TOPIC: PRESUMPTIVE INCOME TAX SYSTEM AND …
TOPIC: PRESUMPTIVE INCOME TAX SYSTEM AND PROFITABILITY OF SMALL BUSINESS ENTERPRISES IN UGANDA
CASE STUDY: NAKAWA DIVISION
BY:
WERE FRANCIS
07/U/15960/EXT
207015877
SUPERVISED BY: MR. TURYAKIRA NAZARIUS
A RESEARCH REPORT SUBMITTED TO MAKERERE UNIVERSITY
IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE AWARD OF DEGREE OF BACHELOR OF COMMERCE OF
MAKERERE UNIVERSIY
JULY 2011
DECLARATION
I hereby declare that the work in this report is entirely attributed to my personal efforts and has never been presented before for an award
Where earlier work was cited, acknowledgement has been made.
WERE FRANCIS
SIGNATURE:……………………………………….
DATE:…………………………………………….....
APPROVAL
I certify that this research work has been submitted for examination under my supervision
Signature: ……………………………………………… Date: …………………………………
MR. TURYAKIRA NAZARIUS
(Supervisor)
DEDICATION
I dedicate this piece of work to my late grandmother ANNA NEKESA NAMUDEPI of Busia district.
REST IN PEACE
ACKNOWLEDGEMENTS
I am grateful to the following people for their contribution, support and assistance in having this book accomplished. Am Indebted to my supervisor, Mr. Turyakira Nazarious without whose guidance, support and encouragement the work would never have been.
I am also grateful to my parents Mr. and Mrs. Okumu Amolo Willingstone for their continued support, encouragement and unwavering commitment in helping me towards attaining my goals. Thank you dad and mum.
I am particularly thankful and would like to extend my sincere appreciation to my brother Were Edrin, my sister Namudepi Tracy and all my family members for their moral support.
I would also like to thank all my dear friends for their moral, Social and academic support they have given me during my stay at campus especially discussion group members;Nalumu sara,Mugisha Julius, Eric lubanga ,Mbabazi Elizabeth ,lizzmo, Mutebi, Ngabirano Kenneth,Nabakooza Florence,Kayiga Charles and Nandaula Maria you guys and girls were great and I will miss u all.
Special thanks go to Arinaitwe Edith, Owen, Chris and Kemisa.I appreciate all the encouragement and support you showed me.
Lastly, I would like to thank to all the staff department of distance education for their intellectual and logistical support.
LIST OF ACRONMY
SBES Small Business enterprises AICPA American Institute for Certified Pub
GET German Economic Team UNCTAD United Nations Conference on Trade and Development
URA Uganda Revenue Authority
USSIA Uganda Small Scale Industries Association
USAID United States Agency for International Development
UNDP United Nation Development Programme
IMENCC Informal, Micro and Small Enterprises Sector National Coordination Committee
ITA Income Tax Act
SEC Section
UN United Nation
TABLE OF CONTENTS
DECLARATION i
APPROVAL ii
DEDICATION iii
ACKNOWLEDGEMENTS iv
LIST OF ACRONMY v
TABLE OF CONTENTS vi
LIST OF TABLES ix
CHAPTER ONE 1
1.1 Background 1
1.2 Statement of a problem 2
1.3 Purpose of the study 2
1.4 Research objectives 3
1.5 Research questions 3
1.6 Scope of the study 3
1.6.1 Geographical scope 3
1.6.2 Content Scope 3
1.6.3 Time scope 3
1.7 Significance of the study 4
CHAPTER TWO: LITERATURE REVIEW 5
2.0 Introduction 5
2.1 Definitions 5
2.1.1 Taxation 5
2.1.2 Presumptive Taxation 5
2.1.3 Small Business Enterprises. 6
2.2 Presumptive Income Tax system 7
2.2.1 Procedures of Paying Presumptive Tax 9
2.2.2 Types of Presumptive Tax 9
2.2.3 Administration of Presumptive Tax 11
2.2.4 According to the Income tax Act 1997 13
2.3 Profitability of small business enterprises. 14
2.4 The concept of Profitability 14
2.4.1 Indicators of profitability 18
2.4.2 Measurement of profitability 18
2.4.3 Factors affecting profitability 19
2.5 Presumptive Income Tax System and Profitability of Small Business Enterprises. 20
CHAPTER THREE 24
3.0 Introduction 24
3.1 Research design 24
3.2 Sampling design and procedure 24
3.2.1 Study population 24
3.2.2 Sampling methods 24
3.2.3 Sample size 25
3.3 Data collection 25
3.3.1 Source of data 25
3.3.2 Procedure 25
3.4 Data collection methods and instruments. 25
3.4.1 Questionnaires 25
3.4.2 Interviews 26
3.5 Data processing and analysis 26
3.6 Limitations of the study 26
CHAPTER FOUR: PRESENTATION, ANALYSIS AND INTERPRETATION OF FINDINGS 27
4.0 Introduction 27
4.1 Characteristics of respondents 27
4.1.1 Gender 27
4.1.2 Age bracket 28
4.1.3 Education level 28
4.1.4 Nature of the respondents business 29
4.2 Presumptive income tax 30
4.2.1 Registration for presumptive tax 30
4.2.2 Awareness on tax paid 31
4.2. 3 paying right amount 31
4.2.4 Business survival 32
4.2.5 Computation of presumptive tax 32
4.3 Profitability 33
4.3.1 Level of Profits. 33
4.3.2 Cash Balances 34
4.3.4 Other sources of funds to gear business operations 35
4.4 Relationship between n between presumptive income tax and profitability levels 36
CHAPTER FIVE: SUMMARY, CONCLUSIONS AND RECOMMENDATIONS 38
5.0 Introduction 38
5.1Summary of findings 38
5.2 Conclusions 39
5.3 Recommendations. 39
5.4 Areas for further research. 40
REFERENCES 42
APPENDICES 46
APPENDIX I 46
QUESTIONNAIRES 46
APPENDIX II 51
LIST OF TABLES
Table 1: Presumptive Income tax rates 13
Table 2: showing sex of respondents 27
Table 3: showing the age distribution. 28
Table 4: showing the education level of the respondents. 28
Table 5: showing the nature of the respondents business. 29
Table 6: showing duration of business 29
Table 7: showing whether the business is registered for presumptive tax 30
Table 8: showing whether the tax payers knew the type of taxes they are supposed to pay 31
Table 9: Showing whether Amount paid match with the amount earned 31
Table 10: showing whether business closed after failing to pay taxes 32
Table 11: Showing whether tax payers know how presumptive income tax is computed. 32
Table 12: showing whether businesses generate enough profits to carry out business operations 33
Table 13: showing whether the business is left with some cash to acquire more stock 34
Table 14: showing whether presumptive tax affect profits of SBES 34
Table 15: showing whether businesses use some external sources of funds to acquire stock 35
Table 16: showing whether presumptive tax system affects the following elements of business 36
ABSTRACT
The purpose of the study was to examine the relationship between presumptive income tax system and profitability of small business enterprises in Uganda. The conceptual framework was based on the relevant literatures on presumptive income tax system. The specific objectives of the study were:,to evaluate the effectiveness of presumptive income tax system, to examine the profitability of small business enterprises and to examine the relationship between presumptive income tax system and profitability of small business enterprises.
In order to achieve the above objectives data was got from both primary and secondary sources. Primary data was collected through administering of questionnaires to sample of 50 traders in five areas of nakawa market, bugolobi, kitintale, ntinda and mbuya while secondary data was got from dissertations, books, journals and unpublished research reports.
The findings show that most traders are not registered for tax and ignorant about the type of taxes they pay and a majority of them agree that presumptive income tax system affects their profitability levels.
Recommendations have been made which include the following;
i. Tax payers should employ professionals’ like accountants to keep for them proper books of accounts.
ii. The government should introduce tax education in schools so that people know the importance of tax.
iii. URA should embark on intense tax education programmes
iv. URA should as well also embark on a nationwide registration exercise of all small scale businesses.
