has only paid a lip service. In fact, the
Uganda Investment Authority (UIA) which was set up to promote investment in
Uganda was not attractive for the small business. The UJA would only support
proposals from companies with more than US $ 50,000 to invest. The
development banks in the country did not have programs for small businesses.
It is only the non-government organizations and specialized financial
institution that have come in to assist small businesses. It is easier for large
businesses to get land for industrial development and license to operate the
business that the small operate. Large businesses get easy access to utilities
than small businesses. Consequently, there is no enabling environment to
promote small operators.

Managerial skills; the managerial skill is the most important constraint faced
by small business. At the formation stage a small scale business owner is able
to run a business but as it grow and ages, managerial demands arise. These
are in the form of operational managerial requirement like production, sales,
and finance and most important is the ability on how manage them. Some
owners have the ability over these but in the long run they need to employ
other people. Some people believe that entrepreneurship skills are part of
managerial skills. While others would wish differ and go beyond that.
Entrepreneurship 1s beyond management and not all mangers are
entrepreneurs.

18
2.2.3 RELATIONSHIP BETWEEN TAXATION ANT SMALL SCALE BUISNESS
PREFORMANCE
Tumwine, (200 1), says that the growth and performance of small scale
business has been retarded mostly by poor taxation policies. He revealed that
high indirect taxes hinder business expansion with a big proportion of
business profits ending up being paid as taxes therefore it is clear that profit of
small business are greatly reduced by the tax paid by then in order to survive,
traders have been forced to increase the prices of their commodities so as to
incorporate the tax elements. But this has left most of them unhappy as the
number of customers decrease reduction in the sale and in some case a
subsequent closure of the business are unavoidable facts in the same way.
On the other hand Hanson J .L (1978) said that, high taxes affect consumption
and consequently discourages investment in small scale businesses. High
direct taxes will lead to high prices of good hence a shift in consumption
pattern from highly goods to lowest priced goods hence taxation and
performance of small scale businesses are mutually related. Keynesian modes
taxes are show that government revenues can be realized through fiscal policy
mechanism. Has adverse effect on business in form of savings propensity to
consume. Fiscal policy includes tax policies therefore meaning that, taxation
and small scale business performance are related.

In addition Zake (2003) said that high taxes considerably reduce the profit
margins of individuals undertaking, and act as a disincentives to further
investments. These taxes are threatening the firm's investment in the area to
earn enough incomes, but they failed to do business because of high taxes.
This agrees with Frank, (1995) who argues that, earnings from mcome
statement of small business after netting taxes little income is left for
appropriation this has scared new entrants in the industry, hence meaning
that taxation and performance of small business are related. When taxes are
high the level of business performance is low and when the taxes are low
business performance tend to be high.
19
From the above, summary suggests that, taxation being the process of
administering and collecting taxes. It is concerned with public revenue,
expenditure and public debt. The efficiency of taxpayers and reduction in
ability to work will be due to poor tax administration which will negatively
affect production levels. Hence taxation seen major obstacles of small business
growth and performance.

20
 CHAPTER THREE

REASAERCH METHODOLOGY

3.1 INTRODUCTION
This chapter covers the background which data which will b e gathered. It
discusses the research design, methods of collecting data, data processing,
analysis and presentation as well as limitations to the study and it includes the
target/research population and the sample size and sample design and the
appendix instrument.

3.2 RESEARCH DESIGN

This study will b e both analytical and explanat ory in nature and it will
basically analyze taxation and performance of small scale business. It will be
qualitative and quantitative.

3.3 TARGET /RESEARCH STUDY POPULATION.

The study population will be 200 shops on the market selected to represent the
small scale business around the market in my research, Using sample
technique.

3.3.1 SAMPLE SIZE.

The samples will 50 sh ops out of t he 2 00 shops which is the research
population it selected to represent the small scale business around the market.

Table 1: S h owtng t h e numb er an d composition o f respondents

Category of Respondent Number of Respondents
Small scale business own er 43

Workers within the shops 7

Total 50
21
3.3.2 THE SAMPLING TECHNIQUES
The researcher shall employ three sampling techniques for carrying out the
research. This will include, quota sampling, multi- stage cluster sampling and
purposive judgmental sampling in data collection.

