Taxation Systems and Policies: A killer of SMEs?

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Opinion scores on the impact of tax systems and policies on the growth of SMEs in Ghana vary among business owners and managers. Do the tax systems and policies in Ghana impede SMEs growth? Do the tax systems and policies drain the investments of SMEs owners? Is poor tax planning, lack of training, and high cost of taxation, among others, the limiting factors of SMEs growth? Or is it the assumption that all or most of the obstacles confronting small businesses are the expression of market imperfections?

Small and Medium Enterprises (SMEs) are essential to the growth and development of all economies. Taxes from these enterprises remain an essential source of government revenues (Okpeyo, Musah, & Gakpetor, 2019). As a result, SMEs are gaining widespread acceptance as viable drivers of economic growth (Harash, 2014; Harash, Al-Timimi, & Alsaadi, 2015). Studies show that SMEs in developing and developed countries form part of the main driving forces for economic prosperity (Ademola, James & Ifedolapo, 2012; Olatunji, 2013; Harash, 2014).

SMEs have been defined differently by many individuals and institutions using various yardsticks such as numbers of employees, the volume of sales, value of assets, or the volume of deposit in banks (Ademola, 2014). SMEs are a small business in any manufacturing, processing, or servicing industry that satisfies a staff strength not exceeding 50 persons (Smatrakalev, 2014).

Economists believe that resources that smaller businesses direct towards tax compliance could, instead, be used for reinvestment to facilitate future growth (Tomlin, 2008). Small businesses, under the regular system of taxation, are seen to be discriminated against since the compliance necessities, cost of compliance and tax rate are the same for both small and large enterprises (Ocheni, 2015).

 

It is, further, argued that reducing the compliance costs and tax rates increase the profit margin of small enterprises and amplify the tax revenue due to government since the simplified provisions for a micro-enterprise historically reduce the size of the shadow economy and the number of non-complying registered taxpayers (Vasak, 2008).

 

Most of the SMEs in Ghana collapse without fulfilling their expectations. Most SMEs are not able to survive longer compared to the bigger corporations. Some of the factors that are believed to account for their demise include poor internal administration policies arising from the design of tax systems, tax policies, and tax burdens (Ocheni, 2015; Tee, Boadi & Opoku, 2016). Business owners claim that high taxes and tax systems do not allow new businesses to recoup initial investments (Bateman, 2013).

Though payments of taxes are essential for the economic growth of our country (Ali-Nakyea, 2008), attention is also required on the side effects of tax systems and policies on the growth of SMEs. As a result of scanty literature on the exploration of the negative effect of tax systems on the survival of SMEs in developing countries (Baurer, 2005), assertions of owners, managers, and employees of these enterprises need to be brought to the fore to enable tax authorities to relook at the tax systems and policies (amount of tax paid by SMEs, time spent in compiling and paying tax and the tax impact on purchases and sales) and their impact on SMEs growth in Ghana.

 

In a survey that examined the effect of taxation on the performance of small and medium scale enterprises (SMEs) from 91 respondents in Nigeria, Ocheni and Gemade (2015) found that multiple taxations had a negative effect on the survival of SMEs, and the relationship between SMEs size and its ability to pay taxes was significant. The study, therefore, recommended that governments should come up with uniform tax policies that will promote the development of SMEs.

 

In a research study that analyzed the effect of tax incentives on the growth of small and medium-sized enterprises (SMEs) in Nyarugenge, Rwanda, Twesige and Gasheja (2019) surveyed 136 SMEs. It found that 78.7% agreed that they know the tax incentives that are available to SMEs, such as wear and tear, loss carried forward, and value-added tax (VAT) refund. The study also found a strong positive and significant relationship between tax incentives and the growth of small and medium enterprises in Rwanda. The study concluded that tax incentives are key to the sustainable growth of SMEs. Governments should design policies that specifically address issues related to the sustainable growth of SMEs.

In Ghana, Tee et al. (2016) surveyed 102 managers and/or executive officers of Small and Medium Enterprises in the Ga West Municipality in the Greater Accra Region on the impact of tax policies on SMEs’ growth. The study established that a greater part of the respondents agreed that there was an unfavorable influence of current tax policies on the growth of SMEs and called for reforms of the tax policies in the country.