CHAPTER ONE
1.1 Background
Presumptive income tax system is a method used to tax small business enterprises in Uganda with annual turnover of Uganda shs.50 million and below sole traders and self employed categories. (ITA 1997 SEC (5). It was introduced during the 1997 tax reforms in order to ease the taxation of Small Business Enterprises, which are hard to tax and were characterized by high non – compliance levels (Sserwanga and Walter; 2003).
This system of taxation is uncertain, inequitable to the investors and the tax payers. Unlike individual income tax however, the tax rates are varied. While some Small Business Enterprises pay a fixed rate ranging from shs. 100,000 to shs. 450,000 per annum, others pay 1% of their gross turnover whichever is lower. Equity therefore does not prevail across the board for tax payer in the same bracket. This mean that the amount to be paid is not certain (un predictable) to the tax payer because assessment is based on presumed income (Kirambaire 2003).
Presumptive income tax system is imposed on the gross turnover without any deductions; small firms are neither entitled to generous initial allowances for investments in machinery or subject to any restrictions on writing off business expenditure. This deprives them of the benefits that could enhance their growth and profitability. (Reinikka and Collier, 2003). It should be noted that, Uganda is private sector is dominated by Small Business Enterprises, providing backward and forward linkage to the large scale enterprises. (Government of Uganda, 1997).
Profitability may mean the excess of revenues over expenses incurred in generating those revenues. According to Pandey (2002), profitability is a measurement of overall performance and effectiveness of the firm. It represents an increase in cash flows plus changes in the value of assets. Profitability can be measured by the degree of cost reduction that is the ability to minimize costs and maximize revenues in the business.
The research therefore focused on Small Business Enterprises owner which include private investments of individual or group of individuals in an attempt to generate more revenue and expand on their profits alongside taxes.
The research will be carried out in Nakawa division because of the numerous numbers of Small Business Enterprises there. In Nakawa division, presumptive income tax rates have had a negative impact on the profitability of Small Business Enterprises. Despite the endeavors of Small Business Enterprises to generate adequate sales turnover, the Ugandan tax structure does not favor them. The high presumptive income tax rates on their gross turnover tend to threaten them away from the industry yet they account for 93% of total number of Uganda firms and generate more than 52% of total turnovers employing 82% of the private sector workforce (Akileng 2003). Therefore, the vitality of Small Business Enterprises in Uganda is essential to government’s objectives to raise the rate of productivity growth in the economy.
1.2 Statement of a problem
Presumptive income tax rate system was enacted by government as per second schedule of section 5 of the income tax act (1997) to promote SBES. However, it has affected their profitability as measured by the return on capital employed.
The presumptive income tax system operates in such a way that those business whose annual turnover is less than five million are exempt from tax. Those whose gross turnover is more than five million but less than twenty million pay 100,000,those whose annual turnover is more than twenty million but less than fifty million pay 250,000 or 1% of gross turnover.lastly,those whose gross turnover is more than fifty million pay 450,000 or 1% of gross turnover which is ever lower(Pius K Bahemuka).
Despite the fact that presumptive income tax system was enacted to promote Small Business Enterprises, they have continued to perform poorly(Kiiza, 2005), 35% of Small Business Enterprises do not survive for more than one year after commencement (UN development paper 1998).
1.3 Purpose of the study
The study was to find out the relationship between the presumptive income tax system and the profitability small business enterprises in Nakawa division.
1.4 Research objectives
a. To evaluate the effectiveness of the presumptive income tax system
b. To examine the profitability of Small Business Enterprises.
c. To determine the relationship between presumptive income tax system and profitability of Small Business Enterprises.
1.5 Research questions
The research questions to guide this study are:-
a). How effective is the presumptive income tax system in Uganda?
b). what is the annual turnover and profitability of Business Enterprises?
c).Is there any relationship between presumptive income tax system and profitability of Small Business Enterprises?
1.6 Scope of the study
1.6.1 Geographical scope
The study focused on Small Business Enterprises in Kampala Nakawa division. This is because the division has many business enterprises and business activities. The study was restricted to Nakawa division due to limited funds and time.
1.6.2 Content Scope
The research focused at how the presumptive income system is a major threat to the profitability performance of Small Scale Enterprises.
1.6.3 Time scope
The study examined the effect of the presumptive income tax rates on the performance of Small Scale Business Enterprises from 2006 to 2010.
1.7 Significance of the study
The study intends to make the following contribution.
a) To create knowledge for policy makers and tax administrators on the relationship between the presumptive income tax system and the profitability of Small business Enterprises in Uganda.
b) To make a contribution in terms of knowledge in the area of taxation and performance of small business enterprises since little research has been done in this area.
c) To stimulate further research in investment and taxation in Uganda; with specific interest in Small business enterprises.
d) To enable potential and existing investors to appreciate the effects of taxation in investment returns and capital flow.
CHAPTER TWO: LITERATURE REVIEW
2.0 Introduction
This chapter is preceded by the chapter on the introduction that brings an insight on the background. This chapter therefore reviews the existing literatures on presumptive income tax system and profitability of small business enterprises. The literature tries to justify the existence of a relationship between the presumptive income tax system of small business tax payers and the profitability of small business enterprises.
2.1 Definitions
2.1.1 Taxation
Taxation is process by which government or municipal quasi public body raises monies to fund its operations. It’s the impact an investment has on the investor’s liability for the payment of federal, states, and local taxes. It is a process of administration and collection of taxes. , (Tumuhimbise, 2001).
A tax is defined as a tool used by government to raise revenue to finance activities that benefit the community as a whole which if left undone, no individual community as a private concern would undertake to perform it. (Minister of Finance Hon. Nkanji, Budget speech presented on June 1995).
Economists define a tax as a leakage from the circular flow of income into the public sector.
2.1.2 Presumptive Taxation
The oldest example of presumptive taxation can be found in ancient Egypt. The amount of corn to be handled over the treasury in kind differed from year to year. The level of taxation was decided by linking the amount of corn to be handed over a constant factor and a variable one (Grapper Haus, 1997).
Presumptive taxation involves the use of indirect means of ascertaining tax liability, which is different from the usual rules based on the tax payer’s accounts. The term “presumptive”, is used to indicate that there is legal presumption that the tax payer’s income is no less than the amount resulting from application of the indirect method (Thuronyi, 1996).
In Uganda, presumptive taxation is meant to cater for the incomes of small business enterprises in the informal sector who do not keep records. Presumptive taxation is basically a method of determining income and tax liability of small tax payer with the view of widening the tax base and increasing the tax revenue yield. (Tindimawe 1999)
2.1.3 Small Business Enterprises.
The definition of Small Business Enterprises varies from person to person and from one economy to another. Thus its hard to get a concrete definition. The definition is usually based on the number of employees, turnover or value of assets.
Small business enterprises are defined in respect to the number of people employed, capital employed and sales turnover (Astley, 1997), while Belkaovi and Karpic, (1989) used nets sales to define small business enterprises, while (Trotman and Bracley, 1981) used both sales and total assets to define small Business Enterprises, UNCTAD,(2000)defines small business enterprises as a business involving one to two persons, with simple enough activities to be managed directly on a person to person basis.
A small business enterprise is defined as a business involving one to five persons, with simple enough activities to be managed directly on a person to person basis.(Kizza ,2006).
Ministry of finance, planning and economic development defines a small business enterprises as a unit within a capital investment not exceeding $300,000.
A small business enterprise is one employing between 1-25 persons / people and with assets and capital not exceeding US$ 100.000 (Uganda small scale industries Association (USSIA).
Because of lack of consistency of the definitions of Small business enterprises, the difference in the definitions will not be fundamental to this research (Hall berg, 2000). However, for the purposes of this study, Small business enterprises are defined as those resident business units with gross annual turnover of not more than fifty million Uganda shillings. This definition includes any business irrespective of number of employees or capital invested but excludes any professional and public utility business (ITA 1997).
2.2 Presumptive Income Tax system
Presumptive income tax system refers to a method of collecting taxes from tax payers using the gross annual turnover (ITA, 1997). The income tax liability of the tax payers is determined without using financial reports. The presumptive method applies to resident, non professionals with a gross annual turnover of not exceeding fifty million shilling (Akileng, 2006).
Presumptive income tax system was introduced in the 1997 income tax reforms to streamline income tax collection (Background to the budget 1996) and widen the income tax base (Bird, 1992).
