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ISSUES IN SME DEVELOPMENT:Business Environment, Taxation Issues

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SME Management (MGT-601)
VU
Lesson 10
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
ISSUES IN SME DEVELOPMENT
Short And Medium-Term Issues
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.
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 operations1.
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.
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1 To this point, the Ten Year Perspective Development Plan 2001-2011 notes that there is a large range of
zoning and other regulations imposed by the federal, provincial and local governments and public sector
utilities which affect the functioning of SME hence, legislation similar to the US Small Business Regulatory
Enforcement Act of 1996, which includes Regional Small Business Ombudsmen, would be considered to
ensure fair and effective functioning of SME. Whatever the mechanism to enforce it, a "level playing field"
is one of the cardinal conditions for SME development.
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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
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SME Management (MGT-601)
VU
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%2 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%3 of businesses reports a crunch of taxes, while 28% of
businesses felt that the taxes in the country are too high.
World Bank SME Policy Note 2001, the results of SMEDA-World Bank Investment Climate Survey 2003
2
also conform to the findings.
3 The 56% figure is an addition of the three tax related responses: High Taxes 28%, High sales tax 16% and
high income Tax Rate 12%.
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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 books4.
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 base5. 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 economy6. There has been no consideration as such reviewing
tax law form an ordinary SME or even micro enterprise perspective.
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SME Management (MGT-601)
VU
In Japan, after the war in 1949, old taxation system was replaced by new system to resolve the problem of
4
incomplete bookkeeping and fear of over taxation of SME. The new system allowed certain tax merits if a
tax return is made with a " certain formula of quick bookkeeping." This system resulted in not only the
improvement of financial accounting but also the strengthening of financing systems for SME.
5 There are 1.05million active tax filers in Pakistan. In 1999-2000 the number of salaried taxpayers was
440,000 and those filed under old self-assessment scheme were 275,000. Lowering tax rates may well lead to
substantial expansion of the tax base in compensation and be neutral for the government income. However,
without more profound improvements in the relationship between government and the enterprises, hopes
should not be raised high for tax rate changes to bring immediate tax base expansion.
6 A taskforce on the reform of tax administration, chaired by Mr. Shahid Hussain, was constituted by
government, which gave detailed recommendations in its report published in May 2001. Based on this
document and comments from the IMF and the World Bank a restructuring plan was drawn up by the
CBR. This restructuring plan is now being made operational with the World Bank support.
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
Arbitrary (dependent on will or pleasure)
Bilateralism (consist of both parties)
Inter alia (among other things)
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Table of Contents:
  1. THE HISTORY:Cottage Industry, CONCEPT OF SMALL BUSINESS
  2. THE RELATIONSHIP BETWEEN SMALL AND BIG BUSINESS:The SME’S in Pakistan
  3. THE ROLE OF ENTREPRENEURSHIPS IN SMEs:Focus and Perseverance Guide the Entrepreneur
  4. THE ROLE OF ENTREPRENEURSHIPS IN SMEs:Kinds of Entrepreneurs
  5. SMALL ENTREPRENEURS IN PAKISTAN:National Approaches
  6. THE DEVELOPMENT OF SMES IN PAKISTAN:The Industrial History of Pakistan
  7. GOVERNMENT’S EFFORT TOWARDS SME DEVELOPMENT:Financing Programs
  8. THIS LECTURE DEFINES THE ROLE OF NGOS AND SMEDA:Mission Statement
  9. ISSUES AND POLICY DEVELOPMENT FOR SME:Monitoring Developments
  10. ISSUES IN SME DEVELOPMENT:Business Environment, Taxation Issues
  11. LABOR ISSUES:Delivery of Assistance and Access to Resources, Finance
  12. HUMAN RESOURCE DEVELOPMENT:Market and Industry Information, Monitoring Developments
  13. MARKET AND INDUSTRY INFORMATION:Measuring Our Success, Gender Development
  14. LONG TERM ISSUES:Law and Order, Intellectual Property Rights, Infrastructure
  15. THE START UP PROCESS OF A SMALL ENTERPRISE:Steps in Innovative Process
  16. TECHNICAL FEASIBILITY:Market Feasibility, Market Testing
  17. FINANCIAL FEASIBILITY:Financial resources and other costs, Cash Flow Analysis
  18. ASSESSMENT OF PERSONAL REQUIREMENTS AND ORGANIZATIONAL CAPABILITIES:Analysis of Competition
  19. Post Operative Problems of a New Enterprise:Environmental Causes
  20. HOW TO APPROACH LENDERS:Bank’s Lending Criteria, Specific Purpose, Be Well Prepared
  21. WHAT A BANK NEEDS TO KNOW ABOUT YOU:General Credentials, Financial Situation
  22. COMMERCIAL INFORMATION:Checklist for Feasibility Study, The Market
  23. GUARANTEES OR COLLATERAL YOU CAN OFFER:Typical Collateral
  24. Aspects of Financial Management:WINNING THE CASH FLOW WAR, The Realization Concept
  25. MEANING OF WORKING CAPITAL:Gross Working Capital, Net Working Capital
  26. RECRUITMENT, SELECTION AND TRAINING:Job Description, Job Specification
  27. SELECTION AND HIRING THE RIGHT CANDIDATE:Application Blank, Orientation
  28. TRAINGING AND DEVELOPMENT:Knowledge, Methods of Training
  29. CONDITIONS THAT STIMULATE LEARNING:Limitations of Performance Appraisal, Discipline
  30. QUALITY CONTROL:Two Aspects of Quality, Manufactured Quality
  31. QUALITY CONTROL:International Quality Standards, MARKETING
  32. MARKETING:Marketing Function, MARKETING PROCESS - STEPS
  33. MARKETING:Controllable Variable, Marketing Uncontrollable, Marketing Mix
  34. MARKETING:Demerits of Product Mix, Development of new product, SMEDA
  35. ROLE OF TECHNOLOGY:Training programmes, Publications
  36. ROLE OF TECHNOLOGY:Measure to Undertake for Promoting Framework.
  37. EXPORT POTENTIAL OF SME IN DEVELOPING COUNTRIES I:Commonly Seen Assistance Programme
  38. EXPORT POTENTIAL OF SME IN DEVELOPING Countries. II:At the national level
  39. WORLD TRADE ORGANIZATION (WTO):WTO Agreements: Salient Features
  40. WTO MINISTERIAL CONFERENCES:PAKISTAN AND WTO
  41. WORLD TRADE ORGANIZATION (WTO) PAKISTAN & WTO. II:International Treaties
  42. WORLD TRADE ORGANIZATION (WTO) PAKISTAN & WTO. III:Agriculture
  43. WORLD TRADE ORGANIZATION (WTO):PAKISTAN & WTO. III
  44. WORLD TRADE ORGANIZATION (WTO):CONCLUSIONS AND RECOMMENDATIONS
  45. SUMMARY & CONCLUSIONS:Financing Tool, Financing Tool