The Impact of Taxation on the Developmentof Small Scale Bussineses in Busolwe Town Council, Butaleja District

THE IMPACT OF TAXATION ON THE DEVELOPMENTOF SMALL SCALE BUSSINESES IN BUSOLWE TOWN COUNCIL, BUTALEJA DISTRICT

HALUGA ALLY

1153-06044-00537

A RESEARCH DESERTATION SUBMITTED TO THE COLLEGE OF HUMANITIES AND SOCIAL SCIENCES TO THE DEPARTMENT OF DEVELOPMENT, PEACE AND CONFLICT STUDIES AS PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE AWARD OF THE BACHELORS DEGREE OF DEVELOPMENT STUDIES OF KAMPALA INTERNATIONAL UNIVERSITY

SEPTEMBER, 2018 DECLARATION

I HALUGA ALLY declare that this report contains first class information which has never been submitted to any university or higher institute of learning for the award of bachelor degree.

Signature Date

HALUGA ALLY

REG .NO.1 153-06044-00537 APPROVAL

This certifies that this research report has been under my supervision and it is now ready for submission to the department of Development, peace and conflict studies of Kampala International Un

Signature Date ~

DR. ASABA RICHARD

)affsupervisor DEDICATION

This report is dedicated to my family of Late Himwero Musa and Mrs. Nahato Tausi for the grate support endeavored to me during the course of my studies and this research to the accomplishment. ACKNOWLEDGEMENT

I Haluga Ally extend my sincere gratitude to acknowledge my supervisor Dr.ASABA RICHARD who sacrificed his time to check my work, offered guidance, comments to ensure that I produce quality work up to the accomplishment of this research. I use the very chance to extend my sincere gratitude to all the lecturers of the department of Development, peace and conflict studies of Kampala International University whom I have ever passed through their hands during the course of my studies at KIU for their services is highly appreciated.

Gratitude is extended to the CDO of Busoiwe town council madam Were Harriet, Mr. Were A grey Mujere the examiner of accounts and Mr. Mugoya and Kanare the HOF, Head of finance for their assistance rendered to me during the course of data collection process of this research.

I also extend great thanks to the following: , my beloved sister Natabo Luba,my brothers Himwero Maigi Musa,Wanguwo Shaban,Hiisa Adam,Weere Yusuf,Tabo Yakub and Haluga Asuman and my uncle Muholi Alumasi who offers financial and material support and all my closed relatives and long-lasting friends like Weere James,Malyonga David, including my closed course mates like Kobusinge Proscovia who offered accompaniment not forgetting the Almighty Allah who gave me wisdom and power to the accomplishment of my studies.

iv ABBRIVIATION

ACE Allowance for Corporate Equity

CDO Community Based Officer

EU European Union

EUR European Union Regulation

FBO Faith Based Organisation

FY Financial Year

GDP Gross Domestic Product

HOF Head of Finance

ITA Income Tax Act

LST Local Service Tax

MSMLB Micro Small, Medium and Large Business

NGO Non-Government Organisation

PAYE Pay As You Earn

SACCO Saving and Credit Cooperative Organisation

SME Small and Medium Enterprise

URA Uganda Revenue Authority

VAT Value Added Tax

WHT With Holding Tax

V TABLE OF CONTENTS

DECLARATION APPROVAL DEDICATION ACKNOWLEDGEMENT iv ABBRIVIATION v TABLE OF CONTENTS LIST OF TABLES ix ABSTRACT CHAPTER ONE 1 iNTRODUCTION 1 1.0 Introduction i Background to the study 1 1.2 Statement of the problem 2 1.3 Purpose of the study 2 1.4 Objective to the study 3 1.5 Research questions 3 1.6 Scope of the study 3 1.6.1 Content scope 3 1.6.2 Time scope 3 1.6.3 Geographical scope 3 1.7 Significance of the study 3 1.9 Definition of key terms s CHAPTER TWO 7 LITERATURE REVIEW 7 2.0 Introduction 7 2.1 The concept of taxation 7 2.2 Classification of taxes 7 2.3 The purpose of taxation 8 2.5 The impact of Taxation on small scale businesses 9 2.7 Summary 12

vi CHAPTER THREE .13 METHODOLOGY 13 3.0 Introduction 13 3.1 Research design 13 3.2 Area of study 13 3.3 Study population 13 3.4 Sample size 13 3.5 Sampling procedures! Strategies 14 3 .6 Methods and Instruments of Data collection 14 3.6.1 Survey 14 3.6.2 Interviews 14 3.6.3 Observation 15 3.8 Data Analysis and Processing is 3.9 Data Presentation 16 Reliability and validity of study variables 16 3.11 Ethical considerations 17 CHAPTER FOUR 18 FINDINGS AND INTERPRETATIONS 18 4.0 Introduction 18 4.1 Democratic characteristics 18 4.1.1 Table 1 Showing Demographic characteristics of respondents 19 Table 2 below shows whether taxes are a compulsory payment for all retail business or not in Busolwe town council 20 4.1.3 Table 3. Showing how taxation affect business in Busolwe town council 21

4.1.5 Table 5. Showing assessment of small business in Busoiwe town council for tax purposes .... 22 4.1.6 Table 6 showing the number and percentage change of respondents on getting assistance out of the tax they pay 22 4.1.7 Table 7 showing the how long different small scale business men been paying tax and their response to tax charges 23 Table 8 showing response on how taxation affects saving rate of small business in Busolwe town council and how they often save 24 Table 9 showing impact of taxation on investment decisions of small business in Busolwe town council 25

VII REFERENCES .38 APPENDICES .41 APPENDIX I: QUESTIONNAIRE TO BUSINESS PROPRIETORS 41

VI I I LIST OF TABLES

4.1.1 Table 1 Showing Demographic characteristics of respondents 19 4.1.2 Table 2 showing that tax is compulsory payment for all retail business or not 20 4.1.3 Table 3. Showing how taxation affect business in Busolwe town council 21 4.1.4 Table showing the number of small business persons in Busolwe town council with record book and those without record book of their business and their percentage responses 21 4.1.5 Table 5. Showing assessment of small business in Busoiwe town council for tax purposes 22 4.1.6 Table 6 showing the number and percentage change of respondents on getting assistance out of the tax they pay 22 4.1.7 Table 7 showing the how long different small scale business men been paying tax and their response to tax charges 23 Table 8 showing response on how taxation affects saving rate of small business in Busoiwe town council and how they ofien save 24 Table 9 showing how tax payment affects investment decisions of small business in Busolwe town council 25 4.1.10 table showing Response on impact of tax on profitability of small business 26 4.1.11 Table 11 showing response to challenges faced by tax payers in Busolwe town council 27

ix ABSTRACT

The study was designed to establish the impact of taxation on small scale business in Busoiwe town council in Butaleja District in Eastern Uganda. The objective of the study included: to establish the types of taxes paid that small scale businesses are required to pay to analyze the effects of the taxes levied on small, scale businesses and to analyze the challenges faced by small scale businesses in paying taxes in Busoiwe town council. Simple random sampling and purposive sampling was used to collect data. The sample size was drawn from three wards in the council which include: Busolwe central, Zebra, and Dundo. Forty (40) respondents were interviewed by the use of questionnaires and interview guide these where used to gather primary data. Data presentation and analysis was done in tabula format using numbers and percentages and description was used in analysis to supplement on what is in the tables. The study revealed that reduction in profits were as a result of high taxes imposed on small scale businesses where what they gain out of sales as profit is spent on clearing tax dues and thus little is saved to add stoke in their business, The investment decisions of small scale businesses are equally influenced by tax levied in that when tax charged seem to be low traders save much more than when tax levied on the business is high which fetches them less profit. The study established that most small business is family run thus making them depart from the objectives of the businesses. The existence of lack of tax education leads to non-compliance among taxpayers arising from multiple taxes imposed on the business taxpayers that makes them not to appreciate taxes levied.

