Vol. 11(5), pp.

89-98, May 2019

DOI: 10.5897/JAT2019.0339
Article Number: 389D68C60826
ISSN 2141-6664
Copyright © 2019 Journal of Accounting and Taxation
Author(s) retain the copyright of this article
http://www.academicjournals.org/JAT

Full Length Research Paper

Effect of tax incentives on the growth of small and

medium-sized enterprises (SMEs) in Rwanda: A case
study of SMEs in Nyarugenge district
Daniel Twesige1* and Faustin Gasheja2
1
Department of Accounting, College of Business and Economics, University of Rwanda, Rwanda.
2
College of Business and Economics, University of Rwanda, Rwanda.
Received 25 February, 2019; Accepted 11 April, 2019

The study analyzes the effect of tax incentive on the growth of small and medium-sized enterprises
(SMEs) in Rwanda taking SMEs in Nyarugenge as a case study. Qualitative and quantitative research
approach was adopted. The population includes 49000 SMEs from agricultural, industrial, services and
tourism sectors operating in Nyarugenge district. A sample of 136 SMEs was determined using Silovin
and Yemen’s formula of sample size. Simple random and purposive sampling techniques were used to
select the sample. The data set was analysed using descriptive statistics. A multiple regression
analysis was used to explain the relation between variables. The results from the study revealed that
75.7% of the respondents agreed that they know the tax laws, 78.7% agreed that they know the tax
incentives that are available to SMEs. The results further revealed that wear and tear, loss carried
forward and value-added tax (VAT) refund as the most tax incentives available to Rwandan SMEs as
evidenced by 100, 94.1 and 95.6%, respectively. The study indicated that there was a strong positive
and significant relationship between tax incentives and the growth of small and medium enterprises in
Rwanda as approved by coefficients of correlation equal to 88.8% of R-square. This meant that only
11.2% of the variation in the growth of SMEs was outside the tested variables. The study concluded that
tax incentives are the key to the sustainable growth of SMEs. The government should design policies
that specifically address issues related to the sustainable growth of SMEs.

Key words: Tax, tax incentive, small and medium-sized enterprises (SMEs), growth.

INTRODUCTION

The theory behind using tax incentives to promote small assumed that businesses would consider tax implications
and medium-sized enterprises (SMEs) is at its core from in their calculation of the value of their expenditure
the finance theory of net present value (NPV) decision decisions since any reduction in the cost of capital
rule. The rule implies that firms continue to spend on caused by tax policy leads to an equal increase in
capital assets and R&D as long as the present value from expenditure (Hansson and Brokelind, 2014).
an additional unit of capital or R&D is equal to or exceeds SMEs play a vital role in the economic development of
the cost of the additional unit. Consequently, it is a country. Studies have indicated that SMEs contribute

*Corresponding author. E-mail: [email protected].

Author(s) agree that this article remain permanently open access under the terms of the Creative Commons Attribution
License 4.0 International License
90 J. Account. Taxation

