SMEs and tax compliance: A case study of selected small and medium enterprises in Kampala

Abstract

Small and Medium Enterprises (SMEs) play an important role in the growth of developing economies. Development of Small and Medium Enterprises is heavily influenced by the level of taxation, its administration and compliance. It is vital for policy makers to consider the alignment of tax policies to the growth needs of SMES. This report analyses tax compliance and how noncompliance affects SME performance. The purpose of this study was to investigate the level of tax compliance among selected SMEs in Kampala City and the objectives were; to assess the extent of tax compliance among selected Small and Medium Enterprises in Kampala city, to assess the level of tax awareness among Small and Medium Enterprises in Kampala and to examine the impact of tax non-compliance on SME performance. The research was primarily carried out in Kampala city with consideration of hardwares, saloons, retail shops, restaurants and supermarkets. The survey was administered using sampling where 60 SMEs were selected from a total population of 2500 SMEs and interviews and questionnaires were used. Data was analyzed using SPSS, Regression analysis was employed in this study and the findings of this research indicated that majority of the respondent’s perceived adverse impact of tax policies on SMES compliance and growth in Kampala. It was concluded from the study that respondents are more likely to be tax compliant, if they perceive that enforcement makes evasion more difficult; tax information is inadequately available, and that the filing procedures are difficult and there are tendencies of non-compliance as a way of escaping the tax burden and maximize their profits. The researcher recommended the need to continuously train technical staff to keep abreast with the tax law and any other changes therein, in relation to tax rates and penalty rates, considering lowering the tax rates to enhance collections and the tax returns ought to be simplified and accompanying notes reconstructed into plain language that can be understood by all taxpayers.