This tax system does not apply to resident’s tax payers who are in the business of providing medical, dental, architectural, engineering, accounting, legal or other professional services, public entertainer’s public utility services and construction services (ITA 1997 and Waliya 2005).
Presumptive income tax system is based on some measures of economic activity that proxies for taxable income, rather than taxable income itself (Christian 2004). The accounting requirements are not completely absent, as tax payers must be able to prove that the qualities to presumptive tax regime.
Presumptive income tax system is employed in economies where specific groups of individuals of tax payers are hard to tax, these groups of tax payers lack financial transparency that allows for effective taxation by the government. (GET, 2004)
Chen and Reinikka (1999), concerned with this view, they stated that the non taxable small business enterprises in Uganda are now subject to a presumptive income tax, unless they opt to file an income tax return.
Omara (2004) makes a case for presumptive income tax system and appreciates that this kind of tax is necessary for the hard to tax payers who comprise a majority of the payers.
Sunley etal, (1996), recognizes the complex and complicated nature of taxation of small business that existed under the deposit system before 1995, in making a recommendation for Uganda to re-adopt a farm of presumptive income taxation for small business enterprises based upon standard assessments did not show whether it was an efficient kind of tax for small business tax payers as to qualify for a good tax system.
Aaron and Slemrod (1999) assert that presumptive income tax system is appropriate in an economy with a sizeable illiterate population and a big informal sector like Uganda.
However, the problem with the presumptive income tax system is how to keep out the system large and medium enterprises that hide themselves from the tax men’s eye. Thus as the small become bigger, they will graduate into the normal tax system, so one must also ensure that, those who are in the normal system already or should be in the system do not migrate a shift into the simplified system and take on the disguise of smallness to shield / themselves from taxation (Bird and Walter, 2003).
As pointed out by Bird and Wallace (2004) the critical issue is whether these presumptive methods of taxation are really effective first in bringing firms into the formal economy and then, after few years, forcing them to move into the normal tax system, while minimizing the number of firms that move from the normal tax regime into the simplified one. The main problem is that these objectives are to some extent inconsistent. To be attractive for informal firms the methods need not to be simple and based on readily available information to reduce compliance costs (Araujo, Bonjean and Chambas, 2004), they should also provide for an effective taxation that will be lower than that based on the normal tax rules. However, this would discourage them from moving into the normal tax regime and attract firms that are in the formal sector to move to the presumptive regime, resulting in loss of revenue to the Tax Authority. One solution to this conundrum might be a periodical revision of the threshold for eligibility for the simplified regime.
2.2.1 Procedures of Paying Presumptive Tax
In order to enjoy the benefits of paying the lower tax in each market, a tax payer is required to file a return of gross turnover for a given year of income otherwise a tax payer will automatically be assessed to the standards (Pius K Bahemuka 2000) and Uganda Revenue Authority (URA)
The payment of Presumptive Income Tax can be paid in full amount during the financial year or tax payer may opt to pay the tax provisionally during the year in four equal quarterly installments in case of individuals. Then the two equal semiannual installments in case of companies (URA journals, 2005).
According to revenue Staff Magazine volume 4 No. 1 July December 2003 presumptive tax contributed 2.16 billion Uganda Shillings in the year 2002-2003.
2.2.2 Types of Presumptive Tax
Unified tax. The unified tax is the most important presumptive tax. It applies to business operated by natural persons with up to 10 employees and an annual gross income of not more than $500,000. Legal entities are subject to the unified tax in case they have not more than 50 employees and an annual gross income of not more than $1000. The tax rates are 6% on turnover.
Fixed tax: The second most important presumptive tax is a fixed tax in form of patent. This option may be used by the natural persons with a gross income from entrepreneurial activities in the 12 months preceding the grant of the patent of up to 7000 times the “tax-fee minimum income, in case the business has no more than 5 employees. A person applies for such a patent to the local revenue authority; patent fees are set by local councils between $1000 and $ 1200 (Amon, 2000).
Presumptive systems based on indicators have become increasingly popular in transition countries, these systems aim at being more precise than turnover – based systems in estimating the profit potential of the individual entrepreneur (Hughes, 1999). However, this brings up a clear conflict of the objective. The objective to tax the true potential profit of the small business conflicts with the objective to design a simple and transparent system policy makers in transition countries face considerable difficulties designing indicator based systems that establish an acceptable balance these objectives. Systems tend to be extremely complicated and unclear or they do not sufficiently differentiate between business activities (Drake, 2000). The latter is in case Georgia, where presumptive system only distinguishes between five groups of activities. The gap left will be filled by the current study using the case study of Uganda.
In this case, except for retail trade, transportation and jewellery shops (and restaurants, which are subject to a different regime) all small business production and service activities are in the same category and thus subject to the same tax burden. The system therefore has not achieved its objectives to tax according to the profitability of small businesses
Brighton (1993) observed that there are three presumptive taxes for very small businesses that can be assessed by the local administration within certain limits; the so-called trade permit (for service), the small enterprise tax (for intermittent trade activities), and the market fee (for selling agricultural produce).
As Thiessen (2002) notes correctly, it is hard to understand why sole entrepreneurs in the service sector with no employees and a gross income below $1000 per year should have the choice of three presumptive taxes. Such entrepreneurs can either opt for the unified, tax the fixed tax, or for the trade permits. Many other small businesses have at least a choice between two taxes, the unified tax and the fixed tax. The Ukraine approach offers small business the possibility of tax shopping, unnecessarily complicates the tax system, and reduces the revenue collection from this sector of the economy.
2.2.3 Administration of Presumptive Tax
In Ukraine, a USAID report lists presumptive taxation administration as an instrument to facilitate the collection of revenues from the shadow economy. Similarly, the letter of intent of the government of Moldova of November 30, 2000, which describes the policies that Moldova intends to implement in the context of its request for financial support from the IMF, includes a commitment to analyze the appropriateness of a presumptive tax administration on small enterprises to draw private business into the tax net. Along the same lines, a senior IMF official considers the administration of presumptive to be influenced by a number of factors such as micro economic policy decisions, the efficiency and effective of the administrative and also the degree of fiscal corruption.
Therefore in regulations dealing with taxation, the introduction of threshold levels or reduced monitoring and reporting requirements can significantly reduce the burden and compliance costs administration for 5, MBE’s. On the other hand several World Bank reports also have pointed to the weaknesses and risks of presumptive tax systems. The FAIS (2001) report on Georgia, a part from highlighting the potential benefits of a simplified scheme, considers a fixed tax to be very complicated, and a recent World Bank report on tax policy and tax administration in Ukraine discusses the risk of lack of focus and unjustified generosity of presumptive systems (Ivonavich, 2001). Obviously there is a relatively short history of small business taxation in transition countries.
In the initial stage of tax reform some countries experimented with the use of tax incentive schemes not only for large business and foreign investments but also for large businesses and foreign investments but also for small business development. In Kazakhstan, in the first stage of transition (1990-1993) incentives for SMBE’S were introduced, exempting Sambas from profit tax for the first three years after establishment. For the fourth years they paid 50% of the tax rate, with the full rate applied only after five years.
During that period, the number of small businesses grew rapidly, in part because of re-registration of the previously established coops. Many small business were set up by big state-owned enterprises whose managers, using incentive granted to small businesses, often put state resources into them. This resulted in serious abuse and embezzlement since there were no legal criteria for the status of small business entities in order to improve the situation, the government had to take extreme measures and abolished all privileges.
Similarly in Moldovan the law, on supporting and protecting “small businesses” of May 1994, established tax holidays for five years. For micro – enterprises and two years for small enterprises engaged in priority activities, such as construction, production of medical equipment and production of children’s food stuff. In case of non – priority activities the tax holidays were reduced to three years for
micro – enterprises and one year tax holiday schemes are not an appropriate instrument to address tax evasion in the small businesses sector, and the specific compliance problems of micro enterprises and self – employed, transition countries generally have moved to the design of simplified for hard – to – tax payers along the lines of systems applied in other developing and developed countries. There are three main types of systems in place in the region.
