Throughout human history, mankind has engaged in business transactions – from bartering simple goods to selling and purchasing sophisticated products and services. Governments have been one of the most visible agents in these processes. Initially, they were entrusted to create an efficient legal and regulatory framework for these exchanges to take place in a safe and fair environment. In turn, they became one of the largest financial beneficiaries of this activity – through levying taxes.Through time, people came to realise that the businesses, which were perceived as mere suppliers of goods or services, actually deliver far-reaching benefits to society when given a favourable environment and support. Following that, governments started to assume an added role of supporting businesses rather than just regulating their activities. While most governments have proved themselves to be competent in delivering what is expected of them, some have failed by being hostile towards the private sector, especially small businesses.
When we consider the case of Ethiopia, my observation is that the current government has failed to deliver in full what is expected of it, by being unfriendly towards small businesses, especially those that prefer not to be organised under the national micro and small business development plan.
This unfriendliness is manifest in a number of ways. First, the business licensing requirement is cumbersome and the same for a new medium or large-scale company. Hence small business owners are forced to spend a lot of money before launching, waste time, and suffer going to a number of government offices to establish their enterprise. The licensing process alone may take 30 or more days depending on a number of factors. Judging from many countries’ experience, licensing for small businesses usually doesn’t take more than one day.
Second, small businesses are burdened by the same requirements as larger, well-resourced businesses. This is because they are required to purchase expensive cash register machines, operate the machines with no room for mistakes (or face substantial financial penalties for each mistake), buy items with receipts and keep a proper record of all financial activities (or face the consequence of rejection of the expenses by auditors) and stop any sales activity in case something went wrong with the cash register machine. All these demands from a small business that may make less than ETB1,000 from daily sales is too much by any reasonable standard.
The financial penalty to be paid by small businesses for any mistake while using the cash register machine is the same as that of large companies. For example, one small company that I know erroneously printed a cash refund receipt from its cash register machine. After reporting the incident, the company was ordered to pay a whopping ETB25,000 for this silly mistake, which wasn’t done intentionally. This financial penalty amounts to 30 days of sales revenue for the aforementioned small business. That same amount would take less than 30 minutes to earn for a large company that has ETB1 million in daily sales.
Any such penalty will have to come from the small business owner’s personal pocket because government auditors refuse to accept such penalties as company expenses. Obviously an owner of a medium or large business is more likely to afford paying any such penalty out of his or her own pocket.
The reporting burden is also the same. Monthly reporting for a small business, which is mostly done by the owner, may take days, which takes away highly valuable time from the small business owner, who usually assumes multiple roles on any given day – as purchaser, marketer, production controller, or cash collector, in addition to handling family matters. Monthly reporting for the owner of a large business is most likely never an issue in terms of opportunity cost because the owner rarely does it.
Small businesses are also forced to pay the same percentage on workers’ pension contribution, which is now 11Pct, and the upcoming health insurance contribution, currently 3Pct, every month for each worker just like medium and large businesses. Such contributions are affordable for larger, healthier businesses that have sales revenue in excess of ETB100,000 per month, but how can any government ask a small business that may have sales revenue of ETB30,000 per month (less than USD1,500per month) to carry the same burden?
The profit tax rate is the same, 30Pct, for all PLCs – small, medium or large. As a result, a small business with an annual net profit of ETB100,000 and a beer factory with an annual net profit of a ETB100 million pay the same 30Pct profit tax.
Third, small businesses that operate outside of the national micro and small business development plan are disfavoured in terms of government attention and support. Small businesses that are organised under the national micro and small business umbrella get a number of supports, like temporary storefronts in good locations, allowing them to start their business with negligible or no competency certificate, facilitating them to access credit and capital goods without formal collateral. All of these benefits are commendable and the government is doing a fantastic job at providing them.
However, those small businesses that choose to operate without getting organised are deprived of the aforementioned support. It’s an unbelievable, unfair, and unsustainable discrimination. Had it not been for these limitations, these small businesses could have earned more profits.
The logical question then should be ‘why does the government take such a position?’ One reason is to keep ideology for its own sake. One of the pillars of the developmental state ideology followed by the ruling party is that the government must play a supreme role for developing the country while the private sector in general is considered less relevant in achieving that end.
Such an ideology, however, is short-sighted, creates unhealthy segregation between small businesses, costs the country dearly through lost opportunities, is unsustainable in the long-run, and is something that must be modified quickly. A country need not advocate an ideology for decades for its own sake.
The second reason the assumption that the private sector is full of cheaters. Based on the speeches of our high-ranking officials one can infer that they believe private businesses, big or small, are rent seekers, must not be trusted, need to be heavily regulated and must be threatened and stiffly penalised.
Undeniably, some businesses in the private sector hide income from sales and cheat on taxes. But the few millions stolen by the private sector, though not acceptable at all, are nothing compared to the hundreds of millions of birr wasted every year through large government projects.
The other reason for the government disliking small businesses is because it is hard-pressed to raise much-needed revenue. The government has embarked upon one of the largest government-sponsored developments in Africa, which requires a lot of money. On top of that, as a number of international studies suggest, Ethiopia is not collecting as much legible tax as it should. Hence the government is hard-pressed to collect much higher revenue than it is doing now.
While this is understandable, the question is: Should the government do this in a blind fashion, especially when it comes to small businesses? As stated above, the government penalises small businesses for all kinds of minor mistakes, does not accept legitimate expenses for which small businesses may not obtain “acceptable” receipts, just for the sake of collecting an increased amount of revenue.
The consequences of this distressing environment are multifarious: turning some of the honest small business owners who suffered from such actions into cheaters, creating a loss of confidence in the business environment, increasing aversion towards the government among the business community, and engendering doubt in the minds of foreign investors as to the predictability of the government when it comes to payments and taxation.
Meanwhile the country in general and small businesses in particular are paying a heavy price in terms of immediate and future lost opportunities – like employment opportunities, foreign currency revenue, taxes, innovation, the opportunity to transform small businesses into larger enterprises and human capital flight due to discouragement.
4th Year • June 16 2016 – July 15 2016 • No. 40