• Monday, Aug 08, 2022
  • Last Update : 04:24 pm

Tax policy getting in the way of a thriving SME sector

  • Published at 10:27 pm November 24th, 2020
IDLC PRI SME research inforgraph 2020

'Some of the policies are so regressive and interfering to business'

The country’s existing tax policy does not support the small- and medium-sized entrepreneurs to flourish; rather it holds back their progress, said experts on Tuesday.

“Some of the policies are so regressive and interfering to business,” said Ahsan H Mansur, executive director of the Policy Research Institute.

The tax policy is unthinkable and formulated in such a manner that it does not help SME entrepreneurs but rather hinders them with the tax burden, he said at a webinar organised by IDLC Finance to share the findings of research titled “Access to Finance for SME and impact on job Creation: Empirical Evidence based on IDLC Finance”. 

IDLC and PRI have jointly conducted quantitative research before the pandemic began.  The research assessed 782 IDLC SME clients across the country and covered information from their inception to 2019.

“The impact of tax policy is severe on SMEs.”

For instance, an entrepreneur has to pay 7 per cent advance income tax, whereas his/her gross profit margin is 5 per cent, said Mansur, a former economist of the International Monetary Fund.    

“The government itself has created obstacles for the cottage, micro and small entrepreneurs through its policies.”

He went on to cite the VAT Act enacted in 2019 to further his point.

“It is a burden for the SME sector and does not help at all.”

When a manufacturer wants to produce a part of its product by an SME entrepreneur through subcontracting, he/she has to pay a 10 per cent value-added tax, which increases the cost of doing business. 

As a result, the manufacturer does not want to provide work to the SME. 

“The SME sector is the driver of growth for countries like Bangladesh. To accelerate economic growth and job creation, we have to invest in SMEs,” he added.     

Meanwhile, the study found 105.7 per cent growth in employment generation by the SMEs from their inception. 

Female-owned businesses had higher employment growth: 146.2 per cent as opposed to about 100 per cent.

“The SME sector contributes to national income and employment generation to a great extent. Employment is a great tool to alleviate poverty,” said Bazlul Haque Khondker, director of PRI, while presenting the findings of the study.

The largest employment growth was in the service sector (174.2 per cent), followed by the manufacturing sector (131 per cent). 

The majority of the entrepreneurs are male, accounting for the bulk of employment.  The share of employment generated by male entrepreneurs in total employment has been around 71 per cent during 2016-18. 

However, the share dropped by about 2.7 percentage points in 2018-19 as the share of employment generated by female entrepreneurs increased.

The SME sector has witnessed significant growth in employment generation at an annual rate of 50 per cent in the five years to 2019. The employment growth was 75 per cent between 2016 and 2019. 

The sample enterprises that were incorporated before 2000 showed employment growth of 137.7 per cent.

In contrast, for the recently established enterprises, the annualised employment growth over the five-year average period was significantly higher at about 50 per cent. 

“It may be a reflection of the start-up employment phenomenon,” Khondker added.

The SME entrepreneurs who availed loans from financial institutions recorded significant growth in employment but accessing funds from institutions remained a big challenge.    

As per the study findings, about 92 per cent of sample enterprises started their business with their own funding, while 3.1 per cent started with borrowing from individuals or informal lending sources.

“Access to capital is more difficult than the lending rate. The interest rate is not an issue; access to finance is a big issue to the SME entrepreneurs,” Khondker said.

There is enormous scope for lending in the SME sector but it is not possible overnight, said Mansur, also the chairman of Brac Bank, whose target demographic is the SME sector.

“We cannot realise the potential of the SME sector due to lack of finance. From Brac Bank, we have set a target to increase the amount of total loans disbursement to 60 per cent from the current 50 per cent.”

Preparedness and infrastructural development are very crucial. 

“Lending without an ecosystem may be disastrous.” 

In the case of SME lending, there is a perception that it is risky and the rate of default loans is higher, said Arif Khan, chief executive officer and managing director of IDLC Finance. 

“But we have proven it is not true,” he said, adding that 47 per cent of IDLC’s loan portfolio consists of SME loans.

Where the average default loan rate is 10 per cent, it is 3 per cent in SME lending and it is 1 per cent in case of women entrepreneurs. 

But there may be problems if a company disburses without preparedness. One has to ensure good governance and transparency, he said.  

“At IDLC along with the MSMEs we relentlessly work for women entrepreneurs and have seen a positive impact in the economy. The findings reinstate the fact that funding MSMEs is not only profitable, this also has important macroeconomic impact such as employment creation.”