This article examined the effect of tax systems and policies on the growth and survival of SMEs in one of the major Municipal Assemblies in Ghana. This article is based on the survey responses of the management and business owners within the La Nkwatanang Municipal Assembly, who have registered with the Ghana Revenue Authority.

The Survey confirmed Tee et al. (2016) the study. Most business owners and managers disagreed that tax laws in Ghana are simple to comprehend. They further disagreed that tax systems and policies pose less burden on local businesses. Business owners of small enterprises at La Kwantanang Municipal Assembly disagreed that tax systems and policies in Ghana support SME growth. They, however, agreed that tax rates were moderately high and that the costs in filing tax returns, as well as the tax rates negatively affect profitability. They further agreed that a complicated regulatory system imposes high expenses on their businesses in terms of filling tax returns. It was again indicated that taxes and complex tax systems put undue pressure on smaller businesses, and penalties associated with non-compliance are too high.

Lack of visits and training by the tax authorities (56.7% business owners confirmed) on income tax and VAT matters caused about 37.3% SMEs to suffer penalties in filing tax returns over the past years (17.9% on income tax; 19.4% on VAT). On tax reliefs to SMEs, approximately 71% of business owners did not know such an incentive. This finding was a direct opposite of the Twesige and Gasheja (2019) study. Only 11.9% had confirmed ever receiving some reliefs. This situation raises important questions on the effectiveness of the tax systems since the majority of SMEs with less than ten years in existence would often require support in terms of such incentives. The above situation underpins how policies adversely affect the development and growth of SMEs.

 

A summary of the actual impact of the tax policies on businesses showed that the new VAT scheme is very difficult for SMEs to calculate. Managers and owners expressed that the taxes drain their investments and continue to collapse their businesses. Others complained that rates and costs of filing tax returns were expensive and, as such, increase their cost of doing business.  Checks from the Ghana Revenue Authority revealed that a rate of 25% applies to SMEs in Ghana. Taxes such as PAYE, Corporate, and Personal Income taxes are the types of taxes that SMEs are expected to comply with, where applicable. The mode of assessment is provisional, and capital allowance is available for SMEs. Business owners, however, assert that due to their inability to engage qualified accountants as a result of financial constraints, access to capital allowances becomes difficult.

 

Conclusion

The discussions above show that the impact of tax policies and systems on the growth of SMEs in the Ghanaian economy cannot be downplayed. Tax systems and policies are influential on the survival and growth of SMEs though market imperfections cannot be ruled out entirely. Tax authorities should, therefore, relook at the tax policies and systems to suit SMEs and encourage tax compliance. Areas such as tax rates, lowering of compliance and administrative costs, reduction in general costs, and measures to improve the levels of voluntary compliance should be considered to push for the growth of SMEs indirectly and ensure their future survival.

 

Though incentives for SMEs such as tax holidays for startups, low tax rates for a large number of employments, possible exemption from withholding taxes, and capital allowances, may be available, most SME owners seemed not to be aware. Education is, therefore, needed to enhance the capacity of business owners and managers of SMEs. It is, further, recommended that policies that will push for enough funds and other activities leading to SME growth and survival in the La Nkwantanang Municipality in particular and the nation in general, should be enacted. The conceptual framework of this article is shown in figure 1.

 

Tax Systems and Policies:

·         Tax Rate

·         Tax Type

·         Mode of assessment

·         Tax Incentives

·         Training

 

SMEs Growth and Survival

 

 

 

 

 

 

Figure 1: Conceptual Framework

REFERENCES

 

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Ademola, G. O., James, S. O., & Ifedolapo, O. (2012). The Roles of Record Keeping In the Survival and Growth of Small Scale Enterprises in Ijumu Local Government Area of Kogi State. Global Journal of Management and Business Research, 12(13), pp. 40-51. Retrieved from https://www.semanticscholar.org/paper/The-Roles-of-Record-Keeping-In-the-Survival-and-of-Ademola/e7217c203e6457e7dc92880616d946eb3b355df7

Ali-Nakyea, A. (2008). Taxation in Ghana: Principles, practice and planning (2nd ed.). Accra, Ghana: Black Mask Limited.

