Impact Of Taxation On Business Survival Among Small And Meduim Scale
Enterprises (SMEs) In Sri Lanka
(Research proposal)
Rohan chularathna
PGDBFS/2022/18
Postgraduate Diploma in Business Finance and Strategy
(PGDBFS 2021/2022)
Semester III
PGDBFS 303- PGD Dissertation
Lecturer: Dr. Thusitha
Business School
The Institute of Chartered Accountants of Sri Lanka
Contents
01. Chapter One: Introduction ................................................................................3
1.1. Background of the study................................................................................3
1.2. Problem statement .........................................................................................4
1.3. Objectives of the study ..................................................................................5
1.4. Research questions ........................................................................................5
1.5. Significance of the study ...............................................................................5
1.6. Variable identification ...................... Ошибка! Закладка не определена.
02.
Chapter Two: Literature Review ......................................................................7
2.1. Literature review ..............................................................................................7
03.
Chapter three: Research Methodology ...........................................................10
3.1. Introduction ....................................................................................................10
3.2. Research design .............................................................................................10
3.3. Population and sample for the study..............................................................10
3.4. Data collection method ..................................................................................10
3.5. Model for the research ...................................................................................11
3.5. Research hypothesis .......................................................................................12
3.6. Method of data analysis .................................................................................12
3.6.1. Descriptive statistics ................................................................................13
3.6.2. Measures of Central Tendency ................................................................13
3.6.3. Measures of Variability ...........................................................................13
3.6.4. Reliability test ..........................................................................................14
References ................................................................................................................15
01. Chapter One: Introduction
1.1.
Background of the study
The economy of any nation benefits greatly from SMEs. Actually, it turns into the foundation of
the growing economy. It might be challenging to manage a SME's sustainability, though.
Insolvency may happen if this problem cannot be resolved. So, it's important to comprehend how
long it takes to survive and the things that affect it. These SMEs participate in serious business and
tax planning, which includes practical financial management techniques, because they are aware
of the dealings and transactions environment and setting in addition to their operations.
Since taxes are assessed based on a company's revenue, financial performance and taxes are
inextricably linked. Taxation is typically thought of as a superior method of generating income for
the government. Despite economists' satisfaction, when businesses are taxed, this is likely to cause
them to withdraw their investments. As a result, the burden of corporate taxes is transferred to
workers in the form of lower salaries, higher prices for consumers, and other ways. Taxation is
one of the primary fiscal strategies the government of any nation such as Sri lanka can utilize to
ensure economic stability and in the financing of capital investment. When a tax authority,
typically a government agency, levies or imposes a tax, it is referred to as taxation. This term
covers all forms of involuntary levies, including income, capital gains, and estate taxes. The
government imposes a variety of taxes on the income, wealth, or gain of a person, family, or
business firm for the benefit of the general populace.
SMEs typically have to operate in an onerous regulatory environment, where there are numerous
regulatory agencies, numerous taxes, onerous importation procedures, and expensive port fees that
constantly place a significant strain on their operations. Since they are heterogeneous, many SMEs
must deal with a variety of agencies at great expense. These differences in size and structure may
also carry different record-keeping obligations that have an impact on how much it costs the
businesses to comply with (and how much it costs the revenue authorities to administer) potential
alternate tax obligations. Public corporations, for instance, may have stricter accounting
regulations than sole proprietorships, and businesses with employees may be subject to the full
range of rules pertaining to the withholding of social security and income taxes (International Tax
Dialogue , 2007).
Tax compliance can become unnecessarily burdensome under a complex regulatory structure and
tax regime with ambiguous administration and enforcement, which frequently has highly
regressive effects on the growth of SMEs as they are enticed to change into forms that offer them
a lower or occasionally no tax burden (Masato, 2009). As a result, the citizen is subject to a tax
system that is expensive. A mismanaged tax system will always lead to inaccuracy, high collection
costs, taxpayer time waste, low tax generation, and a departure from the best possible resource
allocation (Farzbod, 2000).