more than 50% of the gross domestic product (GDP) in 25,000. Enterprises are exempt from the value-added tax
many developing countries. More still, SMEs are the (VAT) if their turnover is lower than € 35,000. Moreover,
largest employers where by more than 90% of the enterprises with less than € 100,000 of turnover in the
working force is employed by SMEs. preceding year only have to file VAT returns and make
In a bid to stimulate growth of SMEs, a number of VAT payments on a quarterly basis (instead of monthly).
countries have used tax incentives, for both investors and Suppliers with a turnover of less than € 110,000 may pay
listing firms, to promote activity on SME boards. Tax VAT on a cash basis (De-Wit and De-Kok, 2014).
incentives for investors are the more common approach, Bulgaria does not have special tax incentives for SMEs.
particularly in advanced markets (Mintz and Chen, 2011). Small companies are subject to administrative reliefs,
For instance, Poland adopted the policy of encouraging though. Enterprises whose net sales in the previous year
investment in shares of SMEs through removing so- were below BGR 300,000 (≈€ 150,000) do not have to
called “back-end” taxes, which are the taxes applied to make advance tax payments and those with net sales
profits made when selling a security. below BGN 3,000,000 (≈€ 1,500,000) only have to make
In South Korea and India, investors benefit from quarterly advance payments (instead of monthly). In
reduced capital gains taxes on SME equity investments. addition to that, simplified accounting standards apply for
This is done via the cutting of short-term capital gains tax SMEs. VAT registration is only required for enterprises
in half, from 30 to 15%, for shares listed of SMEs. The with more than BGN 50,000 of turnover (De-Wit and De-
UK and Spain adopted a tax incentive policy where the Kok, 2014).
retail investors may deduct a set percentage of the value Croatia provides comprehensive investment incentives
they invest in shares of SME equity. This happens via for new undertakings. Income from new investments
offering tax offsets only for acquiring shares in new SME (also by existing enterprises) can be subject to corporate
equity offerings. In France, the investors can get a tax income tax rates that are reduced by up to 100% for 10
credit of 18% of the value invested in innovation mutual years. The exact amount of the reduction depends on the
funds French acronym. The latter invest at least 60% of size of the investment and on the number of newly
their portfolios in SME equity. Though these policies have created jobs related to the investment: 100% reduction if
been adopted the possible outcome may not significantly investment of at least € 3 million and related to 15 new
affect entrepreneurs as their interest rather lies with the employees; 75% reduction if investment of at least € 1
capital influx from equity offerings in SMEs (Broersma million and related to 10 new employees; and 50%
and Gautier, 2017). reduction if investment of less than € 1 million and related
Belgium offers several investment allowances. The to 5 new employees (De-Wit and De-Kok, 2014).
general investment deduction for SMEs amounts to Finland does not provide tax incentives specifically
10.5% of the depreciation taken on assets. The rate targeted at SMEs. There is a regime of accelerated
varied between 10.5 and 12.5% since 2009. The depreciation for fixed assets being used in production
incentive is restricted to companies with fewer than 20 activities (200% of the usual depreciation rate on
employees. Unused amounts can be used in subsequent machinery, equipment and industrial buildings). The
years with a maximum carry-forward of € 946,800 (or regime used to be restricted to SMEs until 2013 but is
25% if the unused part exceeds € 3,787,210). now available for all enterprises. Moreover, with the
Additionally, an allowance of 20.5% is granted to SMEs super deduction of 100% of salary costs incurred for R&D
for investments in safety measures either in the year of projects being capped at € 400,000, SME should benefit
the investment or the following year. Concerning carry- more than large enterprises. Businesses with less than €
forwards the same rules apply as for the aforementioned 8,500 of turnover are exempt from VAT. If turnover is
deductions. A national interest deduction is available for below € 25,000, only yearly VAT payments need to be
all Belgian companies. It amounts to 4% of qualifying made, if it is below € 50,000, only quarterly payments are
equity. SMEs, however, are allowed to deduct an required (instead of monthly). Moreover, SMEs are
additional 0.5%. Since 2012, carry-forwards are no longer subject to reduced documentation requirements with
possible (De-Wit and De-Kok, 2014). regard to transfer prices (De-Wit and De-Kok, 2014).
Austria does not offer special tax incentives for SMEs Zimbabwe provides investment incentives with six
on the firm level. There is only an adjusted minimum tax objectives in mind: Employment creation; small business
for newly founded companies of € 1,092 that merely development; industrial development; export promotion;
benefits low-income companies. On the shareholder spatial development; and “upliftment” of the
level, Austria grants full exemption to income from disadvantaged. Many of the incentives take the form of
participations in unlisted European SMEs (that is, financing arrangements, which operate through the
dividends, capital gains and interest payments) for so- Ministry of Industry and International Trade, the Industrial
called intermediary investors. Intermediary investors must Development Corporation and the Zimbabwe Investment
be corporate entities financed with equity capital. For Centre. The most extensive tax incentives accrue to
individual investors, dividends from such intermediary exporters. Under the Export Processing Zone Act of
investors are exempt from income taxation up to € 1995, enterprises in manufacturing, processing or
 Twesige and Gasheja 91

