Deadly blow to entrepreneurship – Comment
View(s):It’s unfortunate that Sunil Perera, Sri Lanka’s legendary entertainer and a leading light in the campaign by artistes for political change in end 2014, is relatively quiet these days. Otherwise this popular balladeer would have ‘played the merry devil’ dishing out song after song of the chaos and confusion that’s taking place in the aftermath of the 2015 budget.
While the Sunday Times and its business sections have repeatedly alluded to the crises and subsequent changes in proposed taxes and other proposals so much so that one pundit said the only thing that remains in the budget is “Honourable Speaker…”, this time our focus is on the across-the-board annual license fee and a tax on voluntary liquidation on companies.
Not only have the proposals triggered alarm and confusion but are also filled with contradictions and misleading messages.
Consider this. The Finance Minister makes a promising and absolutely necessary pitch to cheer on small and medium enterprises (SMEs), the backbone of the Sri Lankan economy.
“… in spite of the significant contribution to the economy, SMEs find expansion difficult, mainly due to the obstacles they face in accessing funding, both equity and debt. Our government is therefore keen to partner the growth of SMEs. As such we have already formulated a ‘SME Policy’ that covers a gamut of issues of the SME sector,” he said in the 2016 Budget presentation.
However “ekapathen denava .. aneeth pathenn gannava,” was how a SME entrepreneur described the lopsided proposals in the budget. “SMEs are the core of the economy, but what has happened in the budget is a deadly blow to entrepreneurship and risk-taking,” he said.
For instance while encouraging companies to list in the stock market with tax relief, the government on the other hand imposes new taxes in the form of an annual fee which affects small organisations the most. Every company registered with the Registrar of Companies to be subjected to an annual license fee of Rs.60,000 for private companies (mostly SMEs); Rs. 500,000 for public quoted companies and Rs. 100,000 for others (including companies non-functioning).
In addition, a charge of Rs. 250,000 is to be imposed on voluntary liquidation of a company. Entrepreneurship is all about taking risks, an issue governments have constantly complained about vis-à-vis banks. Commercial banks are unwilling to lend to small entrepreneurs saying they are weak, lack collateral and thus are unwilling to risk lending to this sector.
So rather than encourage entrepreneurs to take risks, the government is killing the spirit of entrepreneurship. The Finance Minister said that the progress of the SME sector is of vital importance for the success of a nation. “As such more attention should have been provided for the development of this most vital sector. An approximately 70 per cent contribution to the GDP from the SME sector is somewhat positive but with a more focused approach the opportunity to improve the sector will provide significant dividends to enhance growth rates. Honourable Speaker, I am compelled to state that the contribution through advances to develop the SME by state agencies had been found wanting whilst the private sector had managed to make a telling contribution during the past year. The focus of the previous regime on SMEs too had been blurred and very little had been done towards the development of same,” he had said.
The ‘blurring’ is now on the other foot (Finance Ministry) because the budget scheme of tax relief for SMEs is being spirited away, all or most of it from annual fees and a tax on voluntary liquidation. It won’t be surprising if only a few SMEs opt to list in the stockmarket given these contradictions. In fact, rather than give an impetus towards nurturing – and as the budget called it “stimulate the startup eco system (for SMEs)…” – the reverse is happening.
This is not all. The confusion continues.
The head of a local chamber said they were given to understand by the government that the new annual fee would only be applicable if the accounts ending March 31 are not submitted by the normal due date as prescribed by the Registrar of Companies. “There was a small fee earlier too as a penalty for late submissions,” he said.
However a senior official at the Registrar of Companies said it was still unclear how this would be enforced. “We are not sure whether the rates would be applied as an annual fee, a penalty measure, or at all,” one official, adding that they were awaiting an implementing circular from the ministry.
In February, a group of 50 small and medium scale enterprises pleaded with President Maithripala Sirisena, in a letter, to repeal these clauses in the 2016 budget. The group offered more SME-friendly, tax-collection options where companies whose post-tax profit doesn’t exceed Rs.2 million should be exempt from the annual license while the license fee for companies above this level should vary based on their taxes.
While saying it is unfair and impractical for the license fee to remain constant even if a company makes a loss, the group said the compulsory winding up tax was also unreasonable as units wind up when they go out of business and have no other option than to close down.
There are thousands of registered companies that are inactive and this is the reason for the government move. But most people agree this is not the way to solve that problem. The state needs to collect taxes and equitably too, compared to the present day where the rich pay fewer taxes than the poor. However imposing a no-holds-barred tax on SME’s will not only make people have second thoughts on forming small businesses but also impact on the viability of existing ones.