Rethink SME taxation policy

During the Global African Investment Summit (TGAIS) that was hosted in Kigali, one of the panelists, Youssef Boutros-Ghali, a former Egyptian finance minister and former chair of the International Monetary and Financial Committee, said small-and-medium enterprises (SMEs) are not only a source of taxes but also a source of employment. “Give them room to grow first. Governments need to support them. In my 10-year period as a finance minister, we are obsessed with attracting foreign direct investments (FDIs) and large corporations. But we tend to forget that the vast majority of enterprises generating jobs in our economies are SMEs. And these, therefore, have specific requirements in terms of macro-policy,” Boutros-Ghali told TGAIS delegates. It is important to understand, therefore, that SMEs play an instrumental role in any economy due to the fact that when all the individual effects are aggregated, they surpass that of the larger companies. The social and economic advantages of SMEs cannot be overstated; SMEs create a lot of new jobs each year, competition, economic dynamism, and innovation, which all stimulate the entrepreneurial spirit and the diffusion of skills. In Rwanda, SMEs comprise 98 per cent of all the businesses and contribute to about 41 per cent of all private jobs. That’s why the government has come up with policies that support the sector’s growth. The Ministry of Trade, Industry and EAC Affairs has, for instance, designed the SME policy whose overall objective is to foster job-creation, as well as widening the tax base and boosting exports through the promotion of value addition. Even with such contributions to the economy most SMEs collapse before their fifth anniversary due to many reasons, including macroeconomic factors, business environment, growth opportunities, and historical determinants. However, one of the key challenges SME start-ups face is taxation. Though most of the small businesses might be in formative stages, they are usually treated as established enterprises, with minimal, if any, incentives. We need to understand that their stature makes them unique, which is why government agencies, like Rwanda Revenue Authority, need to consider these unique qualities when dealing with SMEs. Tax policies should, for instance, be designed to support SMEs to drive growth and promote entrepreneurship. So, the SME sector should not only be viewed as a source of revenue, but as a key driver of economic growth and development, a factor that is often True, tax revenue from individuals and businesses help the central and local government to finance public services, but tax assessment and administration among SMEs should be done in manner that consider their income and need for survival. Otherwise, many the SME sector will continue operating informally, or try to evade and avoid taxes because the perceived benefits outweigh the perceived costs. One would argue that the resources SMEs direct towards tax compliance could be used for reinvestment and facilitating growth. Therefore, reducing the compliance costs and taxes could help increase the profit margins of small enterprise operators. It also increases the government’s tax revenue since it encourages more SMEs to formalise their operations. Though there are some policy measures geared toward SME growth, tax law should ensure SMEs pay supportive dues. Tax policies can be designed in such a way that they do not only directly affect SMEs, but also indirectly propels growth. Lastly, it is essential that SMEs pay taxes in relation to their sizes (capital) and profits; otherwise, ignoring these affects their progress. Considering that there is a relationship between SMEs sizes and their ability to pay taxes. Therefore, if SMEs are ‘overtaxed’, many will opt to stay in the informal sector, which narrows the tax base that RRA is working hard to expand. The writer is the ACE Rwandacountry manager

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Rethink SME taxation policy