HSA5000CBE Section 01CBE Scholarly Research and Writing (11 Weeks) - CBE - 2021 Summer Quarter Deliverable 7 - Scholarly Research Paper Deliverable 7 - Scholarly Research Paper

Research on the Effect of High Taxation on Small and Medium Enterprises (SMEs) In

Africa

Rasmussen College

Jennifer Franks

Submitted on August 10, 2021 for Caroline Gulbrandsen Has 5000

Scholarly Research and Writing Course

Research on The Effect of High Taxation on Small and Medium Enterprises (SMEs) In

Africa

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Research on the Effect of High Taxation on Small and Medium Enterprises (SMEs) In Africa Introduction

Small and medium-sized companies have long been recognized as a vital engine for economic

growth and industrialization in developing and emerging countries (SMEs). SMEs. Small

businesses are rapidly acknowledged for their significant contributions to job creation, economic

growth, and poverty eradication across Africa. According to the World Development Report, the

primary methods to pull people out of poverty are to provide "sustainable" employment and

chances for small and medium-sized businesses. However, in interacting with the government in

general, and with tax regulations in particular, the overwhelming majority of small and medium-

sized companies in developing nations are private firms that face unique difficulties (Ndiaye et al.,

2018).

Many of these businesses' difficulties may be linked to poorly thought-out tax regulations and a

lack of adaptability to future policy changes. There are few situations in which the complexity and

ambiguity of tax rules and their application of excessively high tax rates are not a problem (Ndiaye

et al., 2018). Given the shift in taxation potential, if the tax system is not adequately adapted to the

particular environmental circumstances, a more significant burden may be placed on tax-paying

businesses, thereby harming the end consumer. The main purpose and end goal of this study is to

assess the impact of high taxes on various small and medium-sized enterprises (SMEs).

Literature Review

In particular, small and medium-sized businesses (SMEs) face considerable challenges in

complying with taxes and regulatory requirements. Tax compliance may be defined as the

voluntary and complete performance of all tax obligations mandated by law (Daniel & Faustin,

2019). According to the results, small and medium-sized companies face a disproportionate

amount of the regulatory burden. Due to the form and size of small and medium-sized companies,

tax compliance is a critical issue for these businesses (Abdulquadir, 2021). This is particularly true

given that most small and medium-sized enterprises (SMEs) lack the resources and expertise

required to comply with a wide variety of complicated laws. According to the study results, high

compliance costs may result in tax evasion and fraud and a decrease in the country's

competitiveness in terms of tax attractiveness, which may deter investment (Daniel & Faustin,

2019). If an business fails to to file a tax return within the specified time frame or a total loss to

submit tax returns demonstrates non-compliance with tax laws. Other non-compliance with tax

rules includes underreporting income, over reporting deductions, and failing to pay assessed taxes

by the due date.

In some instances, failing to comply with tax rules may result in the taxpayer failing to pay all

taxes assessed against them. According to studies, tax cheating is widespread across the world,

especially in developing nations. According to empirical research, tax evasion is common in

developing countries and has a detrimental effect on development, resulting in economic

stagnation and other social and economic problems (Abdulquadir, 2021). Academics have

identified high tax rates as a factor in tax evasion. Additionally, it is said that a higher tax rate

raises the taxpayer's stress and reduces their disposable income, thus raising the probability of tax

evasion on their side. Numerous academics have addressed the problems raised by this literature.

The most notable is the inflexibility of tax placement choices in the face of cross-country tax

inequalities, which many scholars have addressed. There is still a mismatch between individual and

corporate taxes, but this is a resolved issue. To address market failures while avoiding negative

repercussions, the government must review its tax discrimination against entrepreneurs and create

entrepreneurial-friendly tax laws, among other things (Abdulquadir, 2021). Tax rates on a lesser

scale have a conceptually and qualitatively significant effect on a corporation's growth. The

marginal tax rate is used in this context to refer to the amount of tax paid on additional income

after the base rate is determined. This lends credence to the assertion that raising income taxes has

a detrimental effect on small and medium-sized companies (Ndiaye et al., 2018).

Tax impacts are defined in this research as any short- or long-term change in a business's

performance resulting from or caused by relevant tax laws, regardless of how little or significant

the difference in the business's performance is. Taxes may have a positive or negative impact on a

business's performance. The term "negative fiscal impact" refers to the tax effect that causes

businesses' performance to decrease or restrict (Everest Phillips, 2010). Taxes are deemed

advantageous when they positively or helpful affect a business's performance and development.

Thus, progressive tax policies benefit business performance, while unprogressive tax policies harm

economic success (Ndiaye et al., 2018). It was determined that high taxes have a detrimental effect

on the performance of small and medium-sized businesses and that the money generated by the

government as a result of lousy tax practices has a beneficial effect on small and medium-sized

companies, as well as an inverse relationship between the two.

Hypothesis

H0: There is no statistically significant connection between the tax structure and the financial

success of small businesses.