In conclusion according to researcher findings, low tax ra e policy is an instrumental to the survival and growth of small businesses. However, the best talK policy that suit SMEs encourages compliance and should be lower for both compliance cost I and administrative cost to reduce uncertainty faced by tax payers to improve on their compliance and should be designed in such a way that should not affect taxpayers business expansion and growth.

According to the established findings the researcher recommended tax collection be defined with respect to which the government should collect certain tax from small businesses, and tax be collected in relation to the size, ability to pay including location. Tax policies should be designed in such a manner that it will encourage potential taxpayers, voluntary compliance and ultimately lead to business interest of small business persons in Busoiwe town council.

xi CHAPTER ONE INTRODUCTION 1.0 Introduction This chapter consists of the background to the study, statement of the problem, purpose of the study, objectives of the study, research questions, scope and significance of the study.

Background to the study Small and medium enterprises (SME) play an important role in the production sector of many developed and developing countries(Balunywa.2012).The higher the share of small and medium businesses in the economy, the higher productivity can be potentially realized with the SME sector. Development of small and medium enterprises is heavily influenced by the level of taxation, its administration and compliance. It’s generally accepted that the way out of the problem of the economic development for any developing economy is to devote a lot of energy to the development of small scale business enterprises. (Tomlin. 2008) The modern economist looks at small business development as necessary step for rapid growth. The researcher is interested in carrying out the impact of small scale enterprises in Busolwe town council. It is now realized that large business cannot alone play the dynamic role in rapid growth and development of the economy but also small ones contributes a lot towards social economic transformation.(Kay. 1990)Taxation has important effects on many parts of the economy, including impacts on firm creation and on the development of small and medium-sized enterprises (SMEs). Developing an environment conducive to SME growth at the same time as ensuring tax compliance is a challenge all countries face. (Colell 2010) The purpose of this research is to compile information on national approaches to this challenge that allows community members to learn from the experience of others. To this, a questionnaire survey will be conducted among small and medium sized member of Busoiwe town council to identify and compare tax policy and tax administrative arrangements in place. Most small businesses are quite routine operations within protected local markets, but some are pioneering ventures through the promotion of new products or the development of new processes, seek to enlarge their markets and to challenge the position of established firms Furthermore, in many cases, taxation are qualitative rather than quantitative in character, which makes them more difficult to measure.(Devreux,2009) According to Uganda Bureau of Statistics report on census of business

1 establishment(2010/201 1) overall, more than one million people were employed and average number of employees per business reduced to 2persons in 20 10/1 1 compared to 3persons in 2001/2002. The information showed that 70% of businesses had an annual turnover of less than Five million shillings. Attempt was made to categorize the businesses into Micro, small, medium and Large Business (MSMLB) and information showed that micro businesses were the majority, accounting for 70% of the total number of the businesses, while 20% were small businesses according to business census 2010/2011. In Busolwe town council, many businesses merged up between 2000 to 2006 Before Busoiwe was gazette a town council, many businesses closed between 2008 /20 10 as a result of multiple taxes which is too high for small businesses to sustain themselves. This triggered the researcher to do this research t on the impact of taxation on small businesses.

1.2 Statement of the problem Most small businesses break down because of high taxes imposed on them that reduce their effective performance in terms of profitability, saving and investment levels making it difficult to run the business normally in relation to high taxes that fetch them low profits. It was suggested that up to 50% to 60% of government revenues depend on the SME sector (Bolton, 2010). Thus, the higher the profits realized by small and medium businesses, the higher the productivity that can be potentially realized with the SME sector. Taxation of small businesses has been very much in the public eye as it contributes towards the development of nation’s economy and provides local revenue that is used at local government level to facilitate the provision of social services such as provision of water, electricity, health facilities, etc.(Bolton 2014)According to Gentry and Hubbard, Taxation reduces the availability of a safety-net, such as alternative job opportunities, this has forced many people to resort for small businesses thus self-employment dealing in small businesses argue that tax differentials could either encourage or discourage the adoption of self-employed status.Ther~f~re the study looked at the impact of taxation on the development of small scale businesses in Busolwe Town Council.

1.3 Purpose of the study To assess the impact of taxation on the development of small businesses in Busolwe town council, Butaleja district

2 1.4 Objective to the study (i)To establish the types of taxes that small scale businesses are required to pay. (ii)To analyze the effects of the taxes levied on small scale businesses. (iii)To analyze the challenges faced by small scale businesses in paying taxes

1.5 Research questions (i)What are the types of taxes required to be paid by small scale businesses in Busolwe town council?

(ii)Do taxes paid affect small scale businesses in Busolwe town council?

(iii)What are the challenges faced in paying the different types of taxes in Busolwe town council?

1.6 Scope of the study The study focused on relationship of taxation on the performance of the market and how it affects the level of saving and investment of households in Busoiwe town council Butaleja District.

1.6.1 Content scope The study focused on how taxation affects the level of saving and investment in Busoiwe town council in Butaleja district.

1.6.2 Time scope The study focused at the study variables for a period of June-July as this years have drawn serious ever increasing with multiple taxes despite the existence of inflation coupled with currency devaluation.

1.6.3 Geographical scope The study was conducted in Busolwe town council in Butaleja district, Bunyole west constituency found in Eastern part of Uganda.

1.7 Significance of the study The study was important to the researcher, the community businesspersons in Busoiwe town council Butaleja district and policy makers as well as implementers.

3 To scholars and researchers, the findings of the study are expected to contribute to the existing literature about taxation and the effect it causes to the economy as a whole.

To the tax authority and government, the study was intended to guide them in adjusting tax policies so that they suit requirements of small-scale businesses.

For future reference to academicians the study would help future researchers to gain knowledge and skills about taxes and performance of small scale business enterprises.

The accomplishment of the study enabled the researcher to acquire first-hand information on skills about processing of research work and data analysis. This proficiency will enable the researcher to handle such related work with a lot of precision and proficiency.

1.8 Conceptual framework Figure Independent variables Dependent variables

‘I, ______Small scale Process Taxation businesses > Providing infrastructures > Tax collectors > Community > Infrastructural participation > Collecting taxes development > Involvement of > Distributing tax > Tax commercial distributors sector > Managing taxes > Tax > Business management operators

Source: Fredrick Taylor(2012)

4 1.9 Definition of key terms A tax can also be defined as a contribution imposed on any person, business/property, for supporting central/local governments (Tayebwa, 2012)There is no clear definition of a “small” business, and that most persons who use the term do so without having in mind any specific definition in terms of size. One can, of course, classify business firms by such quantitative criteria as the number of employees, total assets, or total sales, and then designate certain size

classes as representing small business. , for example, that a small business is “one that is too small to float securities on the public market,” or “one that sells its goods and services in one community

According to European Union defines, SME as an enterprise with fewer than 250 persons and which has an annual turnover not exceeding EURO 50m.(Bolton 2013).

