Effects of taxation on business in less developed countries with special reference to Sri Lanka
Taxation today plays a major role in economic activity, as the prime source of revenue and as a tool of economic management for government and as a major recurrent outgoing for business firms and households. Theoretical analysis of the impact of new taxes or changes in taxation is usually conducted with reference to investors and business firms exercising 'rational' profit (or present value) maximising behaviour under conditions where all other relevant factors remain unchanged. Empirical evidence on business response to taxation is however inconclusive in the case of developed economies and sparse in relation to LDCs. This thesis examines the impact of taxation on business in LDCs at the level of the individual business firm, using the survey technique supported by content analysis and ratio analysis of published material. The study is carried out with particular reference to Sri Lanka, a typical LDC, but the findings are also supported by analysis of business opinion in two other developing countries. A separate examination is undertaken of the perceptions of and responses to taxation of MNC business operating in LDCs. The research results lead to three main conclusions. Firstly, the perceptions of business relating to taxation are seen to be non-uniform and for the most part are related to organisational characteristics of the business entities. Secondly, business response to taxation does not always correspond with rational profit maximising behaviour on the part of business managers. Liquidity objectives appear to be at least as important. Finally, perhaps the main conclusion drawn from the research findings is that the impact of taxation on business decisions is small and that taxation is not by any means a major constraint on business development; the main reason being the presence of other more restrictive environmental influences.