H1: There is a statistically significant connection between small and medium-sized company

tax structure and financial growth.

Research Design

The researchers used an explanatory or causal research strategy for this investigation. The

study was discovered to be required to demonstrate a causal connection between two variables,

namely the relationship between tax management and the development of SMEs. An online survey

technique was utilized to gather participants' thoughts, ideas, or opinions on a specific topic or field

of research. The survey method would include, among other things, a questionnaire, online surveys

of survey participants, and results from current papers and publications (Ndiaye et al., 2018). Prior

research has shown the effectiveness of the survey method in producing opinions, attitudes, and

descriptions and finding cause-and-effect relationships between variables. To conduct their

investigation, the research team used a variety of strategies and tactics. A sample of small and

medium-sized businesses was chosen using a subjective selection method to ensure that this

particular sample was representative of the larger community.

Methodology

The researcher has chosen a sample of SMEs from several developing African countries to

achieve our study objectives. Persons from the municipality have been entitled to submit the

government tax returns (Ndiaye et al., 2018). As a result, researchers built an impartial picture of

SMEs, taxpayers, and to what extent tax payments affected their company due to the target

population.

The researchers have employed a purposeful selection technique to pick a sample from the

general community to offer the participants exact results. Non-random sampling techniques are

used, and non-random selection criteria are defined for the example by the researcher. Purpose

sampling is a method for finding the optimum sample size for a study based on the research

objectives. Due to the time limitations and difficulties of evaluating the government's list of all

SMEs, these techniques are expected to be utilized. It will also help identify small and medium-

sized (SMEs) prepared to complete the questionnaire. Statistics are used to choose a sufficient

number of persons or components from the population to enable scientists to generalize the

properties or composition of the respondents to the demographic following the previous research

and comprehend the sample's properties or features.

Questionnaires have been employed in this research to collect survey data for empirical analysis,

which was then used to inform the results. The open and closed questions were answered

individually by the participants (Nieuwenhuizen, 2019). The purpose of the study was explained to

the participants, and they were promised that any information they gave would always be kept

private. As a result, the respondents received clear instructions on completing and completing the

surveys that they followed and were successful. This is because providing clear instructions and

the confidentiality of information considerably lowers the probability of partial answers.

Data Analysis

The regression method, more specifically multiple linear regressions, will be the primary statistical

instrument that will be used to evaluate the effect of the tax system on the performance of SMEs.

Given that almost all variables in this study are measured as intervals or ratios, regression is a

significantly more effective method for determining the relationship between two or more

variables than the majority of other analytical tests, such as non-parametric tests, and was thus

chosen for this investigation (Nieuwenhuizen, 2019). The findings of statistical tools like SPSS and

Microsoft Excel will be shown in several ways, including histograms, PowerPoint presentations,

bar graphs, and columns.

Conclusions and Recommendations

A significant finding is that taxes on small and medium-sized companies have a different impact

on profit growth than taxes on big corporations. According to the study's findings, changes in tax

rates are linked with changes in the pricing of different goods and services. Specifically, the data

indicate that rising tax rates raise production, distribution, and sales costs. This, in turn, influences

consumer buying patterns. In reaction to price rises, consumers reduce their purchases of the items

mentioned above. The findings recommend that regulations governing SMEs be simplified to

make compliance easier for small companies. This requires comprehensive and transparent tax

legislation, as well as a simple and time-efficient tax filing process. In addition, prohibiting and

discouraging the use of information and communication technology is essential.

References

A Review of Factors Affecting the Growth of Small and Medium Enterprises (SMEs) in Tanzania.

(2019). European Journal of Business and Management. Published.

https://doi.org/10.7176/ejbm/11-33-01

Abdulquadir, A. (2021). PARTICIPATION OF AGRIBUSINESS SECTOR SMALL AND

MEDIUM SCALE ENTERPRISES (SMEs) IN THE AFRICAN CONTINENTAL FREE

TRADE AREA (Afcfta); CHALLENGES AND PROSPECTS. SSRN Electronic Journal.

Published. https://doi.org/10.2139/ssrn.3773091

Daniel, T., & Faustin, G. (2019). Effect of tax incentives on the growth of small and medium-sized

enterprises (SMEs) in Rwanda: A case study of SMEs in Nyarugenge district. Journal of

Accounting and Taxation, 11(5), 89–98. https://doi.org/10.5897/jat2019.0339

Ndiaye, N., Abdul Razak, L., Nagayev, R., & Ng, A. (2018). Demystifying small and medium

enterprises (SMEs) performance in emerging and developing economies. Borsa Istanbul

Review, 18(4), 269–281. https://doi.org/10.1016/j.bir.2018.04.003

Nieuwenhuizen, C. (2019). The effect of regulations and legislation on small, micro, and medium

enterprises in South Africa. Development Southern Africa, 36(5), 666–677.

https://doi.org/10.1080/0376835x.2019.1581053