• Monday, Jan 30, 2023
  • Last Update : 08:54 am

OP-ED: Where SMEs will stand in the coming year

  • Published at 02:24 pm June 27th, 2020
These enterprises seek an array of relief from the government to tide over the economic crisis Bigstock

Small and medium enterprises drive the economy forward, but they are also most vulnerable to Covid-19

The finance minister has presented the 49th budget, which is the largest ever in Bangladesh, but he used the shortest possible time and presented it digitally.

In the past, we have seen finance ministers take the trouble to read the budget for the people of the country. This is one unconventionality, and I believe people liked the idea.

Another good feature is the highest GDP growth of 5.2% to be achieved in this year, which is probably one of the highest in the world. Not only that, the proposed GDP growth for the coming fiscal is also at 8.2% -- another brave step while the whole world is suffering from the fever of Covid-19.

The revenue target estimated is also high (8.5%), even though in the last year we were far behind the target (about Tk100,000cr behind the revised target). On the other hand, the investment target achieved in the last fiscal was only 12.7%, against the projected investment for next fiscal, which is 25.3%. The export target was 15% while it was negative growth at 10% in the last year. The import growth was also negative at 10%, and next year’s target is estimated at 10%.

In view of all these economic indicators, people easily believe that we are expecting the present Covid crisis to be resolved soon and that everything will go back to normal. But we have to remember that this is a global issue, and we cannot expect that everything will be normalized by the beginning of the next fiscal year, or that all countries will be ready to have normal trade and business from a stipulated time.

In this scenario, the government has taken four main specific strategies to frame this year’s budget. These are: Discourage luxury expenditure and prioritize creating jobs, create loan facilities at subsidized interest rates for industries and business, expand coverage of the safety net and protect informal sectors, and increase money supply with a balance to check inflation.

The main source of resources needed to meet the expenditure of the budget is from NBR, which is Tk3.30 trillion (87%), non-NBR tax Tk0.12 trillion (4%), and non tax receipts Tk0.35 trillion (9%). The budget deficit (5.5%) will be met by foreign sources (58%) and domestic sources (42%).

The priority sectors are health (education), agriculture, social safety net, and job creation (industry and trade). Under these priority heads, there are a number of sub heads. In the meantime, a lot of discussion is being held highlighting that even though there is high allocation for the social safety net, a number of heads are included in this segment which do not actually belong to the category.

Some of these are: Pension funds, interest subsidies, assistance for the partial interest waiver of deferred loans of commercial banks due to Covid, refinancing schemes for low-income farmers, and loans for employment generation programs. We believe some changes in that respect will appear in the final budget.

Under the priority areas of job creation (industry and trade) enough importance has been given to expanding the role of SMEs. A target has been taken to increase its contribution from the present level of 25% to 32%. The stimulus packages announced in March-April, 2020 have been included in the budget amount, which is about Tk1.7 trillion.

It is also estimated that about Tk1.56 trillion will be spent through the finance ministry. Also, if we consider public investment to be 8.1% of GDP, about Tk2.8 trillion will be required, and to meet 25.3% private sector investment about Tk8.02 trillion will be required.

This huge amount of money is needed to meet the estimated targets taken in the budget. Unless enabling environments for SMEs are created by announcing supportive policies, the targets of the budget cannot be achieved.

For SMEs, the announced stimulus has not so far been used properly because of stringent conditionalities. Loans are to be given as overdraft, which is a sort of credit risk for banks, while the amount mentioned in the circular is 25% of the working capital; this is not always sufficient for small entrepreneurs. The conditions are very stringent; at least considering the Covid situation, these could be reduced further.

There is a limit for manufacturing and trading, so banks are not in an easy situation to provide funding from these packages at their own choice. Before Eid, it was heard that banks were preparing themselves for how to spend money; still, implementation is not significant and entrepreneurs, especially of SMEs, are struggling most.

The fund announced as a stimulus package is also to cover cottage, micro, and small and medium industries. Banks are not usually interested in funding cottage and micro industries because of cost enhancement of fund management. A separate fund can be managed and micro-finance institutions can be engaged for disbursing the money.

In the budget, an amount of Tk2,000 crore has been announced (social safety net head) to be disbursed through PKSF, Karmosongsthan Bank for employment generation programs. But its distribution mechanism is not yet finalized.

