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

Introduction

On a global scale, small companies are increasingly recognized for their significant

contributions to job creation, economic development, and poverty eradication throughout Africa.

As per the World Development Report, providing "sustainable" jobs and opportunities for small

and medium-sized companies are the most effective ways to lift people out of poverty (Ndiaye et

al., 2018). However, due to their interactions with the government as a whole, and with tax laws, in

particular, the overwhelming number of small and medium-sized companies in developing

countries are privately held corporations that confront a variety of specific challenges.

Numerous problems these companies face may be traced back to poorly thought-out tax

laws and a lack of flexibility in responding to future policy changes. It is difficult to find a scenario

in which the complexities and vagueness of tax laws and the application of overly high tax rates do

not present a difficulty (Ndiaye et al., 2018). The tax system may be burdened with an increased

load due to the change in taxing potential if it is not appropriately suited to the specific

environmental conditions. Despite the positive contribution that taxes may make to a country's

Gross Domestic Product (GDP) in general, much more emphasis needs to be paid to the negative

impact of taxation on the development of SMEs in particular (Nkwabi & Mboya, 2019).

Small and medium-sized enterprises (SMEs) are critical drivers of economic growth in

both emerging and developed nations (Ndiaye et al., 2018). As formerly said, small and medium-

sized businesses (SMEs) not only create more new employment than big corporations or macro-

enterprises, but they also bring creative ideas, products, and business techniques into the

marketplace (Nkwabi & Mboya, 2019). However, according to the literature, there has been little

progress in understanding the detrimental impact of taxation on the financial performance of SMEs

in developing countries (Ndiaye et al., 2018). This scenario presents significant concerns regarding

matching the tax system to the unique needs of a given country's development requirement, as it

must strike a balance between the policy's short- and long-term consequences. This also raises the

need for a more in-depth investigation of how tax payments influence the growth of SMEs in

general (Ndiaye et al., 2018). This would be detrimental to the end consumer. In this research, the

authors seek to determine the effect of high taxes on various small and medium-sized companies

(SMEs).

Research Question

What are the impacts of taxation on small and medium-sized enterprises in Africa?

Hypotheses

HO: A statistically significant relationship exists between the tax system and the financial

performance of small companies.

HA: There is no significant relationship between the tax system of a country and the financial

performance of small companies.

Limitations

First and foremost, since the study was limited to a small portion of Africa, it does not

analyze regional and municipal differences throughout the whole continent of Africa as a whole.

Another possibility is that some entrepreneurs were reluctant to express their honest thoughts

during the interviews because they considered some of the questions sensitive. Furthermore, since

this group was tiny, it is unlikely to have impacted the overall findings and conclusions. Secondly,

researchers experienced time and financial constraints; thus, they conducted no thorough research.

Literature Review

Abiding with taxation and administrative obligations may be very difficult for small and

medium-sized companies (SMEs). It is possible to define tax compliance as the voluntary and

complete fulfillment of all tax responsibilities imposed by law. As per findings, small and medium-

sized businesses bear a disproportionate share of the regulatory burden compared to giant

corporations (Nkwabi & Mboya, 2019). Tax compliance is a crucial problem for these

organizations to address because of the structure and size of small and medium-sized enterprises

(Daniel & Faustin, 2019).

Given that the vast majority of small and medium-sized enterprises (SMEs) lack the

resources and knowledge necessary to comply with a broad range of complex regulations, this is

especially true. Following the study's findings, high compliance costs may result in tax evasion and

fraud, a reduction in the country's competitiveness in tax attractiveness, and a deterrent to

investment (Abdulquadir, 2021). Tax law noncompliance is shown by the failure to file a tax return

within the prescribed period or by failing to submit any tax returns at all (Daniel & Faustin, 2019).

Aside from underreporting income and over-reporting deductions, other examples of

noncompliance with tax laws include failing to pay assessed taxes by the due date, among other

things.