Schuetze and Bruce (2004). Commission Recommendation of 06/05/2003, C (2003) 1422 final Within the SIVIE category, a small enterprise. The EU definition of small scale businesses employs fewer than 50 persons and has an annual turnover and/or annual balance sheet total not exceeding EURO I Om.

A micro-enterprise is defined as an enterprise that employs fewer than 10 persons and whose annual turnover and annual balance sheet total does not exceed EURO 2m. (Sterm 2012) The study is to assume a small scale business as one with the following features; A business which employees 1-50 people, has a capital investment of less than shillings 40 million, has average annual revenue/sales of less than shillings 50 million.(Bruce 2010)

A small Business Taxpayer for income tax purposes is a resident taxpayer whose gross turnover from all businesses owned by such a person in a year is above Ten Million Shillings but is less than One Hundred and Fifty Million Shillings. (URA Small Business Taxpayers Vol.2 issue I FY 2015/16)

Summary

The small scale business is an important element of the market economy which influences the rate of economic growth, structure and quality of the growth Domestic Product (GDP). Nevertheless imposing high and multiple taxes combined with poor agricultural commodity

5 Prices, rising input costs combined with low productivity erode small scale businesses into social economic problems. On the other hand small scale businesses play significant role in developing and designing new policy modes for rural transformation in the area. In this situation small scale business provide new ways to diversify peoples’ sources of income to supplement agricultural income for existing Agro industrial and farming enterprise and also provide new jobs for those involved in it.

6 CHAPTER TWO LITERATURE REVIEW 2.0 Introduction This chapter consists of existing literature on taxation and its impact on performance of small- scale businesses by different scholars from different sources such as textbooks and journals paper presentations.

2.1 The concept of taxation Taxation refers to assessment, collection, administration and management of taxes. (Lal.2010). It deals with raising public revenue, managing public expenditure and public debt. (Manasseh, 2000). The general idea behind taxation is the provision of public goods and services consequently, up to 50-60 per cent of government revenues depends on the StylE sector (Small Business in Ukraine 1997 41). Thus, the higher is the share of small and medium businesses is in an economy, the higher the productivity that can be potentially realized with the SME sector. However, the benefits received by taxpayers from the government are not related to or proportionate to the tax paid (Bhatia, 2002).

The government is responsible for providing to its citizens certain public facilities and services like roads, hospitals, schools, and market securities. There are two main tax authorities; the local government authority and the central government authority through Uganda Revenue Authority (URA).

Tax can be defined as a compulsory and non-refundable contribution executed by government for public purposes. Payment is not followed by concurrent benefit in return. A tax is generally referred to as a compulsory levy imposed by the government upon the assessment of various categories. A tax is paid without a corresponding return in terms of goods or services from the government and hence it is referred to as a non-quid proquo payment (Income Tax Act, 2009)

2.2 Classification of taxes According to Manasseh (2000), taxes are classified as either direct versus indirect or proportional versus progressive tax.

7 Direct versus indirect taxes.

1. Direct taxes are those that affect the individuals/firms directly through a deduction from earnings. Examples include; individual income tax, corporation tax, taxes on property and others.

2. Indirect taxes are those taxes that are paid to government by an intermediary and then passed on to the final user by including the tax in the final price. Examples include; export and import duties, excise and local production, value added tax (VAT) and others.

Proportional versus progressive tax, Based on equity, taxes are classified as progressive. A tax is said to be progressive when tax rate increases as the taxable income increases.

Proportion tax is a tax imposed so that the tax rate is fixed with no change as the taxable base amount increases or decreases. The amount of tax is in proportion to the amount subject to taxation.

2.3 The purpose of taxation According to Income Tax Act (1997), taxation is an important source of government revenue and an economic policy tool by government to attain economic growth. The importance of taxation therefore arises from the debate of whether government should interfere in the operations of the market mechanism. Income Tax Act (1997) further noted that taxes may be levied for other reasons but revenue remains the prime objective of most taxes. Balunywa. (2008) noted that, taxation has increased in importance not only as a tool of raising revenue for the traditional roles but also for accelerating the economic growth and ensuring social justice. The primary objective of taxation in underdeveloped countries is not related to stability of income and expenditure. These countries face a number of problems of insufficient savings and Capital accumulation, which calls for a need to promote specific products to fill both the supply and deñiand gaps. It is the problem of growth that covers a number of aspects; the tax system has to be designed to help the economy (Bhatia, 2010).

The social-productive and social-economic advantages of small and medium businesses (flexibility, adaptation, open entry/exit to the sector, etc.) can help an economy to overcome those problems. Consequently, the development of small and medium enterprises should become an important part of economic policy of every economy in transition.(Bhatia,20 12)

8 (Roy2009) says that much attention should be paid to critical aspects of tax administration, training, procedures, staffing, collection and use of information. The weaknesses in tax administration are mainly caused by lack of relevant information about the tax payer, continued criticism of the tax and its structure. The tax structure should be simple in order to avoid tax evasion.

2.4 The following types of taxes apply to small scale businesses in Busolwe town council

Progressive tax. This is where the tax rate increases as the tax payers income increases for super markets, wholesale shops, hardware shops do not pay the same tax rate like the retailers and one man’s business.

Capital gain tax. This type of tax is levied on gains made by the seller of a capital asset whose value has appreciated at the time of sale.

Property tax. This type of tax is levied on property accumulated by savings of individuals.

Custom duty. This type of tax is imposed on commodities leaving or entering the town council.

Excise duties. This kind of tax is obtained from domestically produced commodities like rice which is a major produce of the place..

2.5 The impact of Taxation on small scale businesses Given the fact that there are financial institutions and mechanism for collecting the community’s savings and bringing them to investors, the level and patterns of investment will be greatly influenced by taxes. This is because the investors are interested in making profit yet profitability of investment can be affected through various tax measures in the following ways according to a world view. (Roberts 2009) i. The possibility of taxing small sized businesses on their savings discourages those with low income and new entrants in the market if this happens, the investor will be experience a low level of savings and the overall level of investment will be low.

ii. The authorities might tax earnings from investment to an extent that it might become a problem for the firm to raise adequate resources in the market.

9 iii. If the retained profits of the firm are taxed, they will be not be able to depend much upon their internal resources for expansion; instead, they will be borrow and invest if at all they do so (Bhatia.20 13).

A capital tax that is higher when labour income fall make the strategy costly because it reduces return to saving if one earn less labour income Kocherlakota (2005) Gentry and Hubbard conclude that the tax system influences the numbers of people adopting self-employment, and in a study of the US these authors argue that tax differentials could either encourage or discourage the adoption of self-employed status. However, taxation is only one of a series of influencing factors affecting this choice. Taxation reduces the availability of a safety-net, such as alternative job opportunities, and the presence (or absence) of a sense of financial security.

Holtz-Eakins argues that the tax regime is likely to prove ineffective in addressing liquidity constraints even though he acknowledges that business owners are in the best position to judge the commercial prospects of their businesses. Keuschnigg also considers that tax reliefs could be offered to hands-on venture capitalists to enable the expansion of their managerial resources and so increase the volume of investments made.

