TAX ADMINISTRATION AND   PERFORMANCE OF SMALL AND MEDIUM ENTERPRISES IN KAMPALA CAPITAL CITY AUTHORITY, UGANDA

CHAPTER ONE

INTRODUCTION

• Introduction

By igniting socio-economic growth through providing employment opportunities, opening new markets and involving masses in their local economies.SMEs are increasingly regarded the health of all economies. Given their proximity to the local communities, SMEs ultimately enjoy more customer-centeredness that comparatively provides them with greater ability to survive economic downturns than the bigger enterprises in the urban settings (Ocheni, 2015). In reality however, the performance of SMEs in countries like Uganda is as good as the taxes.

Tax administration practices, includes tax collection, audit procedures, and taxpayer support services, are known to play a critical role in SME performance (Kasumba & Awori, 2018).  Relatedly, delays in tax refunds, lengthy audit processes, and inconsistent enforcement can deter SMEs from complying with tax regulations, affecting their financial stability (Kasumba & Awori, 2018).

In light of these complexities, understanding the relationship between Tax administration and SMEs performance in KCCA, Uganda, is deemed crucial. This study will examine the effects of tax administration on the performance of SMEs in Kampala Capital City Authorities (KCCA), Uganda. Where tax administration will be the independent variable (IV), and performance of SMEs is the dependent variable (DV). 

This chapter presents the background to the study problem, the study purpose, research objectives, research questions and hypotheses. The chapter also covers the conceptual framework, significance and justification of the study, scope of the study as well as the operational definitions of key terms and concepts in the study.

1.1 Background to the study

The background in section is presented under four perspectives that include the Historical, theoretical, conceptual and contextual backgrounds in the proceeding subsections.

1.2.1 Historical background

SMEs are historically rooted in the earlier writings over 4000 years ago globally. Principally, these writings were in respect with small business loans under relative terms and conditions. Elsewhere on the globe, the World War I aftermath saw flourishment of small business in almost all strong ancient cultures across world including the Egyptians, Arabs, Babylonians, Jews, Greeks and Romans as never before (Day, 2000; Kauffmann, 2006). Although small business later became a subject for contempt from government policies because of the perceived poor quality of their products and services, small business people trading across countries were the ones who spread public law, religions, and business philosophies.

The period after the was characterized a major resurgence of SMEs throughout the developed world with countries including Russia and Eastern Europe developing small business be the backbone of their economies through the provision of services and products. Accordingly, SMEs have been at the heart of Africa’s growth for the last 3 decades or so (Kauffman, 2006).

In context of Uganda, SMEs are considered to be the leading growing sectors in the country (Hatega, 2007). It should be noted that, SMEs in the economic development of Uganda cannot be overstated. SMEs contribute significantly to job creation, income generation, and poverty reduction (Uganda Investment Authority, 2020). Despite their positive role to the Development of Uganda, SMEs have in history faced various obstacles that restrict their performance and long term survival, and tax administration stands tall among them.

Taxation in Uganda has evolved over the years, with the government implementing several reforms to enhance revenue collection and promote economic growth.  According to the tax system in Uganda, SMEs constitute a substantial portion of the business landscape in Kampala which is the Uganda’s capital city that faces unique challenges related to tax compliance and administration (Bwire, 2015). While tax policies and regulations are designed to provide incentives and support for SMEs, the extent to which these policies are effective remains a subject of debate (Kariisa & Sejjaaka, 2015). The government has introduced tax incentives and exemptions to encourage SME growth, but SMEs continue to grapple with high compliance costs, often diverting resources away from their core operations

Today, the informal sector in Uganda where a significant number of SMEs operate poses a challenge to tax authorities (Fjeldstad & Heggstad, 2012). Many SMEs choose to remain informal to avoid the complexities and costs associated with formal tax compliance, impacting both revenue collection and SME access to government support programs (Bwire, 2015).

1.2.2 Theoretical background

The study will be underpinned by the Balanced Score Card (BSC) model by Kaplan and Norton (1992). The BSC model enables organizations like SMEs to measure their business performances consindering financial perspectives and non-financial perspectives. The BSC model addresses an organization’s strategic plan, looking at the Mission and Vision. The model is to the effect, that organizational performance happens when management deliberately strikes a balance in providing a scientific analysis of the performance in response to customers’ needs, exploring financial strategies and procedures, properly harnessing internal processes to meet vision and strategy of firm, and enhancement of organizational capacity through innovation, proper resource management, and good relations with stakeholders (Albright et al., 2015). Accordingly, the BSC model will guide and manage the feedback which will again help the learning processes to determine the target figures. While the financial perspective will market the organisation to the shareholders and financial bankers. This is will be determined by the quantitative benchmark based on previous data.

