The chapter is concerned with the background of the study, statement problem, purpose of the study, objective of the study, research questions and scope of the study and the significance of the study.
2.1 BACKGROUND OF THE STUDY
The income tax Act and constitution are the main legal basis for charging income tax. It is chargeable to both artificial and mutual persons hence can be businesses, companies and people. According to Bahemuka (2001), income tax administration is the identification of tax payer, assessment of tax payable and collection of tax dues. The administration of income tax involves identification of tax payer which is done with reference to natural or artificial persons who earns income, assessment of tax payable which is ascertainment of taxable income as detailed by income tax Act 1997, collection of tax due which may be paid as either provisional or final tax (section 104.122 and 113) and also involves tax educators and monitoring their performance Obwori , (2003). Profitability according to Ny’ ang’a (2010) refers to the state of organizational performance where turnover is greater than input costs. It is also the ability of an organization to generate revenue that is over opportunity cost of the time and opportunity is evident in financial performance of the business, the quality of the services offered, the way resources are utilized, flexibility, innovation, Obwori, (2003) The state of profitability of small scale business in Uganda is affected by high levels of tax employed, daily expenses and low average sales. The table below shows the average monthly sales as follows:
Table1.1.1: Average monthly sales
month| Jan| Feb| Mar| Apr| May| Jun| Jul| Aug| Sept| Oct| Nov| Dec| Average sales inUGX millions| 7.5| 10| 8.5| 6.5| 11| 9| 8.5| 8| 6| 5.5| 7.5| 17| Source: UBOS
According to the table 1.1.1, the month of October had the lowest average sales of 5,500,000 shs may be due to increase in daily expenses that were incurred compared to December which had the highest average sales of 12 millions may be due to the festive season which increased the daily sales as it is a boom month.
Other month were between six millions
Income tax in Nakawa has left many businesses with a number of challenges that include unfair treatment of tax payers, tax payers undergo a lot of processes some of which are not necessary, limited understanding of tax obligations as a result of inadequate education Bahemka, (2001) The state of profitability may be increased by applying for loans at low interest rates, minimizing expenses and improving on the average sales thus more earnings and higher profitability. But despite of the above effort, the earnings are still down, with the continuation of these challenges of poor tax administration, businesses may be forced to cease.
2.2 STATEMENT OF THE PROBLEM
Despite the measurements that have been put in place to increase earnings and profitability through loans from Micro- financial institutions, Ugandan vendors have not been able to attain high earnings and profitability due to high tax levied on their products resulting into increasing expresses and sales leading to poor tax administration system that is exploitative. If this is not corrected most small businesses will cease operations.
2.3 PURPOSE OF THE STUDY
The purpose of the study will be to establish the relationship between income tax administration and profitability of small scale businesses in Uganda
2.4 OBJECTIVES OF THE STUDY
a) To assess the income tax administration system
b) To establish the level of profitability and earnings of small scale businesses in Uganda c) To establish the relationship income tax administration and earnings of small scale businesses.
2.5 RESEARCH QUESTIONS
The researcher will be guided by the following research questions to successfully reach the above objectives....