In advanced economies direct business taxes are presently levied on profits, in some cases adjusted in accordance with the tax code. Such adjustment relates to adding back accounting depreciation and then deducting “capital allowances” calculated in accordance with the rules of the tax authority. Bond, Devereux and Gamine are critical of the capital allowances system and argue that it does not offer adequate incentives to encourage investment, particularly in the presence of tax incentives to utilize debt as opposed to equity. The most elegant response to this has been the proposal of an “Allowance for Corporate Equity” (ACE)

In rational expectations framework with complete financial market imperfections caused by taxation hold many businesses and companies choice of funding and would be irrelevant for their business decisions on investment. Boddingtons.(2009) There is a growing microeconomic literature with Keynesian flavor on the impact of uncertainty on investment. When optimal investment decisions are irreversible and inertial, then expectations and volatility of product demand has significant influence (Guthrie, 2012 and Bloom, 2000).

10 According to Tomlin (2008), economist argue that resources smaller companies directed towards tax compliances are resources that could be otherwise be used for investment, facilitating future growth. Hence there is a belief that taxes a complex tax system put disproportionate pressure on small businesses. It always should be remembered that as the tax rate increases, the welfar~ losses increase by a greater proportion (Cullis and Jones 2012, p.174).

The positive impact of trade licenses was also emphasized by many entrepreneurs in experimental zones. It was observed that some of them started expanding their businesses turning a small enterprise into a medium one. Thus, the State Committee for Entrepreneurship Development prepared a proposal to add 18 regions to the experiment (Letter of SCED to State Taxation Administration 10-154 1999).However, that project of Law also possess some draw backs. That a fixed (lump-sum) tax special trade licenses create a problem of double taxation which reduces the saving rate of the people with small businesses in Busolwe town council and affects the profitability of their business.

The next weakness of the Project is similar to the one of fixed (lump-sum) tax. There is no limit of value of sales of an enterprise that can buy a license. It means that every expensive boutique is able to buy a trade license and, thus, the government can lose revenue. However, on the other hand, it could have a positive aspect as well: if a factory is not able to find a wholesale buyer for its production, it can open a small store, buy a trade license and try to sell the goods through that store. The more small stores of that kind are opened, the more revenue the government will receive. Relating to this is that many small business persons in Busolwe town council are limited by the value of which an enterprise can buy a trade license as it seem to be expensive

2.6 Impact of Taxation on small scale businesses in Uganda! Busolwe town council

Taxation affects the expansion of small scale businesses to turn into large operating businesses

High progressive taxes discourages saving, investment and consumption hence leading to low production and unemployment in

Some taxes for example progressive tax cause inconveniences to the tax payer because they are paid in lamp sum and in advance hence increasing chances of tax evasion.

11 Direct taxes have a direct impact on the tax payers because they are paid directly paid out of their incomes hence affecting income levels of small business operators.

Tax on sales and profit reduce not profits. High taxes on inputs and also on profit are obviously detrimental for business growth because they affect adequate re-investment.

Tax rates such as tariffs and Quotas increase the price of the goods in the domestic markets. This distorts the market signal that could guide an efficient allocation of the economy’s resources.

Taxes also increase on operational expenses as the tax that is determined will be an obligation of the operating businesses or its owner.

2.7 Summary Small and medium enterprises play an important role in transitional economies due to some of their special features: flexibility, quick adaptation, minimum bureaucracy; and special functions: creating of additional working places, active promotion of innovations, creating a competitive environment. Therefore the government charges low taxes it would favor the growth and expansion of these small businesses as they would be able to buy trade licenses

12 CHAPTER THREE

METHODOLOGY

3.0 Introduction This chapter covers different ways which data was gathered research design, study population, sample size, sampling techniques, source of data collection, procedures and methods of data processing, analysis, and presentation and illustrates the reasons to why the methods were chosen.

3.1 Research design The study used a mixed method design in which of both qualitative and quantitative methods was used. Qualitatively the researcher used both open-ended interview and closed-ended questionnaire was used to obtain quantitative data.

3.2 Area of study

The study was carried out in Busolwe town council; Butaleja District. Busoiwe Town Council is located in the Eastern Uganda in Butaleja District, 204km from Kampala and 46km from Mbale Town. It is located South of Butaleja District Headquarters and boarders with Butaleja Sub County in East, Busoiwe Sub County in the West, Busaba Sub County in the North and Kirewa sub county of Tororo District in the South. According to the current National population and Housing Census 2014 provisional result Busolwe Town Council was estimated to have a population of about 16730 with 7962 male and 8768 female 90% of the people leaving in Busoiwe town council are Banyole and speak Lunyole as mother language.

3.3 Study population The study population on small scale business in Busolwe town council was 1 60.The researcher selected such population because the population is too big and it is expensive for the researcher to reach every small scale businessperson thus he is going to sample only 25% of the study population to represent the whole population in Busolwe town council.

3.4 Sample size The study sample size was 40 respondents covering three wards of the Town Council. A sample size is defined as a small part of population intended as representative as a whole. The assumed sample size was 160 of the total number of small businesses covered in three wards of the Town

13 Council out of which only 25% of respondents were sampled thus 40 respondents were sampled to present the entire number of small businesses in Busolwe Town council in Butaleja District.

3.5 Sampling procedures! Strategies The researcher intend to use two sampling techniques which involve random sampling where every each person of the target population is given chance to participate and respond to the questionnaires and purposive sampling techniques was used by the researcher where he selected a few people from the population for specific purposes depending on the understanding of the researcher since he had some knowledge of the area. Respondents to be sampled included small scale businessmen such as shopkeepers, supermarkets, tenderer, market vendors, carpenter (30) departmental heads of the organization such Head of Finance, community Development Officer CDO(5), and political leaders (5). Because the researcher hope to get different opinions from them which is helpful as it enables the researcher to compare various ideas of respondents for consistency and occurrence.

3 .6 Methods and Instruments of Data collection The researcher faced people of different education levels, religion, family background and tribes who were the respondents. While in the field, the researcher used different methods in data collection which included;

3.6.1 Survey A researcher designed questionnaire in form of written set of questions to which respondents recorded their answers, usually within defined alternatives. The questionnaire was used on the basis that the variables under study cannot be observed for instance the opinions, and feelings of the respondents he reveals. Thus questionnaires consisted of both open and close-ended questions administered to respondents who were engaged in small sized businesses in Busolwe Town Council. The researcher found it useful to meet people of different education levels to the extent that other respondent failed to fill the questionnaires and they refer the researcher to the next respondent.

3.6.2 Interviews The researcher used aninterview guide to interview the respondents through face to face interaction between a researcher and the respondent through one on one interaction and group

14 focused discussions. To generate primary data, this helped to avoid on overgeneralization of ideas as many respondents had various opinions on the study variables

3.6.3 Observation The researcher will travel to various parts in the town council during data collection and critically observe the impacts of taxation on business performance, level of saving and investment with necked eyes which will be evidenced by the capital stoke of the respondent which will be observed by the researcher.

3.6.4 Desk Review

The researcher got some information from the existing published literatures such as text books, journals, newspapers, hand books, organizational charts containing information related to the study variable for compulsion purposes. For example the researcher got some information from URA guide to small business taxpayers FY 20 16/ 17 which will be part of secondary data. The researcher was given an acceptance letter from the organization which he moved with during data collection process.

3.7 Procedure of Data Collection

The researcher designed questionnaires to which were distributed to various respondents and were given enough time to fill and answer the questions then after the researcher made a follow up to every person who was given the questionnaires. The researcher also recorded down the information that was obtained from interviewing the one on one interaction and group discussions. In order to avoid loss of information the researcher also used Audio recordings for effective collection of data.

