Taxation Policies and Financial Performance of Small and Medium Enterprises in Mukono District a Case Study of Mukono Central Division

Abstract

Therefore, the purpose of this study is to determine how tax policies impact the financial performance of SMEs in Mukono District, and more specifically, in Mukono Central Division. The study's specific goals are to: Evaluate the potential impact of tax awareness and knowledge levels on SMEs' financial health; determine the impact of tax administration criteria on financial performance; and ascertain the potential effects of tax rates on business performance. This study will be conducted using a structured approach, with a focus on the issues that SMEs face as a result of tax policies and their effects on the expansion and sustainability of their businesses. The study adopted a descriptive cross-sectional research design in using qualitative and quantitative data collection methods. Target population were 100 registered small-scale businesses comprised of retail shops, hardware shops, groceries, and general merchandise dealers. The study sample consisted of 80 respondents, which was drawn through both probability and non-probability techniques. Structured questionnaires were used to collect data. To determine the connection between tax laws and financial results, the gathered data was examined using descriptive statistics in the form of means, frequencies, and standard deviations. The study finds a strong positive relationship between tax-related variables and SMEs' financial performance, with tax awareness (r = 0.60), tax administration (r = 0.65), and tax rates (r = 0.70) significantly influencing profitability and growth. Multiple regression analysis confirms that tax awareness (β₁ = 0.35, p = 0.001), tax administration (β₂ = 0.45, p = 0.000), and tax rates (β₃ = 0.50, p = 0.002) are statistically significant predictors of financial performance, with tax rates being the most impactful. The study highlights that tax knowledge enhances compliance, investor confidence, and risk management, while complex regulations and high compliance costs hinder SMEs' profitability. To improve financial performance, policymakers should simplify tax administration, lower tax rates, and introduce incentives that promote business sustainability, ensuring fairness and transparency to encourage compliance.