By: Victor Ogiemwonyi
Small and Medium scale Enterprises ( SMEs) constitute the bulk of the businesses that provide the most jobs, contribute to goods and services , create innovation, competition, and new markets for every economy.
It creates 60 – 70% of all employment of most economies. It is also an avenue for lowering Income disparities and also promotes the development of Skills.
The Nigeria Bureau of Statistics, (NBS ) says SMES constitute 97% of Businesses in Nigeria. The 18 million SMEs in Nigeria, contribute over 50% of employment, and may even be more, giving the large informal sector of the Nigerian Economy. It also contributes over 50% of our GDP, 50% of Industrial Jobs, and 90% of manufacturing. It provides local jobs and services, it is close to customers, and are also very flexible in responding to their needs. All these make them the major driver of our economic growth.
One of the best ways to get this sector to contribute more to the economy, is to free it from burdens, that inhibit its growth and make the operating environment more enabling. Every SME you talk to, will tell you that the unstable environment, compounded by regulatory burdens, multiple levies and Taxes are its main problems.
The general complaints of under developed infrastructure and particularly, lack of electricity, maybe problematic, SMES, will be able to navigate through it, if relieved, of the other stifling burdens, that make life impossible for them, to contribute more meaningfully to the Economy.
Whenever the problems of SMEs are highlighted, every Government’s immediate solution, is to throw money at it, without seeking to understand the problems, and how well it can be approached , with more feasible solutions.
In my view, one of the most effective and equitable solution, is to use Taxing solutions, that will allow SMES, reduce the burdens that they face daily, put more money in their pockets that will help them, solve immediate problems, like paying for the increased cost of diesel, increased cost of raw materials, hire more hands and increase their ability to pay for increased transportation cost, resulting from increased fuel prices and the very deplorable road infrastructure network.
All these, will be done simply by exempting SMES with N50m or less in Turnover, from paying Company Income Taxes.
This is justified, given the high inflationary environment that has made SMES operating cost sky rocket, and have made their survival, even more difficult.
This increase from the current exemption threshold, of N20m , currently in place, will help in no small measure to ease some of the pains for SMES. This will go a long way to Lessen, their burden, and make them, more productive.
Especially, giving the increases we have seen, in the cost of living and the increased electricity and fuel cost, alone, in recent times. This relief will make even more sense, instead of money thrown at SMES, that have no proper measurement for success or accountable results. This single policy change, will make SMES increase their growth rate, increase their productivity and create employment for many and contribute more meaningfully to the Economy.
The other benefits of this policy, will include, a more focused Federal Internal Revenue (FIRs,) who will use its limited resources, more productively, to properly collect Taxes where there is potential to get more Tax revenues .
The current system of a wide net, for collecting taxes, that catches very little, should be redirected to focus on where Taxes can actually come from.
We can already see the results of exempting SMES with N20m or less in Turnover. FIRS, is reporting higher collection of Revenues, in the current year, despite the harsh economic environment and the many businesses that have closed down, indicating that, the lower threshold of paying Company Income Tax, by SMES, has not affected its Revenue collection. If anything, it has enhanced its collection. Any careful study, of the cost benefit analysis of FIRS collection of SMES Taxes, will show that, very little is collected from this segment, of Company Income Tax collection, and the cost of collecting these Taxes, might even be more , than what it actually gets at the end of the day.
The less burdensome, administration of Taxes, helps the Government at the end of the day. A streamlined collection of Company Income Taxes, will unleash capacities for SMES, that we have never seen before. It is a widely held view, in Economics, that money in the hands of Entrepreneurs, who create it, is more productive, than handing it over, in the form of Taxes, to Government to reallocate .
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It will be a more effective Tax collection strategy, and more equitable, because it affects all SMES, and its benefits can only go to Businesses that created it, in the first place.
No Government Agency, is required to administer this relief, when granted , it is also not Money from Government directly, to be given at the discretion of any Government Agency, it will be money created by each SME for itself. The relief to SMES will be quick and effective. It will also lead to more Taxes for Government in the form of VAT Taxes, coming from the larger productive activities of SMES.
As the SMES grow their Businesses and create more goods and services, to sell to customers, VAT taxes, will grow, to be collected. This may even pay for itself and compensate for the Taxes that Government has forgiven , in the higher taxable bracket, that comes with raising the SMES Taxable threshold to N50m and above.
The implementation of this policy, will also progressively lead to formalization of the many informal Businesses that have kept their records to themselves, because of the fear of the burden of Taxes, that maybe forced on them, to pay.
This policy should be a priority now, given the pain in the economy and the very high cost, that has been imposed on SMES because of policy changes, that may not have been properly, evaluated with its impact, on the Economy, before its, implementation.
Doing this, will be effective, equitable and the right thing to do now.
Victor Ogiemwonyi, is a retired Investment Banker, and writes from Ikoyi, Lagos.