Entrepreneurs UNDER SIEGE….as taxes, bureaucracy costs plague SMEs

13 Jul, 2014 - 06:07 0 Views
Entrepreneurs UNDER SIEGE….as taxes, bureaucracy costs plague SMEs Veterinary Distributors Technical Sales executive Mr Felix Sithole inspects veterinary products in one of their branches. Agro chemical products have of late been on demand following the downsizing of CFI subsidiary Farm and City — Picture By Prudence Mpofu.

The Sunday Mail

Veterinary Distributors Technical Sales executive Mr Felix Sithole inspects veterinary products in one of their  branches. Agro chemical products have of late been on demand following the downsizing of CFI subsidiary Farm and City — Picture By Prudence Mpofu.

Veterinary Distributors Technical Sales executive Mr Felix Sithole inspects veterinary products in one of their branches. Agro chemical products have of late been on demand following the downsizing of CFI subsidiary Farm and City — Picture By Prudence Mpofu.

ASPIRING local entrepreneurs, particularly in the small and medium-scale sector, face formidable challenges ranging from punitive taxes, bureaucratic sloth and extortionate costs of importing and exporting goods relative to their peers in the SADC (Southern Africa Development Community) region.

It seems the One Stop Shop (OSS) Investment Centre, which was launched by Government in December 2010, was tailored to woo foreign investors by simplifying the procedures and processes involved in applying for local business opportunities.

However, the recently released Doing Business 2014 SADC report, a co-publication the World Bank and the International Finance Corporation (IFC), indicates that the local investor is desperately gasping for breath, especially in an environment that continues to be poisoned by seemingly insurmountable obstacles.

In essence, the Doing Business gauge, which measures the critical stages in the life cycle of a fledgling business principally compares regional economic blocs such as ECOWAS (Economic Community of West African States) and SADC, and also highlights the performance of individual countries within SADC.

On the overall, the index considers more than 189 economies — 47 in sub-Saharan Africa, 33 in Latin America and the Caribbean, 25 in East Asia and the Pacific, 25 in Eastern Europe and Central Asia, 20 in the Middle East and North Africa and eight in South Asia, including 31 from the OECD (Organisation for Economic Corporation and Development) high-income economies.

The hypothesis considers a local limited liability company operating in the largest business city.
In virtually all the aspects considered fundamental in operating an efficient business — starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting investors, paying taxes and trading across borders — Zimbabwe fared badly.
The country ranked 170 out of the 189 considered, and of the 16 regional countries observed, Zimbabwe is perceived to be only better than three countries.

Whilst the procedures considered in starting a business in Zimbabwe at nine might be viewed as compatible to those obtaining in the region, eight, it is the time taken in processing the applications that is worrying.

In the region, it takes about 35 days, roughly a month, to process the paperwork, but in Zimbabwe the same process takes a whopping 90 days, about three months.

In West African states it takes only 14 days, underlining the sheer amount of work that is needed to rein in the glaring red tape that currently exists.

But the number of procedures involved that are needed for a small business to obtain the necessary approvals to build a simple warehouse and connect it to basic utilities, at 12, are better than the average 14 in the region.

In fact, only the Democratic Republic of Congo, Zambia and Lesotho have lesser procedures at 11.
However, again, it is the time taken in regularising the warehouse, which the study considers as integral to dealing with construction permits, that is a huge letdown.

In other jurisdictions in the region, applicants are used to getting their construction permits in 182 days, but not in Zimbabwe.
Local authorities take a maximum of 496 days, which, essentially, is more than a year — the worst of all the 189 countries studied.
For example, in neighbouring South Africa it takes just 78 days.

“Zimbabwe made obtaining construction permits more difficult by imposing inspections by Chief Building Inspector or Deputy Chief Inspector, which would take longer time. It also increased the fees due to inflation. Meanwhile, it is more time consuming to obtain water connections from local authorities . . .