According to Ogbonna & Appah, (2012) Tax is a form of debt or other levy placed upon a taxpayer
which could be an individual or a legal body and failure to pay is penalized by law. Thus, taxation
is not a voluntary payment or donation but an enforced contribution exacted pursuant to legislative
authority. In a country with a modern taxation system, like Nigeria, taxes are collected in monetary
units that can be used for a wide range of activities or goals, including spending on maintaining
public order, protecting people and their property, building economic infrastructure, such as roads
and public works projects, social engineering, and running the government.
According to recent estimates, small enterprises provide for 70% of all jobs in emerging countries
as well as local capital formation. It has many advantages. Unfortunately, a substantial percentage
of small businesses fail (Adebisi, 2013). Despite the government's best efforts, some of its
objectives for economic expansion are falling short. Governments at the federal and county levels
treat small and medium-sized businesses poorly. Now, they have developed rules that, whether
intentionally or accidentally, have the effect of killing SMEs. Some of these measures' overarching
goal is to formalize the impacted sectors, guaranteeing consumer protection, tax payment, and fair
competition.
1.2.
Problem statement
Unfavorable relationships between taxes and a company's capacity to survive and grow are some
of the most difficult needs that SMEs in developing countries like Sri Lanka face. These difficulties
are like a worm eating a sizable portion of the income generated by all of these SMEs for their
growth and sustainability, such as high tax rates, multiple taxation, complex tax regulations,
complete lack of proper enlightenment or education regarding tax related issues, insufficient
resources, inadequate technological and management skills, environmental issues, and government
regulations that affect SMEs operations. Due to this, there are now more small and medium-sized
enterprises closing their doors (SMEs).
1.3.
Objectives of the study
The general objective of this study is to investigate the effect of corporate taxation on business
survival among small and medium scale Enterprises (SMEs) in Sri Lanka.
(i)
To investigate the effect of corporate taxation on financial performance among small
and medium scale enterprises in Sri Lanka.
(ii)
To examine the relationship between customs duty on financial performance among
SMEs in Sri Lanka.
(iii)
To examine the relationship between liquidity of the company on financial performance
among SMEs in Sri Lanka
1.4.
Research questions
The following research questions will be answered to achieve the objectives of this study:
(i)
To what extent does corporate taxation affect financial performance among small and
medium scale enterprises in Sri Lanka?
(ii)
To what extent does custom duty affect financial performance among SMEs in Sri
Lanka.
(iii)
1.5.
To what extent does liquidity of the company affect the financial performance.
Significance of the study
In order to reduce the effects of corporate taxation, the government and its agencies, such as the
Joint Tax Board and the Inland Revenue Service, would find the study to be of immense
significance. The study will also be helpful to local tax collectors and the state board of internal
revenue because it will try to remind them of the effects of various taxes on firms, especially small
and medium-sized ones. As a guide for their research, the study will also be helpful to scholars
who intend to investigate a related topic. Finally, both the general public and academic students
will benefit from it.
1.6.
Research framework
A conceptual framework illustrates the ostensible connection between the independent variable
and the dependent variables. The independent variables in this study include inflation, interest
rates, money supply, and gross domestic product, with the exchange rate acting as the dependent
variable.
Independent variable
Dependent variables
corporate taxation
custom duty
liquidity of the company
1.1.Figure: 01 Authors illustration
Financial performance
02. Chapter Two: Literature Review
2.1. Literature review
A study-report by Mnewa and Maliti (2018) found that the majority of small businesses in Salaam
region in Tanzania had a lower likelihood of achieving or maintaining the country's rising
profitability. Businesses in developing nations frequently struggle to deal with tax issues.
Taxes are often assessed as a percentage of a business’s net revenue, in accordance with the general
principle that governments should bill taxes when the taxpayer has the ability to pay. Certain taxes,
such as property taxes, are levied on the worth of an asset without regard to ability to pay. For
businesses that operate with slim margins, higher income tax rates will only make those margins
slimmer; notwithstanding, raises to value-based taxes could potentially make a profitable business
unsustainable (Mwakisha, 2020).