services that are licensed by an Export Processing Zones The Rwanda fiscal policy provides various tax
(EPZ) (Kaplan, 2001). Authority to operate in an EPZ is incentives with the aim of enhancing business and
related to obtaining a 5-year tax holiday, followed by a foreign direct investment. The Rwanda investment board
rate of 15 percent. EPZ companies also receive the provides tax incentives such as accelerated depreciation
standard duty-free access to imports and refunds on of 50% for investment in new or used assets, preferential
sales tax for domestically procured goods and services. corporate income tax rate of 0 and 15% for the registered
In addition, they are exempt from capital gains tax, investors, tax holidays of seven and five years. In
shareholder‟s taxes and non-resident taxes on interest, addition to tax incentives provided in the investment,
fees, royalties and remittances. Other exporters outside there are number of tax incentives provided in the fiscal
EPZs qualify for a rebate or drawback of certain duties on tax law. These include loss carried forward for a period of
imported inputs. Since January 2003, manufacturers that five years, exemption of some income and allowance of
export 50% or more of their volume are taxed at 20%. some expenses like research and development. All these
Finally, exporters can take a double deduction for export incentives are aimed at promoting businesses in Rwanda
marketing costs. Tax holidays apply to other activities as (MINECOFIN, 2012).
well. Tourism operators in approved tourist development SMEs play a very important role in many developing
zones benefit from a 5 year holiday, followed by a 15% countries. Young (2009) observes that especially in the
tax rate. The same provisions apply to industrial park developing countries the health of the economy as a
developers. Build-own-operate-transfer projects obtain a whole has a strong relationship with the health and
5 year holiday, followed by 15% for 5 years, 20% for 5 nature of SMEs. In Rwanda for example, the SMEs
years, and then the normal tax rate. In growth point contribute more than 60% of new jobs created. Due to
areas, approved manufacturers get a 10% tax rate, while the importance of SMEs to the Rwandan economy, the
certain infrastructure projects get a 15% rate. Special Government of Rwanda has made notable intervention
investment allowances also apply to a limited set of by putting in place measures like the Umurenge SACCOs
beneficiaries (Kaplan, 2001). that are geared towards promotion of and development of
The aim of Tanzania‟s tax incentive programs is to SMEs (MINICOM, 2016).
attract productive investment, create employment and The study by MINICOM, NISR, MIFOTRI, and PSF
enhance exports. The Tanzania Investment Act of 1997 indicated that 99.9% of the population are employed by
provides the basic framework for investment promotion, small and medium enterprises and only 0.1% by large
though associated tax measures are incorporated into the enterprises. This implies that a large number of work
respective tax legislation. The main change in 1997 was force is employed by SMEs. Despite their significance
to end income tax holidays outside of export processing and the financial support given to them, the SMEs are
zones, in favour of expensing of capital assets and faced with the threat of failure with the past statistics
remission from customs duty on capital goods for holders indicating that three out of five fail within the first few
of a Certificate of Investment from the Tanzania (Zee et months of operation. According to MINCOM et al. (2017),
al., 2002). only a fraction of the establishment started in 2010-17
Tax incentives in Kenya can be grouped into either remained in operation. The effect of SMEs
investment promotion incentives or export promotion discontinuation is very dangerous and devastating as it
incentives. Investment Promotion Incentives include leads to loss of jobs and assets as well as the GDP.
Investment Deduction Allowance which was introduced in However, despite of the importance of sustainability
1991 to encourage investment in physical capital such as and continuity of SMEs, studies solely focusing on
industrial buildings, machinery and equipment, industrial whether tax incentives affect the growth of SMEs in
building allowances which was Introduced in 1974 with developing countries particularly Rwanda seem to be
the objective of encouraging investment in buildings used very limited and scarce. It is within this context, that
for industrial purposes like hotels and manufacturing researchers want to investigate the effect of tax
plants, mining deductions allowance which was incentives on the growth of SMEs in Rwanda.
introduced to encourage investors to venture into the The study answered the following two questions:
mining industry which is very capital intensive and farm
works deductions which was introduced in 1985 to (1) Does the tax laws in Rwanda provide tax incentives in
encourage investment in the agricultural sector. Export the support of SME growth
promotion incentives program has three main schemes (2) There is a significant effect between tax incentives
which include the EPZ, Manufacture Under Bond (MUB) and SME growth.
and the Tax Remissions and Exemption Office (TREO).
The objective of EPZ‟s is to generate and encourage THEORETICAL AND CONCEPTUAL FRAMEWORK
economic activity and foreign direct investments while
MUB and TREO regimes were meant to encourage Neo-classical theory
investors to manufacture for export within the country
(Githaiga, 2013). Neo-classical economic theory argues that providing tax
92 J. Account. Taxation

