2.10.2. Policy objective 3:
Put in place mechanisms for SMEs to access appropriate business
financing
Financial institutions perceive SMEs as high risk and are
therefore inflexible in terms of collateral accepted and repayment terms. This
is compounded by the fact that most small borrowers lack experience and
understanding of financial organizations and do not have the necessary skills
to make successful applications.
In addition, most financial products from commercial banks are
not suitable to the agricultural sector, where most SMEs currently operate, and
existing regulations limit the total funds available for lending. The policy
recommends working with private commercial banks to strengthen their SME
lending windows and knowledge of SME's in general.
Despite this, there are funds available for SMEs to assist in
lending. Currently there are four credit lines and four guarantee funds created
by Government for which SMEs are eligible. These include funds for export
promotion, agricultural development and SME development. They are managed by
two different entities: the National Bank of Rwanda and the Rwandan Development
Bank (BRD). However, this poses two problems: firstly the complexity of having
a number of different funds managed by different entities; and secondly the
issue of «conflict of interest», when the facility is managed by an
institution that is the biggest recipient of the fund itself (i.e. currently
BRD).
2.10.3 Policy objective 4:
Simplify the fiscal and regulatory framework for SMEs growth
The promotion of a legal and regulatory framework, that
supports the development of SMEs, is key to both promoting and formalizing the
sector. Current Rwandan investment and tax policy is structured toward the
promotion of large enterprises and also fails to take advantage of the huge tax
potential of an SME base that is willing to comply with simplified procedures
and tax rates that stimulate rather than stifle entrepreneurial thinking.
In Rwanda both the high rate of taxation and the complexity of
the tax code are major burdens to SMEs. Businesses in Rwanda must currently pay
under a minimum of seven separate tax regimes, meaning not only is taxation
high, but the World Bank estimate 3% of Rwanda's GDP is spent on compliance
issues (Red Tape Study, 2008). This goes beyond taxation to include
environmental regulations, EAC and international quality and safety standards
required for export and Rwandan government health protocols. Many SMEs in
Rwanda are shut down due to failure to comply with environmental or health
regulations, even though they cannot afford to comply or do not understand the
regulations themselves.
The Government recognizes the need to simplify the complex
systems and to reduce the rate of tax in order to encourage unregistered
businesses to enter the tax system. In line with this, a move towards a Flat
Tax regime in Rwanda is currently being discussed. The aim of a FT will be to
reduce the administrative burden on all economic agents, expand the available
tax base through formalization and thus increase revenue generation.
Experience in other countries has shown that lowering taxes
can actually increase tax revenue by improving tax compliance and increasing
the tax base. The South African Revenue Service has increased its revenue by an
average of 17% a year while continuously introducing incentives such as the
consolidated turnover tax, to reduce taxes for individual SMEs.
The implementation of a flat tax encompassing income, VAT,
employment and profit taxes is already in the process of being studied and
developed. Special attention is being paid to the possible impact on SMEs,
particularly around the proposed removal of all exemptions, incentives and
special conditions. A flat tax should maximize government tax revenue
collection while keeping rates low enough to allow tax payers an acceptable
return for their effort and entrepreneurship. It is assumed that the flat tax
will be introduced for all businesses in Rwanda.
v Strategies
A number of key strategies are required in order to achieve
this policy objective:
» Simplify tax procedures for SMEs filing returns by
reducing the number of payments to two per year and the number of taxes to be
paid to one single authority as opposed to the current situation.
»Undertake a publicity campaign to inform SMEs of the new
FT regime and benefits of formally registering as a tax payer.
» Sensitize SMEs to new regulations to increase
formalization.
» Adopt a non-retroactive payment policy for newly
formally registered SMEs
»Introduce a reward scheme for registered SMEs that
induce un-registered SMEs to register for tax purposes and Work with regulatory
agencies to simplify and streamline regulations for SMEs, making them SME
friendly.
» Provide financial support through the SME development
fund to assist existing viable SMEs that face closure for non-compliance.
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