A. Quota sampling
This shall address the issues of repetitiveness where the matrix describing the
characteristics of the largest population will be used to determine what
proportion of the population is male and female and for each sex, what
proportion falls into the various educational levels.
B. Multi -stage sampling
This sampling technique shall involve two basic steps; listing and sampling of
the study population; the list of the primary sampling units will comprise of
forty three (43) small scale business owner, seven(7) workers within the shop,
this sample of those units will be selected and then listed.
C. Purposive sampling
In this sampling technique, the researcher will sample the population basing
on the researcher's own knowledge of the population, its elements and the
nature of the research designed, especially in the initial design with the
questionnaires wishes to select the particular respondents to test the broad
applicability of the research questions designed.

3.4 DATA COLLECTION METHODS

The researcher will get information from secondary data sources this include
literature on taxation and small scale business in records of small business
activities m Namwongo and pnmary data from the questionnaires
administered, observation of the business activities and interviewers.

3.5 INSTRUMENTS OF DATA COLLECTION.

The following instruments will be applied in data collection and analysis:

22
3.5.1 Questionnaires.
These will be advanced by the researcher to get information on facts of how
taxes affect the performance of small scale business.
The researcher anticipates that questionnaires will help to collect data from
respondents who will have no time to be interviewed within the market and
also those who may have time. The respondents will have to answer or fill in
the answers at their own place or free time.

3.5.2 Interview
The researcher shall carry out interview with the sampled such as shops owner
or small scale businesses owners. By get the information that may be relevant
for him to draw logical conclusion on which he may base his opinion.

The researcher shall try to create a conductive environment for interview by

building a report through explanation of the purpose of the study and
assurance. The researcher prefer this data collection methods since he hopes
that it will give him room to make clarification on some of the questions
through probing for easy understanding and will ensure validity and reliability
of data.

3.5.3 Observation.
In this method, the researcher will use the eye to observe what actually
happens on the ground and will take the record, more so, the researcher will
observe the activities of the correspondents, selling and buying activities of
shops and how they carry their business activities. This will be done using
observation technique such as natural observation.

23
3.6 Sources of Data.
The researcher will use mainly two sources of data to get information on how
taxes affect the performance of small scale businesses include the following
discuss:

3.6.1 Primary sources.

The researcher shall be involved in face to face contact and conversation with
the respondents or interviewing from whom he hopes to get the information
pertaining to the topic of the study, the researcher will also be active asking
questions or give to them questionnaires and the information will be filled by
the respondents on the questionnaire.

3.6.2 Secondary sources

The r esearcher shall collect and use data from the preVIous reports on the
study of different text books, Journals, internets, reports from small scale
businesses performance among others secondary Literature.

3. 7 DATA PROCESSING
The processing of data will be done so as to verify the data collection. This is so
in order to ensure the completeness and uniformity, editing will be done by the
researcher which will involve checking the data for error, omissions and gaps.
This will help the researcher to detect the errors that may influence the results.
Editing will also help the researcher to ensure that every question in the
interview guide has an answer and these answers given are accurate and
correct.

3. 9 DATA ANALYSIS
Under data analysis, both quantitative and qualitative method will be used in
this statistical and non statistical approaches will be used in the analysis of
the finding.

24
 CHAPTER FOUR

PRESENTATION OF FINDINGS, INTERPRETATION AND DISCUSSION OF

SUCH FINDINGS.

4.0 Introduction.
This section reflects t he findings of the study, the related interpretations and
discussion on the effect of taxation on the performance of small scale
businesses in Uganda using the literature review obtained in pervious chapter
in the line with the research objective such as;
(i) To evaluate the operation of taxation in Uganda.

(ii) To assess the performance of small scale business in Uganda.

(iii) To establish the relationship between taxation and performance of

small scale businesses.