incentives to one group of investors rather than another attract investment, they also often argue for incentives
violates one of the principal tenets of a good tax system, without taking account of the costs borne by the economy
that of horizontal equity. This inequality distorts the price as a whole (Zee et al., 2002).
signals faced by potential investors and leads to an
inefficient allocation of capital (Comanor, 1967). The
justification most often given for special incentives is that Tax incentives theory
there are market failures surrounding the decision to
invest in certain sectors and locations, which justify UNCTAD (2003) defines tax incentives as instruments
government intervention. that reduce the tax burden of any party in order to induce
Market failures result in either too much or too little them to invest in particular projects or sectors. They are
investment in certain sectors or locations. The key market exceptions to the general tax regime and may include,
failure most often cited is positive externalities not reduced tax rates on profits, tax holidays, accounting
internalized in the project‟s rate of return that are higher rules that allow accelerated depreciation and loss carry
in certain sectors than in others. An example is research forwards for tax purposes, and reduced tariffs on
and development where investment yields a higher social imported equipment, components, and raw materials, or
than private rate of return because not all the increased tariffs to protect the domestic market. The
technological knowledge can be effectively patented and Kenya Revenue Authority (KRA) defines tax incentive as
as such there exists an exalted justification for a provision that grants any person or activity favourable
subsidizing research and development investment conditions that deviate from the normal provisions of the
(Kaplan, 2001). tax legislation. Tax expenditures refer to revenue losses
Colmar (2005) points out that there are other purported that a government incurs by providing tax exemptions,
benefits of tax incentives, such as symbolic signalling deductions or allowances, tax credits, preferential tax
effects and the need to compensate for inadequacies in rates or deferral of tax payments legally to any party in
the investment regime elsewhere. Provision of the economy (Gravelle, 2013).
investment incentives is in the form of either tax relief or The budget deficit of a government is a form of a
cash grants. International experience shows that such negative saving and a reduction in the deficit can
incentives play only a minor role in investment decisions. positively influence the net national savings more than
Firms make investment decisions based on many factors any feasible changes in tax policies and encourage
including projections of future demand, certainty about savings within an economy which will then stimulate
future government policy, prevailing interest rates and investments (Goolsbee, 2004). Keen (2013) defines tax
moves by competitors. In general, neo-classics see incentives as all measures and strategies which provide
incentives as „nice to have‟ but not deal-breaking. Yet for more favourable tax treatment to a certain activities or
incentives remain a popular policy for both developed sector, and he went on to describe the following to be
and developing countries. typical tax incentives:

(1) Tax holidays: is defined as the temporal exemption of

Agency theory of tax incentives business investment from certain specified taxes,
typically at least corporate income tax. Partial tax
According to Zee et al. (2002), despite the lack of holidays offer the reduced obligations rather than full
evidence to support the efficacy or efficiency of fiscal exemption.
incentives, governments continue to offer them. Tax (2) Special zones: are placed in geographically limited
incentives offer an easy way to compensate for other areas where qualified companies can locate and hence
government-created obstacles in the business benefit from the exemption of various scopes of taxes or
environment. In other words, fiscal incentives respond to administrative requirements.
government failure as much as market failure. It is far (3) Investment tax credit: this is the deduction of some
harder, and takes far longer, to tackle the investment fraction of an investment from the tax liability
impediments themselves like low skills base, regulatory (4) Investments allowance/Accelerated depreciation: is
and compliance cost than to put in place a grant or tax the deduction of some fraction of an investment from
regime to help counterbalance these impediments. taxable profits (in addition to depreciation).
Although it is a second-best solution to provide a subsidy (5) Reduced tax rates/Preferential tax rates: are the
to counteract an existing distortion, this is what often reductions in a tax rate, specifically the corporate income
happens in practice. tax rate.
Agency problems also exist between government (6) Exemptions from various taxes: are the exemptions
agencies responsible for attracting investment and those from certain taxes, most of the time those collected at the
responsible for the more generic business environment. border such as tariffs, excises and VAT on imported
Whilst investment-promotion agencies can play an inputs.
important role in coordinating government activities to (7) Financing incentives: are the reductions in tax rates
 Twesige and Gasheja 93

