Boosting the SME sector
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.