4.1 Response rate

Out of the 50 questionnaires distributed to respondents, all were returned
giving a response rate of 100%.
Table 1: Showing distribution of respondents by gender

Gender of Frequency Percentage

respondents
Male 22 44%
Female 28 56%
Total 50 100%

Source: Primary Data

25
From the table above 56% of the respondents were female and 44o/o were male
thus there was no bias on either sex. This implies that majority of the
respondents are female who own small scale business and have shops.
Figure 4.1

Distribution of Respondents by Gender

• MALE
• FEMALE

Table 2: .Shows responses on how the tax system is related to the

performance of their small scale businesses

Sex of respondents No. of respondents Percentage (o/o)

Male 22 40

Female 28 60
Total 50 100

Table 2 show that out of 50 respondents who participated, 22 were males

forming the percentage of 40°/o whereas the female respondents were 28 with
the percentage of 60o/o. The subtotal of the respondents were 50 meanwhile the
sub percentage of the respondents was 100%
The above disparity between the figures and the percentages of the female and
male respondents could be as a result of gender equality in most of the small
scale businesses around the market.
When the researcher consulted those who were not working within the market
or they just come as customers, the following responses were obtained.

26
 -~
- -

Table 3: Shows responses on how taxes Systems were related to

Performance of the small scale businesses &om those who did not working
within the market they are just customers.

Item Tally No. of Percentage

respondents
Aware IIIII IIIII 25 50
IIIII IIIII
IIIII
Not aware IIIII IIIII 25 50
IIIII IIIII
IIIII
Total 50 100

· re4.2
AWARENESS OF TAX SYSTEMS USED

• AWARE

• NOTAWMf..

When the respondents were asked about their education levels the following
responses were obtained.

27
Table 4: Showing the education background of respondents

Level of Small Worker Frequency Percentage

Education scale within (%)
businesses the
owners shop
O'Level - 5 20 40
A'Level - 2 15 40
Diploma 5 - 10 10
Degree 5 - 5 10
TOTAL 10 7 50 100
Source: Primary data
From the table above 10% were degree holders, 10% were diploma holders,
40% were 'A' level drop outs and also 40% were 0' Level drop outs. This
indicates that the m ajority of the r espondents were '0' level and 'A' level
holders have enough skills to carry out their work and they were able to
interpret the questionnaires as majority of the population knows how to read
and write and more so it showed that the majority of the r esponden ts had
knowledge about the tax system since they are educated men and female with
some qualifications.

28
Fi re 4.3

40
35
30
25 • Small scale businesses owners

20 • Worker within the shop

15 • Frequency

10 • Percentage(%)

5
0
O'level A' level Diploma Degree

The researcher further consulted the respondents to determine their ages. The
researcher found out the following responses.
Table 5 : Show the ages of respondents

Age group(years) Tally No. of Percentage

respondents
18-24 It// 10 20
25-30 IIIII II 20 40
30-45 IIIII IIIII 10 20
45 above IIIII Ill 10 20
Total 50 100

Table 6 Shows that the respondents within the age bracket of 18-24 formed the
percentage of 20%, 25-30 formed the percentage of 40o/o, those between 30-45
years formed the greatest percentage of 20% whereas those above 45 years
formed the percentage of 20o/o out of the sub percentage of 100.

29
Figure 4.4

40

35

30

25
• frequency
20
• percentage
15
10
5

0 ~---------.----------.----------.----------~

18-24 25-30 3Q-45 45 and above

30
Table 6: Shows the Marital Status of Respondents

Marital status Frequency Percentage(%)

Single 10 20
Married 30 60
Separated 8 16
Divorced - 0
Widowed 2 4
Total 50 100
Source: Primary data
The table above shows that 20o/o of the respondents were single, 60% are
married, 16o/o were separated and 4% were widowed and there were no fmdings
on divorced respondents. This shows that most respondents were married
which can also be explained by majority middle aged respondents.