for the funds‟ providers for example: the reduced certificate for starting a business. It also eased
withholding taxes on dividends. transferring property by eliminating the requirement for a
(8) Loss carried forward: when the business makes a tax clearance certificate and by implementing the web-
loss, the loss can be carried forward to offset the future based Land Administration Information System for
profits of the business. processing land transactions. Privatization of state-owned
enterprises and reformation to pro-investment policy has
actively taken place to attract foreign direct investment
Growth of SMEs (FDI). However, despite no limits on foreign investment,
participation, or control of enterprises, FDI levels are still
Countries that have tax incentives for SMEs claim that low.
preferential tax treatment creates a large number of jobs Businesses in Rwanda are categorised into four
and enhances the level of entrepreneurship that is depending on the levels of sales. If the annual turnover
associated with flexibility, speed, risk taking and ranges from Frw 2,000,000 to 12,000,000 the business is
innovation (Chen et al., 2002). Berger and Udell (1998) classified as a micro. From the annual turnover of
emphasize the fact that SMEs are key drivers of 12,000,001 to 20,000,000 it is classified as a small
economic success, because they are job creators, sales business and from Frw 20,000,001 to 200, 000,000 it is a
generators and the source of tax revenue. These authors medium business and Frw 200,000,000 is classified
base their assertion on the facts that a large percentage under large business. The micro and small business are
of SMEs contribute to the various countries‟ gross taxed under a lump sum tax regime whereas the medium
domestic product, they employ a large percentage of the and the large businesses are under a real tax regime.
workforce and the high ratios of small businesses to large The authors of this paper have developed a conceptual
businesses in the countries concerned. framework which represents the synthesis of literature on
According to Berger and Udell (1998), SMEs represent how to explain a phenomenon. It illustrates actions
fertile ground for the development of large, profitable, tax- required in the course of the study given his previous
paying employers and SMEs experience high growth knowledge of other researchers‟ point of view and his
rates in comparison to large enterprises. However, tax observations on the subject of research. It shows the
policies that are aimed at promoting the economic growth relationship between variables. It is composed as follows
of small businesses should be evaluated judiciously, (Figure 1).
because the inherent characteristics of small businesses As illustrated in the Figure 1, the independent
can make a specific differentiated tax policy undesirable. variables, that is, those which are believed to play a role
Studies undertaken in this regard have produced the in the growth of SME as measured by increase in the
following findings: the majority of SMEs have limited assets, retained earnings and sustainable growth rate
growth potential small businesses vary in terms of are: investment allowance, loss carried forward and wear
productivity, job growth, wages, innovation and export and tear. However, for the relationship to hold,
performance within the same industry subgroups. Small government policy and economic conditions must be put
business also do not all follow the same growth pattern. into consideration. Therefore, they are here defined as
Certain small businesses will remain small for most of intermediate variables.
their existence and it is for this reason that it is not
obvious why a tax system should influence the growth
process. Such intervention, to the extent that it does not RESEARCH METHODOLOGY
act in a lump-sum way, influences marginal decisions and
could lead to excessive risk taking and over investment The research methodology adopted in the study is discussed here.
(Heshmati, 2001). It shows the description of the research methods and instruments
that was employed in the study. It covers the research design,
survey population, sample size, sampling procedures, sources of
data, data collection instruments, validity and reliability of the
Business environment in Rwanda research instrument, measure of research variables, and measure
of research instruments. It also shows how the research was
The World Bank Doing Business Report (2013) ranked processed, analysed and presented.
Rwanda 32nd out of 189 countries, which is a significant
jump up by 22 positions from the previous year. It excels Research design
in registering property and starting a business by entering
the top 10 worldwide. In Rwanda, it takes only 12 days to The study design was based on a multi-method strategy which
register property and two days to start a business, which used both qualitative and quantitative research approaches. A case
are far less than the regional averages and even the study and a survey strategy were used in this study. This helped
the researcher to have a triangulation of different strategies.
averages of OECD countries.
According to Bell (1993), a multi-method strategy occurs when
Several reforms have contributed to improving the more than one research approach and data source are used in a
business environment. For example, in the recent years, study of social phenomena. A multi-method approach can be
Rwanda reduced the time required to obtain a registration undertaken within a single research strategy by using multiple
94 J. Account. Taxation

Independent Variable Dependent Variable

Tax incentives GROWTH

 Investment allowance  Increase assets

 Loss carried forward  Increase in retained
 Wear and tear earnings
 Special zone
 Tax holiday
 Special CIT rate
 Capital gain exemption

Figure 1. Conceptual framework of the study.