The theory will guide to understand, describe and predict performance of SMEs from the four perspectives. The BSC model will help SMEs to framework and build a communicating Strategy, which will allow SMEs to easily improve and communicate the best strategy to their stakeholders.

1.2.3. The Conceptual Perspective

The conceptual perspective of this study revolves around tax administration and performance of SMEs in Kampala Capital City Authority.

Tax administration is a concept made up of two concepts, tax and administration. From a general perspective, citizens have a civic and patriotic responsibility to pay taxes to the government that are used to finance the delivery of socio-economic services and amenities and a for the well-being of the society. Tax can accordingly be defined as a form of levy that is imposed and paid by all legible citizens and non-citizens resident within a defined tax jurisdiction (Ogbonna & Ebimobowei). The above definition implies that tax is a levy on, it is compulsory in nature and, subject to the jurisdiction of that government. The typologies of tax vary depending to country and level of government. The study will adopt the definition by Kasumba and Awori (2018) that tax administration refers to the execution of the core activities for collecting taxes within a tax jurisdiction that are imposed by law.

In the context of this study, tax administration will be conceptualized into business registration, tax assessment and auditing/Compliance. The process involves obtaining a TIN and registering for various taxes. The process involves filing tax returns, declaring income and expenses, calculating tax liability, paying tax due. On the other hand auditing is the examination and review of a business’s transactions and tax returns to make sure there is accuracy and compliance with tax laws. Audits can be conducted by tax authorities or independent auditors.

The performance of SMEs in this study therefore will be looked on using both financial and non-financial measures that include customer satisfaction, financial performance, internal processes and innovations and growth

1.2.4. Contextual background     

The contextual perspective of this research is concerns on factors of socio-economic and institutional landscape of the City. Kampala, as the capital city, serves as a dynamic hub for SME activities across various sectors (World Bank, 2021). This economic environment shapes the challenges and opportunities faced by SMEs, and understanding these local dynamics is essential. The tax policy landscape in Uganda is characterized by tax incentives and simplified tax guidelines for small businesses (URA, 2023), This contributes to the unique context in which SMEs operate. Additionally, the prevalence of the informal economy in Uganda, particularly in Kampala, is a defining factor. Fjeldstad and Heggstad’s (2012) research on informality and tax evasion underscores the significance of this context. Government initiatives, such as the Uganda Development Bank, play avital role in shaping the local business ecosystem and access to financial support (Uganda Development Bank, 2021). The legal and regulatory framework, including investment regulations (Uganda Investment Authority, 2021.

Lastly, social and cultural factors, such as tax morale and social norms, are deeply ingrained in the Ugandan context, impacting compliance decisions (Kariisa & Sejjaaka, 2015).

This contextual perspective considers the unique socio-economic, institutional, and regulatory conditions that SMEs in Kampala, Uganda, operate within. Understanding these contextual factors is essential for interpreting the study’s findings and providing targeted policy recommendations that align with the local environment.

1.3. Problem Statement

Be it developing or developed economies, SMEs increasingly play an advance role in driving countries’ and world economy as well as the stepping stone towards industrialization.

Indeed, in KCCA,you witniss SMEs providing a useful bridge that connect the informal sector of family enterprises and the formalised corporate sector.  Accordingly, Government of Uganda (GoU) through URA and KCCA have provided various tax administration policies and practices to be followed by SMEs in the city.  Some of such tax administration practices pursued in KCCA include business registration, tax assessment and tax audit. The presumption is that performance of SMEs is greatly affected by the effectiveness in tax registration, assessment and audit.

Despite awareness about and practice of tax administration, the performance of SMEs is far below expectations. There is evidence that SMEs in KCCA face serious decline in financial performance which has resulted to a decrease the available profits for tax remittance to the government (Gordon & Dawson, 2017). Relatedly, the mortality rate of SMEs in KCCA like elsewhere in Uganda is still comparatively high with about one third of new SMEs not surviving beyond one year of operation (Adcorp, 2014). The performance of SMEs in KCCA like elsewhere in Africa, often face a myriad of challenges in navigating the tax compliance landscape. These challenges encompass high compliance costs, complex tax regulations, informality, and uncertainties associated with tax refunds and audits (Hatega, 2007). The interaction between SMEs and tax authorities is further compounded by the prevalence of the informal economy in Kampala, which poses unique compliance dilemmas. The government, recognizing the importance of SMEs, has introduced tax incentives and support programs, yet it remains unclear how effectively these policies mitigate the obstacles faced by SMEs and their performance.