They are based on turnover/gross incomes,
Specific indicators for the size and output of the business, such as the floor space, the number of employees or the location of business or they are;
General patents for specific professions irrespective of the size, location and turnover of the business.
A number of transition countries use turnover or gross income as a parameter to determine the tax liability of small business (Hoyte, 2007). Turnover or gross – income – based systems can be structured in different ways. One alternative is to apply the same tax rate to all businesses subject to the tax, irrespective of the business activity. This approach fails to consider that profit margins can be substantially different in different business sectors. Examples are the unified tax in Ukraine, which operates in principle with only one rate of six percent on sales.
Alternatively, you divide the small business community into a number of business segments with different tax rates for the individual segments. This is supposed to take into account the different profit margins in business segments, although the number of segments under a turnover based systems is relatively small (Nair, 1990). It is generally tax far less differentiated than an indicator based systems. Examples for this alternative are the Armenian small business tax, which distinguishes three categories of business traders, who pay 4% of gross turnover. Caters with a 7% rate on gross turnover and other businesses, for which the rate is 7% for turnover up to Dram 30 million and 12% for the portion of turnover exceeding Dram 30 million (Baros, 2004).
2.2.4 According to the Income tax Act 1997, Small Business enterprises whose annual gross turnover is less than 50 millions have the following as their rates as per 2nd schedule sec. 5.
Table 1: Presumptive Income tax rates
|Class |Tax applicable |
|Gross turnover does not exceed 5 million per annum |0 (NIL) |
|5 million per annum | |
|Where gross turnover exceeds 5 million but not exceeding 20 million per annum |100,000 |
|Where gross turnover exceeds 20 million but does not exceed 300 million per annum |250,000 1% of gross |
| |turnover which ever is |
| |lower. |
|Where gross turnover exceeds 30 million but does not exceed 40m per annum |350,000 or 1% of gross |
| |turnover which ever is |
| |lower |
|Where gross turnover exceeds 40m but does not exceed 50m per annum |450,000 or 1% of gross |
| |turnover whichever is lower|
Source: Secondary data (Pius K. Bahamuka)
Basing on the presumptive tax rates in table 1 above the rates do not favour performance of Small Business Enterprise. These rates are high and are computed on gross turnover rather than profits, thus scaring away Small Business Enterprise since this will reap the invested funds.
Several presumptive tax assessment programs can be used to improve Small Business Enterprise compliance, but they are not properly managed in many countries. The system used in a country should presumable be related to the policy objective. For example to reduce evasion in general or simplify the system for small tax payers as well as to the sophistication of its tax administration (bird and Wallace, 2003).
2.3 Profitability of small business enterprises.
The assessment of financial performance of profit entities has a well established methodology that includes the computation and interpretation or univariate and multi-variate modes. Univeriate predictors of performance of periods and there ratios assess liquidity position, profitability levels and efficiency, (Makerere Business Journal, 1996).
A study carried out by USAID 1995) revealed that the small business enterprises sector employ about 20% or the population of working age and 60% of entrepreneurs in Uganda depend on their business for at least half of their business income.
Profitability of Small Business Enterprises is therefore vital to the economy because a large percentage of the population depend on them for their livelihood, there is thus need to support these Small Business Enterprises (Kiiza, 2005).
2.4 The concept of Profitability
Boggers (1967) described profitability as the organization’s desired state where turnover is the greater than input costs. This was corroborated by Herman son et al (1987) who said profitability is the organizations ability to generate income. Therefore, profitability must reflect only in the income statement of the organization to certify that the income generated is greater than the input costs.
The growth of Small Business Enterprises has retarded due to lack of knowledge on taxes. Mitra (1997) found out that most enterprises in Uganda are struggling with no profit and hence no taxable income yet they would not have paid it they were to use the corporate rate. This is due to the fact that most Small Business Enterprises do not keep proper books of accounts. Taxation has thus greatly reduced their profits thereby undermining their struggle to expand.
Taxes directly affect the profitability of business resources (Mutebi 2004). Presumptive income taxation on small business enterprises greatly reduces their profitability, limits their leverage of growth and creates poor revenue performance, (Asio, 2004).
Also, Mitra (1997) asserts that income tax mismanagement is one of the principal causes of persistent budget deficits, he said that mismanagement of taxes forces business to close down most of the time, making them earn less than expected revenue since then usually loose customers on closing, Small Business Enterprises have little capital investments such that if this capital is taxed, as it usually is, the business are left with no means of survival.
Generally speaking the principal motive of most small business enterprises is profitability. Maximization of profits is not the only motivation of small business enterprises but typically the most important therefore the success of any business depends on the profits it enjoys, (Batty 1978). The greater the percentage returns, the more successful the business is regarded Birabwa (1996) says profits of Small Business Enterprises are maximized through cost reduction, good management skills and good budgetary control.
Pandey (1995) indicates that profits are made to measure the operating efficiency of business firm. The ownership of the small business enterprises is interested in the profitability of the firm which enables the owners to get a reasonable return on capital employed
Liversey (1987) concurred with this view. He argues that profits are a reward for successful entrepreneurial activities and so profits are a source of finance for future ventures and growth of Small Business Enterprises. The owner should evaluate the performance of his business in terms of profits.
Further more, a study carried out by Tumwine (2001) revealed that high taxes hinder business expansions, with a big proportion of business profits ending up being paid as taxes. Therefore profits of Small Business Enterprises may be greatly reduced because of the taxes paid by them. In order to survive, traders have been forced to increase prices of their commodities so as to incorporate the tax element but this has left most of them unhappy as the number of customers has decreased hence a reduction in their sales, (Kiiza, 2003).
It should be noted that taxation is likely to encroach on expected revenue thus reduced investment finance because most Small Business Enterprises are financed out of their profits and savings. This is in line with the argument that Small Business Enterprises depend entirely on internally generated funds for their growth and survival since they can hardly access loan capital from financial institutions due to the high borrowing rates and requirements for collateral security. Therefore over taxation of their profits means depleting their major source of funds for expansion (Mugulausi, 2001)
In the recent surveys, small businesses in Uganda have blamed unfair taxes for their poor profits and in some cases, their business failure. According to the report by Ministry of Finance (2004) people are angry about the taxes. The plethora of local taxes more especially presumptive tax in damaging local enterprises and undermining the credibility of government (report by MOF, http//afrika.no).
The World Bank “ Business Environment and Enterprise performance survey 2”, carried out in transition countries in 2002, indicates that the introduction of simplified tax systems has not substantially changed the perception of the small business community that the tax burden for Small Business Enterprise is too high and create an obstacle for business development. The survey shows that even in countries operating a simplified system, complaints about high taxes are as frequent as or even more frequent among Small Business Enterprise than among large businesses.
Presumptive income taxation techniques have been employed for variety of reasons; one is for compliance burden on tax payers with low turnover and to combat tax avoidance or evasion. Presumptive income taxation methods provide a more certain and equitable distribution of the tax burden that stimulate profitability of the business firms (Thuronyi, 1996). The certainty and equity of the presumptive income tax system can be considered desirable because of their incentive effects on the tax payers’ ability to earn more income as he meets his tax liability
Small business enterprises owners are aware and bitter that businesses of dramatically different assets and levels of income are often assessed the same amount of taxes. The primary concern was in there nature of assessments which are random. These remote assessments generate uncertain and inequitable tax liability which pushes businesses into terminal poverty of their assets that have declined but they are expected to pay the same amount of tax liability (Muhumuza and Ehhart, 2000). Certainty and equity are important to tax system because it helps to improve on the performance of the firms in terms of revenue which increases the level of tax compliance. (AICPA, 1992).
The efficiency and convenience of the presumptive income taxation may be difficult to evaluate in the success of their goals. The efficiency and convenience of the presumptive income tax system should aim at obtaining some basic level of revenue from all economic agents of small business enterprises (Bird and Wallace, 2003).
Convenient and efficient presumptive income tax system minimizes the burden of payment by coordinating it with the level of profitability of the small business enterprises. The quality of convenient and efficient income tax system should be able to increase the ability of the small business enterprise to generate high revenue (Muhumuza and Ehrhart, 2000) This view is supported by AICPA 1992, who stress that a convenient and efficient tax system reduces the cost to collect and to pay taxes to both the government and small enterprises, and hence increasing the ability of the Small Business Enterprises performance.