Source: Researcher‟s Own Impression (2019).

sources of data or across research strategies (Bell, 1993). The used to determine those factors that explain tax incentives. The
combination of qualitative and quantitative design approach has result of the analysis was presented in form of tables for the
been recommended and used by researchers in situations where interpretation. Pearson‟s correlation was used to establish the
one of the approaches is insufficient to reveal all that is required to relationship between tax incentives and growth of SMEs. A multiple
be known about a phenomenon (Bell, 1993). regression analysis was used to examine the model on tax
incentives and growth of SMEs. T-test was used to examine the
variability of each variable of tax incentive. The model equations
Study population are:

A study population is a group of element/items/or people in which Growth (G) = F (tax incentives (TI))
the study interested. The study population of this study was 49000
SMEs in Nyarugenge district registered with the RRA. However, the G = β0 + β1TI + α (1)
study targeted the managers/owners and the accountant/director of
finance of each SME. where TI = F(accelerated depreciation (AD), loss carried forward
(LC), wear and tear (WT), Special zone (SZ), tax holiday (TH),
special CIT rate (ST), capital gain exemption (CE)).
Sample size and sampling procedure
Capital gain exemption:
In selecting a sample an optimum sample size was considered.
According to Kothari (2000), an optimum sample is the one which TI = β0 + β1AD + β2LC + β4WT + β5SZ + β6TH + β7ST +β8CE +α
fulfils the requirement of efficiency, representativeness, reliability
and flexibility. To determine the sample size, the researchers used Substituting in the first equation gives:
the Solvin and Yamen‟s formula (n = N/(1 + N(e)2 where 136 SMEs
were determined. G = β0 + β1AD + β2LC + β4WT + β5SZ + β6TH + β7ST +β8CE +α

Source of data and research instruments

RESULTS AND DISCUSSION
Both primary and secondary data were used in this study. The
primary data were sourced by using a questionnaire and Table 1 shows the type of industry of the responding
documentary techniques were utilized to collect secondary data. SMEs, where respondents in the sector of agriculture
The questionnaires were closed ended and self-administered. The constitute 0%, commerce constitutes 47.8%, service
closed ended questionnaires have been recommended in social constitutes 36%, consultancy constitutes 10.3%, and
science research due to its advantages over open ended
education constitutes 0%. As seen, the majority of
questionnaires (Sekaran and Bougie, 2016).
respondents are involved in commerce sector.
Table 2 shows the result of the enquiry on the
Data processing and analysis understandability of the tax laws in Rwanda, where
30.9% of the respondents said that they strongly agree,
Data were first collected from the primary survey and then a
44.8% agreed and 24.3% disagreed when asked if they
secondary survey was compiled, sorted, edited, coded in order to
have the required quality accuracy and was analysed statistically understand the tax laws in Rwanda. The results from the
using the statistical package for social scientist (SPSS). Principal survey revealed that the majority of the respondents
component analysis approach and varimax rotation methods were understand the tax laws as evidenced by 75.7% of the
 Twesige and Gasheja 95

Table 1. Type of industry.

Type of industry Frequency Percent Valid percent Cumulative percent

Agriculture 0 0 0 0
Commerce 73 53.7 53.7 53.7
Service 49 36 36 83.8
Valid
Consultancy 14 10.3 10.3 94.1
Education 0 0 0 100.0
Total 136 100.0 100.0 -
Source: Primary Data (2019).

Table 2. Respondents‟ views on understanding the tax laws in Rwanda.

Respondents’ views Frequency Percent Valid percent Cumulative percent

Strongly agree 42 30.9 30.9 30.9
Agree 61 44.8 44.8 75.7
Valid
Disagree 33 24.3 24.3 100.0
Total 136 100.0 100.0 -
Source: Primary Data (2019).

Table 3. Respondents‟ views on awareness of the tax incentives available in the tax laws.