Therefore, this study aims at investigating the relationship between tax administration and SMEs’ performance in KCCA, Uganda

1.4 Objectives of the study

1.4.1 General Objective.

The general objective of the study is to investigate the relationship between tax administration processes and the performance of SMEs in Kampala Capital City Authority, Uganda

1.4.2 Specific Objectives

1. To examine the relationship between tax registration performance of selected SMEs in KCCA, Uganda.
2. To examine the relationship between tax assessment and performance of selected SMEs in KCCA, Uganda.

• To investigate the relationship between tax audit and performance of selected SMEs in KCCA, Uganda.

1.5 Research Questions

The study is ought to answer the following Three Questions:

1. What is the relationship between tax registration performance of selected SMEs in KCCA, Uganda?
2. What is the relationship between tax assessment and performance of selected SMEs in KCCA, Uganda?

• What is the relationship between tax audit and performance of selected SMEs in KCCA, Uganda?

1.6 Research Hypotheses

Based on the research questions and the general objective, the following research hypotheses will be used:

1. Tax registration has a significant positive relationship with performance of SMEs in KCCA, Uganda
2. Tax assessment has a significant positive relationship with the performance of SMEs in KCCA, Uganda.

• Tax audit has a significant positive relationship with the performance of SMEs in KCCA, Uganda.

1.7 Conceptual Framework

The conceptual framework illustrating the relationship between tax administration and Performance of SMEs in KCCA is presented in figure 1.1 below)

.

Tax Administration (IV)                                              

       a             

SMEs Performance (DV)

Source: Balanced Score Card Model (Kaplan & Norton, 1992)

Fig 1: A conceptual Framework depicting the relationship between Tax Administration and SME Performance

The conceptual Framework above shows a hypothesized relationship between tax administration and SME performance in KCCA, Uganda. Tax administration will be taken as an independent variable with dimensions of business registration, tax assessment and tax audit.

While SME performance will be the dependent variable, measured by financial performance, internal processes, perceived customer satisfaction and growth and innovations. It is hypothesized that adoption of the above tax administration practices would lead to a corresponding SME performance in KCCA, Uganda. The framework enables SMEs to align their strategic objectives with key performance indicators and drive continuous improvement in all aspects of their business operations

1.8 Justification of the Study

SMEs are the foundation of almost economies in developing nations like Uganda, these increases to employment levels and economic growth. However, the intricate relationship between tax administration and SME performance in the specific context of Kampala, Uganda, remains underexplored. The study therefore will address this crucial knowledge gap by investigating how tax administration policies and practices influence SMEs’ compliance behaviour and, consequently, their performance.

This research also seeks to connect a theoretical gap by exploring how factors such as business tax registration, tax assessment and tax audit affect SMEs performance.  Methodologically, this will advance the field by adopting a mixed-methods approach, combining quantitative and qualitative insights. By using a holistic research design, this study will be a multifaceted perspective on the complexities surrounding tax administration and SME performance, contributing to methodological diversity in the field.

Furthermore, from a contextual perspective, this research acknowledges the distinct socio-economic and institutional landscape of Kampala, Uganda. Existing studies often neglect adequately  to consider the hard challenges faced by these SMEs in the area, For example the prevalence of the informal economy, government initiatives  to support SMEs, and the intricacies of Uganda’s tax regulations.

1.9. Significance of the study

The significance of this study may extend beyond social inquiry, as it has the potential to inform SMEs themselves, policy actors, and the academia. By examining tax administration and performance of SMEs within the unique socio-economic landscape of KCCA, this research offers evidence based information and business insights to all SMEs that they can use embrace and align tax administration towards their business performances. SME owners and managers in Kampala may also benefit from actionable recommendations derived from this study, enhancing their ability to navigate the tax landscape efficiently and improve their overall performance. Relatedly, the general public also stands to gain from a thriving SME sector as it contributes to job creation, poverty reduction, and economic resilience

The findings of this study are also expected to provide relevant information and insights to policy makers and policy actors. In terms of practical implications, this research can guide policy makers and policy actors in the design and review of tax policies that are more conducive to SME growth, thereby fostering economic development in urban authorities similar to KCCA

From an academic perspective, this study will enrich available knowledge relating to tax administration and SME performance in developing economies.  To that extent, therefore, the study findings will facilitate the  empirical inquiry into effective tax administration practices that can support overall performance of SMEs.

