AN INVESTIGATION INTO THE CHALLENGES OF TAX COMPLIANCE AMONG SMALL AND MEDIUM ENTERPRISES (SMES). A CASE STUDY OF EYUMOJOCK, CAMEROON

CHAPTER ONE

INTRODUCTION

Background of the study

Small and Medium Enterprises (SMEs) are widely acknowledged as the primary catalysts for global economic expansion and progress.  In Cameroon, there is a lack of easily accessible data on small and medium businesses (SMEs). However, figures from the Registrar General's Department indicate that 92 percent of registered firms fall into the category of micro, small, and medium enterprises. Small and Medium Enterprises (SMEs) play a significant role in the country's economy. They account for over 85% of manufacturing employment and contribute around 70% to Cameroon's Gross Domestic Product (GDP). As a result, they have a substantial influence on economic growth, income, and job opportunities (Adeoti, 2020). Cornelius, Ogar & Okar, (2016) regards small and medium-sized enterprises (SMEs) as a catalyst for job creation, competition, economic vitality, and innovation. These factors contribute to fostering an entrepreneurial mindset and the spread of expertise. Studies show that in emerging economies, SMEs in India, which make up around 30 million operators, have been the primary source of numerous innovations in manufacturing and the service sectors. They also play a crucial role in connecting corporate entities and public sector units or enterprises in the supply chain. SMEs in India make up around 20% of the country's GDP, account for 45% of industrial production, contribute 40% to exports, employ 60 million people, generate 1.3 million jobs annually, and manufacture over 8,000 high-quality items for both domestic and international markets (Linda, 2020). The small business sector in South Africa constitutes a significant proportion of the economy. The SMEs sector comprises 84% of all private employment and represents around 80% of the entire formal economy. According to Ocran & Affum-Osei, (2016), they provide a greater contribution to the South African GDP than the combined total of the large corporations. Undoubtedly, this necessitates the implementation of efficient information providing strategies to enhance the productivity of small and medium firms (SMEs). It is worth noting that many major corporations originated from SMEs, indicating that the SMEs of today are the potential future great corporations that need nurturing to assure their development. Therefore, SMEs are often regarded as the breeding ground for local entrepreneurship and facilitate the creation of many small-scale investments that would otherwise not occur (Aladejebi, 2018). Hence, it is imperative for developing economies such as Cameroon to enhance the progress of its private sector by establishing a conducive environment for the expansion of small and medium enterprises (SMEs), reinforcing the factors that contribute to business prosperity, and tackling the challenges that pose a threat to the survival and progress of SMEs(Aladejebi, 2018). This will guarantee that they can effectively fulfil the intended role in economic development. In addition to serving as a significant source of employment and revenue in several developing nations, small and medium-sized enterprises (SMEs) possess a flexible character that enables them to effectively adjust to evolving market circumstances, rendering them more capable of enduring cyclical downturns. In order to achieve voluntary tax compliance it is necessary to implement an ideal tax policy that does not stifle entrepreneurial initiative. Tax compliance pertains to companies conforming to the tax rules and regulations established by the government. SMEs may find it especially challenging to comply with tax regulations owing to their limited resources, knowledge, and occasionally, lack of understanding of legal obligations (World Bank, 2018). Small and medium-sized enterprises (SMEs), unlike big businesses that have specialised tax departments, frequently do not have the expertise to deal with complex tax issues. This makes them more susceptible to making mistakes and facing fines for non-compliance. The complexities of tax compliance among small and medium-sized enterprises (SMEs) are diverse and may arise from a range of circumstances. Firstly, small and medium-sized enterprises (SMEs) may have challenges in comprehending and deciphering tax legislation, which is often complex and prone to frequent revisions (Aladejebi, 2018). Additionally, the restricted availability of financial resources and staff may impede small and medium-sized enterprises (SMEs) from effectively establishing comprehensive tax compliance systems (Alm, Martinez-Vazquez, & Torgler, 2017). Furthermore, the casual character of many small and medium-sized enterprises (SMEs) in certain areas could lead to a deficiency in documentation and openness, hence posing a challenge for regulatory agencies in enforcing tax compliance (OECD, 2016). Furthermore, cultural and sociological issues may also impact the way small and medium-sized enterprises (SMEs) perceive tax compliance. There are situations when people have a general lack of faith in government organisations or believe that tax cheating is common and considered acceptable by society. These views have the potential to weaken initiatives aimed at encouraging small and medium-sized enterprises (SMEs) to willingly comply with tax regulations, as well as diminish confidence in the justness and equality of the tax system. The impact of tax compliance difficulties on small and medium-sized enterprises (SMEs) may be significant. Failure to comply with regulations not only subjects small and medium-sized enterprises (SMEs) to monetary fines and legal consequences, but it may also hinder their ability to get crucial services, such as funding and government assistance programmes (European Commission, 2020). Furthermore, the act of evading taxes by small and medium-sized enterprises (SMEs) has the potential to weaken the credibility of the tax system, erode public confidence, and put fiscal stability at risk (PwC, 2019). To effectively tackle the difficulties associated with tax compliance among small and medium-sized enterprises (SMEs), it is necessary to have a thorough grasp of the fundamental problems and to create specific interventions to address them. Therefore, the researcher sought to  investigate the challenges of tax compliance among Small and Medium Enterprises (SMEs). A case study of Eyumojock, Cameroon.

