Michelle Proposal
Michelle Proposal
Michelle Proposal
BY
18/U/20629/PS
QUANTITATIVE ECONOMICS
MAKERERE UNIVERSITY
JUNE, 2021
0
Table of Contents
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3.7.3 Multivariate Analysis............................................................................................................17
References......................................................................................................................................19
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CHAPTER ONE: INTRODUCTION
1.1 Introduction
This study will establish the impact of tax on SMEs in Uganda. This chapter therefore consists of
the background to the study, problem statement, purpose of the study, objectives of the study,
Globally, taxes have greatly affected the way economies perform regardless of the political and
social difference among countries worldwide (Sebikari, 2014). According to OECD, “taxes are
unreciprocated whereby the welfares received from the government as a result of paying taxes is
not usually commensurate to payments tax payers pay (TazegüL, 2016). Economists believe that
smaller companies usually have small resources so they usually direct these limited resources
towards tax compliance which would have been used for reinvestment and facilitating future
growth. Therefore, such a tax system puts a lot of pressure on the small tax payers (Alvi, 2010).
Taxes have existed virtually as long as there have been organized governments. The first tax law
legislation was introduced in 1919 and ever since then taxes have evolved through a number of
reforms. The government in an attempt to widen the tax base and collect more revenue has had to
levy several taxes especially on business enterprises in Uganda which constitute a large part of
the formal sector. The taxes charged on business enterprises in Uganda include; corporation tax,
value added tax, presumption tax and exercise duty (Sebikari, 2014). In 1997 the Income Tax
Act was made. This was to give guidance in assessment and computation of taxes.
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The Ugandan government has made some recommendable efforts to promote development
through taxation since the inception of the current taxation laws for purposes of promoting
development. The main possible objective of taxation in Uganda has always been to mobilize
resources needed to meet the aspiration of government. In Uganda a considerable fraction of the
businesses are sole traders operating small scale business, locally owned and managed by
individuals or families and often with very few employees working at a single location. Taxation
in Uganda is based on system that existed in Britain as it was a British colony. This also applied
to other colonies elsewhere and for East Africa, one tax system operated under British
administration. This process began in 1900 with the hut tax regulation which imposed a standard
UPPAP reports local taxes to have negatively affected the development of the SMEs and affect
the ability of the poor to escape poverty (Syllabus, 2016). However, there have been some
reforms in the rate schedule for graduated tax – involving shifting the rate brackets upward.
These reforms were meant to improve the overall fairness of the graduated tax and ensuring that
it does not hurt the poor. Some improvements in the progressivity of this tax are reported by
(Ssewanyana & Kasirye, 2012).Therefore this current study will aim at finding the impact of tax
on the performance of SMEs in Uganda using secondary data collected by world bank in
Uganda.
In Uganda, taxation was highlighted as a key impediment to the performance of SMEs. Income
tax rates that are charged on SMEs are not accurate. In many instances, the tax rates are
computed with lack of assessment of the actual revenue of an entity, despite these entities
making losses. In addition, business rates have been enhanced since the introduction of devolved
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government hence increasing the tax burden to most SMEs. Most SMEs in Uganda do not
survive past their fifth-year birthday after inauguration which shows poor performance in the
SME sector (Sebikari, 2014). The deficiencies in the performance of SMEs is associated with the
poor tax policies in Uganda which affect the ability of these enterprises to mobilize the required
Despite the services provided, small scale business enterprise’s performance in Uganda is still
poor. This could be due to the increasing tax burden brought about by tax rates which are revised
annually in the country. These rates seem to be taking an upward trend which has led to winding
1. To examine the relationship between labour efficiency and the performance of SMEs in
Uganda.
2. To examine the relationship between capital size and the performance of SMEs in Uganda.
SMEs in Uganda.
Hypotheses
1. There is no relationship between labour efficiency and the performance of SMEs in Uganda.
2. There is no relationship between capital size and the performance of SMEs in Uganda.
Uganda.
