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
A
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:…………………………………………….....
i
APPROVAL
I certify that this research work has been submitted for examination under my supervision
Signature: ……………………………………………… Date: …………………………………
MR. TURYAKIRA NAZARIUS
(Supervisor)
ii
DEDICATION
I dedicate this piece of work to my late grandmother ANNA NEKESA NAMUDEPI of Busia
district.
REST IN PEACE
iii
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.
iv
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
v
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
vi
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
vii
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
viii
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 operations33
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
ix
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.
x
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.
1
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.
2
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.
3
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.
4
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).
5
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).
6
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)
7
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
8
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).
9
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.
10
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
11
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
12
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
5 million per annum
0 (NIL)
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.
13
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
14
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.
15
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//www.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
16
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.
17
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%
18
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
19
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.
20
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
21
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.
22
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
23
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.
24
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.
25
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.
.
26
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
27
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
28
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.
29
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
30
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 0.0Agree 3 6.0 6.0 6.0Not sure 2 4.0 4.0 10.0Disagree 37 74.0 74.0 84.0Strongly disagree 8 16.0 16.0 100.0Total 50 100.0 100.0Source: Primary Data
31
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
32
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
33
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
34
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
development
- - 1 2% 5 10% 40 80% 4 8%
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.
35
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%.
36
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.
37
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.
38
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.
39
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
40
REFERENCES
AICPA, (1992) Blue print for tax simplification
Akileng (2004), Presumptive income tax and performance of small business
Barbone, Luca and Sanchez, Luis-Alvaro. The Political Economy of Taxation in CIS Countries
(mimeo) March 2003.
Barkman, et al (1996).The determinants of small firm growth an interregional
study in the UK 1996-1990 Jessica Kinsley London.
Bird, RM Tax policy and economic development. The Johns Hopkins University Press Baltimore
and London 1992.
Borne. Luca and Sanchez, Luis-Alvaro. The Political Economy of Taxation in CIS Countries
(Mimeo) March 2003.
Brunetti, Aymo. Kisunko. Gregory and Wede (1997). Institutional Obstacles to Doing
Business”. World Bank Policy Research Working Paper.
Bwire Jackson (2001) income tax administration and performance of the informal sector
unpublished research report.
case of Mbarara municipality.un-published repor publishers, Kampala.
A.R. Nsibambi, (1998). Decentralization and civil society
Chandler, Mark, “Tax Collection and the Shadow Economy in the Baltics”, Paper for
Conference on Unofficial Activities in Transition Countries: Ten Years of
Experience, Institute of Public Finance, Zagreb, and October 2002.
Christian,12(2004),presumptive income tax and tax compliance. Department
of economics university of Michigan 611 tappart.
Chursov, Andrey (2001) Small and Medium Size Enterprises in Kazakhastan. Research Paper.
Coping With Vat: taxes and tax policy. Publication of the makerere business journal
publications, makrerere university printer, Kampala.
41
D.Chen And R.Reinikka(1999)business taxation in low developing revenue countries. study of
Uganda in comparison with neighbouring countries, the world bank.
Di Siena, Marco, “II Caso Albania: La Small Business Tax:, Rivista della Guardia di Finanza No
3-2000, p.1139.
Duanjie C, Frank C and Jack M. (2000). Taxation, SBEs and Entrepreneurship, OECD Science,
Technology and Industry Working Papers.
Edmiston et al (2003) tax structures and FDI. The deterrent effects of complexity and
uncertainity.William Davidson working paper 558 university of Michigan business school.
enterprises. Unpublished report
FEED (Forum on Entrepreneurship and Enterprise Development) (NA) (1998). Report on
Meeting of Working Party on Institutional Framework for Entrepreneurship.
FIAS (Foreign Investment Advisory Service, World Bank), “George: Study of Administrative
Barriers to Investment” (mimeo)_December 2001.
Fisman and svenson (2002). Are corruption and taxation really harmful to
growth? Firm evidence.columbia business school New York.
Gibutayi innocent(2001)effect of taxation.(vat and income tax) on performance of small business
enterprises case study nakawa.unpublished research report.
Harrison, Steve (1997), Presumptive Taxes in Central and Eastern Europe. Bulletin for
International Fiscal Documentation (BIFD).
Harrison, Steve (1997). Presumptive Taxes in Central in Central and Eastern Europe. Bulletin
for International Fiscal Documentation n (BIFD).
Ikiz, Ahmet Salih (2000). Shadow Economy in Bulgaria: Small and Medium Enterprises and
Taxation;. Paper for Conference on Unofficial Activities in Transition
Countries.
in Uganda. Fountain
International Finance Corporation (IFC), “The Sate of Business in Ukraine”, June 2000.