2.4.1 Indicators of profitability
According to Kamukama (2008), contribution is excess of sales revenue over the variable costs incurred by the company in generating these revenues. Profit – volume ratio is a good indicator of the rate at which profit is being earned in the business.
The high profit volume ratio indicates that there is low profitability in the business.
According to Arura (2004), the profitability of different sectors of a business such as sales areas, class of customers, product lines and methods of production may be compared with the help of profit – volume ratios.
The profit level of a business can also be indicated by an increase in the sales. If the sales of a business increase, there will be corresponding increase in the costs, or when the marginal increase in sales is greater than the marginal increase in costs varied in generating the revenue, profits also increase (Arura, 2004).
2.4.2 Measurement of profitability
According to Rose Mary (2011), every firm is most concerned with its profitability and one of the most frequent used tools of financial ratio analysis is profitability ratios which are used to determine the company’s bottom line.
Profitability ratios show a company’s efficiency and performance. The commonly used ratios are Gross Profit margin, net profit and operating profit margin.
Net profit margin
The net profit margin shows how much of each sales shillings shows up as net income after all expenses are paid (Apollo 2011) For example if the net profit margin is 10% it means that 10% of every shilling is profit. It measures profits after consideration of all expenses including taxes, interest and depreciation.
Net II margin (%) = Profit after tax x 100%
Sales revenue
Gross profit margin
Looks at the cost of goods sold as a % of sales. This ratio looks at how well a company controls the cost of its inventory and the manufacturing of products and subsequently passes on the cost to its customers. The larger the margin the better for the firm.
Gross profit margin = Gross profit x 100%
Sales revenue
Operating profit margin
Operating profit margin is also known as earnings before interest and taxes. The operating profit margin looks at the earnings before interest and taxes as percentages of sales.
Operating profit margin = earnings before interest and tax x 100
Net sales
2.4.3 Factors affecting profitability
Segmentation of the market
According to Nigel and Christine (2007), indiscriminate use of the marketing mix is a wasteful use of precious resources. Competitive advantage is a relative concept that involves differentiating an organization from its rivals in the eyes of the customer.
Individual demand
According to Charles and Coven, 1992), an individual demand schedule for a specific commodity is the quantity of that commodity a person is willing and able to purchase at each possible price during a particular time. A reduction in demand of a commodity reduces the revenues. This leads to a reduction in profits.
Customer acquisition strategies
Christine and Nigel (2007) argue that increasingly it is recognized that the retention of existing customer is seen as important as acquisition of a new customers. Increased customers imply increased revenue.
Profit planning
According to Pandey (2002) a profit plan is a short term plan. It’s an action plan to guide managers in achieving the objectives of the firm. It is comprehensive and conducted plan expressed in financial terms for the operations and resources of an enterprises for some specific period of time.
Marketing strategy
Is a statement of how an organization plans to compete for business on its particular market. Effective planning must establish targets, identify how and when those targets are to be achieved and establish who will take responsibility for the relevant marketing tasks (Christine and Nigel, 2007)
Pricing
Pricing is concerned with determination of revenues. Pricing plays a crucial role in the derivation of the product margin and profit. The emergencies of profits is similar easy and simple to grasp; it’s the purchase price minus all direct and indirect costs (Christine and Nigel, 2007). According to Malta (2008), the competitive structure of the market makes it aptly clear whether the decision variable for management in a particular situation would be price or output or both. In a situation where there are many buyers and sellers, the firm has to sell its product at prevailing market price and its control will be limited in the amount of units to be sold.
Motivation of workers
Motivation improves the productivity of workers. Regardless of the type of endeavor, the management task is essentially the same; that is, to create and maintain an internal environment in with individuals working together as a group attain efficient performance in conformity with the broad objectives of the firm. The environment should motivate individuals to make their maximum contribution to the efforts of the group (Thomson, 1979).
2.5 Presumptive Income Tax System and Profitability of Small Business Enterprises.
According to Keith (1994), Taxes affect performance of Small Business Enterprises in two ways. First by influencing the aggregate supply of the main factors of production by raising or lowering net (after tax) returns or profits and secondly by influencing the efficiency of resources utilization.
Presumptive Income Tax system introduces a single gross turn over Tax that leads to creation of unequal conditions for different Enterprises and therefore violates Tax equity and efficiency as it distorts economic processes. This raises the question of introducing the different tax rates in order to meet the different gross turn over ratios. But this has provoked tax saving adjustments among the Small Business Enterprises. These processes lead to lobbying pressure in order to get a lower tax rate. More over government has to specify suited Tax rate according to the gross turn over.
In a country like Uganda, were the Tax authorities have a high degree of discretion (Chen and Reinikka, 1999) and under the presumptive income tax system, we expect that the relationship between effective tax rates small business enterprises needs to pay to influence the growth and profitability of these firms (Raymond and Jacob, 2002).
Dalton (1991) noted that taxes reduce the efficiency of the tax payers advisory, affect their ability to work and hence produce resulting into growth effects and profitability of the investments. High growth firms are less likely to see presumptive income taxation more problematic than low growth Small Business Enterprises. However, more Small Business Enterprises firms would enter the high growth and performance category if the tax regimes were not demanding (foreman-peck et al, 2004). This is consistent with Hanford et al (2003) finding that small business enterprises that perceive taxes as most burdensome also experienced higher costs of growth.
Hendy (2003) believes that fiscal policies are drivers that facilitate small business enterprises growth and profitability by promoting high productivity and demand. He argues that poor taxation regulation effectively work against and inhibits the achievement of these objectives. Business Taxes, cost of compliance with government regulations is the most critical issues to small business investment performance.
Businessmen regard a simpler and a fairer system of taxation as essential conditions of any operational Programmes to support Small Business Enterprises Investment activities. When Small Business Enterprises are in initial stages of development its investment requirements are particularly high while the in house capacity to finance these requirements is inevitably limited and considering the job creation potential of Small Business Enterprises, the Presumptive Income Tax system should provide an active existence of these firms irrespective of any negative side effects such a measure might produce (Pripisnov, 1996).
Reinikka and Sven son (1998), while comparing investment and profitability rates among firms in Africa found that, Uganda’s Investment rates are similar to those in other African countries but profit rates are 56 percentage points lower than in other African countries. They argue that, while there many other constraints, to investment, high taxes, contributed to a greater extent to this disparity.
Tindimwebwa (1999) stated that capturing the informal sector using the presumptive income tax system into the tax bracket is inevitable considering its growth in the economy and the shift of economic activities from the formal into the informal sector.
The problems and obstacles have to be carefully handled,” there is no doubt that hurdles must be overcome before gains and profits are achieved. By contributing towards government revenue the informal sector will truly be a partner in the economic development of Uganda”.
Collin, (2000) asserts that if a tax system makes it difficult for the entrepreneur to accumulate and keep wealth he or she will not think it worthwhile to take the large down side risk of starting or expanding a business irrespective of size. There is need for government to balance its revenue requirements against the need to crush the establishment, development or growth of small business enterprises. The government should not kill the goose that lays the golden eggs, (PMSEDU, 1997).
However Sona (2002) put it, despite its streamed line requirements, presumptive income taxation is not always effective….” Developing countries employ crude methods of estimating income because they lack sufficiently qualified resources to analyze the profitability of various economic activities leading to unfair and ineffective taxation of small businesses.
Conclusion
From the literature discussed it can be concluded that there is a relationship between the presumptive income tax system and the profitability of the small business enterprises in Uganda. However like any descriptive analyses, these relationships have been investigated in different areas, different time periods and conditions.
CHAPTER THREE
3.0 Introduction
This chapter discuses the research methods and instruments used by the researcher when carrying out the study. It provides a description of the research design, the sample description, data collection methods and analysis procedures used by researcher.
3.1 Research design
A cross – sectional research design was used to generate data on profitability of small business enterprises. This was supplemented with exploratory research design to determine the relationship between presumptive income tax and profitability of small business enterprise. The study was conducted on a few small scale businesses in Nakawa division.