Respondents’ views Frequency Percent Valid percent Cumulative percent

Strongly agree 39 28.7 28.7 28.7
Agree 68 50 50 78.7
Valid
Disagree 29 21.3 21.3 100.0
Total 136 100.0 100.0 -
Source: Primary Data (2019).

answers. The result from the survey conforms to the mentioned wear and tear; 94.1% of respondents
findings from the study carried out by Vann and Holland mentioned loss carried forward; none of the respondents
(1998). These findings show that taxation means in other mentioned tax holiday, special CIT and special zones and
words the contribution imposed by the government to its listed shares as a tax incentive; 58.8% of respondents
people or to an individual or to companies for the use of mentioned research and development and capital gain
services or facilities provided by the government (Vann exemptions. The results from the survey revealed that
and Holland, 1998). various tax incentives are enjoyed by SMEs. However,
Table 3 shows what came out when respondents were the most ones include wear and tear loss carried forward
asked whether there are aware of the tax incentives that and accelerated depreciation as evidenced in the Table
are available in the tax laws. The results from the survey 4. The results relate to the findings of the study carried
indicated that 28.7% of the respondents strongly agreed, out by UNCTAD (2003). The UNCTAD study revealed
50% agreed and 21.3% disagreed. So, a large number of that there are various tax incentives that are available in
respondents are aware of the tax incentives available in the tax laws that support SMEs. The study defines tax
the tax laws. The results from the survey relates to the incentives as any incentives that reduce the tax burden of
findings from the study carried out by Keen (2013). any party in order to induce them to invest in particular
According to Keen (2013), tax incentives are seen as projects or sectors. They are exceptions to the general
measures and strategies which provide for more tax regime and may include reduced tax rates on profits,
favourable tax treatment to a certain activities or sector. tax holidays, accounting rules that allow accelerated
Table 4 shows the tax incentives enjoyed by SMEs in depreciation and loss carry forwards for tax purposes,
Rwanda, where 42.6% of respondents mentioned that and reduced tariffs on imported equipment, components,
they accelerated depreciation; 100% of respondents and raw materials, or increased tariffs to protect the
96 J. Account. Taxation

Table 4. Distribution of respondents with tax incentives enjoyed by SMEs.

Tax incentive Frequency Percentage

Accelerated depreciation/investment allowance 58 42.6
Wear and tear 136 100
Loss carried forward 128 94.1
Tax holiday 0 0
Listed shares 0 0
Research and development 80 58.8
Special zone 0 0
Special CIT 0 0
Capital gain exemption 58 42.6
Source: Primary Data (2019).

Table 5. Level of sales and profit of SMEs.

Year Sales Profits

2013 6,765,146,070 135,302,934
2014 14,710,080,125 323,621,763
2015 19,052,671,910 476,316,798
2016 23,462,405,030 610,022,531
2017 31,050,521,520 838,364,081
2018 40.050,935,745 1,241,579,000
Source: Primary Data (2019).

Table 6. Level of investment in assets SMEs. Table 6 shows the level of investment in assets SMEs
from 2013 up to 2018. As shown, the level of investment
Year Assets in asset SMEs was increasing, which indicates that the
2013 29,471,200,000 performance of the SMEs is good. The findings conform
2014 38,901,984,000 to findings from previous studies, e.g. by Goolsbee
2015 44,673,981,200 (2004), that assets are probable future economic benefits
2016 49,451,730,600 obtained or controlled by particular entity as a result of
2017 57,321,545,100 past transactions or events.
2018 68,345,217,000
Source: Primary Data (2019). Relationship between tax incentives and growth of
SMEs in Rwanda

Considering the effect of tax incentives on the growth of

domestic market. SMEs in Rwanda, the research established the statistical
Table 5 shows the level of sales and profit of SMEs relationship between tax incentives and promotion of
from 2013 up to 2018, where the sales and profit had SMEs in Rwanda. The relationship was established
been increasing year to year. Based on these results through Pearson correlation analysis using Pearson
from their financial statements the financial performance Moment correlation coefficient as depicted in Table 7.
of the SMEs is good. As profitability is a measure of the Table 7 provides both the coefficient of determination
amount by which a company's revenues exceeds its which is Adjusted R Square and the coefficient of
relevant expenses, the results reveal that an increase in correlation which is R. The coefficient of determination
2
the sales has raised profitability of the SMEs during the (R =0.788) explains the explanatory power of the model
study period. This means that tax incentives have an and indicates that 78.8% of the variation in the growth of
effect on the sales and profitability of SMEs. The findings SMEs is explained by the variation in the explanatory
relates to the study carried out by Külter and Demirgüneş variables of investment allowance, loss carried forward,
(2007) who point out that revenue and profitability of listing shares, and tax holiday. However, the adjusted R
SMES are affected by tax incentives. square of 62.2% indicates that there are other variables
 Twesige and Gasheja 97

Table 7. Model summary.