3.8 Data Analysis and Processing After data collection, the views of the respondents was assessed and examined by the researcher basing on the skills and knowledge gained and involved in checking data for accuracy and consistence. Quantitative data was used as supplement to qualitative data and the event was analyzed using table format and numbers for easy interpretation of the research findings by the researcher. Description was used in qualitative methods of data collection to supplement qualitative data collected. To avoid data loss the researcher used audio recording during interviewing the respondents.

15 3.9 Data Presentation The information gathered was presented using both quantitative format using tabular form and percentages for easy interpretation and reliance by the researcher and the researcher involved description of events as it was established since the researcher involved face-face interaction and observation methods during data collection. The researcher also made constant consultation to ensure accuracy and reliability.

Reliability and validity of study variables To ensure reliability, the researcher carried out a pilot study before the actual collection of data was done together with extensive consultation. The pilot findings enabled the researcher to improve on the research instrument where necessary to ensure reliability and validity of data to match with the published literatures to act as a reference for future researchers. The respondents described and explained how best the pilot study would be done to improve on validity and reliability of data findings.

3.10 Limitations of the Study

The following are some of the limitations of the study

Some respondents can be too busy at their work and therefore have less time to answer the questionnaires and the researcher has to go to the respondents many time especially the leaders and organizational departmental heads like Head of Finance.

The study can be limited by lack of consistence in information giving were each respondent has different opinions on the study variables as far as one on one interview and group discussion is concerned.

Lack of transparency in information giving by some respondents some of which are not willing to give important information to the researcher

The study can be limited by differences in data sourcing. The researcher can find it difficult in getting the right information from the selected population.

The study can also be limited by high cost of research equipment in relation to limited finance.

16 3.11 Ethical considerations The researcher will obtain informed consent from the community members and Business persons, introduce himself and explain to the people in the study area, the objectives of the study and explain to why the particular respondents is chosen, the benefits of the study, and ask questions in relation to the study. The researcher will design interview guide, questions in such a manner that would not violate the rights of the respondents. The information got from the respondents will be handled with a lot care and confidentiality for example personal names will not be reflected on research documents instead numbers of identification will be used.

Summary

The study involved use of both qualitative and quantitative method of research design to study the impact of taxation on small scale businesses in Busolwe town council in Butaleja District. The assumed number of small scale businesses in the council were 160 that were selected out of which 25% were sampled and only 40 respondents were interviewed by the use of both questionnaires and interview guide. Observation was also used by the researcher during data collection that was based to accept the information got from respondents, documentation was used by obtaining data from existing literatures, and respondents were given enough time to answer the questionnaires, data analysis involved checking data for accuracy and consistence, data presentation was done by use of tabula form and percentages for easy interpretation. To ensure Validity and reliance the study involved constant consultations from the experts involving those who ever done research and research supervisor for accuracy.

17 CHAPTER FOUR FINDINGS AND INTERPRETATIONS 4.0 Introduction This chapter presents the empirical findings on the impact of taxation on performance of small scale businesses in Busoiwe Town council Butaleja District. The results are presented in accordance with established objectives which include, to establish the types of taxes paid by small scale businesses, the impact of taxation on small businesses and the challenge faced by small businesses on paying taxes.

4.1 Democratic characteristics Extensive consultation was initially done by the researcher to ensure validity and reliability of data before presentation and compilation were done. The presentation was done in phases the first phase based on the demographic characteristics of the respondents, the second phase based on the general consensus of the impact of taxation on small scale businesses and the third phase based on the established objectives and the fourth phase based on the challenges that tax payers face while complying to tax laws.

18 4.1.0 Bio data presentation

4.1.1 Table 1 Showing Demographic characteristics of respondents Attribute Response Frequency Percentage response Sex differences Male 22 55 Female 18 45 Total 40 100 Age range Between 20-30 years 18 45 Between 30-40 years 12 30 Between 40-50 years 6 15 Above 50 years 4 10 Total 40 100 Marital status Married 22 55 Single 16 40 Divorced 0 0 Widow 2 5 Total 40 100 Education level Primary 4 10 Secondary 20 50 Certificate 6 15 Diploma 6 15 Degree 2 5 None 2 5 Total 40 100 Source: Field Finding, 2018

The table above shows the frequencies and percentage change of bio data of the respondents in response to the researchers. Findings where 55%.of the respondents were male and 45% of respondents were female. This reveals that small scale business in Busolwe town council is dominated by male is evidenced by the highest percentage compared to female.

Though there is a small business that illustrates that women lag behind in involving the selves in small business ventures. In Busoiwe town council the gender gap is not so worrying that would cause inequalities between the two set.

The table also reveals that majority of the respondents were in the age bracket of 20 -30 years giving rise to 45% response, followed with the age range of 30 — 40 female the second highest percentage of 30% respondents. Those with age bracket between 40 -50 were to giving rise to 15% of the respondent’s response. And those with Age bracket above 50 were 4 thus giving the least percentage of 10% response of the total respondents.

19 The table still clearly illustrates that the majority of the respondents were married giving 55% response. In relation to the field finding the married respondents dominate in dealing in small business ventures due to the responsibilities that forces them to work hard to earn a living and support their families.

It was followed by 40% of the response and most of them where youth relatives of the business owners offering family labour. Then the widows consisted 5% of the total population percentage response and the Divorced formed the least percentage response with 0%.

The table further presents the trends of the education status of the respondents and was observed that majority of the respondents had reached secondary level, with the percentage of 50% of total population response followed by the 15% with certificate and 15% diploma respectively. Those of primary level consisted of 10% and the degree holders 5% while those who never gave 5% of the total percentage response.

4.1.2 The general consensus on the types of taxes paid by small scale business in Busoiwe town council

Table 2 below shows whether taxes are a compulsory payment for all retail business or not in Busolwe town council ~~csponse Frequency % age response Yes 39 97.5 No 1 2.5 Total 40 100 Source: Fieldfinding 2018

From the table 2 above the research revealed that 97.5% of the respondents agreed that tax is a compulsory payment for all retail business in Busolwe town council while 2.5% did not know that paying tax is compulsory to every retail business person. According to research findings it was out that there is lack of general awareness by tax payer that the 2.5% failed to realize that it is obligatory to the small business men to pay tax.

20 Table 4.1.3. Showing the types of taxes paid by small scale businesses in Busoiwe town council.

Response Frequency %age response Direct taxes 13 43 Indirect taxes 22 50 Does not know the types of taxes paid 5 7 Total 40 100 Source: fieldfindings, 2018

Table III above presents the respondents response on the types of taxes paid in Busoiwe town council. The researcher found that 45% of the business operators in Busolwe town council pay a direct type of taxes. The research further revealed that 50% of business operators in Busoiwe town council pay an indirect type of taxes and 7% of the respondents were not aware of the taxes they pay implying that a lot of sensitization to business operators in the town council must be conducted.

4.1.3 Table 3. Showing how taxation affect business in Busoiwe town council Response of respondents Frequency % age response Reduce saving 10 25 Reduces on investment stock 8 20 Leads to increase in commodities price 10 25 Low profit gains 12 30 Total 40 100 Source: Fieldfinding, 2018

The above table 4 presents the respondents response on how taxation affects small business in Busolwe town council. The findings revealed that 2.5% alleged that imposing high taxes on small business reduces their saving rate, 20% urged that tax reduces on the investment stock of their business and 25% of respondents suggested that tax leads to increase in commodities price on market which scares customers while 30% took the highest percentage of the total respondent opinion showing that tax especially high taxes results into low profit gains.