3.2 Sampling design and procedure
3.2.1 Study population
The study population covered 50 small scale business in Nakawa division, including its suburbs Kitintale, Mbuya, Ntinda, Nakawa market and Bugolobi market. Reponses were obtained from those Small Business Enterprise paying presumptive income tax.
3.2.2 Sampling methods
In order to obtain representative and relevant population sample, judgment sampling was used to select different types of small business enterprises to obtain the required data and information. The researcher also used proportionate stratified sampling technique to ensure fair representation of Small Business Enterprise. The division of Nakawa will be divided into strata inform of suburbs
3.2.3 Sample size
A total of 50 respondents were selected and these constitute the sample size. The sample size was selected from within and around Nakawa division particularly Nakawa market, Bugolobi market, Kitintale and Ntinda.
3.3 Data collection
3.3.1 Source of data
Primary data: This was obtained from personal interviews and responses from questionnaires issued to owners of SBES and where necessary observation was brought Secondary data: On other hand included documents and journals obtained from school library, world bank, URA records and online journals, articles and publication and newspapers.
3.3.2 Procedure
The procedure pertaining to the study included submission of research topic to the supervisor for approval, writing of a research proposal and obtaining an introductory utter after he proposal which allowed the researcher to go to the field and gather data. The study took two months whereby the researcher requested Small Business Enterprise owner to fill in the distributed questionnaires and in some instances, interviews will be used. The filled questionnaires therefore were collected for presentation, interpretation, discussion and analysis of the findings.
3.4 Data collection methods and instruments
3.4.1 Questionnaires
These were used to collect data from different respondents. The questionnaires designed for sizes owners had both open and closed ended questions. Open ended questions were used to enable respondents give their opinion on the effect of taxation on their business. The questionnaire was simply worded and relatively short to encourage response and compliance. The questionnaires were chosen as a research instrument because it is easy to administer and scores relatively high results.
3.4.2 Interviews
Personal interviews will be carried out in hand with the questionnaires to increase the response rate. The interviewing method was used because of its flexibility to enable probing especially where specific answers were needed and where some respondents were unable to read and write. 50 respondents were interviewed to understand more on the subject.
3.5 Data processing and analysis
Once the relevant data is got, it will be edited, sorted and summarized. The data will be analyzed and tabulated into percentage and presented using tables. The researcher chose this method of analysis because it is easy to use and make interpretation of findings easy.
3.6 Limitations of the study
• There was inadequate time to allow the researcher to carry out nationwide study. The research was limited to Nakawa division and worked within the limited time. However the little time available was budgeted for.
• Owners and managers of small business enterprises were reluctant to disclose some information about the profitability regarding it confidential. Business owners were convinced that the information given was purely for academic purposes.
• There were inadequate resources to carry out a comprehensive study. Since the study involved going to the field. However, the researcher managed to work within the developed budget without compromising on the quality of the study.
CHAPTER FOUR
PRESENTATION, ANALYSIS AND INTERPRETATION OF FINDINGS
4.0 Introduction
This chapter presents the findings and interprets the findings of the study. The findings are presented in relation with the research variable that is presumptive tax and profitability, objectives of the study and research questions.
4.1 Characteristics of respondents
4.1.1 Gender
There was a need to know the sex respondents for purposes of gender balance and this was shown in the table below.
Table 2: showing sex of respondents
|SEX |Frequency |Percent |Valid Percent |Cumulative Percent |
|Male |34 |68.0 |68.0 |68.0 |
|Female |14 |32.0 |32.0 |100.0 |
|Total |50 |100.0 |100.0 | |
Source: Primary Data
The majority of the respondents were male representing 68% of the total respondents. However, it was important to note that small businesses are not run by men alone since 32% of the respondents were female.
.
4.1.2 Age bracket
In order to fully establish the back ground of the respondents, the researcher found it important to know the age of the respondent
Table 3: showing the age distribution.
|Age range |frequency |percentage |Valid percent |Cumulative percent |
|Under 25yrs |16 |32 |32 |32.0 |
|25-35 yrs |24 |48 |48 |80.0 |
|36-45yrs |06 |12 |12 |92.0 |
|46yrs and above |04 |08 |08 |100.0 |
|total |50 |100 |100 | |
Source: Primary Data
Over 80% of the respondents were aged 35years and below. This implies that a lot of youth engage in running small business due to the ever increasing levels of unemployment in the country. Thus meaning that small business in Uganda acts as a source of employment for the youth
4.1.3 Education level
Table 4: showing the education level of the respondents.
|Level of education |Frequency |Percent |Valid Percent |Cumulative Percent |
|Certificate |26 |52.0 |52.0 |52.0 |
|Diploma |16 |32.0 |32.0 |84.0 |
|Degree |8 |16.0 |16.0 |100.0 |
|Post graduate |0 |0.0 |0.0 | |
|Total |50 |100.0 |100.0 | |
Source: Primary Data
The findings revealed that the majority of the respondents, 52% were certificate holders, 32% were diploma holders, while 16% had bachelor’s degrees. This implies that in order to ascertain back ground and authenticity of the information gathered, the researcher considered it imperative to find out the education level of the respondents. The study revealed that most of the people running small business were certificate holders and this is attributed to the low rate of earning from these businesses.
4.1.4 Nature of the respondents business
The researcher found it important to know the nature of the business from where respondents originated, as to whether they were Sole proprietorship, Retailers and Wholesalers.
Table 5: showing the nature of the respondents business.
|Nature of the business |Frequency |Percent |Valid Percent |Cumulative Percent |
|Sole proprietorship |28 |56.0 |56.0 |56.0 |
|Retailer |14 |28.0 |28.0 |84.0 |
|Wholesaler |8 |16.0 |16.0 |100.0 |
|Total |50 |100.0 |100.0 | |
Source: Primary Data
From the table above, 56% of the respondents were sole proprietors, 28% were retailers while the remaining 16% of the respondents were wholesalers. This is attributed to the amount of capital/ money required to start business in any of the above categories
4.1.5 Duration of your business
Table 6: showing duration of business
|Duration of the business |Frequency |Percent |Valid Percent |Cumulative Percent |
|Less than 1yr |12 |24.0 |24.0 |24.0 |
|1-3yrs |24 |48.0 |48.0 |72.0 |
|More than 3yrs |14 |28.0 |28.0 |100.0 |
|Total |50 |100.0 |100.0 | |
Source: Primary Data
The findings revealed that the majority of the respondents, 48% of the business had survived for the period between 1-3yrs, 28% for more than 3yrs while the remaining 24% of the had survived for the period less than 1yr. This implies that very few small businesses enterprises survive for the period more than 3years and this can the result of harsh working conditions such as high taxes, stiff competition `and high taxes.
4.2 Presumptive income tax
4.2.1 Registration for presumptive tax
Table 7: showing whether the business is registered for presumptive tax
|Response |Frequency |Percent |Valid Percent |Cumulative Percent |
|Strongly agree |5 |10.0 |10.0 |10.0 |
|Agree |8 |16.0 |16.0 |26.0 |
|Not sure |4 |8.0 |8.0 |34.0 |
|Disagree |30 |60.0 |60.0 |94.0 |
|Strongly disagree |3 |6.0 |6.0 |100.0 |
|Total |50 |100.0 |100.0 | |
Source: Primary Data
From the table above, 66% of the respondents had not registered for presumptive income tax, 26% of the respondent’s businesses had not registered while the remaining 8% were not sure of if they are registered or not. This implies that there are gaps between the revenue collecting body (URA) and business owners and thus more effort on educating tax payers is needed.
4.2.2 Awareness on tax paid
Table 8: showing whether the tax payers knew the type of taxes they are supposed to pay
|Response |Frequency |Percent |Valid Percent |Cumulative Percent |
|Strongly agree |4 |8.0 |8.0 |8.0 |
|Agree |10 |20.0 |20.0 |28.0 |
|Not sure |10 |20.0 |20.0 |48.0 |
|Disagree |20 |40.0 |40.0 |88.0 |
|Strongly disagree |6 |12.0 |12.0 |100.0 |
|Total |50 |100.0 |100.0 | |
Source: Primary Data
From the table above, 26 respondents representing 52% did not know the type of tax they supposed to pay, 14 respondents representing 28% knew the type of taxes they supposed to pay while the remaining 20% of the respondents were not sure. This implies that the tax collecting body has not done enough to educate SBES owners about the type of taxes they supposed to be paying.