Model R R square Adjusted R square Std. error of the estimate

a
1 0.888 0.788 0.622 0.24618
a
Predictors:(constant), Investment allowance, Loss carried forward, wear and tear, Tax holiday.
Source: Primary Data (2019).

Table 8. Estimated coefficients of the model.

Unstandardized coefficients Standardized coefficients

Model T Sig.
B Std. Error Beta
(Constant) 0.821 0.301 - 2.727 0.004
Investment allowance 0.636 0.216 0.822 2.941 0.037
Loss carried forward 0.773 0.289 386 2.674 0.000
1
Tax holiday 0.664 0.234 0.469 2.874 0.056
Wear and tear 0.686 0.272 0.356 2.522 0.001
Preferential CIT rate 0.715 0.281 0.427 2.544 0.057
a
Dependent Variable: growth of SMEs.
Source: Primary Data (2019).

that affect the growth of SMEs such as government and positive relationship with the growth of SMEs
policy, economic conditions which are not captured by (b=0.715, sig=0.057) indicating that 71.5% of the
the model formulated in the study that account for about variation in the growth of SMEs is explained by
37.8% variation not explained by the model. The Preferential CIT Rate. The results from the survey relates
coefficient of correlation (R=0.888) is greater than 0.5. to the findings of the study carried out by Chukwumerije
This indicates that there is a strong positive and and Akinyomi (2011) which revealed a significant effect of
moderate relationship between tax incentives and growth investment allowances, loss carried forward, tax holiday,
of SMEs. The result from survey relates to findings from listing shares and preferential tax rate.
previous studies. Colmar (2005) identified a strong
relationship between tax incentives and growth of SMEs.
Similar findings are also seen in the study carried out by Conclusion
Chukwumerije and Akinyomi (2011).
Table 8 shows the estimated coefficients of the This research work clearly confirms that tax incentives
regression model of this study. From the findings, all the are germane to the growth, development and continued
coefficients are statistically significant considering the sustenance of small and medium enterprises. However,
positive value of the coefficients and a significance level most of the tax incentives that are available in the tax law
great than 0.05. Specifically, there is a correlation are not enjoyed by SMEs. It is only the large taxpayers
between investment allowance and growth of SMEs that enjoy most of the tax incentives. Tax incentives play
(b=0.636, sig=0.037) indicating that the investment a vital role in ensuring that small and medium enterprises
allowance itself explains 63.6% of the variation in the thrive because the government has made available tax
effectiveness of the growth of SMEs. Moreover, there is a holidays for pioneer companies, and the government also
significant and strong positive relationship between loss grants a number of general and industry specific
carried forward and evaluations with growth of SMEs incentives. Finally, for many SMEs, the decision to
(b=0.773, sig=0.000) indicating that the 77.3% of the remain informal is deliberate because of the cost and
variation in the growth of SMEs is explained by loss procedural burden of joining the formal sector out weight
carried forward. Tax holiday has a significant and positive the benefit of staying in the informal sector. Informal
relationship with the growth of SMEs (b=0.664, sectors make large contributions to nation economies, in
sig=0.056) indicating that 66.4% of the variation in the both human and financial terms. But being visible to
growth of SMEs is explained by tax holiday. Wear and government agencies and formal sector companies, they
tear has a significant and positive relationship with the can be easily reached with capacity building improvement
growth of SMEs (b=0.686, sig=0.001) indicating that schemes. However, they cannot compete for business
68.6% of the variation in the growth of SMEs is explained with larger companies and thus there is a need for
by listing shares. Preferential CIT Rate has a significant governments to accelerate their growth by creating an
98 J. Account. Taxation

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