21 4.1.5 Table 5. Showing assessment of small business in Busolwe town council for tax ~urposes Respondents response Frequency % age response Strongly agree 1 2.5 Agree 3 7,5 Disagree 20 50 Strongly disagree 14 35 Notsure 2 5 Total 40 100 Source: Field Finding 2018

The table above shows that 2.5% of respondents strongly alleged that their business had ever been assessed for tax purposes, 7.5% just agreed that their business had been assessed while 50% Disagreed forming the highest percentage followed by 35% of respondents who strongly disagreed that their business had never been assessed and only 5% where not sure whether the tax official had ever or never assessed the small business for tax purpose.

4.1.6 Table 6 showing the number and percentage change of respondents on getting assistance out of the tax they pay Respondents response Frequency % age response Those who get assistance 29 97.5 Do not get assistance 1 1 2.5 Total 40 100 Manual assistance 27 67.5 Material assistance 2 5 Total 29 72.5 Source: Fieldfinding 2018

The table above illustrates that 97.5% of the respondents revealed that they get assistance out of the tax they pay where 67.5% of them alleged that they get manual assistance inform of extension of social services such as security light, cleaning of town, maintenance of roads, health services and only 5% of them alleged to have got material assistance. And only 27.5% of respondents do not get assistance. While those who alleged that do not get assistance were 2.5%.

22 4.1.7 Table 7 showing the how long different small scale business men been paying tax and their response to tax charges. Response Frequency % age response 2005 4 10~ 2010 8 20 2015 20 50 Above 8 20 Total 40 100 Increasing 40 100

Decreasing 0 - 0 Tax increase influence commodities price 38 95 Do not influence commodities price 2 5 Total 40 100 Source: Fieldfinding 2018

The table above shows the friends how different small business persons been paying tax and their percentage response to tax charges. The study finding revealed that 10% paid tax since 2000, 20% 2005, 50% 2010 forming the highest percentage response while 20% started paying tax above 2010 to date.

The table further shows that 100% of the respondents agreed that tax had been increasing drastically since they started paying tax, while 95% of respondents alleged that tax increase influences commodities price and only 5% urged that tax increase do not influence commodities price.

23 4.1.8 Respondents on effects of taxation

Table 8 showing response on how taxation affects saving rate of small business in Busolwe town council and how they often save Response Frequency %age response Reduces capital for investment 9 22.5 Reduces profits 12 30 Reduces customers purchasing power 1 2.5 Affects business growth 18 40 Total 40 100 Everyday 16 50 Weekly 20 5 Monthly 2 Do not save 2 5 Total 40 100 Source: Field Finding 2018

The table 8 above presents different respondents’ opinions on how tax affects the saving rate of small business in Busolwe town council. The study showed that 22.5 urged that tax especially high tax reduces on capital for investment, 30% alleged that tax reduces profit of the business. While 2.5% urged that tax reduces customer’s purchasing power thus being the least population of response and 45% alleged that tax payment affect business growth taking the highest percentage response.

The table 8 further presents the average savings of the respondents the study reveals that 40% save their money on daily basis. 50% weekly, 5% monthly and 5% do not save respectively. According to the research findings those who do not earn out of their business is spent on daily consumption and others are reserved for tax dues.

24 4.1.9 Response on investment decisions

Table 9 showing impact of taxation on investment decisions of small business in Busoiwe town council Response Frequency %age response Tax affects level of investment 28 70 Do not affect level of investment 12 30 Total 40 100 Tax encourage further investment 8 20 Do not encourage further investment 32 80 Total 40 100 Lowers saving 10 25 Reduces profits 8 20 Increases price of goods on the 10 25 market Lowers business growth 12 30 Total 40 100 Source: Fieldfinding 2018

The table above presents the respondents’ response on how payment of tax dues affects the investment decisions of small business persons in Busoiwe town council. The study showed that 70% urged that tax payment affect the level of investment of small business and 30% urged that it encourages further investment plans, while 80% urged that paying tax dues especially multiple taxes discourage investment and affects their investment decisions for future plan.

The study revealed that 25% of respondents that taxation lower their saving which affect future plans of small business persons 20% urged that taxes reduces the profitability gains. While other 25% alleged that it increases prices for the goods on market, thus raising the cost price and cost of sales for goods to be sold. And 30% of the respondents showed that it lower business growth in relation to the business dealers decisions and effects their expectations.

25 4.1.10 table 10 showing Response on impact of tax on profitability of small business

Response frequency %age response Taxes deemed to be an fair in compulsion to daily earning Agree 30 75 Disagree 4 10 Donotknow 6 15 Total 40 100 High tax leads to low profits Yes 34 85 No 6 15 Total 40 100 Taxes affect profitability of small businesses Strongly agree 21 50 Agree 16 40 Strongly disagree o 0 Dis agree 2 5 Donotknow 1 5 Total 40 100 Average daily sales Less than 10,000 8 20 Between 10,000-29,000 12 30 Between 30,000-49,000 10 25 Between 50,000-69,000 6 15 Between70,000-89,000 1 25 90,000+ 3 75 Total 40 100 Source: Fieldfinding 2018

The table above shows that 75% agreed that tax levied on small business deemed to be un fair in compulsion to their daily earning, taking the highest percentage, 10% of the respondents disagreed that tax charged deemed to be unfair in compulsion to the daily earning, While 15% do not know whether it is deemed to be unfair or not.

The table still shows that 85% of opinion was that high tax leads to low profit and 15% of the total response urged that low profit is not as a result of high tax imposed on small business.

The table further illustrated that 52.5 percentage response of respondents strongly agreed that tax affect the profitability of small business exposing the highest percentage response that what they gain as profit is spent on tax dues. 40% also agreed while 5% disagreed and only 2.5% of the respondent’s response they do not know how tax affect their profitability of small business.

26 The table also shows percentage response on average daily sales of small business persons in Busoiwe town council. The study finding revealed that 20% earn less than 10,000 shillings, 30%

Between 10,000 — 29,000 shillings, 25% between 30,000 — 49,000 shillings, and 15% between

50,000 — 69,000 shillings while 2.5% save between 70,000 — 89,000 shillings and 7.5% save 90,000 and above.

Table lishowing response to challenges faced by tax payers in Busoiwe town council.

Response Frequency %age response Mode of assistance Yes 31 77.5 No 9 22.5 Total 40 100 Mode of tax collection Yes 34 85 No 6 15 Total 40 100 Tax collectors Yes 26 77 No 14 23 Total 40 100 Effectiveness in identifying and registering potential tax payers Strongly agree 18 45 Agree 12 30 Strongly disagree 2 5 Disagree 3 7.5 Not sure 5 12.5 Total 40 100 Source: Fieldfinding 2018

27 The table 11 above shows that 77.5% had challenges with modes of assistance in relation to the tax they pay, 22.5% had no challenge with the mode of tax collection. 85% of the percentage response had challenges with modes of tax collection and 15% faced no challenge with mode of tax collection.

45% of the percentage response strongly that tax officials are effective in identifying and registering potential tax payers, 30% agreed, only 5% strongly disagreed while 7.5% disagreed and 12.5% were not sure.

4.2 Data analysis

This section presents the analysis of the field finding on the impact of taxation on the performance on specific established objectives in correspondence to the established literature on the study variables.

