Effects of Tax Policies on the Growth of Small and Medium Enterprises (SMEs): A Case Study of SMEs in Kabale District

This study aimed at investigating the effects of tax policies on the financial performance and growth of Small and Medium Enterprises (SMEs) in Kabale District, Uganda. Specifically, it examined the impact of tax rates, tax complexity, and tax compliance on the performance and growth of SMEs, with a focus on identifying challenges and proposing solutions to enhance the effectiveness of tax policies. Using multiple logistic regression analysis, the study found that tax compliance had a significant negative effect on financial performance, while tax complexity showed a positive relationship with SME growth. The tax rate did not appear to have a significant effect on either financial performance or growth. The regression analysis indicated that tax compliance (p-value = 0.000) was the most significant predictor of financial performance, highlighting the burden that SMEs face in adhering to tax regulations. Conversely, the complexity of the tax system (p-value = 0.000) positively influenced growth, suggesting that SMEs might adapt to formalized processes as they comply with the tax system. These findings emphasize the need for a balanced approach to tax policies one that encourages compliance while alleviating the associated burdens on SMEs. The study recommends simplifying tax compliance processes, introducing tax incentives, and improving access to tax education and advisory services for SMEs. Additionally, policy makers should focus on enhancing the accessibility of credit and financing to support SME growth and ensure that tax policies align with the capacities of SMEs. A more supportive and business-friendly tax environment could foster the growth of SMEs, leading to more robust economic contributions from the sector.