Perception on the Effect of Taxes on the Growth of Micro and Small Enterprises in Selected Entities: A Case of Iringa Municipality, Tanzania

Abstract

This study investigates the impact of tax policies on the growth of Micro and Small Enterprises (MSEs) in Iringa Municipality, Tanzania. MSEs are critical for economic development, yet they face significant challenges, particularly regarding taxation. Despite existing literature on the effects of tax policies on SMEs globally, there is a notable gap in research focusing specifically on the Tanzanian context, especially on how local tax policies, such as income tax, VAT, and business license fees, affect the performance and growth of MSEs in Iringa Municipality. The main objective of this study is to assess the perceived effects of tax policies on the growth of MSEs, with specific objective To assess the perceived effect of tax policies on the growth of micro and small enterprises in Iringa Municipality. Employing a mixed-methods approach, the study combines quantitative data from structured questionnaires administered to 100 MSE owners selected through a stratified random sampling technique with qualitative insights gathered from interviews and focus group discussions. Findings indicate that while some tax policies may enhance profitability, the overall tax burden including high income tax rates, VAT, and business license fees significantly increases operational costs and constrains revenue growth, leading many businesses to operate informally. Specifically, 70% of respondents reported that high tax rates increase operational costs, 65% stated that VAT reduces profit margins, and 60% indicated that tax compliance procedures discourage business expansion. The study concludes that current tax policies often hinder the growth of MSEs rather than facilitate it, highlighting the need for reforms. Recommendations include simplifying tax laws and procedures, reducing tax rates, and introducing tax holidays for new enterprises. Such measures aim to create a more favorable environment for small businesses, ultimately promoting economic development in the region.