4.2. 3 paying right amount
Table 9: Showing whether Amount paid match with the amount earned
|Response |Frequency |Percent |Valid Percent |Cumulative Percent |
|Strongly agree |2 |4.0 |4.0 |4.0 |
|Agree |14 |28.0 |28.0 |32.0 |
|Not sure |25 |50.0 |50.0 |82.0 |
|Disagree |7 |14.0 |14.0 |96.0 |
|Strongly disagree |2 |4.0 |4.0 |100.0 |
|Total |50 |100.0 |100.0 | |
Source: Primary Data
The study revealed that, 50% of the respondents were not sure whether they were paying the right amount, 32% of the respondents claim that they are paying similar amount compared to bigger businesses while 18% of the respondents that the amount is not similar to what bigger businesses pay. This implies that the government favors bigger businesses by giving them tax incentives such as tax holidays which does not favour SBES.
4.2.4 Business survival
Table 10: showing whether business closed after failing to pay taxes
|Response |Frequency |Percent |Valid Percent |Cumulative Percent |
|Strongly agree |25 |50.0 |50.0 |50.0 |
|Agree |16 |32.0 |32.0 |82.0 |
|Not sure |0 |0.0 |0.0 |82.0 |
|Disagree |5 |10.0 |10.0 |92.0 |
|Strongly disagree |4 |8.0 |8.0 |100.0 |
|Total |50 |100.0 |100.0 | |
Source: Primary Data
According to the table above, 82% of the respondents agree that businesses have closed due to failure to pay taxes, while 18% of the respondents do not believe that failure to pay taxes is not the only cause of their business failure. This implies that taxes have a negative effect business survival.
4.2.5 Computation of presumptive tax
Table 11: Showing whether tax payers know how presumptive income tax is computed.
|Response |Frequency |Percent |Valid Percent |Cumulative Percent |
|Strongly agree |0 |0.0 |0.0 |0.0 |
|Agree |3 |6.0 |6.0 |6.0 |
|Not sure |2 |4.0 |4.0 |10.0 |
|Disagree |37 |74.0 |74.0 |84.0 |
|Strongly disagree |8 |16.0 |16.0 |100.0 |
|Total |50 |100.0 |100.0 | |
Source: Primary Data
From the table above,45 respondents(37+8) representing 90% do not how presumptive tax is computed, 6% of the respondents knew how presumptive income tax is computed while the remaining 4% were not sure of whether of they know or not. This implies that there is little involvement of tax payers in the process of tax assessment which leads to doubt in any figures raised.
4.3 Profitability
4.3.1 Level of Profits.
Table 12: showing whether businesses generate enough profits to carry out business operations.
|Response |Frequency |Percent |Valid Percent |Cumulative Percent |
|Strongly agree |3 |6.0 |6.0 |6.0 |
|Agree |12 |24.0 |24.0 |30.0 |
|Not sure |2 |4.0 |4.0 |34.0 |
|Disagree |32 |64.0 |64.0 |98.0 |
|Strongly disagree |1 |2.0 |2.0 |100.0 |
|Total |50 |100.0 |100.0 | |
Source: Primary Data
From the table above 33 respondents representing 66% disagreed, 15 respondents representing 30% agreed while the remaining 2% of the respondents were not sure whether they generate enough profits to carry out their business operations. This implies that most SBES did not generate enough profits to cater for their business operations
4.3.2 Cash Balances
Table 13: showing whether the business is left with some cash to acquire more stock
|Response |Frequency |Percent |Valid Percent |Cumulative Percent |
|Strongly agree |3 |6.0 |6.0 |6.0 |
|Agree |20 |40.0 |4.0 |46.0 |
|Not sure |4 |8.0 |8.0 |54.0 |
|Disagree |20 |40.0 |40.0 |94.0 |
|Strongly disagree |3 |6.0 |6.0 |100.0 |
|Total |50 |100.0 |100.0 | |
Source: Primary Data
According to the table above, 23 respondents representing 46% agreed that after paying presumptive tax the businesses are left with cash to acquire more stock, 23 respondents representing 46% disagreed while the remaining 8% were not sure whether their businesses are left with some cash to acquire more stock. This is attributed to poor financial practices used by owners of SBES for example lack of proper book keeping practices.
4.3.3 Effect on profits
Table 14: showing whether presumptive tax affect profits of SBES
|Response |Frequency |Percent |Valid Percent |Cumulative Percent |
|Strongly agree |1 |2.0 |2.0 |2.0 |
|Agree |40 |80.0 |80.0 |82.0 |
|Not sure |0 |0.0 |0.0 |82.0 |
|Disagree |8 |16.0 |16.0 |98.0 |
|Strongly disagree |1 |2.0 |2.0 |100.0 |
|Total |50 |100.0 |100.0 | |
Source: Primary Data
From the table above, 82% of the respondents agreed that presumptive affects profits earned by SBES while 18% of the respondents disagreed. This implies that presumptive income tax affects SBES negatively and thus calling for urgent solution since the rate of business closure seems to be high.
4.3.4 Other sources of funds to gear business operations
Table 15: showing whether businesses use some external sources of funds to acquire stock
|Response |Frequency |Percent |Valid Percent |Cumulative Percent |
|Strongly agree |3 |6.0 |6.0 |6.0 |
|Agree |20 |40.0 |40.0 |46.0 |
|Not sure |2 |4.0 |4.0 |50.0 |
|Disagree |20 |40.0 |40.0 |90.0 |
|Strongly disagree |5 |10.0 |10.0 |100.0 |
|Total |50 |100.0 |100.0 | |
Source: Primary Data
The study revealed that 50% of the respondents are left with some balances to acquire more stock thus stopping them from using external sources of funds such as loans, 46% of the respondents believe that they are using external sources of funds to acquire more stock while the remaining 4% of the respondents were not sure. This implies that a majority of SBES use their personal savings and property to acquire more stock.
4.4 Relationship between n between presumptive income tax and profitability levels
Table 16: showing whether presumptive tax system affects the following elements of business
|Elements |Strongly agree |Agree |Not sure |Disagree |Strongly disagree |
|Stock |5 10% |30 60% |8 16% |4 8% | |
|Profits |5 10% |40 80% |5 10% | | |
|Incentives for |- - |1 2% |5 10% |40 80% |4 8% |
|development | | | | | |
|Returns to re-invest |9 18% |38 76% |1 2% |2 4% | |
|Working capital |2 4% |45 90% |3 6% | | |
Source: Primary Data
The findings revealed that presumptive income tax affects the elements of business (for which over 85% of the respondents agreed to this effect) are; profits (90%), returns to re-invest (94%), working capital (94%). This implies that profits, returns to re-invest, working capital are vital elements. Therefore levied extensive survey /study should first be conducted on the above elements.
Table 16: Showing whether there is a relationship between presumptive income tax and profitability levels
|Correlation |
| | Presumptive income tax | Profitability levels |
| Presumptive income tax |Pearson correlation |1.000 |.725(**) |
| |Sig.(2-tailed) |. |.000 |
| |N |50 |50 |
| Profitability levels |Pearson correlation |.725(**) |1.000 |
| |Sig.(2-tailed) |.000 |. |
| |N |50 |50 |
|** correlation is significant at the level 0.01 level (2-tailed) |
Source: Primary data
From the table above findings show that there is a strong relationship between presumptive income tax and profitability levels at Pearson correlation coefficient r=0.725 and this implies that presumptive tax affects profitability levels by 72.5%.
CHAPTER FIVE
SUMMARY, CONCLUSIONS AND RECOMMENDATIONS
5.0 Introduction
This chapter provides the conclusions and recommendations in line with the research objectives. Areas for further research have also been suggested under this chapter. During the course of the study, the researcher found out that their are some areas related to profitability and presumptive income tax that need to be addressed to enable small business enterprises to improve on their profitability levels.
5.1Summary of findings;
General Findings:
.it has been found that a majority of small business enterprises are operated by the male, it was also observed that most SBES do not last for more than three years in operation. Most SBES are sole proprietors and a majority of owners are certificate holders.
