Effects of Turnover Tax on the Financial Performance of SMEs in Luanshya, Zambia

Abstract

The intention of the study was to analyze the effect of turnover tax on business performance of Small and Medium-Sized Enterprises (SMEs) in Luanshya District, Zambia, with a bias towards profitability, cost management strategies and tax compliance. The study investigates the impact of the recently introduced 4% turnover tax by the country’s revenue authority on SMEs with turnover of less than K800,000. This change in tax mechanism meant to broaden the tax base and increase compliance has in reality adversely affected performance of SMEs. Using a case study approach with mixed methods, purposive and simple random sampling techniques were employed to gain insights into the effects that turnover tax has on SMEs. A sample of 50 SMEs were randomly selected interviewed and questionnaires distributed. Descriptive statistics, multiple linear regression and Chi-square analyses were all performed on the collected data. Findings from a mixed methods study (n=50) indicate that turnover tax burden significantly reduced profits (β=-0.140, p=0.009), an indication that applying this form of tax negatively affects performance of business. Findings further indicates that properly managed costs mechanisms bear a positive impact of business performance in particular profits (b=0.1966, p=0.003). This is an indication that prudent operational approaches strengthen financial performance. Tax education (b=0.7598, p<0.001) showed a strong positive link to profitability. This showed the significance of educating SMEs on taxation. A positive relationship was also observed on correlation and chi-square analyses linking tax awareness to compliance (r = 0.7598; χ² = 16.32, p = 0.0026). There was no significant association observed between demographic factors age (p =0.926) and size (0.201) and profitability suggesting that intrinsic factors like tax knowledge and cost control are more important than demographic characteristics. The study concluded that there is need to enhance tax literacy and better cost management structure to boost performance in the face of increased turnover tax.