Corporate income tax and financial sustainability of small and medium enterprises in Rwanda

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Kampala International University
This study was about the Corporate Income Tax and Financial Sustainability of Small and Medium Enterprises (SMEs) in Rwanda. It aimed mainly at establishing whether Corporate Income Tax affects the financial sustainability of SMEs in Rwanda and whether there other setbacks than taxation that affects that sustainability. The researcher explained how SMEs are affected by the corporate income tax especially those which pay a lump sum tax of 4% of their annual turnover. To collect the needed information, descriptive survey was used to obtain profile data. Correctional design was also used in order to obtain the relationship between variables. Data were collected from 24 SMEs out of 25 located in Gasabo district under the regime of lump sum tax of 4%. Both primary and secondary source of data were used to get needed information from SMEs and Rwanda Revenue Authority. The findings revealed that SMEs play a prominent role in the Rwandan economy. However some SMEs fail to sustain due to many reasons, hence their contribution to economy growth through tax payment and job creation get hindered. Some of reasons identified in this research were: Huge burdens in regulatory compliance costs that can be better absorbed by larger firms. Many SMEs suffer from lack of technical and business skills. They do not maintain appropriate books of account which can allow them to determine the real income which would serve as the basis of corporate income tax. Therefore, the tax they pay is calculated based on annual turnover, which is 4% of turnover regardless of whether they made profit or not. In conclusion, SMEs are paying a lot of money than the money they would pay if they were in normal regime of corporate tax. They are paying also penalties due to non compliance with taxation law, the delay in payment and to incompleteness of amount paid. This hinder the funding of daily operations and hence their sustainability. Recommendations have been provided to RRA and PSF that they should organize training, seminars, and workshops for SMEs so that they can be informed about taxes; advantages and how to adhere to the normal regime of taxation. RRA should revise and make easy the taxation system; this will enable SMEs to comply with taxation law without a huge burden. This should reinforce their solvency and liquidity and they will sustain.
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Corporate income tax, Financial sustainability, Small and medium enterprises, Rwanda