Findings on presumptive income tax
It was obvious that most SBES are not registered for tax therefore most of them are ignorant about the type of taxes they supposed to pay hence since most of the small business enterprises are not aware of the taxes they supposed to pay, A majority of them do not survive for more than three years and have closed due to failure to pay taxes.
It was also found that presumptive income tax system affects the profits of small business enterprises. It was very clear from the research that presumptive income tax affects the liquidity position of SBES thus depleting them of the invested funds. Hence a majority of SBES agree that they should not continue paying tax using this system.
Findings on profitability
It has been found out that a majority of SBES do not generate enough profits to carry out their operations. Most respondents agreed that presumptive income tax system affects their profits, sales and liquidity levels. It was observed that most small business enterprises do not acquire loans to finance their operations.
Findings on the relationship between presumptive income tax and profitability of SBES
Therefore, there is relationship between presumptive income tax system and profitability of small businesses enterprises their as a majority of them agreed that taxes affects their profits greatly and this is shown by the positive correlation of r=0.725
5.2 Conclusions.
Conclusion on presumptive income tax
From the findings in chapter four, it is evident that presumptive income tax system has a negative effect on the profitability of small business enterprises. Taxes have not favoured the growth of small business enterprises as they encroach on expected revenue thus reduce on investment finance, yet most small business enterprises are financed out of their own savings and profits. Yet again most small business enterprises are ignorant about the taxes they pay to the tax body and how taxes are computed by the tax body. This ignorance is attributed to poor methods of sensitization being used by URA
Conclusion on profitability
Most small businesses enterprises do not generate enough returns in terms of profits to fulfil their goals of profit maximization and most of them therefore end up not surviving for more three years in operation. The low returns are attributed to high taxes they pay to the tax body.
Conclusion on the relationship between Presumptive Income Tax and Profitability
Since most businesses are not registered for tax, the few which are registered are affected by tax therefore; presumptive income tax affects the profitability of small business enterprises.
5.3 Recommendations.
Recommendation on Presumptive Income Tax
Basing on the study carried out, the researcher recommends that URA embarks on a more intense presumptive income tax education programme especially for small business enterprises. This should be done through various media houses such as newspapers, local radio and television stations.
The presumptive income tax education should be carried out in various languages to ensure that all understand it.
The tax collecting body should also carry out a nationwide registration exercise for all small businesses enterprises since a majority of them are not registered for tax
Recommendations on profitability
Small businesses enterprises should employ people like accountants to ensure that proper and complete records are maintained in their businesses. Alternatively, they could also learn how to write up books of accounts for themselves. This will ensure that correct tax assessments are made to avoid over taxation thus improving on their profits.
Small businesses owners should also join micro finances so that they are able to get loans with low returns for businesses expansion which will lead to increase in stock and sales thus increase profits.
Recommendations on the relationship between presumptive income tax and profitability.
Therefore, it’s important that tax authorities educated SBES the type of taxes they supposed to pay and how those taxes are computed for the benefit of both small business owners and the tax body.
5.4 Areas for further research.
1. The study concentrated on presumptive income tax system as applied to small business enterprises in nakawa division. Therefore it would be good if further research is done involving small business enterprises in the whole country.
2. Another study would involve an evaluation of tax procedures of the presumptive income tax system to determine their applicability on small business enterprises.
3. Tax evasion is one of the major problems facing URA.In many cases government has lost a lot of revenue through this evil. Therefore further research on tax evasion and presumptive income tax system would be necessary.
4. In the recent years, government has been making a lot of reforms in both taxation policy and tax administration in Uganda. Further research to evaluate the contribution of this reforms and policies to the overall collection is necessary.
5. Tax policy is very important for economic growth and development of a country.Ugandas economic growth is said to be growing steadily in the recent years .Does tax policy have any implication to it? That is what should be determined
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APPENDICES
APPENDIX I
QUESTIONNAIRES
MAKERERE UNIVERSITY
QUESTIONNAIRE FOR SMALL BUSINESS ENTERPRISES
Dear sir/madam,
I am a student of Makerere University. I would like you to assist me and answer the questions in this questionnaire by either ticking or filling in the space provided after the question.
Your individual response will be included among a variety of other responses to help me in my study on the impact of presumptive income tax system on the profitability of small business enterprises.
The information provided shall be used strictly for academic purposes and shall be treated with utmost confidentiality.
SECTION A: GENDER POSITIONS
1. Sex
|Male |Female |
| | |
2. Age group
|Under 25 yrs |25-35 yrs |36-45yrs |46yrs and above |
| | | | |
3. Nature of the business
|Sole proprietorship |Retailer |Wholesaler |
| | | |
4. Highest level of education
|Certificate holder |Diploma holder |Degree holder |Post graduate |
| | | | |
Other specify ……………
………………………………………………………………….
5. Duration of your business
|Less than 1 year |1-2 yrs |3-4yrs |More than 5yrs. |
| | | | |
SECTION B: PRESUMPTIVE INCOME TAX SYSTEM
6. The business is registered for presumptive tax
|Strongly agree |Agree |Disagree |Strongly disagree |Not sure |
| | | | | |
7. I know the type of taxes am supposed to pay
|Strongly agree |Agree |Disagree |Strongly disagree |Not sure |
| | | | | |
8. My business pays tax similar to the amount other bigger business pay as taxes
|Strongly agree |Agree |Disagree |Strongly disagree |Not sure |
| | | | | |
9. My business has closed because of failure to pay taxes
|Strongly agree |Agree |Disagree |Strongly disagree |Not sure |
| | | | | |
10. I know how presumptive income tax is computed or assessed
|Strongly agree |Agree |Disagree |Strongly disagree |Not sure |
| | | | | |
SECTION C: PROFITABILITY
11. The business generate enough profits to carry out its operations
|Strongly agree |Agree |Disagree |Strongly disagree |Not sure |
| | | | | |
12. The business always has some cash left to acquire more stock
|Strongly agree |Agree |Disagree |Strongly agree |Not sure |
| | | | | |
13. Presumptive income tax system affects my profits.
|Strongly agree |Agree |Disagree |Strongly disagree |Not sure |
| | | | | |
14. The business did not acquire loan/credit to finance its stock growth
|Strongly agree |Agree |Disagree |Strongly disagree |Not sure |
| | | | | |
SECTION D: RELATIONSHIP BETWEEN PRESUMPTIVE TAX AND PROFITABILITY
15. The tax system depletes my stocks
|Strongly agree |Agree |Disagree |Strongly disagree |Not sure |
| | | | | |
16. Presumptive tax system reduces on my profits
|Strongly agree |Agree |Disagree |Strongly disagree |Not sure |
| | | | | |
17. Presumptive tax system provides incentives for development/investment
|Strongly agree |Agree |Disagree |Strongly disagree |Not sure |
| | | | | |
18. Presumptive tax system leaves my businesses with little returns to re-invest
|Strongly agree |Agree |Disagree |Strongly disagree |Not sure |
| | | | | |
19. My business working capital is affected by presumptive income tax system
|Strongly agree |Agree |Disagree |Strongly disagree |Not sure |
| | | | | |
20. Presumptive income tax system has an effect as my profits.
|Strongly agree |Agree |Disagree |Strongly disagree |Not sure |
| | | | | |
Thank you.
APPENDIX II
TIME SCHEDULE
|Activity |Duration |Period |Remarks |
|Research proposal writing and approval |1 Month |Feb-March | |
|Selection of designs and sampling |1 Month |Feb-March | |
|procedures | | | |
|Preparation of data collection instruments|1 Month |Feb-March | |
|Data collection, coding and analysis |1 Month |March-April | |
|Final report and handover |2 Month |April - July | |
PROPOSED BUDGET FOR THE RESEARCH DISSERTATION
|Item |Quantity |Amount |
|Ream of papers |2 |24,000 |
|Research proposal typing |1 |10,000 |
|Transport | |160,000 |
|Refreshments | |50,000 |
|Research report typing and binding |3 |65,000 |
|Air time | |20,000 |
|Miscellaneous | |40,000 |
|Total | |369,000 |
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