Why business formalisation costs are a major impediment to BuBu policy

 

 

By Moses Mabala

 

 

A section of this policy encourages supermarkets to avail shelve space for locally produced goods of Small Medium Enterprises (SMEs).

 

Since BuBu's launch, the MTIC has done a commendable job in the implementation of the policy by closely keeping tabs on supermarkets and recently organised the BuBu Expo as one of the credible ways of promoting locally produced goods. With BuBu in place, there is now a noticeable display of locally produced products in most supermarkets.

 

However, for many indigenous SMEs, the cost of complying with supermarket requirements is still high and out of reach, making it a significant barrier to market entry. The bureaucracy involved in processing business documentation is a major obstacle, which has seen many SMEs give up along the way and therefore miss out on the opportunities created by the policy.

 

The few that have managed to get over this initial hurdle are struggling to consistently meet supply needs due to the increasing operational costs.

 

For instance, an SME intending to supply roasted groundnuts to a certain big supermarket in town will be required to have:  A registered company, trading License, bank account, VAT certificate, TIN, UNBS certificate, a well packaged product that must be labelled with GS1 listed barcodes, etc.

 

Fulfilling these requirements is indeed an uphill task for many indigenous SMEs. Thus, the reason this article is exploring some of these costs incurred in the course of business formalisation:

 

Company registration (A Limited Liability Company) with a share capital of sh2m involves: Name reservation — sh25,000, legal fees between sh800,000 - sh1.2m to take care of drafting of Board Resolutions, Memorandum & Articles of Association (MAA) depending on your lawyer or firm.

 

Stamp Duty for registration at Uganda Registration Services Bureau (URSB) at sh200,000 and a trading license from KCCA will cost sh260,000 for retailers and must be paid annually for those operating in Kampala areas.

 

Account Opening:  Commercial Banks require copies of MAA, Certificate of Incorporation, Forms 18 & 20, and Board Resolution certified by URSB. The cost of certification is sh100,000.

 

As if this isn't enough, banks also require search fees between sh50,000 to sh60,000 to confirm with URSB on registration status.

 

One wonders why this has to be a mandatory requirement after all certified copies have to be submitted. Additionally, a deposit of sh100,000 is required as the minimum for a transactional or current account opening.

 

Supermarket costs - The cost of presentable packaging bags are approximately sh700,000 for the first two consignments, printing of labels and stickers - sh500,000, GS1 listed barcodes - sh900,000 paid annually to the only GS1 registering company in Uganda. 

 

When it comes to Value Added Tax (VAT) requirements, things get even harder because of the minimum sales turnover of sh150m to qualify. Now, for an SME with a share capital of sh2m to get one, TKK (Towa Kittu Kidogo) will apply at a minimum of sh500,000. Add to this a Quality Certificate from Uganda National Bureau of Standards (UNBS) costing sh850,000 per product paid annually.

 

Even after making your first delivery to your supermarket, your payment will be effected after a month or more. And a lingering surprise awaits you when a withholding tax of 6% is deducted from your gross pay. 

 

Filing of VAT returns has to be done monthly by an external Accountant at a minimum cost of sh30,000 per filing. This is because many SMEs have limited manpower and ICT facilities in house to file. And filing of Annual Returns at URSB is sh50,000.

 

In other words, an average SME with sh2m share capital requires a minimum of sh 5,015,000 in formalization costs to start supplying any major supermarket. Ongoing costs such as license renewals amount to sh2,060,000, income tax - 30%, withholding tax - 6% remitted monthly.

 

As a result, many SMEs have continuously been trapped in the informal sector due to such high costs. Such exorbitant costs are not only choking SMEs but also limiting the potential for upcoming start-ups thus creating an impediment to the intended objective of the BuBu.

 

Owing to the above background, any measures aimed at reducing business formalisation costs, providing finance schemes to SMEs that support product development and agro-processing equipment,  providing legal aid ‘pro borno' to help SMEs with drafting of legal documents for registration, providing tax incentives that simplify VAT registration and waivers on withholding tax and having a one-stop center with all the above mentioned agencies in one place can go a long way in bringing about vibrant, dynamic and competitive SMEs as envisaged in the BuBu policy.

 

One direct way to reduce formalization costs is by abolishing the "Non-Tax Revenue" (NTR) introduced by most Agencies to raise revenue for themselves.

 

Non-Tax Revenues-NTRs have increased unnecessary business costs in the form of ‘fees'. Once such measures are instituted, BuBu spillover effects will automatically drive Agro-industry, partly solve the Balance of Payment problems by Import substituting, Create employment and increase income distribution.

 

The author is an Economist, mabalam@gmail.com