In certain instances, failure to comply with tax regulations may result in the taxpayer being

unable to pay all of the taxes that have been levied against them in full. According to research, the

practice of tax evasion is prevalent across the globe, particularly in impoverished countries

(Abdulquadir, 2021). The results of the empirical study indicate that tax evasion is widespread in

developing nations and that it hurts development, leading to economic stagnation and other social

and economic issues. High tax rates have been recognized as a contributing factor to tax evasion by

academics (Ndiaye et al., 2018). Furthermore, it is said that a higher tax rate increases the stress of

the taxpayer and lowers their disposable income, increasing the likelihood of tax evasion on their

part (Nieuwenhuizen, 2019). In response to the issues highlighted by this literature, many

academics have addressed them (Ndiaye et al., 2018). The most noteworthy is the inflexibility of

tax placement options when faced with cross-country tax disparities, which many researchers have

addressed.

In addition, a discrepancy between individual and corporate taxes persists, although this is

a problem that has been discussed (Abdulquadir, 2021). For the government to effectively handle

market failures while avoiding negative ramifications, it must, among other things, examine its tax

inequality against enterprises and develop entrepreneurial-friendly tax legislation, among other

measures (Daniel & Faustin, 2019). Tax rates on a more modest scale have a theoretically and

qualitatively substantial impact on creating a corporation's revenue (Nkwabi & Mboya, 2019). In

this context, it is appropriate to use the term marginal tax rate to refer to the amount of tax paid on

extra income after the base tax rate has been established. Increased income taxes hurt small and

medium-sized businesses, and this adds weight to the claim.

Regardless of how little or big the change in a business's performance is, tax effects are

defined in this study as any short- or long-term change in a business's performance that is the

consequence of or caused by applicable tax laws, regardless of the size of the difference in a

business's performance (Nieuwenhuizen, 2019). Depending on the circumstances, taxes may have

a beneficial or adverse effect on a company's success (Ndiaye et al., 2018). The phrase "negative

fiscal impact" refers to the tax effect that reduces or restricts the performance of a company's

operations (Abdulquadir, 2021). Taxes are considered advantageous when they have a favorable or

beneficial impact on the operation and growth of a commercial enterprise. In this way, progressive

tax policies improve company performance, while unprogressive tax policies have the opposite

effect on economic effectiveness (Ndiaye et al., 2018). In the study, they ascertained that high

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

government due to bad tax practices has a positive impact on small and medium enterprises, with

the two having an inverse correlation among them.

Research Design

This study was conducted using an explanatory or causal research approach, according to

the researchers. It was found that the research was needed to establish a causal link between two

variables, namely the connection involving tax management and the growth of SMEs (Ndiaye et

al., 2018). Researchers gathered participants' thoughts, ideas, and views on a particular subject or

study area via an online survey method. It is anticipated that the survey technique will comprise a

questionnaire, online surveys of survey respondents, and findings from current papers and

publications, among other things. According to previous study findings, the survey technique has

been proven to be successful in generating views, attitudes, and descriptions, as well as in

determining cause-and-effect connections between variables (Ndiaye et al., 2018). To conduct their

study, the research team used several techniques and strategies. First, a sample of small and

medium-sized companies was selected to guarantee that the model was representative of the

broader corporate sector.

Methodology

To achieve our study goals, the researcher selected a sample of SMEs from various

developing African nations. Individuals from the municipality have been granted the authority to

file tax returns with the government. As a result of the target demographic, the investigators were

able to construct an unbiased image of SMEs, taxpayers, and the degree to which tax payments

impacted their business as a result of their research (Ndiaye et al., 2018). The researchers were able

to create an impartial picture of SMEs that have been paying tax and the degree to which tax

payments have affected their company because of this target demographic. When it comes to data

confidence and generalization, the size of the sample and the method by which it is chosen will

almost certainly impact how confident one may be in what is being collected. The research

included one hundred and fifty (150) small and medium-sized enterprises (SMEs) that had up-to-

date records on their paying taxes.

Researchers used a deliberate selection method to choose a sample from the general

population for this study, allowing the researchers to provide the participants with highly accurate

findings. The researcher employs non-random sampling methods, and a non-random selection

process is established to get a representative sample. According to the research goals, purpose

sampling is a technique for determining the optimal sample size for a study (Ndiaye et al., 2018).