1.10 Scope of the Study

1.10.1 Content Scope

The content scope for this study will pertain to tax administration and SME performance in KCCA, Uganda. Tax Administration will be observed by business registration, tax assessment and tax audit. Performance of SMEs, on the other hand, will be measures by financial stability, growth prospects, operational efficiency, and competitiveness.

1.10.2 Geographical Scope

The geographical scope of this study will be Kampala Capital City Authority, Uganda. In particular, the research will specifically focus on twenty (20) SMEs selected from Kampala Central Division of KCCA, Uganda

1.10.3 Time Scope

The study will primarily focus on a scope of five(5) years from 2019 to 2024. This time frame is deemed good enough to examine the study problem

1.11 Operational Definition of Key Terms and Concepts

Tax- is a compulsory financial charge or levy imposed by a government or other public authority on individuals or organizations to fund public expenditures and achieve fiscal policy objectives. Tax Administration- refers to the processes and procedures used by governments to collect taxes, manage tax payments, and enforce tax laws. The main activities include, business Tax registration, Tax assessment, Tax Audit and Many others.

Business Tax Registration-Business Tax registration, also known as Tax Identification Number (TIN) registration, is the process of registering a business with the Uganda Revenue Authority (URA) to obtain a unique TIN. This registration is mandatory for all businesses operating in Uganda, including – Companies, Partnerships, Sole proprietorships, Trusts, and Estates.

Tax Assessment- is the process of determining the amount of taxes owed by a taxpayer, typically done by a tax authority such as URA. The assessment process involves: Reviewing tax returns and financial records, Verifying income, expenses, and deductions. Applying tax laws and regulations, calculating tax liability, and identifying any tax credits or refunds

Tax Audit- is an examination of a taxpayer’s financial records and transactions to ensure compliance with tax laws and regulations. It is conducted by tax authorities, such as URA, to verify the accuracy of tax returns and identify any potential tax liabilities.

TIN– Tax Indentification Number

SMEs– In Uganda, SMEs are Small and Medium-sized Enterprises, these are defined as businesses with the following characteristics:-Micro Enterprises: These employ up to four people, with an annual sales/revenue turnover of less than UGX 10 million (approximately USD 2,700).Small Enterprises: Employ between five and nineteen people, with an annual sales/revenue turnover of UGX 10 million to UGX 100 million (approximately USD 2,700 to USD 27,000).While Medium Enterprises: Employ between twenty and forty-nine people, with an annual sales/revenue turnover of UGX 100 million to UGX 360 million (approximately USD 27,000 to USD 97,000).

SMEs Performance- The performance of SMEs in Uganda can be defined by the following criteria:

– Productivity: Ability to produce goods or services efficiently.

– Innovation: Capacity to develop new products, services, or processes.

– Growth: Increase in revenue, employment, or market share.

– Profitability: Ability to generate sufficient profits to sustain the business.

– Competitiveness: Ability to compete with other businesses in the industry.

– Job creation: Ability to create new employment opportunities.

– Market share: Ability to increase market share and customer base.

– Export growth: Ability to increase exports and participate in international trade.

– Training and development: Ability to invest in employee training and development.

KCCA- This stands for Kampala Capital City Authority, which is the governing body responsible for the administration of Kampala, the capital city of Uganda. KCCA is responsible for providing various services to the city and its residents, including – Waste management: Road maintenance, Public transport, urban planning, Building inspections, Revenue collection, Health services and Education services.

BSC Model-This is known as the Balanced Scorecard,  it is a strategic management performance metric used to measure an organization’s performance from four(4) perspectives:Financial , that is revenue, profitability, return on investment. Customer, this includes customer satisfaction, retention, market share, Internal Processes of efficiency, productivity, and quality. Learning and Growth which is employee skills, innovation, knowledge management.

UIA-UIA stands for Uganda Investment Authority. It is a government agency responsible for promoting and facilitating investment in Uganda.

URA- This is Uganda Revenue Authority. It is a government of Uganda’s agency responsible for collecting taxes, enforcing tax laws, and providing guidance on tax compliance. Some of the URA’s key services include: Tax registration and identification, Tax returns processing and assessment, Tax payment collection and compliance, Tax refunds processing, Tax education and advisory services, and Audit and investigation services.

MoTIC-  This is The Ministry of Trade, Industry, and Cooperatives, the ministry is responsible for Developing and implementing trade policies and strategies to promote exports and enhance competitiveness and Attracting and retaining investments in trade, industry, and cooperatives among others.