Figure 4.5

• Frequency

• Percentage

Single Married Separated Divorced Widowed

31
 =

4.1.1 Objective one: The operation of Taxation in Uganda.

The research revealed that taxation referred to as process of administering and
collecting taxes, it's concerned with public revenue, public expenditure and
public debt. It is a process of tax administrating, which involve enumeration,
assessment, tax collection, tax services and control m Uganda tax
administration is the responsibility of Uganda Revenue Authority. Taxes play
an important role in the economy as one of the major source of government
revenue and even though the general behind taxation in the prevision of public
goods and services, they are a non quid-pro-quo payment.
Different scholars in the subject classified taxes as either direct or indirect
basing on incidence, proportional versus progressive, regressive versus
digressive basing on their behavior in the relation to the tax base. It derived
from the four function of govemment that is allocation, regulation, distribution
and sta bilization.
The study also found out that economists looked at taxation as a process of
circular flow of income in public sector. The study also revealed on taxation
that the performance of small s cale businesses to be called and for it to be able
to achieve their objective, they should consider the income act 1997 section
three.
The research revealed that in Uganda small scale business pay different taxes
is; corporation income tax charged income earned by a person such as
accompany. Individual income tax charged on income earn individual, Rental
income tax charged on rent earn by individual, presumptive tax charged on
small scale businesses whose gross turnover is less than shillings 50,000
million.
The research revealed that the presumption tax is taxed according to their
category of annual turnover in which the business income lies. Rental tax and
individual income tax are levied on a personal income, of the taxpayers and
reduce their revenue of small scale business hence affecting their performance
negatively.

32
4.2 objective two: The performance of small scale businesses in Uganda
The study revealed on the performance of small scale businesses, it was based
on profits. The study found out that profit in simple term is the function of
revenue and cost. Also the study found out the profit is the responsibility of an
enterprise to the society that is the first responsibility of an enterprise in the
society is to make profit.
This means that the performance depend on the level of production, where the
level of production is low the profit will be from the operation of the enterprise
while where the level of production is high will be increase in profits.
The study found out that different scholars looked at profit is excess of revenue
earned over total costs incurred in the process or event of providing goods and
services. Hence profit is the responsibility of an enterprise in the society.
The re search revealed that Income Tax Act of Uganda section three defined
small scale businesses as a business whose total annual sale turnover doesn't
exceed Ugandan shillings 50,000,000 million. Also the study found out that
small business is based on some general. feature as explained in chapter three.
Therefore the study found out that most business groupings are based on the
investment code Act 1993, under Ugandan Manufacturers Association. The
various groups are in the term of the number of people employed the capital
investment in United State dollars.

4.3 objective three: the relationship between taxation and performance of

small scale businesses
The research revealed that there is a relationship between taxation and small
scale business performance means that high direct taxes will lead to high
prices of goods hence a shift in consumption pattern from highly taxation and
performance of small scale businesses are mutually related. The study also
found out those Keynesian modes shows that government revenue can be
realized through fiscal policy mechanism, fiscal policy include tax policies
therefore meaning that , taxation and small scale businesses performance are

33
related. Hence own view taxation and small scale business level is low business
pay high taxes and when taxes are high the level of business is low. Therefore
low taxes repaid leaving too many incomes for day today running of the
enterprise and increasing their performance.
The research also found out that apart from taxation lack of good managerial
skills affect the performance of small scale businesses. A challenge only comes
when small businesses fail to prepare proper books of accounts thus affecting
their performance.

34
 CHAPTER FIVE

CONCLUSIONS AND RCOMMENDATION

5.0 INTRODUCTION
This chapter presents conclusion drawn from discussion of findings and are
closely related to the purpose and objectives of the study, it is also
recommendation on the performance of small scale businesses and further
research based on the literature review.

5.1 Summary of findings

The findings in ch apters four indicated that taxation has negative effect on the
small scale business performance in terms of profits. Taxes charged on small
scale businesses have gross effect on the expansion of these businesses as they
encroach on the expected revenue.
Hence reducing investment finance since most small businesses are financed
out of their profits and saving, as a result the performance of th ese s mall
business has been undermine.
The findings also revealed that taxation system on small scale businesses aim
at increasing tax revenu e while maximizing constraints to small scale business
survival. The Policy regarding tax burden like presumption tax encourage these
firms to prepare proper books of accounts, locating taxpayer's tax rates, tax
penalties, incentives n eeded to b e applied on small scale business under
different income levels. Thus taxation policies aim at protecting them although
tendering of tax collection endangers the objectives of tax collection.