1.2 Statement of the problem

Small and Medium Enterprises (SMEs) have a substantial impact on the economic growth by contributing to the production of employment, fostering innovation, and creating wealth. Nevertheless, small and medium-sized enterprises (SMEs) have many obstacles when it comes to adhering to tax regulations. These issues prevent them from fully engaging in the formal economy and restrict the government's ability to generate income (Adnan & Rahman, 2019). Although taxes is crucial for achieving sustainable growth, small and medium-sized enterprises (SMEs) face several obstacles in establishing robust tax compliance systems due to limited financial resources, manpower, and expertise. Unlike large corporations with dedicated tax departments, SMEs often lack the capacity to invest in sophisticated tax planning and reporting mechanisms. Furthermore, SMEs in many regions operate in informal sectors characterized by a lack of formal documentation and transparency, which complicates tax compliance efforts (Adnan & Rahman, 2019). Regulatory authorities encounter difficulties in enforcing tax laws and ensuring accountability among SMEs in these informal sectors. Moreover, attitudes towards tax compliance vary across cultures and societies, influencing SMEs' perceptions and behaviours. Factors such as distrust towards government institutions, perceptions of tax fairness, and prevailing norms regarding tax evasion can shape SMEs' compliance attitudes and practices. Against this backdrop the study investigate the challenges of tax compliance among Small and Medium Enterprises (SMEs). A case study of Eyumojock, Cameroon.

1.3 Objective of the study

The broad objective of the study is to investigate the challenges of tax compliance among Small and Medium Enterprises (SMEs). A case study of Eyumojock, Cameroon. The specific objectives is as follows

To identify if tax knowledge affects tax compliance among Small and Medium Enterprises  (SMEs) in Eyumojock, Cameroon.

To assess the level of tax compliance among Small and Medium Enterprises (SMEs) in Eyumojock, Cameroon.

To determine whether fines and penalties influences tax compliance among Small and Medium Enterprises (SMEs) in Eyumojock, Cameroon.

To examine whether compliance cost influence tax compliance among Small and Medium Enterprises (SMEs) in Eyumojock, Cameroon.

1.4 Research questions

The following questions have been prepared for the following

What is the extent of tax compliance among Small and Medium Enterprises (SMEs) in Eyumojock, Cameroon?

Does tax knowledge affects tax compliance among Small and Medium Enterprises  (SMEs) in Eyumojock, Cameroon?

What is  the level of tax compliance among Small and Medium Enterprises (SMEs) in Eyumojock, Cameroon?

Does fines and penalties influences tax compliance among Small and Medium Enterprises (SMEs) in Eyumojock, Cameroon?

Does compliance cost influence tax compliance among Small and Medium Enterprises (SMEs) in Eyumojock, Cameroon?

1.5 Significance of the study

The findings of this study will help the government to institute the necessary legislative and administrative measures to enhance tax compliance in cases of voluntary compliance and enforce compliance in cases of non-compliance.the findings of the study will also be of help to practitioners since it helps them understand various challenges faced by taxpayers towards voluntary compliance and help them advice their clients accordingly.

Furthermore, the findings of the study will be of significant importance to the academic community as it will contribute to library resources and also serve as a guide to future researchers who might want to further explore the study. 

1.6 Scope of the study

The study focuses on the challenges of tax compliance among Small and Medium Enterprises (SMEs). A case study of Eyumojock, Cameroon. Empirically, the study will identify if tax knowledge affects tax compliance among Small and Medium Enterprises  (SMEs) in Eyumojock, Cameroon, assess the level of tax compliance among Small and Medium Enterprises (SMEs) in Eyumojock, Cameroon, determine whether fines and penalties influences tax compliance among Small and Medium Enterprises (SMEs) in Eyumojock, Cameroon and examine whether compliance cost influence tax compliance among Small and Medium Enterprises (SMEs) in Eyumojock, Cameroon.

Geographically, the study will be delimited to Eyumojock, in Cameroon.

1.7 Limitations of the study

Like in every human endeavour, the researchers encountered slight constraints while carrying out the study. Insufficient funds tend to impede the efficiency of the researcher in sourcing for the relevant materials, literature, or information and in the process of data collection (internet, questionnaire, and interview), which is why the researcher resorted to a moderate choice of sample size. More so, the researcher will simultaneously engage in this study with other academic work. As a result, the amount of time spent on research will be reduced.

1.8 Definition of terms

Small and Medium Enterprises (SMEs): Small and Medium Enterprises refer to businesses that typically have a relatively small workforce and/or turnover compared to larger corporations. The specific criteria defining SMEs may vary by country or industry, but they generally encompass enterprises with limited resources, operating in diverse sectors such as manufacturing, services, and agriculture.

Tax Compliance: Tax compliance refers to the adherence of taxpayers, including individuals and businesses, to the tax laws and regulations of a particular jurisdiction. It involves accurately reporting income, calculating and remitting taxes owed, filing tax returns within specified deadlines, and maintaining relevant records and documentation as required by tax authorities.

Tax Regulations: Tax regulations encompass the laws, rules, and administrative provisions established by governmental authorities to govern the imposition, assessment, collection, and enforcement of taxes. These regulations dictate the obligations of taxpayers, prescribe the procedures for tax compliance, and outline the penalties for non-compliance.

Tax Obligations: Tax obligations refer to the legal duties and responsibilities of taxpayers to pay taxes imposed by government authorities. These obligations may include income taxes, value-added taxes (VAT), sales taxes, payroll taxes, property taxes, and other levies applicable to individuals and businesses based on their income, transactions, assets, or activities.

Tax Administration: Tax administration involves the management and oversight of tax laws and regulations by government agencies responsible for tax collection and enforcement. It encompasses activities such as taxpayer registration, assessment of taxes owed, issuance of tax notices and assessments, collection of tax payments, taxpayer education and assistance, and enforcement of tax laws through audits, investigations, and legal actions.