CHAPTER TWO

LITERATURE REVIEW

 2.1 Introduction

This chapter includes review of literature relating to the study on the relationship between tax administration and performance of SMEs in Kampala Capital City Authority, Uganda. This literature review will be organized around the study’s objectives, with a focus on synthesizing results and identifying controversies. The literature will be reviewed from books, journals, internet, periodicals, conference papers, reports, and minutes of meetings. Structurally, the chapter presents the theoretical review, related review of literature and a summary of literature review.

2.2. Theoretical Review

The theoretical part of this study will be basis of the Balanced Scorecard Model by Kaplan and Norton (1992). This model intends to portray the inherent inadequacies of the financial-based performance measurement tools. The model therefore postulates that other than the financial perspective, the performance and sustainability of an organization should consider other indicators including the internal process, customer satisfaction and learning and growth. Going by these postulations, the four perspectives should work complementarily for organizations to perform. The Balance Score Card brings about superior performance among organizations in terms of increased customer loyalty and profitability (Kaplan & Norton, 1992).

The high adoption of the BSC model notwithstanding, scholars have identified various limitations for its application such as its complexity, BSC can be overwhelming for SMEs with limited resources and expertise even the cost of Implementing and maintaining BSC can be costly to the SMEs, it is also time-consuming for example in developing and monitoring which requires requires significant time and effort.On the strategy side , SMEs may struggle to define clear strategic objectives because they lack strategic clearity.

2.3 Related Review

2.3. 1:  Business registration and SME performance.

Business registration is a critical step for entrepreneurs and businesses to formalize themselves and obtain legal recognition as a business entity which brings to their stabilization. World Bank (2020). The efficiency of business registration processes in urban areas has a potential to improve the business viability and performance of SMEs in various ways.

Relatedly according to URSB (2024), KCCA has streamlined procedures through the introduction of online services and one-stop service centers, reducing the time and cost associated with business registration. Accordingly, the integration of online registration allows entrepreneurs to apply, check application status, and make payments online, significantly cutting down on the need for physical office visits (KCCA, 2024). Relatedly according to world Bank (2023), the efforts to reduce processing time have led to the registration process being completed within a few days instead of weeks.

According to Ministry of Trade, Industry, and Cooperatives (MoTIC, 2024), decentralizing services, derived from business registration, makes them more accessible, reducing congestion at central offices and providing quicker service delivery. By implication, such and more registration-based improvements can enhance accessibility and convenience, reduce operational costs, and create a more favorable business environment for SMEs.

According to international Finance Corporation (IFC, 2024), the benefits derived from business registration are what attracts and encourages SMEs to register formally, leading to increased compliance, legal protection, access to government incentives, and financial services.

The streamlined processes derived from business registration, facilitated by online services and innovations like one-stop service centers, can significantly improve the efficiency of business operations generally. They reduce the time and cost associated with these activities, thereby encouraging more businesses to formalize their operations and comply with regulatory requirements. In a nutshell, the efficient registration processes boost SMEs’ competitiveness and growth, contributing to a more conducive environment for SME performance

On a down side however, SMEs in Uganda face several challenges in the business registration process, despite efforts to streamline procedures. According to IFC (2024), the significant challenges include the complexity of the registration process itself. This is to the effect that many entrepreneurs find the process cumbersome due to the numerous forms and documents required. Accordingly, many SMEs struggle with the bureaucratic nature of the registration process, which can deter them from formalizing their businesses. Relatedly according to World Bank (2023), the digital divide and inconsistent of internet connectivity deter the effectiveness and utilization of e-government services in Uganda.

The challenges faced by SMEs in the business registration process have significant implications for their performance and overall contribution to the economy. One of the primary implications is the perpetuation of informality within the sector. Many SMEs opt to remain informal to avoid the cumbersome and costly registration process, which limits their access to formal financial services from banks. Informal businesses often struggle to secure funding necessary for expansion and investment in new technologies, hampering their growth and sustainability. According to a report by the International Finance Corporation (IFC), the inability to access formal financial services is a major barrier to the growth of SMEs in developing countries, including Uganda (IFC, 2024).