According to Tomlin, (2008), economists believe that the resources smaller enterprises direct
towards tax compliance are resources that could otherwise be utilised for reinvestment, promoting
future growth. Hence, there is a perception that taxes and a complicated tax system place an unfair
amount of burden on smaller enterprises. Small taxpayers under the regular system of taxation are
discriminated against, since the compliance requirements, cost of compliance and tax rate are the
same for both small and large enterprises.
According to a research by AfriCOG (2016), bribery in the SME sector has progressed to the point
where it is largely recognized as normal policy. As a result of their participation, many Firms will
benefit right away. Since refusing to engage in corruption puts them in danger of missing out on a
business opportunity or losing their entire clientele when other SMEs but their own turn to shady
practices, SMEs believe that corruption is necessary to their continued existence. Some SMEs give
in as a result of public officials using their influence to extort them in order to protect their
commercial interests.
Olumelu (2017) illustrated that due to numerous taxes and levies, 95% of Small and Medium
Businesses in Nigeria fail within a year. Multiple business regulations, multiple taxes, and
inconsistent government policies influence SMEs' competitive strength. In addition, multiple
levies by the government and its agencies affect small businesses' ability to attract capital in their
investment climate. Five percent of small businesses that survived after one year were a big
disincentive to the nation in terms of employment creation.
Mba & Izunwanne, (2014)investigate the problems, difficulties, and future prospects of SMEs in
Port-Harcourt. The main issues facing Businesses in Port-Harcourt, according to descriptive
statistics, are low funding, inadequate social infrastructures, a lack of managerial skills, and
various taxes. They concluded that in order to maintain continued growth of SMEs in the city, it
is essential to offer soft loans, capacity building, and tax benefits to SMEs operators.
In order to ascertain whether tax payers are aware of all of their tax obligations, laws, and issues
that affect individuals as well as their businesses, Bosco (2011) undertook a study to evaluate the
performance of business enterprises in Ntungamo Town Council. The results showed the problems
that tax payers face with regard to tax assessment, collection, and tax collectors, as well as the
inefficiency of tax collectors and the loss of equipment, sales, and stock as a result of taxes.
Ocheni and Gemade's (2015) study relied on respondents' levels of agreement with the
relationship, which simply defines it, rather than attempting to establish a statistically significant
association between SMEs' sizes and tax-paying capacity. Wangeci (2018)'s study variables (tax
rate, tax policy, and types of taxes) could be explained by Just 50.4% of the development of SMEs
in the developing countries. According to Kamar (2015), government taxation components
(income tax, value added tax, and corporation tax policies) could only account for 5.2% of SMEs,
suggesting that there may be more factors that affect sales revenue but were not taken into account
in the study.
According to Ombati, (2021) Corporate tax has a favorable, considerable impact on the
performance of businesses. This could be explained by the fact that high taxation inevitably leads
to high income, therefore businesses that claim higher performance also tend to pay more corporate
taxes than those who do not. Also, this study found that financial leverage significantly harms
performance. This suggests that businesses are more likely to perform poorly if their debt to asset
ratio is high. This can be explained by the fact that excessive debt carries covenants that may limit
a firm's ability to make investment decisions.
Paul Studenski (1940) argues that while the provision of services by the government to businesses
supports general taxation of such activity, it does not follow that such taxation should be expanded
to the point where it would abstract from businesses the full costs of such services. The prices of
these services can't be completely determined, to start. Because the services themselves oftentimes
cannot be easily distinguished from the services provided by the government to citizens, either
separately or in groups, in their capacity as consumers. Second, even if all of these expenses could
be calculated, they would not necessarily need to be paid for completely by business taxes.
