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MGT601 - SME Management - Lecture Handout 10

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ISSUES AND POLICY DEVELOPMENT FOR SME – II

This lecture deals with the policy-making issues on short and medium term basis. The importance of these issues is self evident in this lecture. This lecture reflects issues where we feel we may achieve strong impacts in the short and medium-term, i.e. until 2011. They should therefore become major topics of our deliberation and shape the formulation of our SME policy.

Issues in Policy Development (Short and Medium-Term Issues)

Business Environment

The large size of the SME sector limits the ability of the Government and business support institutions to achieve competitive coverage by support programs. This is a fundamental reality in most countries of the world and it is why policy framework and regulatory measures are of tremendous importance when SME promotion is concerned. It is agreed that only appropriate policy tools and regulations than with support programs can achieve much more. Likewise, SME development is hampered more by inappropriate regulations than compensated by means of appropriate support programs.

Most of the developed nations therefore have mechanisms in place to revert the biases against small firms. For instance, the United Kingdom introduced the “Think Small First” initiative, which requires all Government organizations to assess the impact of their actions on small business prior to implementation. Furthermore, participation of small business in government procurement is being facilitated as a matter of routine.

The result of such policies is that (unfortunate) surprises to small firms are less frequent. It is made sure that businesses potentially affected are consulted and informed of any forthcoming policy shifts so as to avoid negative impacts. They are also allowed an adequate grace period for the adjustment of economic activity and there is no retroactivity of new regulations. Besides this, special attention is paid to minimizing the room for bureaucratic discretion while developing policy rules or procedures. All such mechanisms are missing in present policy or legal environment in Pakistan. The absence of a specialized, uniform legal framework for the development of SME hampers SME operations8.

Relationships between Government and SME

The relationship between government and SME seems to be fundamentally flawed. In many cases this extends also to other large organizations and their interaction with smaller clients as SME. Our compulsion of centralized control stems from the fear of the regulator to be misled by the opportunistic profit-seeking entrepreneur. And our administration practice is characterized by rent-seeking bureaucrats, who given the low level of their pay, take advantage of low literate entrepreneur. Of course, we all know there are many dedicated and honest professionals on both sides. But the fact of the matter remains that there are severe attitude problems in the relationship between the two sides. The only way to break this discouraging situation is to face the problem squarely and seek solutions in a positive spirit and entertain systematic dialogue between the two sides. The present divide is, among others, reflected in a language gap. Part of the concern for local business people is the inadequate business facilitation process in the local language, which includes laws, regulations and business support material available in the English language only.

As a starting point, we propose to consider the increased usage of Urdu in our written documentation, in our official deliberations and communications.

A second point is how we may increase the share of SME participating in the provisions of goods and services to public sector, as it is common practice in many countries. A typical SME in Pakistan caters to the domestic private sector. It is noted that fewer than 4%9 are supplying to the government sector. Some of the issues are related to tough bargaining price (36%) and supplies on credit (34%) and other are related to absence of rules on how to the public sector should increase its procurement for SME. Further points may possibly emerge from the dialogue between Government, stakeholders and their SME clients.

Taxation Issues

High tax rates are one of the major reasons for firms to drift into the informal economy. This holds for the countries all over the world, including developed countries. These effects are compounded by high compliance costs for small firms to deal with tax laws and other forms of government regulation. This is a specific size-related disadvantage compared to large-scale firms, which have not only the necessary accountants, but also frequently, also in-house tax and legal advisors. Compliance costs have monitory implications (such as paying tax advisor fees or salary payments to personnel dealing with tax issues); time cost implications (in the form of time spent by a taxpayer to handle tax issues), and physiological cost (in terms of anxiety, stress and apprehensions related to possible mistake or a possible audit by the tax authorities).

Firms in Pakistan’s SME sector, encounter an increasingly complex legal, tax and administrative environment, both in starting up and developing their business. According to research, 67% of enterprises termed tax regulations as most problematic. 56%10 of businesses report a crunch of taxes, while 28% of businesses felt that the taxes in the country are too high. From SME point of view, the present tax structure and administration generally distort incentives and discriminate against small firms who are harassed by the tax authorities. Smaller firms found tax related issues more restrictive than larger firms, 69% of firms, whose size of assets was less than Rs.1million faced the greatest of tax related problems. Many small firms claim it is not possible for them to maintain books11. As per law or hire a professional due to cost constraints.

The prevailing system is non-standardized and offers excessive discretion to the tax authorities. There is no consolidation or rationale in current provincial or local tax structure either. Hence, there has been a constant confrontation between tax authorities and the business communities resulting in very slow expansion in tax base12. Two sectors; retailers and small to medium sized manufacturers have already propounded the idea of fixed taxation as remedy to this continuous ailment. Cognizant of the change required to cater to the SME sector in its policies, there have been reforms in the advance stage of implementation of Pakistan’s tax regime. But these reforms are focused on tax administration and management, instead of addressing the aspects that directly affect SME. No incentives are being offered to SME to enter the formal economy13. There has been no consideration as such reviewing tax law form an ordinary SME or even micro enterprise perspective.

Reference

  1. As quoted above
  2. SME sector By SMEDA
  3. Developing SME policy in Pakistan By Policy planning and strategy department (SMEDA)
  4. Small entrepreneurs in developing countries by Dr Asghar S. Nasir

Book Recommended

Small entrepreneurs in developing countries by Dr Asghar S. Nasir

Key terms

  1. Arbitrary (dependent on will or pleasure)
  2. Bilateralism (consist of both parties)
  3. Inter alia (among other things)

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