According to World Bank (2023), the inefficiencies in the registration process also impacts SMEs’ operational efficiency. The bureaucratic hurdles affect productive activities that would enhance business performance. The delays and inconsistencies in obtaining necessary licenses and permits can lead to disruptions in business operations, missed opportunities, and a lack of competitiveness in the market. World Bank found that procedural delays and unpredictability in business registration processes significantly hindered SMEs’ ability to plan and execute their business strategies effectively

Relatedly, The Uganda Investment Authority (UIA, 2024) highlights that the financial constraints resulting from the high costs of formalization are a significant factor in the poor performance and high failure rates of SMEs. Moreover, the financial burden associated with registration and compliance can strain SMEs’ limited resources. High costs of registration, coupled with hidden expenses such as intermediary fees and lost productivity due to time spent on the process, reduce the capital available for other critical business activities. These financial strains lead to poor investment in essential areas which are crucial for production and business growth  which can improve competitiveness.

In view of the business registration challenges highlighted in the literature review above, the extent to which business registration affects SME performance in countries like Uganda is not known. The study is therefore timely to address this knowledge gap

2.3.2: Tax assessments and SMEs performance.

In the context of SMEs, tax assessment generally describes a procedure by which tax administrators determine the taxable amount to be paid by an SME. The amount is computed based on the difference between what the SME has declared and what the tax authority deems appropriate. Evaluating these aspects involves examining the tax assessment processes, the challenges faced by SMEs, and the measures in place to ensure fair and accurate tax practices (URA, 2024).

According to Coulibaly and Gandhi (2018), the accuracy and fairness of tax assessments on business enterprises are critical issues that significantly impact the performance of that organizationally generally. Relatedly according to World Bank (2023), the accuracy and fairness of tax assessments have profound implications for the performance of SMEs in Uganda. These impacts manifest in various dimensions, including financial health, operational efficiency, compliance behaviour, and growth potential. Relatedly according to (Chigome & Robinson, 2021), when tax assessments are precise and based on actual financial data, businesses can compute their tax liabilities and plan their finances. This helps SMEs to avoid unexpected tax burdens that can strain their cash flows and disrupt their operations. However, inaccuracies in tax assessments, whether due to errors in record-keeping or flaws in the assessment process, can lead to significant financial challenges. Overestimations of tax liabilities can deplete the financial resources of SMEs, limiting their ability to invest in essential business activities such as expansion, marketing, and innovation (IFC, 2024).

According to World Bank (2023), tax assessment also impacts the operational efficiency of SMEs. The period required to comply with authorities and address assessments can divert resources away from core business activities. SMEs often have limited administrative capacities, and the need to engage in detailed tax record-keeping and respond to audits can be burdensome. This diversion can result in reduced productivity and hinder the ability to focus on growth-oriented initiatives. The World Bank highlights that excessive administrative burdens from tax compliance can impede business efficiency and innovation, particularly for SMEs that already operate with constrained resources

According to UIA (2024), promoting a fair tax system, is paramount to voluntary compliance and integrating more businesses into the formal economy (UIA, 2024)will encourage compliance among SMEs.This compliance helps SMEs in avoiding legal penalties and fines, but also enhances the business’s credibility. On the other hand, perceived unfairness or inconsistencies in tax assessments can lead to non-compliance or tax evasion. SMEs may resort to informal practices to escape what they see as an unjust tax burden, thereby missing out on the legal protections and benefits that come with formalization.

The implications of tax assessments extend to the growth potential and market opportunities available to SMEs. Fair tax assessments ensure that businesses can operate on a level playing field, where tax obligations do not disproportionately burden smaller enterprises. This equity is crucial for SMEs to compete effectively with larger firms and to seize market opportunities. Moreover, formalized businesses with compliant tax records are better positioned to access financing, government contracts, and international markets. These opportunities can drive business growth and expansion, contributing to broader economic development. The Ministry of Trade, Industry, and Cooperatives (MTIC) emphasizes that equitable tax practices are vital for enhancing the competitiveness and scalability of SMEs (MTIC, 2024).

Finally, but not the least, Transparency International (2023) submits that trust in tax institutions is critical for maintaining high levels of entrepreneurial spirit and investment in business ventures. The report argues further that consistent and fair tax practices can reduce stress and foster a positive business environment, encouraging entrepreneurial activity. Conversely, frequent disputes over tax assessments and perceived injustices can demoralize business owners, reducing their motivation and willingness to invest in their businesses.

In summary, the reviewed literature on tax assessment and the performance of SMEs in is multifaceted and non-committal about the existential association between the two. The study will therefore examine this association within the context of SMEs in KCCA, Uganda

2.2.3 Tax audit and performance of SMEs

Tax audit is deliberately undertaken to verify whether a taxpayer has complied with the all provisions of a particular tax policy within a tax jurisdiction (OECD, 2016). Tax audit is therefore an inspection by a tax body to verify the accuracy of tax returns as well an attempt to detect any noncompliance behaviors therein (Kirchler, 2017).

