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Is the taxman frustrating job creation among SMEs?

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Added 16th May 2019 04:52 PM

These SMEs are often run by battle-hardened and experienced entrepreneurs, who have had their fair share of failure before stabilizing in business.

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These SMEs are often run by battle-hardened and experienced entrepreneurs, who have had their fair share of failure before stabilizing in business.

By Ronald Mukasa
 
In a recent article, the IMF highlighted the need for the creation of 600,000 jobs annually to match Uganda’s 3% population growth. Central to creating these much-needed jobs are the small and medium-sized enterprises (SMEs) with growth potential.
 
These SMEs are often run by battle-hardened and experienced entrepreneurs, who have had their fair share of failure before stabilizing in business. They often employ more than 5 people and have a tested track-record in their chosen sectors. They are heroes in their localities but largely remain locally focused and seldom grow to their maximum potential. According to the UBOS Census of Business Establishments (COBE) 2010, such business is estimated to be about 30,000 in Uganda. If each of these SMEs created only two (2) jobs a year, they have the potential to contribute 60,000 jobs annually.
 
However, many of these SMEs are not growing into the household brands that shall create much-needed jobs and also possibly fly Uganda’s flag across our borders. According to the 2018 Uganda Entrepreneurial Ecosystem Initiative (UEEI) study, it was observed that many such SMEs are growing horizontally, across sectors (largely into real estate), and are not growing vertically into their chosen sectors of specialization. We don’t see many businesses opening new branches or factories to manufacture what they have previously traded in though quite a number are quick to start constructing rental apartments or arcades. In as much as there is a need for investment in the real estate sector given the high population growth, these SME entrepreneurs are better placed to build durable local enterprises and ultimately contribute to employment. It however appears there is a ‘glass ceiling’ which many local SMEs can’t break through in order to deliver on this promise. The ‘glass ceiling’ is certainly caused by several factors, internal and external, ranging from the business culture to access to affordable finance. In this article, I shall, however, highlight one possible cause; unfriendly implementation of the tax regime, which if handled could kick-start the process of breaking through the ‘glass ceiling’.
 
Many SMEs would like to grow and expand their businesses however the taxman is often viewed as a hindrance. Unfortunately, the taxman is often the head of the welcoming committee into the formal sector and has a tendency of not being very patient with the SME’s deficiencies. Despite welcome efforts by URA to actively engage SMEs like Tax Education, the perceived unfriendly implementation of the tax regime has left many SMEs in the shadows of their business sectors unwilling to come out prominently because of the fear of having a nasty encounter with the taxman. Some may quickly conclude that if the SMEs are afraid of URA, then they certainly have something to hide and the more reason they should be followed up. However, given the challenges of starting a business in Uganda, the default position of most SMEs at this point in their growth is poor records, insufficient working capital, unstable human resource, inefficient operations, and weak business models. However, these are also solid entrepreneurs that have battled daily to create an enterprise in a turbulent business environment and the country can’t afford to lose them.
 
It is therefore unfortunate when the first opportunity to become formal is met with a tax bill at times so big that it spells the end to the enterprise. This tax bill often finds the entrepreneur struggling with bank loans, financial pressures from the extended family, unpaid wages and suppliers. Given the ‘strong hand’ of the taxman, the tax bill usually takes precedence and the SME is usually driven to make a bad business decision like taking an expensive loan from a money lender at rates as high as 20% per month. This may translate into the decline or collapse of the business given all the other unmet obligations. Luckily the entrepreneurial spirit in the business owner shall live on and they shall possibly go under for a short while and emerge under a new business name. This, however, doesn’t serve the national goals given that most potential local brands with job creation capacity are not given an opportunity to flourish as a result of this untimely death or decline.
 
In order to begin addressing this challenge, stronger effective collaboration between the SME, their public/private support organizations, technocrats, lawmakers and the taxman is needed to enhance the protection and survival of these SMEs. These SMEs should have an assurance that the government’s ultimate goal is their business survival and this goal supersedes the immediate tax return. If SMEs perceived the government's intentions as such, possibly trust could be created and solutions to the existing tax burden can be found. However, if SMEs continue to feel that the only interest government has in their businesses is taxes, we may not be able to fully enjoy the potential benefits from these SMEs especially in terms of job creation.
 
The journey of an entrepreneur is a challenging one and few manage to make it through to the end. However, as a nation, we need to support those who have chosen to stick it out and have achieved some reasonable success. In return, I believe that most of these entrepreneurs shall expand their vision beyond achieving personal success in helping the nation achieve her national aspirations. It may give us great returns to treat SMEs as national heroes and patriots. Notwithstanding their internal deficiencies, these men and women have some of the solutions to Uganda’s unemployment challenge and we should support them to break through this apparent ‘glass ceiling’.
 
The writer is the  Head of Research, Innovation, and Learning
 
Enterprise Uganda
 
ronald.mukasa@enterprise.co.ug
 
+256782388091

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