“Instability and severe administrative backlog led to increase of costs for all construction permit related procedures by US$14 and delays in approvals by 474 days,” observes the report. Power utility Zesa (Zimbabwe Electricity Supply Authority) however seems to be up to the task as the time taken to connect a small business, requiring a standard three-phase, four wire Y, 140-kilovolt ampere (kVA) subscribed capacity connection, at 106 days is better than the regional average of 145 days.

It even takes more days in West Africa. Only Namibia, DRC and Mauritius are better.
Notably, the World Bank observes that, contrary to perceptions, transferring property title in Zimbabwe is considerably better than other parts of the continent.

The number of procedures, which are six, are less than the SADC average of six, while it takes less than 36 days to do so, 15 days better than regional averages.

Similarly, credit information systems and borrowers and lenders’ rights in collateral and bankruptcy laws are observably compatible to the regional economic bloc.

Economists believe that credit information systems enable lenders to view a potential borrower’s financial history (positive or negative)—valuable information to consider when assessing risk.

They also permit borrowers to establish a good credit history that will allow easier access to credit. In addition, sound collateral laws enable businesses to use their assets, especially movable property, as security to generate capital, while strong creditors’ rights have been associated with higher ratios of private sector credit to GDP (Gross Domestic Product).

Taxman hounding businesses to the informal sector
Most crucially, the recently published data seems to suggest that the country’s punitive tax region is hounding SMEs into the informal sector. Government estimates that more than US$7 billion is circulating in the informal market.

According to Doing Business data, in economies where it is more difficult and costly to pay taxes, larger shares of economic activity end up outside the mainstream economy where businesses pay no taxes at all.

Statistics show that the administrative burden of complying to taxes in Zimbabwe seem to be steep. The number of tax payments that are expected from SMEs per year total more than 49 locally, markedly more than the average 31 in SADC. Closer to home, only seven days suffice. Also, the tax portion claimed by the taxman is largely viewed as grossly unfair as more than 35,3 percent of the profit accrues to the authorities. But Zimbabwe fares way better in this regard than the DRC, Angola, Tanzania, Mozambique, Swaziland and Madagascar.

In the post-2009 period, the country took deliberate steps to reduce the corporate income tax rate from 30 percent to 25 percent.
Capital gains tax was also slashed from 20 percent to five percent and the payment of corporate income tax was simplified by allowing quarterly payment through commercial banks.

Bloated import and export expenses
What is, however, extremely alarming for local entrepreneurs is the onerous time and cost it takes to either import or export a container of wares.

Zimbabwe ranks as the worst of all the countries that were considered.
While it takes regional economies an average of 28 days to export at an average cost of US$1 904 per container, it takes the local exporter more than 53 days at US$3 765 per container. Likewise, both the time and cost taken to import is scandalous.
It takes more than 71 days to import a container at a jaw-dropping cost of US$5 660, while 34 days are generally viewed as ideal in SADC.
The regional cost of importing is US$2 428 per container for the region and US$2 111 for Ecowas.

In South Africa, the importer is charged an estimated US$1 980.
Whatever the aberrations involved in the importing and exporting, the Doing Business data portray the local courts as able stewards in enforcing contracts and, to some extent, resolving insolvency.

Not surprisingly, the ease of enforcing contracts falls with regional averages.
There are however some challenges in terms of recovering investments in insolvent businesses. On average, it is believed that one is able to recover on 13 percent of the investment. This compares to Botswana where it is possible to recover 62 cents on the dollar.

Market watchers believe that Government still needs to invest more effort in reforming the business environment, particularly in eliminating bureaucratic sloth in order to make businesses be more efficient.

Equally, some of the bloated costs point to the country being both a high cost destination and producer of commodities.

Business Editor’s Note: “Much of the information that we used for our lead story in the business section is from the Doing Business  report, readers can download document here”click here – Doing Business Zimbabwe

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