Indeed, beyond verifying taxpayer compliance, tax audit today serves various critical roles that have potential to make a significant contribution to improved administration of the tax and consequently influence the performance of business enterprises especially SMEs. According to Kirchler (2017). However, the meaningfulness of tax audit activities to enterprise performance can critically depend on financial performance,for example revenue growth, and profitability of the SME.

Moreover, there is empirical evidence in literature to suggest that various factors can influence tax audit on business performance in the most developed countries like Uganda. It is such factors including but not limited to compliance tests, penalties, tax refund and accumulated that determine the extent to which tax audit influences performance of SMEs (Cohen & Sayag, 2018; Mihret & Yismaw)

In a nutshell, however, tax is widely known to be unpopular in developing countries and therefore, it has never been easy to administer. Accordingly, tax administration is generally  hard which may have implications on the eoverall performance of SMEs.

2.4 Summary of Literature Review

Evidences from literature above, suggested that tax administration possesses a critical influence on the performance of SMEs. Literature therefore infer that when properly done, business registration, tax assessment and tax audit that provide SMEs with stable ground for competitive advantage that resonates into financial performance, customer satisfaction and enterprise growth. Regardless of the above views on tax administration practices could influence SME performance, various knowledge gaps are eminent.  Firstly, the studies that informed literature were not direct on how particular tax administration practices out rightly influence SME performance. Relatedly, other than the limited available empirical evidences, many of the available studies were conducted in a context different from Uganda. It is therefore possible that such studies and literature are not appropriate to the Uganda setting. Such and more gaps suggested a need for up-to-date studies to understand the study problem from a more contextual perspective. The study therefore sought to bridge the knowledge gaps by introducing empirical evidence that, tax administration affect SMEs performance in KCCA, Uganda.

CHAPTER THREE

METHODOLOGY

3.1 INTRODUCTION

This chapter presents, describes and justifies the methods and approaches that will be used in the study. Specifically, the chapter covers the research design, study population, determination of sample size, sampling techniques and procedure. Additionally, the chapter also presents the data collection methods and instruments, validity and reliability, procedure of data collection, data analysis techniques, measurement of variables and ethical considerations before, during and after the research process.

3.2 Research Design

This study will be a case study research design that will adopt both qualitative and quantitative approaches. The study design will enable the researcher to come up with an intensive and in-depth investigation of the study problem (Amin, 2005). The triangulation approach will enable each of the two methodological approaches to complement each other. In particular, the quantitative approach, on one hand, will be used to generate statistical findings numerical data that will make generalization of findings possible (Croswell, 2013). On the other hand, the qualitative approach is intended to generate in depth information on the underlying opinions, feelings and belief surrounding tax administration and SME performance in KCCA, Uganda.

3.3 Study Population

The study population will be 70 generated from twenty Kampala Central Division. In particular, the population categories will include SMEs attendants (40), top management team (TMT) of Kampala Central Division (5), political leaders of Central Division executive committee (DEC, 10), and traders’ executive members in central division (15). These population categories are considered representative and good enough to provide the necessary study information

3.4 Sample Size and Selection

Basing on Krejcie and Morgan statistical tables (1970) as cited from Amin (2005), the sample size will be determined to be 59 (Appendix III). The sampling procedures are illustrated in table 3.1 below

Table 3. 1: Population Categories and Sampling Procedures

Source:

3.5 Sampling techniques and procedure

3.5.1 Purposive sampling

This is a non-probability technique that will enable the researcher to select participants in a population category based on purpose (Amin, 2005). In particular, the technique will be used to select the members from population categories including DEC and TMT. The technique will help the researcher to use his experience and judgement to handpick all but only those individuals that are assumed to have the most information relevant to the study area (Campbell et al., 2020).

3.5.2 Simple random sampling

This is a selection technique where all respondents will have an equal and independent chance of being selected in the sample. The technique will be applied to select representatives of SME attendants and traders. The technique is intended to minimize selection bias that usually happens with other sampling techniques. In particular, the technique will follow a lottery method in which each member of that category shall be assigned a number and after which one number at a go will be selected at random

 3.6 Data collection methods

This study will use primary data generated from questionnaires and interviews.

3.6.1 Questionnaire survey

This will be a data collection method, where closed ended questions measured on five point likert scale will be developed, according to the objectives of the study, and researcher administered to the SME attendants. The researcher-administered approach is intended to take take care of their expected varying levels of literacy. (Mugenda & Mugenda, 2008). The method is also expected to minimize bias since the respondents shall be able to answer the questions from their own perspective (Amin, 2005).