4.2.1 To establish the types of taxes paid by small scale businesses

There are so many types of taxes paid by small and medium scale businesses. These taxes are categorized into two forms which are direct and indirect taxes. Direct taxes affect the individual/firms through deduction from earnings and examples of these include income tax ,tax on property and others while indirect tax are paid to government by intermediaries and they include import duties, local production tax, Value Added Tax(VAT) and others(Manasseh 2009).

According to research findings from table 3, the study showed that50% of the respondents in Busolwe town council pay an indirect type of tax, 43% pay direct tax whereas 7%of the respondents do not know the types of taxes they pay (Manasseh, 2009)

4.2.2 To analyse the impact of taxes levied on small scale business

A) Impact on investment decision of small businesses

Taxing small businesses affects businesspersons’ investment according to research findings from table 9 the study showed that 70% of respondents argued that taxes affect small business investment level. During data collection through the use of interview guide the respondents informed the researcher that taxes do affect their businesses argued that what they gain from the business is reserved for paying tax dues and this interferes with business owners expectations.

28 The researcher established that taxing small businesses makes their resources directed towards compliance that could be otherwise used for future expansion and growth that causes proportionate pressure on small businesses in correspondence with Tomlin (2008)

Taxation do not encourages further investment according to the research findings 80% argued that imposing multiple taxes on small businesses such as ground, trade licenses, income tax affects the investment decisions of small businesses and the researcher was informed that multiple taxes makes traders not to invest much in various ventures due to fear to pay taxes thus dodging by constraining and concentrating on business thereby affecting their future investment plans..(Bhatia, 2012), While 20% argued that low taxes encourages further investment than high tax the respondents informed the researcher that when taxes levied are low traders invest more in businesses compared to when taxes tends to go high.

Whereas research findings revealed that taxing small businesses affect investment levels of small businesses due to fear of the high tax, some respondents informed the researcher that taxes collected by the town council Authorities have been used in establishment of Busoiwe daily market that added a working environment for further investment in the council. In addition the HOF of Busolwe town council Mr. Kanare informed the researcher on this that taxes paid are used for maintenance of street light, roads, latrine coverage program and facilitation of sensitization of communities on government development programme. Basin.g on the finding the researcher found out that tax leads to further investment in the area as it is used for ensuring good investment environment.

Furthermore the research findings from table9 shows that 25% argued that taxation lowers the saving of small scale business which affect their investment decisions in business dealings for further expansion for as far as their expectations are concerned. In addition some respondents who were interviewed by use of interview guides through face to face interaction and group discussions respondents informed the researcher that imposing high tax reduces saving made on profit gains alleging that the little saved is spent on clearing tax dues which scares away the new entrants and investors, renderers’ who would wish to deal in the business ventures. The researcher found out that it was in correspondence with (Guthrie, 2012), (Kocherlakota, 2009).

29 According to Gordon and Dowson (2017), through taxation the Government takes away money from people they would otherwise spent on other investment ventures which affect the investment decisions of small business persons. The researcher established that this was in line with some of the respondents opinions who were interviewed during data collection.

Tax lowers expansion and growth small business the research finding from table 9 shows that 30% of the respondents revealed that tax lowers small business growth and expansion in response the traders’ expectations. This was in line with existing literature (Bhatia, 2012). The researcher was formed by some respondents that tax especially high taxes leads to increase in commodities price, production cost and transport cost and forces them to raise the cost of sales that scares a way the customers thereby reducing on daily sales of the business.

B) Impact of taxation on saving rate

Tax reduces the saving rate of small businesses according to the research findings from table 8 revealed that 22.5% of respondents argued that high tax reduces on capital for investment one of the respondents informed the researcher during data collection that little is gained out of sales if the government charges high tax which could not enable them to save money for further investment and accumulate their wealth. On this note the researcher through use of observation method discovered that most small businesses depends on family labour thus these businesses fetch them less profit which enable them support their families and also use it to clear tax dues at the end there is nothing to be saved. The researcher was informed that it discourages traders with low income and new entrants (Poutziouris 2009).

Taxation reduces on profits of small businesses in Busolwe town council where 30% of the respondents alleged that paying tax dues reduces on the little profit gains thus end up having little or nothing to save. Some respondents assured that researcher that taxes imposed on small business are too heavy for them to continue operating normally therefore leaves little to be saved. The researcher tried to establish approximant solution to high taxes levied from the tax officials in the council and was informed Head of Finance Mr. Kanare together with the examiner of account of Busolwe town council Were Agrey Mujere that tries to ensure proper identification of all taxpayers through registering them assess them and a touch tax.

30 Tax reduces customer’s purchasing powers from field findings table 8 reveals that 2.5% urged that tax reduces customer’s purchasing power during data collection through one on one interview and group discussions the researcher established that charging high prices makes business owners to charge different prices for the some commodities on the market which tend to be high and scaring to the potential customers that affect the purchasing powers of low income business persons. On this note the researcher argues the government should ensure friendly tax to the tax payers.

Taxation affects business growth some respondents alleged that tax reduces stoke assets of the businesses according to the research finding 45% alleged that tax payment affect business growth to backup this during data collection the researcher was informed by the respondents through oral interview that involved one on one interaction and focused group discussions that in most cases taxes imposed on small businesses do not tally with the capital vested in their businesses and argued that taxes affects the booming of the business, interferes with business expansion. (Bordingnon 2011)

Taxation especially imposing high tax on small businesses promotes a poor saving culture among small scale businesses as established from field findings as shown in table 8the study reveals that 40% save their money on daily basis. 50% weekly, 5% monthly and 5% do not save respectively. According to the research findings those who do not earn out of their business is spent on daily consumption and others are reserved for tax dues.

C) Impact of taxation on profitability of small business in Busoiwe town council

From the field findings the research table 10 the researcher established that 75% had agreed that high taxes levied on small scale businesses are deemed to be unfair in compulsion to the daily earn of the in business respondents alleged that it reduces stoke asset of the business that tax is levied on the little capital thereby reducing on the level of profitability of the business and as a result leads to stagnation of the business and closer of many others (Kocherlakota, 2010).

High taxes imposed on small businesses leads to low profit from the field findings tablel085% of the respondents’ opinion shows that high tax leads to low profit. Through interviewing the

31 respondents the researcher established that high taxes fetches low profit to the business persons as he was informed by most respondents that charging high taxes reduces on their profit thus end up using the capital met for investment to clear tax dues in order to enable them continue operating . However, the researcher established that tax alone cannot lower ones profit in business dealing but a combination of various factors using profit gains to pay school fees for their children, spending on medical care, home consumption.

The study further revealed that 52.5% of respondents strongly agreed that tax affect profitability of small businesses arguing that what is gained as profit is spent on tax dues. One of the respondents alleged that low profit as a result of high tax levied on the tax payers enables them to work for life support only but not to help the accumulate wealth they argued that others end up borrowing loans from financial institutions which in the long run result into loss of their properties due to failure to pay back the loans on time thus the researcher established that it was in line with established literature (Gentry and Hubbard, 2008).

From the research findings the study shows that 52.5 percentage response of respondents strongly agreed that tax affect the profitability of small business exposing the highest percentage response that what they gain as profit is spent on tax dues. 40% also agreed the respondents revealed that taxes especially high tax reduces on profits of the business and discourages new entrants on the market in dealing in businesses due to fair of being taxed on little capital. However, the researcher was informed by the examiner of account of Busolwe town council as one of the respondents that one of the policies they used in the council is that trade license have been merged with Local Service Tax (LST) for easier collection of both tax and ensure reduction of tax burden to tax payers and also lowers the tax rate charged on tax payers to enable that tax payers save some money as profit gains from the business.