The contribution of SMEs to the socioeconomic sector of the nation is significant since they create
jobs, innovate, and generate income (Faloyin, 2015). Entrepreneurship must be promoted because
it has been a significant driver of progress, but it is regrettable to observe that most enterprises do
not succeed after the first few years of operation because, among other problems, a sizable amount
of their earnings is sucked up by unlawful taxes (Kaigama, 2016)
The study by Ogbonna & Appah, (2012) discovered that tax collectors do not take a business's size
into account while collecting taxes. Moreover, taxes are gathered based on the revenue generated
by SMEs. Also, they have shown that multiple taxation and the sustainability of SMEs have a
substantial relationship. So that SMEs can continue to exist as an entity, government should stop
collecting the excessive taxes from them. The test also found no correlation between the size of
SMEs and their capacity to pay taxes.
When liquidity and solvency are taken into consideration, organizations that spend more on
purchased inputs than on capital are less likely to increase efficiency. Liang Fu, (2016) claims that
a different phrase for a company's liquidity that refers to liquid assets kept in the book of
accounting. The corporate investment behavior of family enterprises has a firm's financial distress
risk tolerance as evidenced by a significantly greater degree of corporate liquidity when dealing
with liquidity risk.
03. Chapter three: Research Methodology
3.1. Introduction
The methods used for this investigation is covered in depth in this section of the proposal. The
primary topics covered in this section are the research design, data collecting, sample used, and
accepted analysis methods.
3.2. Research design
Descriptive research design survey is used in building up this project work, the choice of this
research design was considered appropriate because of its advantages of identifying attributes of a
large population from a group of individuals. The design was suitable for the study as the study
sought to examine the effect of corporate taxation on business survival among small and medium
enterprises in Sri Lanka.
3.3. Population and sample for the study
Population of a study is a comprehensive group of individuals, institutions, objects or aggregate
items or things with common characteristics from which the research is interested in getting
information for the study - The effect of corporate taxation and customs duty on business survival
among small and medium enterprises in Sri Lanka. Employees of five (5) random SMEs in
Colombo were considered as the population of this study. At least 100 employees from the selected
companies will be given the question to conduct the research. Five company from the Colombo
stock exchange will be selected and there financial liquidity will be calculated using current ratio
and financial performance of the company will be analyzed using return on asset of the company.
3.4. Data collection method
To find solutions to the research problem, test the hypothesis (if you're using a deductive
approach), and assess the results, data collection is the act of gathering information from all
relevant sources. Various type of data collection techniques can be distinguished: Primary data
collecting methods and secondary data collection methods.
In respect to this study, it is totally based with the primary data. The term "primary data" refers to
information that has not before existed. the research's original findings are primary data. When
compared to secondary data research, primary data gathering and analysis often take more time
and effort to complete. Primary data can be either qualitative or quantitative or mix approach. This
research contains mix approach.
Questionnaire is the main instrument of data collection. In this Study questionnaire will be
developed based on the objective of the study. A five-point Likert scale rating format will be used
in line with the type of information being sought. Thus, it is categorized as Very high- (5), High(4), Average- (3) Low- (2), Very low- (1). The mean values of the descriptive table will be
compared with the cut-of mean. The primary data will be obtained by administering questionnaire
to obtain data from staff of the businesses; primary data for this research will be obtained from
participants by the use of structured questionnaires as the major tool of data gathering. Data that
will be used in this study will be collected in this analysis using a well-structured & organized
questionnaire.
To calculate the liquidity of the company selected company’s current ratio will be calculated using
the balance sheet also, to check the financial performance of the company return on asset for the
last 5 years will be calculated. Total observation for the study will be 50.
3.5. Model for the research
𝑭𝑰𝑵𝑷 = 𝜶𝟎 + 𝜶𝟏 𝑪𝑻𝑨𝑿 + ℇ … … … … … … … … (𝟎𝟏)
Where:
CTAX - Corporate Taxation
FINP – Financial performance
α0 - Constant
α1 – Regression Coefficient
ℇ - Error Term
𝑩𝑰𝒁𝑮 = 𝜶𝟎 + 𝜶𝟏 𝑪𝑻𝑨𝑿 + ℇ … … … … … . … … (𝟐)
Where:
CTAX – Multiple Taxation
BIZG -Business growth
α0 – Constant
α1 - Regression Coefficient
ℇ - Error Term
3.5. Research hypothesis
The following hypotheses will be tested for confirmation or rejection in this research review:
H01: corporate taxation has no significant effect on financial performance among small and
medium scale enterprises in Sri Lanka.