3.6.2 Interview

The interview, as a data collection method in this study,will be a face-to-face interactions between the researcher’s team and respondents on specific questions about the study topic .  The technique is expected to generate qualitative data as aligned to the study objectives. This method will enable the researcher to gather in-depth information that will be supplemented by the findings from the questionnaire survey (Sekaran, 2003). Respondents will be prompted and probed to extract detailed information for the study.

3.7 Data collection instruments

3.7.1 Self-administered questionnaire

A questionnaire in this study will be a series of questions and other prompts that will be used to gather mostly quantitative information from respondents. In particular, researcher-administered questionnaires will be used to capture primary data whereby the respondents will be left to read and answer the questions by themselves.

3.7.2 Interview guide

There will be an Interview guide or a document containing a set of pre-determined questions that will be used to guide the interview (Amin, 2005).  The researcher will employ semi-structured questions and open ended items to explore and capture the qualitative data about the study variables.

3.8 Quality control of the instrument

Quality control of instruments will be determined using both validity and reliability to checks.

3.8.1 Validity

According to Mugenda and Mugenda (2005), validity refers to accuracy of a research instrument, To ensure validity, the researcher will request the supervisor to rate the items in the designed questionnaires. This will be done to improve on the items designed in the instrument to enable the researcher to gather what he intends to gather using the instrument. Upon the supervisor rating, the content validity index (CVI) will computed guided by an equation

The   formula for    CVI = (No. of items experts that declared item valid)

Total no. of items

The validity results will be determined according Drost (2020) who argues that a C.V.I above 0.7 signifies a valid instrument.

3.8.2 Reliability

The above relates to the consistency of a measure to the extent twhich the results can be reproduced under the same conditions. To ensure consistency of the research instruments, the researcher plans to give questionnaires to the respondents not be part of the population study in order to determine the reliability of the instrument. The study will use a split half to test the instruments. Data coded will be done and data captured in the computer, generation and tabulations using the Cronbach’s Alpha to estimate the reliability of the instrument (Sekara, 2003.

3.9 Procedure of data collection

The process of data collection shall begin with obtaining clearance from Uganda Management Institute (UMI). After the research had received approval letter for data collection, he will proceed to the field to request for clearance and fix appointments for eventual data collection. Upon reaching clearance from Central Division, KCCA, the researcher will introduce himself to ready to proceed for data collection.

3.10 Data analysis

The study will use both qualitative and quantitative techniques to analyse  the data collected.

3.10.1 Qualitative data analysis

The qualitative data will be gathered from interviews, which will be analysed using content and thematic analysis techniques. Content analysis will involve reading through the data set to get a general sense of what was all about before coding. (Amin, 2005). Content analysis will include developing codes that represents what the data will all be about. Thematic analysis on the other hand shall involve organizing and merging codes into categories or themes reflecting the bigger picture of the data (Sekeran 2003)

3.10.2 Quantitative data analysis

This will be analysed using both descriptive and inferential statistics.  Descriptive statistics shall be analysed using percentages, mean and standard deviations for each item in the questionnaire. Pearson’s correlation statistics will be used to test the relationships at 99 and 95% confidence limits.  For inferential statistics, a multiple regression analysis shall be used to determine the extent of effect each of the dimensions of the independent variable has on the performance of the organization (Sekeran 2003)

3.11 Measurement of Variables

Both the nominal and ordinal scales were the measurements used. According to Mugenda and Mugenda (2005), nominal scales are used for identification purposes while ordinal scales are used to rank responses in orderly manner. Responses shall be rank ordered using a 5-point-likert scale (1=strongly disagree 2=disagree 3=not sure 4=agree and 5=strongly agree)

3.12 Ethical clearance

The study will make a number of ethical considerations relating to informed consent, privacy and confidentiality. For this case, the researcher has to wait for an introduction letter for data collection from Uganda Management Institute.

The researcher will also respect the respondents’ right to informed consent. The researcher will therefore take time to explain the study to the respondents for them to understand the purpose of the study before they could decide on whether or not to participate.   The study will then collect data from only those respondents who will accept to participate in the study.

Raw-data will only be collected in environments that respondents will deemed private and their responses treated with utmost confidentiality and privacy. Accordingly, no other person(s) will have access to any data collected from the field of study.

The researcher will also observe the UMI ethical issue of anti-plagiarism where by testing his work for using TURNITIN and attained a similarity scores of not more than 15%.