5.2 Conclusions
Generally ther e has been poor taxation system by tax authority with focus
being on the small scale businesses, hence resulting into a greater scope to
taxation for instance VAT. Also there is need to receive and improve the legal

35
system in order to ensure efficiency, enforcement of tax laws to increase
compliance to introduce tax education to enlighten small scale businesses on
the importance of paying taxes.
Poor performance of small scale businesses is as a result of inadequate
identification assessment and collection, which are aspects of taxation
performance. Therefore tax policy should focus on improving taxation
performance in favor of small businesses. Likewise other factors also affecting
this variable should be taken into account. Taxation performance remains a
major area to be explored by revenue authorizes of various classes of taxes,
since improving taxation performance enhances almost all aspects of tax
policy, including tax from small scale businesses.
Small scale businesses are those annual gross turnover does not exceed million
Uganda shilling, while large scale businesses are those with capital of more
than fifty million Uganda shillings. The small business taxed depending on
gross turnover and they pay fixed amount orl% of the annual turnover which
is lower while large businesses are taxed at rate of 30 %. Therefore URA tried to
avoid business income tax difference by imposing a fixed rate of 30% on
businesses regardless of whether it is a small or large business. High direct
taxes will be high prices of goods hence a shift in consumption pattern from
highly taxation and performances of small scale businesses are mutually
related.

5.3 Recommendation
Basing on the study carried out, the researcher recommends the following:
The government through URA should embark on intensive tax education
program especially for business community. This should be done through
various media and in different languages on radio stations, televisions. URA
should carry out massive training of its staff about tax assessment collection
methods, as well as how to handle taxpayers.

36
Taxpayers should employ skilled people like accountants to ensure proper and
complete records keeping in their businesses. This will enable then to pay only
the taxes that they must pay and infringe on their profits.
Tax education should be included in primary school syllabus to ensure greater
sensation even among the young generation since a greater percentage of small
scale business owner have as far as primary least with this knowledge
taxpayers can control their liquidity position.

5.4 Areas for further research

• The role presumption tax on performance of small business.

• Tax evasion and tax avoidance of small scale businesses in developing

countries.

• Effect of taxation on growth of small business enterprise.

37
 REFERENCES
Bhatia H.L (2002), Public Finance 23rd published edit Vikas house PVT Ltd.

Coping with Taxes Value Added Tax and Tax policy, A publication of Makerere
university printer, Kampala.

Frank Wood (1999), Busman According, 5th edition.

Hanson J.L (1978), A Text Book of Economics, 7th edition.

Harper M. (1998). The Challenges of Taxation in Developing Countries, Impact

of Small Enterprise Development. London International Technology
Publication.

Http.www.Intemationaltaxreview.com

Kibera et al ( 1997) Shaping School Culture, the Heart of Leadership San

Francisco. CA: Jessey-Bass

Manasseh Tumuhimbise 2000), Introduction to Taxation in Uganda Publishers

Limited Kampala.

Mugerwa J.N (2003) Economics Coverage, Update edition.

Mugerwa Johnson (2001) Taxation and Performance of Selected Small Scale

Enterprise in Nakawa Unpublished Research Report.

Musgrave R. A 1980 Public Finance in Theory and Practice (3° edition) McGraw
Hill. New Vision Friday July 11th 2003.

38
Okello Khalist (2006), Principle of Taxation, Printed in Uganda By Kakadde and
Kampala Printers.

Pandey I.M (1995), Financial Management, Prentice Hill.

Peter F. Drucker (1990). The Prentice of Management, 11th edition. British

Library Publishing Great Britain.

Pias K. Bahemuka (2001), Income Tax in Uganda, Edit Foundation Publishers

Ltd. Kampala.

Richard G Lipsery (183), An Introduction to Positive Economics 6th edition.

Sejjaka S. Et al. Coping with Taxes VAT and Tax Policy Makerere University
Journal. Taxation and Economic Development, the Uganda Economic Journal
(1973)

Tayebwa B. Mugisha (1992), Basic Economics 2th edition, simplified pamphied

The Income Tax Act ( 1997), 2nd edition.

The Participatory Poverty Assessment Report. (1996), by the Minister of

Finance and Planning Economic Development.

39
 APPENDICES

APPENDIX INSTRUMENTS (I)

A. QUESTIONAIRES.

Dear respondent,
As a student of Kampala International University pursumg Bachelor of
Business Administration, I am carrying out a research on the topics: The
effects of taxation on the small scale businesses.
Case study: - Small shops on market and small scale business

The purpose of this study is to collect information on the effects of taxation on

the small scale businesses.