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Baurer, L. (2005). Tax Administration and Small and medium enterprises in developing countries. World Bank Group. Retrieved from: http://documents.worldbank.org/ curated/en/ 711511468779448847/ pdf/391100Taxadmin01PUBLIC1.pdf

 

Harash, E. (2015). The Role of Environmental Uncertainty in the Link between Accounting Information System and Performance of Small and Medium Enterprises in Iraq. Global Journal of Management and Business Research, 15(2). Retrieved from: https://www journalofbusiness.org /index.php/GJMBR/article/view/1718/1620

Harash, E., Al-Timimi, S., & Alsaadi, J. (2014). Effects of Financing on Performance of small and medium enterprises (SMEs). IPASJ International Journal of Management (IIJM), 2(10), 1-9.Retrieved from https://www.researchgate.net/profile/Emad_Harash/publication /315721901_Effects_of_Financing_on_Performance_of_small_and_medium_enterprises_SMEs/data/58deb6254585153bfe947643/Effects-of-Financing-on-Performance-of-small-and-medium-enterprises-SMEs.pdf?origin=publication_list

Ocheni, S. I. (2015). Impact Analysis of Tax Policy and the Performance of Small and Medium Scale Enterprises in Nigerian Economy. Strategic Management Quarterly, 3(1), 71-94.http://dx.doi.org/10.15640/smq.v3n1a3

Ocheni, S. I., & Gemade, T. I. (2015).  Effects of Multiple Taxation on the Performance of Small and Medium Scale Business Enterprises in Benue State. International Journal of Academic Research in Business and Social Sciences, 5(3), 345-364.Retrieved from https://hrmars.com/hrmars_papers/Effects_of_Multiple_Taxation_on_the_Performance_of_Small_and_Medium_Scale_Business_Enterprises_in_Benue_State.pdf

Okpeyo, E.T., Musah, A., & Gakpetor, E.D. (2019). Determinants of Tax Compliance in Ghana: The case of Small and Medium Tax Payers in Greater Accra Region.  Journal of Applied Accounting and Taxation, 4(1), 1-14. Retrieved from https://www.researchgate. net/ publication/ 332108050_ Determinants_of_Tax_Compliance_in_Ghana_The_Case_ of_Small_and_ Medium_ Tax_Payers_in_Greater_Accra_Region

Smatrakalev, G. (2014). Tax policy for small and medium enterprises. Paper delivered at the 6TH Global conference on business and economics; Gutman Conference Center, U.S.A. Retrieved from: http://www.gcbe.us/6th_GCBE/data/Tax%20Policy%20For% 20Small%20And% 20Medium%20Enterprises.doc

Tee, E., Boadi, A. L., & Opoku, T. R. (2016). The Effect of Tax Payment on the Performance of SMEs: The Case of Selected SMEs in Ga West Municipal Assembly. European Journal of Business and Management, 8(20), 119-125. Retrieved from: https://iiste.org/ Journals/ index.php/EJBM/article/view/31660/32532

Tomlin, B. (2008, May). Cleaning Hurdles: Key reform to make small business more successful. C.D. Howe Institute Commentary, Economic Growth and Innovation, 264, pp. 1-24. Retrived from https://www.cdhowe.org/public-policy-research/clearing-hurdles-key-reforms-make-small-business-more-successful

Twesige, D., & Gasheja, F. (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), pp. 89-98. Retrieved from https://www. academicjournals.org/journal/JAT/article-full-text-pdf/389D68C60826

Vasak, S. (2008). Small, Medium and Large Enterprises. USAID Business Climate Reform. Retrieved from https://www.pdf.usaid.gov/pdf doc/DNADO675.pdf

 

 

 

About the authors

 

Francis Osei-Kuffour is a Ph.D. Student, Adventist University of the Philippines

[email protected]

 

Olga Yiadom-Boakye (Mrs) is with the Controller & Accountant General’s Department

[email protected]

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