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1.6 Significance of the study
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 will guide them in adjusting tax policies so that they suit requirements
will help in gaining insight about taxes and performance of small-scale business enterprises. The
accomplishment of the study will enable the researcher to acquire hands on skills about
processing of research work and data analysis. This proficiency will enable the researcher to
The conceptual framework explains the relationship between the outcome variable and the
selected independent variables. From the framework below, performance of SMEs is the
outcome variable being affected by the capital size, labour efficiency, tax system and socio-
Capital size
Socio-
Labour Performance
demographi
efficiency of SMEs
c factors
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Tax system
From the above framework, labour productivity is a measure of how much each employee
contributes to a firm’s output. The higher an SME’s labour productivity, the higher its likelihood
for growth. This is because highly productive firms command higher profits, thus being able to
employ more workers through firm expansion and pay more taxes among others. Capital size
also determines the performance of SMEs for example the more inventory capital available in the
firm the higher the performance of SMEs. Tax system highly determines the performance of the
SMEs. For example, the higher the commodity tax imposed on the final output, the less profit
margins received by the firms hence reducing on their performance. Demographically, age,
gender, education, and experience of the task are being stated to have influence on business
performance. Highly literate individuals are productive, creative and innovative as they look for
bringing out new brands in human society as per fulfilment of needs or demands as well human
wants in a civil society. The learned as well seasonable female are highly inclined to becoming
entrepreneurs as compared to illiterate and inexperienced ladies of human society. However, the
individuals between the age of 25 and 44 are willing to be entangled in innovative performance
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CHAPTER TWO: LITERATURE REVIEW
2.1 Introduction
This chapter looks at taxation and its impact to SMEs in Uganda. It consists of existing literature
on taxation by different scholars/research studies from magazines, text books, journals and
newspapers. This chapter covers theoretical frameworks and empirical literature which is in line
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2.2 Theoretical review
This section presents the theoretical argument related with SMEs performance and taxation
Gibrat stipulates that the rate of growth of a firm is independent of its initial size. By implication
it would mean that large firms are preferable in context of private sector development given that
they create more employment than small firms (Lotti et al., 2007). Conversely, Krasniqi & Lajqi,
(2018) states in his learning model that younger firms learn over time, which helps them improve
their performance as they accumulate market knowledge. According to this model, young firms
grow faster than old ones. The author deduces that small firms grow faster than large ones. This
is a convergence process where small firms will eventually become as large as any other longer
firm in the same sector as time goes by. Olawale & Garwe, (2010) on the other hand claim that
as a new small firm start and develops, it moves through some growth stages. He also identified
the stages of growth of SMEs as; existence, survival, success, take off and resource maturity. In
each stage of development as different set of factors is critical to the firm’s survival and success.
The model gives an insight into the dynamics of SMEs growth including the distinguishing
characteristics, problems and requirement of growing SMEs and explains business growth
process amongst SMEs, the precise moment in time in which a startup venture becomes a new
business has not yet been theoretically determined. However, the ideal business survival could be
equated with a firm that has fully completed the transaction to stage two organizations in the five
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2.2.2 Theory of taxation
According to the theory of taxation by Kaplow & Fleurbaey, (2014), an efficient taxation policy
should minimize costs of taxation to society, per unit of tax revenue raised. When economic
agents are more or less similar for their size, business and value of sales and it is possible to
calculate fixed sums for them to pay, lump-sum taxes should be imposed. This would be of
especial importance in transition economies when authorities do not have the capacity to
effectively impose sophisticated tax systems. Presumably, as the market economy matures, the
tax system might take on some of the elements of tax systems found elsewhere. Good taxes meet
four major criteria. They are (1) proportionate to incomes or abilities to pay (2) certain rather
than arbitrary (3) payable at times and in ways convenient to the taxpayers and (4) cheap to
Small Medium Enterprise (SMEs) have varying definitions based on different fundamentals of
measurement. They can be defined basing on the value of assets, capital employed, sales
turnover or number of employees. In Indonesia, the grouping of micro, small and medium sized
SMEs based on the amount of gross income and the amount of labor. According to Budi business
sector, micro, small and medium enterprises play a role important in the structure of the
Indonesian economy (Okumu & Buyinza, 2018). According to the Income Tax Act (1997), small
scale businesses are those with growth turnover of less than 50 million shillings per annum. In
Uganda it’s not only income tax Act that has tried to define small scale businesses; there are also
institutions which have tried to define small scale business (SSB) such as; Ministry of Finance
Planning and Economic Development (MFPED), the Uganda Small Scale Industries Association
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(USSIA). The MFPED defines SSB as a unit with a capital investment not exceeding US$
300,000.
Chalmers, (2020) describes performance of small-scale business as the ability to attain its goals
by using resources in an efficient and effective manner, the goals of the organization include;
Taxes levied on revenue are worthwhile only if it can generate meaningful revenues at acceptable
rates and procedures (Kato & Tsoka, 2020). According to Okumu & Buyinza, (2018) through
taxation, the government takes away money from people they would otherwise spend on private
sector. As a result, purchasing power reduces per unit of production in the private sector to the
public sector. They further asserted that, one of the most frequent arguments against high income
tax is that it destroys the incentive to business people and employees to work harder and more
efficiently. According to the Khalilzadeh-Shirazi & Shah, (1991) businesses carry out tax
planning so as to have a minimal tax liability and thus increasing the purchasing power. It is
through taxes that the government takes away money from people/business they would otherwise
spend on private sector. This loss of purchasing power reduces the demand for units of products
Labour factor are a greater relevance in SMEs context. In developing countries, SMEs are
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economic growth (Nunes et al., 2013). The effects of growth on labour productivity may be
the expectation of higher future earnings, and informal relationships between employees is not
substantially affected, then growth can contribute into increased labour productivity. If growth
contributes into a less efficient control of the action of employees by owners/managers, and also
a relevant breaking of informal labour relationships, then growth may contribute to lower labour
Working capital management covers all decisions that have an impact on current assets and
liabilities and consequently on corporate liquidity (Sensini & Vazquez, 2021). Bello & Sensini,
(2020) reported that increasing investment in working capital has a positive impact on
profitability. The researcher suggested that the growth in working capital may lead to an increase
information asymmetry, thus leading to an increase in profitability (Afrifa, 2015). On the other
hand, Anton & Afloarei Nucu, (2020) suggested that the increase in working capital has a
negative impact on profitability. In this perspective, the researcher highlighted that the
investment in working capital causes the need for additional financing, the increase in financial
costs, an increase in storage costs, causing a negative impact on profitability and an increase in
Therefore, the relationship between working capital management and profitability depends on the
size of the company, its life cycle, the power relationship with the stakeholders. In particular,
larger firms have greater bargaining strength and easier access to financial resources than SMEs
(Afrifa, 2015; Anton & Afloarei Nucu, 2020). This circumstance, although not sufficient if not
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supported by proper financial management, facilitates the management of working capital in
large companies. On the other hand, the financial constraints that often characterize SMEs
influence the management of working capital and sometimes leading to decisions dictated by the
above constraints rather than correct financial management choices (Afrifa & Tingbani, 2018).