Your response will be treated with high degree of confidentiality and the
information gathered or obtained is strictly for academic purposes.

PERSONAL DATA (QN 1-4).

Please help to tick the most appropriate and fill m the blank spaces where
applicable.
1 Age
a) 18-24 D c) 30-45 D
d) 45-and above
b) 25-30
D D
2. Sex:
a) Male D b) Female
D
3. Marital status
a) Married
D b) Single D
40
4. Level of education
a) '0' level D c) 'A' level D
b) Diploma
D d) Degree
D
e) other
D
RESEARCH QUESTION ONE (Qn. 5-7)
5. How do you find the tax system on the small scale business?
a) V. good c) Fair
D D
d) Non
b) Good
D D

6. Is there any relationship between the taxes and how it affects the
performance of the small scale business?
c) Some how
a) Yes
D D
b)No D d) others (specify') D

7. How do you determine the efficiency of taxes that are collected from your
business?

41
RESEARCH QUESTION 1WO (Qn. 8-9)
8. Does the tax system cope up with the technology changes in the country?
a) Yes D c) S b) some how · D

b)No D d) None D
9. Does the tax system affect your business performance?
Yes D No D
Ifyes, how?

RESEARCH QUESTION THREE (Qn. 10)

11. Which of the following taxes is levied on your business?
a ) Corporation Income Tax Yes None

b) Individual Income Tax Yes None

c) Rental income Tax Yes None

d) Presumptive Tax Yes None

RESEARCH QUESTIONS FOUR (11-14)

11. Has these been important in the taxation system?
a )Yes D NoD
if yes, explain

42
12. What are the specific effects are of taxes on the performance your
businesses?

13. How do you manage and solve the problems of your business?

14. What technique do you use to follow up your business activities?

THANK YOU FOR YOUR VALUABLE TIME AND INFORMATION.

43
(B) INTERVIEW GUIDES.
1. How do you determine the efficiency of tax systems used in the country?

2. How do you fmd the tax system used in the country?

3. What relationship is there between the tax systems and the performance of
your small scale business?

4. What are the general effects of taxes on the performance of your business
activities?

5. Do you think the tax system can help your business to achieve the vision,
mission, and set objectives?
Yes c===J No c===J
If yes, How

44
6. What are your views on the future of taxation?
····· ····· ·· ···· ··· ········ ··· ···· ······ ········ ······ ·········· ········· ····· ·· ·········· ····· ·· ··· ·········· ····· ··
···· ······ ···· ···· ········· ···· ··· ······ ······ ······· ····· ················ ··· ····· ·· ··········· ··· ······ ········ ·· ···
....... ..... .. ... ................. .. .............. .... .. .. .......... .. .... ............ .......... ....... ................

45
 APPENDIX (II) TIME FRAME

Time Period Activity

December to January Proposal writing

January to February Da ta collection

Data Compilation February

Handing in of Dissertation February

46
 APPENDIX (III)

BUDGET FRAME WORK

PARTICULARS QUANTITY UNIT COST AMOUNT
Stationary
Pens 3 250/= 7500 / =
A flash Disk 1 25.000/= 30,000/=
Rim of Papers 1 10,000/= 10,000/=
Sub Total 47,500/=
Travel and Communication
Air time cards - - 22,000/=
Travels - - 50,000/=
Meals - - 35,000/=
Sub Total 107,00/=
Data Collection
Library 6 DAYS 5,000/= 30,000/=
Internet 15 HOURS 1,500/ = 2 2,500 /=
Sub Total 52,500/=
Typing and Printing
Proposal 1 COPY 20,000/= 20,000/ =
Research Report 1 COPY 70,000/= 70,000/=
Sub Total 90,000/=
Consultations
Editing 1 COPY 20,000/= 20,000/=
Miscellaneous - 36,000/= 36 000 7=
Sub Total 56,000/=
Photocopying and Binding
Research Report 2 COPIES 6,000/= 12,000/=
lPhotocopy)
Research Report 3COPIES 3,000/= 9,000/ =
(Binding)
Sub Total 21,000/=
GRAND TOTAL 374,000/=

47