The study finding revealed that 20% earn less than 10,000 shillings, 30%Between 10,000 —

29,000 shillings, 25% between 30,000 — 49,000 shillings, and 15% between 50,000 — 69,000 shillings while 2.5% save between 70,000 — 89,000 shillings and 7.5% save 90,000 and above. The research established that tax especially high tax lowers the average earning of small businesses the researcher was informed by the respondents that high tax leads to increase in commodities price thus scaring customers by affecting their purchasing powers that makes them to buy less than the real weight they used to buy thus businessmen earns low profit gains.

32 4.2.3 To analyze the challenges faced by small scale businesses in paying taxes

Business operators face a lot of challenges as far as paying taxes is concern. According to research findings from table 11, the study showed that 77.5%had a challenge with the mode of assistance as far as paying tax is concern. They claimed not to get any form of assistance from tax officials hence being un aware of the types of taxes they pay. During data collection, the researcher was informed that due to lack of assistance, business operators fail to know the right channels to be followed to identify the developments made out of their taxes. (Tomlin, 201 1).The table further indicates that 22.5% get assistance from the tax collectors. The respondents further explained to the researcher that the assistance given to them is insufficient hence more is still needed.

Do you have a problem with the mode of tax collection? From the research findings, 85% argued that the mode of tax collection by officials is not favorable to them. They explained to the researcher that given the fact that their taxes are paid in cash form, the possibility of loss and corruption these taxes are high(Bhahia,2014).they proposed at least to pay their taxes in banks or other means other than cash. While 15%argued that the mode of collection of these taxes is favorable to them because it is time saving and not costly to them.

Challenges with tax collectors. Table 11 further reveals that 77% of the respondents had a challenge with tax collectors. They accused them of being harsh and rude to them during the process of collection. They further explained to the researcher that incase of failure to pay taxes in time, they confiscate some of their commodities an inflicting heavy punishments to them hence subjecting many to withdraw from business(Gentry,2013).Whereas 23% urged that the tax collectors are kind in the process of collecting taxes,

4.3 Summary

According to the research findings the researcher found out that small business in Busolwe town council were dominated by more men than women leaving a gender gap in economic development of business ventures. Through interviewing various respondents of one on one interaction and group discussion the researcher established that women lack startup capital, having fixed home responsibilities that was in correspondence with the theoretically motivated Vector Error Collection Model (VECM), (Onofri and Tsenova20l4).

33 The study revealed that reduction in profits were as a result of high taxes imposed on small scale businesses where the respondents informed the researcher that what they gain out of sales as profit is spent on clearing tax dues and thus little is saved for add stoke in their business. The research further establishes that investment decisions of small scale businesses are equally influenced by tax levied in that when tax charged seem to be low traders save much more than when tax levied on the business is high which fetches them less profit. Thus small businesspersons prefer low tax to be charged on them as it allows their capital to accumulate and encourage them to invest in business ventures that automatically leads to overalldevelopment of the council by widening tax base.

34 CHAPTER FIVE

CONCLUSION AND RECOMMENDATIONS 5.0 Introduction

This chapter presents a summary of field findings of the study variables which include: conclusion, recommendation, and the area of further studies as follow

5.1 Conclusion of the Study

From the study findings on the impact of taxation on the performance of small scale businesses in Busolwe Town council based on the established objectives of the types of taxes paid by small scale businesses, effect of taxes paid by small scale businesses and the challenges faced by small scale businesses in paying taxes. The researcher concludes that the study was more of negative response to high tax than positive as it was advanced by the respondents during data collection that imposing high tax on small businesses reduces the would be reserved profit gains. Thus traders save little which does not enable their profit to accumulate for further investment and expansion of the business to transform from small to medium sized and finally large scale business.

To this, the researcher found out that low profit were dUe to a combination of factors such as limited knowledge among taxpayers on their business to the extent that 30% of the population that was sampled had no record book.

The study established that most small business are family run thus making them depart from the objectives of the businesses as some of them spend autonomously by pulling money from the business without making accountability.

The existence of lack of tax education leads to non-compliance among taxpayers arising from multiple taxes imposed on the business taxpayers that make them not to appreciate taxes levied.

Finally there was need to for constant sensitization of the taxpayers especially those with small businesses and tax collectors should also change the modes of collection from daily collection to monthly or annually this gives taxpayers enough time to calculate profit gains for clearing tax dues and remain with what to run the business.

35 5.2 Recommendation The researcher advance the following recommendations which were derived from the study findings

> To begin with the Government should reduce on tax levied on small scale businesses by keeping it low and ensure friendly tax to taxpayers to allow businesspersons benefit from the businesses. > Secondly the government should charge taxes to small businesses according to their income status, location and size of business stoke. Businesses are taxed uniformly yet others are not strategically located characterized with few customers, and are slow moving giving rise to less sales that fetches low profit. > The government should eliminate multiple taxes imposed on small businesses in order to enable traders save some profit gains to accumulate their capital for further investment in other business ventures. > The government should constantly sensitize small businesspersons on saving so as to accumulate their income that would enable them make further investment and boost their businesses. > The local government should encourage tax payers to voluntarily start to pay tax by bank through the Busolwe Town council General Fund account rather than direct payment to the council to minimize on the rate of tax avoidance common among taxpayers in the council. > The local government should promote the policy on the idea of issuing demand note to tax payers to any person found on premise~ in case of failure or delayed payment of tax dues for proper management of tax especially on ground tax. > The government should ensure proper identification of new tax sources to reduce on pleasure from the small business taxpayers for tax to promote conducive environment for small scale business expansion through elimination of some multiple taxes. > The government should put in place tax appeal tribunal in which taxpayer can attribute. ~ The tax authority should sometimes accept partial payments of tax due to unavoidable circumstances and uncertainties such as climatic changes which affect small business

36 effectiveness since most of them are slow moving with the total capital less than five million shillings (5’OOO, 000sh) with the gross turnover of the business less than ten million shillings (10,000,000sh) in a year this is in correspondence with (Schuetze and Bruce 2014) and URA tax guide for small scale business taxpayers vol.2 issue 1 FY2015/16. > The researcher also recommends that traders should be encouraged to form trade association in form of SACCOs to promote saving this would help them improve on their saving rate which later enable them invest much and expand their businesses thus transforming them from small to medium sized and finally large businesses that leads to capital accumulation. > The local government should put much focus on lobbying and advocate for allocation of funds to the development projects formed by small businesspersons from central government to support small business growth in the area. > The government should consult taxpayers before taxes are levied and as well responds to the needs businesspersons’ .in addition the local government should involve taxpayers in decision making on matters concerning tax dues. > The government should also give tax relief to new entrants in business ventures to motivate them and attract more people to engage in business dealing and widens tax base in the area. ~ Finally the researcher recommends that the government should setup a governing body in charge of monitoring local revenue to minimize on loss of tax revenue collected from taxpayers to ensure that taxpayers benefit from the tax they pay through accessing socio economic services out the tax they pay.

5.3 Areas of further research The researcher advanced further research to be on done the implications of multiple taxes on small business growth in the council. The researcher suggests more research be done on the relationship between saving and investment.

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