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CHAPTER THREE: METHODOLOGY
3.1Introduction
This chapter discuss the research design, study population, study variables, sources of data, data
collection methods and instruments, data processing, analysis and presentation and limitations of
the study.
The study used secondary data which was collected using a cross section study design. The
cross-sectional design chooses a sample to represent a population and easily provide a quick
snapshot of what’s going on with the variables for the research problem. The data was collected
by World Bank in 2013 about the SMEs in Uganda. Both methods of data collection that is to say
qualitative and quantitative methods were employed during the collection of data.
characteristics. It is the sum of all that conforms to a given specification and from which a
sample is taken. The Uganda`s Enterprise Panel Survey considered both SMEs and LEs in the
different parts of the country. However, for this current study, SMEs will be selected as the study
population.
3.4 Sampling
During the survey, Simple Random Sampling (SRS) of stalls was used. This however came in
after doing a one stage stratification of elements of study depending on regions where the
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3.4.2 Sample size
A suitable sample size is a critical matter as it influences the statistical significance and power.
According to Nick et al. (2009), choosing the correct sample is not a matter of preference, it is a
crucial element of the research process without which you may well be spending months trying
to investigate a problem with a tool which is either completely useless, or over expensive in
terms of time and other resources. The researcher selected a sample of 1000 SMEs in the
different parts of the country using purposive sampling method. This was used in order to select
A stratified random sampling procedure was used to select the participating enterprises in the
panel survey. Stratification refers to the division of the population into none overlapping and
internally homogeneous sub populations with respect to the variable being studied. The sample
size for this current study was determined using Cochran’s formula (1963) depending on the
population size.
q = 1-p…………………………………………….………………3.2
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Since p is unknown, therefore the sample size to be used is;
n= (1.962*0.3*0.7)/ 0.082
n=1000 enterprises.
Design effect
Where
The study will use secondary data which was collected by World Bank about Uganda`s
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Capital size
Owning a standby generator Categorical
Accessibility to finance Categorical
Size of operating area Continuous
Socio-demographic factors
Population size in the area Categorical
Gender of the top manager Categorical
Education level of the top manager Categorical
Secondary data included policy documents and abstracts of the various scholars relating to the
topic of discussion in question. Secondary data for this study was got from sources like libraries,
archived records from the Town Council, records of selected small-scale enterprises, government
publications, online information, text books, newspapers, and unpublished research reports. This
was because it was readily available and easier to comprehend, as it comprised of extensively
researched work.
In this research, data analysis was done at three levels “univariate, bivariate and multivariate
analysis” using STATA 15 for analysis. Inferential and descriptive statistics will be used.
Descriptive analysis will be performed to explore data in terms of frequencies and percentages.
At this level of analysis, frequency tables and descriptive statistics will be analyzed and
presented. Each variable will be analyzed at a time to establish the percentage distribution of the
respondent`s background characteristics for this study and other selected variables.
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3.7.2 Bivariate analysis
The second level of analysis is bivariate analysis whereby the association between the dependent
variable and each of the independent variable will be investigated. In this analysis, the chi-square
statistic will be used to test for the significant relationship between selected independent and
dependent variable and for continuous variables were categorized. The chi square statistic takes
2
r c O
ij Ei j 2
i 1 j 1 Eij
…………………………………….3.5
In this study, it will be assumed that the level of significance for all chi-square test is 0.000.
The study was after used to study the relationships between the dependent variable and the
independent variables using the binary logistic model to determine the impact of tax on the
………………………………3.6
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Where; is the probability increased output as the measure for the performance of SMEs, is
Under this analysis, the researcher`s interest is in finding out the relationship between the
dependent and independent variables through taking keen interest in the level of significance
(sig) and the odds ratio (Exp (B)). In cases where the significance is less than or equal to 0.05,
that will indicate a significant relationship between the independent and dependent variables. On
the other hand, where the significance is greater than 0.05, this will indicate that there is no
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