H02: There is no significant relationship between customs duty and financial performance among
small and medium scale enterprises in Sri Lanka.
H03: There is no significant relationship between firms liquidity and financial performance among
SMEs in Sri Lanka.
3.6. Method of data analysis
Both inferential and descriptive statistics will be used for data analysis. The descriptive statistics
include mean and standard deviation because the data is assumed to be normally distributed. The
inferential statistics include correlation and multiple regression Correlation will be used to measure
the association between the variables while regression will be used to analyze the relationship
between the variables. For the qualitative analysis this study will be using narrative analysis
method which means a group of analytical techniques known as "narrative analysis" are used to
analyze texts or visual data that take on a storied form. People tell tales to help them organize and
make sense of their life, and their storied narratives are useful and purposeful, according to a
frequent presumption of narrative approaches. On the basis of whether they concentrate on the
narrative content or structure, many methods to narrative analysis are classed, with the thematic
version asking what a tale is about and the structural version asking how a story is put together to
achieve specific communication goals. The dialogic/performance narrative analysis, which
focuses on the context and sees tales as being multi-voiced and co-constructed, might be added to
this basic typology, according to Kohler Riessman (2008).
3.6.1. Descriptive statistics
Intelligent simplification of a huge amount of data is accomplished via descriptive statistics. It
offers a summary of the sample or measurements acquired throughout the study period for the
researcher or analysts. Two different types of measurements can be used in descriptive statistics:
central tendency measures and variability measures, sometimes known as spread (Irungu, 2017).
Mean, median, and mode are the measurements of central tendency, whereas variance, standard
deviation, skewness, kurtosis, and the minimum and maximum variables of a given data set are
the measures of variability.
3.6.2. Measures of Central Tendency
 The mean
The mean value is derived by dividing the total number of figures in each data set by the total
number of figures in that data set. It provides the sample's plain average. The reliability of this
metric is thought to be the highest of all the central tendency measurements.

The median
The median is the midpoint of the data set and is also known as the "50th percentile". It should be
noted that the median has a minimum effect by the outliers and skewed data than the mean.
 The mode
The mode is the value that has the highest occurrence within the data set. Therefore, the descriptive
statistical tables show no mode if any of the numbers or value is not repeated.
3.6.3. Measures of Variability
 Variance and Standard Deviation
The measures of the dispersion of the data in a particular sample are variance and standard
deviation (SD), which are derived from the mean. Finding the difference between each data point
and the mean is the first step in calculating a data set's variance. Next, the values are squared,
added, and finally the average is calculated. Yet, the issue with variance is that due to the squaring,
it alters the original unit of measurement. To demonstrate how the standard deviation, which is
created by taking the square root of the variance and changing the unit to the original measurement,
is used more frequently to produce the results (Iwatsubo, 2006).
 Skewness
Skewness is used to measure the symmetry of a distribution. It illustrates how much the
distribution diverges from a normally distributed data set. The skewness value can be either
positive, negative or zero (symmetrical distribution).
 Kurtosis
Kurtosis is a measurement used to find out whether the dataset is light-tailed or heavy-tailed. The
dataset which has a higher kurtosis value is considered as heavy-tailed and has more outliers while
the dataset with a lower kurtosis is categorized as light-tailed and has few outliers.
 The minimum and maximum variable
This shows the minimum and maximum value of the given data set.
3.6.4. Reliability test
When there is a greater correlation between two or more predictor variables, multicollinearity often
arises. In other words, it is possible to forecast one variable using the other as a predictor. This
produces redundant data, which skews the regression model's findings. The collinearity test will
be employed in this study to assess the validity of the data. The VIF (varying influence factors)
and the tolerance are the two primary indicators used in the collinearity test. We use these values
as a benchmark to determine the data's level of reliability. The standard value for tolerance should
be greater than 0.2 and the VIF value should be less than 10.
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