The Effect of Income Tax On Profitability Levels of Small and Medium Enterprises (Smes) A Case Study of Kapchorw A Municipal, Kapchorw A District

ABSTRACT

The study was carried out to determine the effect of income tax on the profitability levels of small and medium enterprises. The objectives included to evaluate measures used in assessing ' taxes on SME's to determine the relationship between income tax and profitability levels of SME's. The study was a survey involving a collection of both quantitative and qualitative data. Primary data was collected through interviews using questionnaires and secondary data from journals, text books and pe1-iodicals. The findings revealed that income tax negatively affects a number of SME's in that all profits which would have been ploughed back into the business are eroded away by tax. Recommendations include; sensitization of income tax payers by URA officers in form of tax education should be done regularly. URA should also train their staff about tax assessment and collection methods as well as how to handle tax payers and small scale beginners regardless of the size and level of gross annual turnover should be exempted from income tax deposits.

CONTENTS

DECLARATION ........................................................................... Error! Bookmark not defined.

DEDICATION ............................................................................... Error! Bookmark not defined.

ACKNOWLEDGEMENT ............................................................. Error! Bookmark not defined.

ABSTRACT .................................................................................................................................... v

LIST OFT ABLES .......................................................................................................................... vi

CONTENTS ................................................................................................................................. vii

CHAPTER ONE: INTRODUCTION .......................................................................................... 1

1.0 Back ground to the study ............................................ Error! Bookmark not defined.

1.1 Problem Statement .................................................................................................... 5

1.2 Purpose of the study .................................................................................................. 5

1.3 Study objectives ........................................................................................................ 5

1.4 Research questions .................................................................................................... 6

1.5 Scope of the study ..................................................................................................... 6

1.5.1 Study scope ........................................................ Error! Bookmark not defined.

1.5.2 Geographical scope ............................................................................................. 6

1.6 Significant of the study .............................................................................................. 6

CHAPTER TWO: LITERATURE REVIEW ............................................................................ 8

Introduction ................................................................................................................... 8

2.0 Concept of Taxation .................................................................................................. 8

2.1 Origin and development of income tax in Uganda ......................................................... 9

2.2 Income tax .............................................................................................................. 10

2.2.1 Computation of income tax ................................................................................ 11

2.3 Principles/cannons of taxation .................................................................................. 11

2.4 Types oftaxes ......................................................................................................... 11

vii

2.4.1 Direct taxes ...................................................................................................... 11

2.5 Importance of taxes ................................................................................................. 12

2.6 Analysis of financial profitability/performance ........................................................... 14

2. 7 Types of profits ....................................................................................................... 15

2.8 Profit measurement ................................................................................................. 16

2.9 Income tax and the perfonnance of small scale businesses ........................................... 16

CHAPTER THREE :METHODOLOGY ................................................................................. 19

3.0 Introduction ............................................................................................................ 19

3 .1 Research Design ..................................................................................................... 19

3 .2 The study population and sample .............................................................................. 19

3.2.1 Study population ............................................................................................... 19

3 .2.2 ample size ........................................................................................................ 19

3.2.3 Sampling method .............................................................................................. 20

3 .3 sources of Data ....................................................................................................... 20

3 .3 .1 Primary data .................................................................................................. .' ... 20

3.3.2 Secondary Data ................................................................................................. 21

3.4 Data collection methods and instruments ................................................................... 21

3.4.1 Questionnaires .................................................................................................. 21

3.4.2 Interview guide ................................................................................................. 21

3.4.3 Procedures .......................... : ............................................................................. 21

3.5 Data processing and Analysis ................................................................................... 21

3.5.1 Data processing ................................................................................................. 21

3 .5 .2 Data analysis .................................................................................................... 23

3.6 Likely limitations to the study .................................................................................. 23

viii

CHAPTER FOUR: DATA ANALYSIS ................................................................................ ,. ... 24

4.0 Introduction ............................................................................................................ 24

4.1 General findings about the characteristics of respondents ............................................ 24

4.1.1. Respondents by gender (Sex) ............................................................................. 24

4.1.2 Age group of respondents ................................................................................... 25

4.1.3: The level of education ....................................................................................... 25

4.2 Tax assessment and collection .................................................................................. 26

4.2.1: Existence of the business ................................................................................... 26

4.2.2 Registration for income tax ................................................................................ 26

4.2.3 Effect of income tax on survival on SME's .......................................................... 27

4.2.4 Frequency of paying income tax ......................................................................... 27

4.2.5 Types of taxes paid by SME's ............................................................................ 28

4.3.1 What should be done to help reduce the negative effect of income tax? ................... 30

CHAPTER FIVE: SUMMARY OF FINDINGS AND RECOMMENDATIONS ................ 31

5.0 Introduction ............................................................................................................ 31

5 .1 Summary and findings ............................................................................................. 31

5.1.1: Income tax and its likely effects on perfom1ance .................................................. 31

5 .1.2 Other problems affecting SME' s profitability ....................................................... 32

5.2 Conclusion ............................................................................................................ 32

5 .3 Recommendations .................................................................................................. 32

5 .4 Areas for further research ......................................................................................... 33

REFERENCES: ........................................................................................................................... 34

QUESTIONNAIRE ..................................................................................................................... 35