International Finance Corporation (IFC), “The state of Small Business in Ukraine”, May 1999.
42
Kirambire (2003).Attributes of a good tax system, review of Uganda tax system during URAs
first ten years of existence. URAs bulletin.
Kizza (2006), the effect of taxation on the performance of small scale business
Korop, E., “The Government Rescues Small Businesses from Asphyxia”, Izvestia, March 25,
2002.
Lubega Barbara(2001).presumptive tax and small scale business performance.unpubllshed
report.
Lukwaya Samuel(2001) effects of income tax administration on performance of small scale
business(a survey of small business).unpublished report.
Manasseli Tumuhimbise (2002) Introduction to taxation in Uganda. Published by the author.
McCluskey, W.J and Keith S. (2004). Decentralization and Rural Property Taxation: Guidelines
Review Panel: Andrew Hilton, Tom Konyimbih, Hamish McDonald,
Alexey Overchuk and Paul Sanderson. McClure and Pardon, (1992). Tax
Reform in Columbia: Process and Results; Tax policy in Developing
countries; Conference Paper, World Bank.
Mintz (2004).the changing structures of tax policies for foreign direct investment in developing
countries.
Mitra, Pradeep and Stern, Nicholas, “Tax System in Transition”, World Bank, October 2002.
Mugulusi Johnson(2001) taxation and performance of selected small enterprises in nakawa.
Mukisa Pascal (2005). The effect of Presumptive tax to the performance of small scale Business.
Un published Research reported submitted to Makerere University.
Musgrave and M; Public Finance in theory and Practice 3rd Edition McGraw Hill 91973.
Nsamba, G.E. (2000). Property Tax as a Vehicle for Equitable provision of Services; A course
on linking Fiscal Decentralization to Poverty Reduction in Africa,
Municipal Development Programme (MDP) and World Bank Institute
(WBI) Session 3. 1st March 2002.
Okello J.L. and Nsamba G.E (2000) “Property Rating Taxation: Uganda Country Report.” In
Property Tax in Eastern and Southern Africa: Challenges and Lessons
43
learned, (Harare, Zimbabwe: Municipal Development Programme, (2000).
Working Paper #2. Pp 67-83.
Parvaiz and ishaq (2000) presumptive tax regime. Jones internationuniversity journal.
Rabushka, Alvin, “Completing Small Business Tax Reform”, Hoover Institution, July 2002.
Reinikka and C. Business Taxation in a low Revenue Economy: A study on Uganda in
comparison with neighbouring Countries. World Bank Publication.
Ritra Reinikka And Jacob Svensson (2001); Confronting competition, investments, profit, risk.
World Bank, Washington D.C
Sinelnikov, S./Zilotareva, A., “Problems of Russia’s Tax System: Theory, Experience, Reform”,
IET Working Paper 19 (in Russian Language), 2000.
Sserwanga Arthur (2002).presumptive income tax laws and quality of financial reports,
Makerere University
Taxation and economic development. The Uganda economic journal (1973)
Terkper Seth (2003), managing small and medium sized enterprises in developing countries, tax
notes international number 29.
Theissen, Urich, “Presumptive Taxation for Small Enterprises in Ukraine”, (mimeo), March
2001.
Thuronyi Victor (1996).presumptive taxation, tax law design and drafting vol.1; international
monetary fund(IMF).
Tindimwebwa(1999);” Taxation of the informal sector and self employed challenges and way
forward” the case of Uganda, paper prepared for CATA 20th technical conference held between
16th-20th august 1999 in belinze,central America.
Urban Management Programme Paper. Washington, D.C: The World Bank. Mulindwa, G.M
(2000). Tax Policy, Administration and Management. Paper Presented on
the Pre-budget Taxation Seminar, ICPAU, March 2000.
Vladimir Prispisnov(1996).|The determinants of small and medium sized enterprises in 1993-
1995 science policy research unit, mantel building university of Sussex Brighton east Sussex
BNI 9RF.
Wallace, Sally, “Imputed and Presumptive Taxes: International Experience and Lessons.
44
World Bank, “Ukraine: Tax Policy and Tax Administration” (mimeo), August 2002.
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
45
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
46
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
47
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
48
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.
49
APPENDIX II
TIME SCHEDULE
Activity Duration Period Remarks
Research proposal writing
and approval
1 Month Feb-March
Selection of designs and
sampling procedures
1 Month Feb-March
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
50