In order to create more jobs, especially in rural areas, the budget has categorically announced to put more emphasis on SMEs and the service sector, and proposed the implementation of various fiscal and stimulus programs. However, the policies in this respect have not been made clear.

The development of cluster-based SMEs is one of the plans to increase the contribution of SMEs. 117 clusters have been identified. No separate allocation for this has been announced. In the SME policy 2019, among 11 strategies, one of the strategies is to enhance cluster-based networks.

Some tax benefits for SMEs have been announced. For example, supplementary duties for nails, screws, small machinery parts, etc have been increased from 0% to 20% to protect domestic industries. Also, increase the import duty for honey in bulk to support honey farmers.

For the RMG sector, the existing duty rate on the import of certain products (such as RFID tag, industrial racking system, cutting table, etc) has been reduced. But some services for the exporters, such as clearance of capital machineries for the release of these goods from the port, have now been taken over from the association.

Among policies that have been taken for the footwear industry is reducing raw materials of this sector. The existing concessionary duty benefit on the import of raw materials by the refrigerator and air conditioner compressor manufacturing industry has been included.

Also, some protections for ship-building, the detergent industry, the sanitary napkin and diaper industry, the plastic and packaging industry, the paper manufacturing industry, the lube-blending industry, and the CR coil industry have been given.

But for the light engineering sector, new SROs which have been issued discriminated against local and imported production: VAT exemptions for imported capital machinery, but locally produced capital machineries are taxed; repair and servicing works were taxed which were not taxed before.

For the plastic sector, under NBR’s General Order 18/VAT/2019, they were ordered to register all manufactured products under VAT irrespective of turnover, while investment up to 3 crore are supposed to be registered under turnover tax. The turnover tax rate remains at 4%, which would need to be reduced to at least 2% because tax credit cannot be enjoyed by turnover tax payers.

Export diversification is one of the primary needs at the moment. Some non-traditional export sectors are also showing good results, such as: Furniture, footwear, ships, boats and floating structures, vegetables, etc.

Cash incentives for some non-traditional exports need to be provided, such as chilled shrimps, recycled materials, etc. Income tax at 10% can also be withdrawn for the time being. Tax at source for local LC for certain items of essentials, fruits, and computer accessories can also be revisited.

The tax holiday has been extended for some new sectors such as: Electronic transformer, artificial fibre, or man-made fibre manufacturing, automobile parts and components manufacturing, aircraft maintenance services including parts manufacturing, automation and robotics design, manufacturing including parts and components, artificial intelligence-based system design and/or manufacturing, nanotechnology-based products manufacturing, etc.

These are sectors in which investment may come in the future, but the plastic and RMG sectors are not included in the list.

An SRO (SRO No 92-AIN/2020/69//Customs) was circulated on March 22, giving all types of duty exemptions for 17 Covid-19 related items. It will remain activated till June 30. The time limit should be extended. Capital machinery, and disposal of hazardous wastages should also be taken proper care of. In that respect, the Waste Generated from Electrical and Electrical Equipment (WEEE) policy can be approved soon, accommodating wastes of these products.

Duty drawback will now be done under the Customs Act 1969, where custom duty and regulatory duty are adjusted by customs authority. The VAT office will give rebate (VAT, SD, AT), and the income tax wing will give AIT. Unless a fully automated system is implemented with integration of IVAS, ITAS, BITEX, and ASYCUDA World, drawback will be a difficult one. SMEs which do not have bonded warehouses are real sufferers in that respect.

Under an amendment in the Finance Bill 2020, Chapter 3, Paragraph 10, changes have been brought in Section 79 of Act no 1V of 1969 (1B). A bill of entry, under sub-section (1), shall be delivered within five working days since the arrival of goods, provided that the board may, by notification in the official gazette, extend such time upon stipulating such conditions or limitations as it deems fit and proper.

It would be almost impossible to clear goods within five days, because a number of organizations are involved in the port, such as suppliers, supplier’s banks, shipping agents of loading ports, L/C applicant banks, courier services, shipping agents of destination ports, etc. For each organization there is a requirement of time. This policy needs to be changed.

SMEs are really a powerful and responsible sector to support economic development, and they are also the largest sufferers of the Covid-19 crisis. Policies need to be framed carefully to support this sector which has been clearly mentioned in the budget, but some policies need corrections for their sustenance.

Ferdaus Ara Begum is CEO, BUILD -- a Public Private Dialogue Platform which works for the development of the private sector.

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