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How high tax regimes hinder  Ghanaian SME business operations
The writer

How high tax regimes hinder Ghanaian SME business operations

In Ghana, taxation plays a crucial role in generating government revenue for public expenditure and developmental projects.

Taxation is used by the Ghanaian government, like many countries across the world, to support infrastructure, education, healthcare, and many social welfare initiatives. Ghana's tax system has undergone revisions throughout the years with the goal of extending the tax base and enhancing revenue collection. 

However, Ghana has struggled to strike a balance between increasing money for national development and easing the burden on enterprises, particularly SMEs.  

Ghana's tax structure has seen changes in rates and policy, resulting in a heavier tax burden on enterprises. 

A high tax system in an economy is one in which the government imposes significant tax rates on individuals and enterprises. 

The execution of such tax laws frequently results in a considerable amount of profits being sent to the government as taxes.

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In the context of Small and Medium Enterprises (SMEs), a high tax system can have a substantial influence on their operations, hurting their profitability, growth, and overall sustainability. I've discussed how the present high tax regime has a significant impact on the operations of SMEs.

Reduced Profitability

High tax rates directly reduce SMEs' revenue, resulting in reduced net profits. Because a significant amount of their revenues is used to pay taxes, profit margins are reduced, affecting the bottom line. 

Profits are frequently used by SMEs to reinvest in their operations. When a significant amount of their revenue is devoted toward taxes, there is less cash available for investing in sectors like R&D, marketing, or infrastructure enhancements. 

This constraint may limit their capacity to expand and develop, thereby slowing growth.  Higher tax costs might impair SMEs' competitiveness.

SMEs may struggle to maintain competitive pricing or offer comparable salaries, perks, or services as compared to bigger firms that may have greater resources to absorb higher taxes, affecting their market position.  

Due to the immediate impact of large tax payments, SMEs may encounter cash flow issues. Meeting significant tax liabilities can put a burden on available working cash, perhaps causing problems financing operating expenditures, paying suppliers, or managing day-to-day costs.  

High taxes might make it difficult for SMEs to attract and retain talented workers. 

Growth and investment are restricted

High tax rates frequently decrease the money available to SMEs to reinvest in their operations. These organizations frequently rely on retained revenues for growth, innovation, and infrastructure development. 

When a large amount of their profits is used to pay taxes, there is less cash available for reinvestment, limiting their growth potential. In a high-tax climate, SMEs may find it difficult to grow their activities.

Whether they are considering regional expansion, new product lines, or entering new markets, a lack of cash resources owing to significant tax bills might hinder their capacity to expand, thus limiting growth options.  SME development and competitiveness are dependent on innovation. 

However, in a high-tax environment, these enterprises may find it difficult to dedicate funding for R&D. Limited investment in innovation might stymie their capacity to develop new goods, enhance processes, and respond to changing market needs, eventually hindering growth. 

High taxes may limit SMEs' access to external capital. With a large amount of their revenues going toward tax payments, they may have difficulty obtaining loans or recruiting investors who view larger tax liabilities as a danger, restricting their ability for development and investment.

Cash Flow Challenges

High tax rates cause SMEs to make considerable and rapid financial outflows to pay their tax obligations. 

This might result in frequent cash shortages, limiting these companies' capacity to fulfill everyday expenditures including wages, electricity, inventory purchases, and supplier payments. Because of the significant amounts shifted to tax payments, SMEs may face operating capital difficulties. 

This burden on working cash might limit their capacity to maintain inventory levels, complete orders, or invest in critical equipment, reducing operational efficiency and limiting their ability to capitalize on growth possibilities.

In a high-tax climate, SMEs may postpone payments to vendors, suppliers, or creditors in order to manage cash flow issues.  

Delayed payments can strain relationships with stakeholders and ultimately result in penalties or lower supplier terms, worsening cash flow concerns.  Some SMEs endure seasonal changes in income and cash flow.

High tax payments during low-income periods may amplify the impact of these changes, making it more difficult to navigate through lean periods and maintain financial stability.  

Costs of Compliance

Tax rules tend to grow more complicated in a high-tax economy, necessitating specific knowledge and experience to maintain compliance. To understand complex tax rules, SMEs may need to hire tax specialists, consultants, or accounting services, resulting in greater compliance expenses.  

Compliance with tax rules sometimes necessitates additional administrative effort, such as record-keeping, paperwork, and the submission of numerous tax forms and reports. 

To manage these administrative chores, SMEs may need to commit additional resources, both human and financial, adding to greater compliance expenses.  

Compliance with complicated tax requirements may involve the use of specialist software or technological solutions for correct record-keeping, tax computations, and reporting. To achieve compliance, SMEs may need to invest in or improve their systems, incurring significant costs.

Lowering Competitiveness

SMEs may struggle to compete with larger firms that can sustain greater tax loads due to economies of scale in a high-tax environment.

This gap in tax liabilities might result in an unequal playing field, reducing the competitiveness of smaller enterprises.

Higher tax rates may raise the likelihood of audits or legal issues. In the case of tax-related investigations or disputes, SMEs may need to budget for legal counsel or expert help, increasing compliance expenses.

The writer is a Lecturer/SME Industry Coach, University of Professional Studies Accra
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