Boost­ing the SME sec­tor

Enterprise - - Contents -

The sup­port to Small and Medium En­ter­prises ( SME) sec­tor through re­lax­ation in taxes and fi­nan­cial as­sis­tance has re­mained a sub­ject of fo­cus based on the con­sid­er­a­tion that SMES are the en­gine of eco­nomic growth in both de­vel­oped and de­vel­op­ing coun­tries.

SMES con­sti­tute nearly 90 per­cent of all the en­ter­prises in Pak­istan, em­ploy 80 per­cent of the non-agri­cul­tural labour force and their share in the an­nual GDP is nearly 40 per­cent. How­ever, un­like large en­ter­prises in the for­mal sec­tor, a small and medium en­ter­prise is con­strained by fi­nan­cial and other re­sources. Econ­o­mists crit­i­cize that the cur­rent SME pol­icy of Pak­istan does not take into ex­plicit ac­count the het­ero­gene­ity of the sec­tor and, thus, con­sists of broad rec­om­men­da­tions for the en­tire SME sec­tor.

Ac­cord­ing to Tariq Say­eed, Vice- Pres­i­dent, Con­fed­er­a­tion of Asi­aPa­cific Cham­bers of Com­merce and In­dus­try ( CACCI), fac­tors like en­ergy short­ages, poor law and or­der, sales tax and in­come tax au­dit, SRO 191, high mark- up rates, lack of tax amnesty schemes, smug­gling, mul­ti­ple tax­a­tion, etc. have ren­dered busi­nesses un­com­pet­i­tive.

Sim­i­larly, Mah­fooz Elahi, Pres­i­dent, Islamabad Cham­ber of Com­merce and In­dus­try ( ICCI), has pointed to­wards the gov­ern­ment fi­nan­cial sup­port needed for the pur­chase and lease of suit­able ma­chines for use of mi­cro en­ter­prises. In or­der to reg­u­late this, there is a need to re­duce cor­po­rate and en­ter­prise taxes plus ex­emp­tion from stamp duty, prop­erty tax, lo­cal rates, etc. This has been a prac­tice in SME pro­mo­tion in Ja­pan and Korea. Elahi stressed that

the real chal­lenge of the gov­ern­ment is to set the SME pol­icy in a way that these en­ter­prises are trans­formed from static to dy­namic units.

In In­dia, the Union Bud­get 2012- 13 in­tends to pro­vide re­lief to SME tech­nol­ogy firms amid mount­ing cost pres­sures. One tech­nol­ogy firm head has fo­cused on tax­a­tion, say­ing, “At present small and medium IT/ Tech­nol­ogy com­pa­nies in In­dia are reel­ing un­der the pres­sure of grow­ing cost due to in­creas­ing wages of em­ploy­ees and higher op­er­at­ing costs due to fac­tors like petrol price rise, grow­ing in­ter­est costs and in­fla­tion. Grow­ing US dol­lar rate is also mak­ing for­eign busi­ness pro­mo­tion ex­pen­sive for them. Gov­ern­ment should pro­vide tax in­cen­tives to SME tech­nol­ogy com­pa­nies as they cre­ate large em­ploy­ment op­por­tu­ni­ties in the coun­try.” In­dian econ­o­mists have sug­gested pro­pos­als for the sim­pli­fi­ca­tion of am­bigu­ous mul­ti­ple tax­a­tion of VAT, CST and ser­vice tax.

China is also tack­ling tax in­crease on SMES due to ris­ing gov­ern­ment deficit. Mem­bers of the Na­tional Peo­ple’s Congress and the Chi­nese Peo­ple’s Po­lit­i­cal Con­sul­ta­tive Con­fer­ence have sug­gested that China should es­tab­lish a bank that specif­i­cally serves SMES, of­fer­ing lower in­ter­est rates. SMES ac­count for 50 per­cent of China’s tax rev­enue and em­ploy 80 per­cent of the work­force. But the SMES sec­tor is suf­fer­ing from fi­nan­cial prob­lems un­der heavy tax bur­den. Ex­perts sug­gest that it would be more ef­fec­tive and ef­fi­cient for the gov­ern­ment to lower these com­pa­nies’ taxes, rather than spend bil­lions on giv­ing them low- in­ter­est loans.

In Bei­jing, for ex­am­ple, a small com­pany on av­er­age has to pay taxes of up to 8.2 per­cent of its rev­enue. The tax rate, which is con­sid­er­ably higher than the av­er­age profit mar­gin for SMES, is one of the ma­jor rea­sons that only 30 per­cent of SMES sur­vive their first year in busi­ness. If the gov­ern­ment waives all taxes on newly es­tab­lished SMES, such as those in their first two years of busi­ness, more SMES will sur­vive, more jobs will be cre­ated, and that will mean more taxes for the gov­ern­ment to col­lect in the fu­ture.

As both In­dia and China at­tempt to lower SME tax­a­tion to help the econ­omy grow and in turn boost in­vestor con­fi­dence and in par­tic­u­lar In­dia’s at­tempt to make ru­pee more sta­ble, Pak­istan can also draw a sim­i­lar map of the tax­a­tion struc­ture for its SME sec­tor.

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