Because of the time constraints and challenges associated with assessing the government's list of

all SMEs, it is anticipated that these methods will be used. It will also aid in identifying small and

medium-sized enterprises (SMEs) that are willing to participate in the questionnaire (Nkwabi &

Mboya, 2019). A significant number of people or components from a population is selected using

statistics to allow scientists to extrapolate the characteristics or composition of the responses to the

target group given the latest study and understand the sample's parts or features.

For this study, questionnaires were utilized to gather survey data for scientific observation,

then used to inform the findings. All of the open and closed questions were addressed

independently by each of the participants throughout the session (Nieuwenhuizen, 2019). It was

emphasized to them that any information they provided would be kept strictly confidential.

Researchers provided clear directions to the respondents on completing and submitting the surveys,

which they followed to the letter and were successful (Nieuwenhuizen, 2019). This is because

delivering clear instructions and maintaining the confidentiality of the information significantly

reduces receiving incomplete responses.

Data Analysis

To assess the tax system's impact on SMEs' performance, the regression technique,

particularly multiple linear regressions, will be the primary data gathering instrument utilized.

Because most of the variables in this research are analyzed as periods or ratios, regression has been

considered considerably more productive than the majority of other testing methods, such as non-

parametric tests, in developing the correlation among two or more independent variables

(Nieuwenhuizen, 2019). It has thus been chosen for this research. In addition, there will be a

variety of methods to display the results of statistical tools such as SPSS and Microsoft Excel, such

as histograms, PowerPoint presentations, bar charts, and columns, among other things.

Recommendations

According to the results, authorities should streamline rules regulating SMEs to make

compliance more manageable for small businesses. It necessitates comprehensive and

understandable tax law, as well as a straightforward and time-saving tax filing procedure. It is

essential to prohibit and discourage the usage of information and communication technologies

(Nkwabi & Mboya, 2019). To address problems such as numerous taxes, tax administrators should

carry out their responsibilities with more efficiency, care, and honesty than before.

Small and medium-sized enterprises (SMEs) should benefit from improved tax

administration services. For instance, small company owners should be educated on the taxes they

are required to pay and the incentives and exemptions they are entitled to. Small and medium-sized

enterprises (SMEs) should have their tax rules streamlined to simplify compliance (Nkwabi &

Mboya, 2019). This requires detailed and uncomplicated tax laws and a straightforward tax filing

procedure that is not time-consuming. It is essential to promote the usage of information and

communication technologies.

Conclusion

Significantly, taxes on small and medium-sized businesses have a different effect on profit

growth than taxes on large firms, according to the study. According to the research results, changes

in tax rates are associated with changes in the price of a variety of products and services

throughout time. Furthermore, the evidence indicates that increasing tax rates increase

manufacturing, distribution, and sales expenses. When prices rise due to an increase in tax rates,

the prices of goods and services rise as well, resulting in a reduction in the consumption rate and a

decrease in sales volumes, thus lowering profitability and causing SMEs to expand more slowly.

Tax payments are one of the financial outflows from a company that contributes to a reduction in

the organization's buying power. This is because a significant portion of the money received is

utilized to pay taxes rather than invest in the company's expansion. According to the research

findings, the buying power of a company decreases immediately after the payment of taxes.

As a result, the amount of tax paid has a negative relationship with the effect of taxes on

purchases. According to the results, authorities should streamline rules regulating SMEs to make

compliance more manageable for small businesses. It necessitates comprehensive and

understandable tax law, as well as a straightforward and time-saving tax filing procedure. In

addition, it is essential to prohibit and discourage the usage of information and communication

technologies. The researchers note the need for further studies and research. They include

evaluating the impact of taxation in developing the SMEs sector in Africa, with a particular

emphasis on various settings. The attitude of tax authorities or regulatory organizations towards the

development of Small and Medium-Sized Enterprises (SMEs) in Africa is also included in this

category.

References

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

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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

Nkwabi, J. M., & Mboya, L. B. (2019). A Review of Factors Affecting the Growth of Small and

Medium Enterprises (SMEs) in Tanzania. European Journal of Business and Management,

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