Taxation and its impact on the profitability of small and medium enterprises in uganda

Abstract

This study aimed at examining “taxation and its impacts on the performance of Small and Medium Enterprises in Uganda.” To achieve this purpose, specific objectives of the study were developed to: determine the types of taxes levied on SMEs in Masaka Municipal Market, the relationship between income tax and profitability levels of SMEs and establish the influence of tax rates on the performance of SMEs in Masaka Municipal market. The study adopted the descriptive study design based on the quantitative and qualitative approaches. Questionnaires and interviews were used to obtain the findings, a sample size of 375 was used to collect information through interviews and questionnaires. The findings showed a positive correlation between Income Tax and Infrastructural Development 0.512, a positive correlation between sales taxes and increase in saving and investments 0.609, a positive correlation between property taxes and controlled market failure 0f 0.732 and a positive correlation between estate taxes and Redistributed income of 0.518. the findings also showed that tax incentives (Beta= .459, Sig. < .000) was a better predictor of the performance of SME’s and this was followed by tax rates (Beta = .311, Sig. < .005), and lastly tax compliance with (Beta= .171, Sig. < .031). and these were calculated using the regression analysis finding out the relationship between, tax compliance, tax rates and tax incentives with the performance of the SMEs. For the influence of tax rates on the SMEs performance, the findings showed tax inconvenience with mean score 2.11 and SD 0.972. the mean of 4.35 and SD of 0.744 showed the size of capital and the taxes levied on the SMEs, basing on the correlation matrix, a strong positive relationship between the taxes and the performance was found out with a correlation co efficient of 0.689. The study recommended that; strengthening the system of taxation through having a simplified system of taxation that can support SME tax payers to meet their tax duties; designing effective tax rates that are not based on the taxable profits as demarcated in the law but on an economic measure which includes the impact of the tax base; strengthening tax incentives to support infant small and medium firms so as to stimulate the performance of SMEs in the economy,