Emmanuel HATEGEKA

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KNOWING THE SEGMENT Particularities of SMEs in
Africa Presentation at the International Tax
Dialogue Conference
Emmanuel HATEGEKA Chief Executive Officer-
PSF Kigali, 22nd April 2009
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Presentation Outline.

• PSF at a glance
• SMEs in Africa An overview
• SME Informality
• SME Tax challenges
• Key constraints to business growth
• Recommendations
• Some best practice case

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PSF at a glance

• 10 years old! Established in December 1999,
• replacing the former Rwandan Chamber of
• Commerce Industry and the then employers
• organization.
• The PSF Mission
• To represent the interests of the private
  sector,
• while providing innovative services for growth
  and professionalism
• of member enterprises towards sustainable
  private sector
• led development.
• The PSF Vision
• To be an effective self sustaining institution
• supporting strong private sector-wide performance

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As the umbrella organization for Rwandas Private
Sector, the PSF has put in place a network of
institutions to better serve its members as one
united voice

• Perform Private Sector Advocacy to influence
  policy reforms for a conducive and competitive
  business environment

• Strengthen Rwanda's Private Sector Companies
  through biz extension services
• Build Human Capacity for Rwandas Private Sector
• Facilitate Sustainable long term Funding
  Sources for Rwandas Private Sector

• Provide dispute arbitration and business
  challenge assistance

• Develop Vibrant strong Private Sector business
  Associations identify sector specific
  challenges
• Sector specific advocacy

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SMEs in Africa An overview

• In most African countries, SMEs form the bigger
  majority of enterprises
• However, they form a very narrow tax revenue
  base. From a FIAS study in Rwanda 0.3 of tax
  payers contribute 48 of the Tax Revenue
• The bigger majority of SMEs operate informally.
• In most African countries, SMEs are run by
  illiterate and semi-literate owners/families.
  From a PSF Rwanda business census, over 90 of
  business are MSMEs. 87 of employees are primary
  leavers or no formal education
• Many SMEs are rural based and thus have limited
  access to urban infrastructure markets and
  technology.

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Most SMEs remain informal. Why?
Business perceptions of advantages to being
informal
Almost half SMEs surveyed in Rwanda cited tax
issues as key advantages to remaining informal
No advantages
No product standards
Avoidance of labour regulations
No health safety inspections
No price controls
No social security contributions
No problems with licences
No income/profit taxes
Source OTF Group, Rwanda Informal Sector Survey
Report, (FIAS) December 2006
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But they know the disadvantages to informality!
Business perceptions of the disadvantages to
being informal
The major challenges for informal firms are
access to finance, raw materials and a broader
market
No access to and insecurity of land
Need to pay bribes to avoid taxes
Access to broader market
Other
Lack of access to raw materials
Fear of government retribution
Lack of access to finance
Source OTF Group, Rwanda Informal Sector Survey
Report, (FIAS) December 2006
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SME challenges center around taxation and
capacity

• Tax rates tax administration are two of the
  major challenges facing SMEs in Rwanda
• In addition to the level of taxes, businesses
  also cite difficulty understanding the tax system
  and the time burden of filing taxes as major
  challenges
• The key reason firms stay informal is to avoid
  paying taxes social security
• The key barriers to becoming formal are the
  financial burden of the tax system and lack of
  information about costs benefits of doing so
• SMEs also lack the capacity as well as the
  financial clout to hire expert employees hence
  resort to family labour next of kin to run
  business
• Some revenue authorities (like Zambia) prefer to
  leave SMEs out of general tax systems due to the
  nature and complexity involved in monitoring,
  evaluating and taxing SMEs.

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From a recent study on the cost of red tape
covering 400 businesses in Rwanda commissioned
by PSF 53 of the respondents mentioned tax as
the most troublesome regulation for obvious
reasons.
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Specific tax issues for SMEs case of Rwanda
Percentage of businesses ranking each issue as a
constraint
Level of taxes on business corporate tax
Level of taxes on business VAT
In addition to the level of taxes, businesses
also see information and administrative issues as
major constraints
Lack of understanding /information on tax system
Time spent dealing with tax issues
Difficulty filing in tax returns
Poor customer service by RRA
Source PSF, OTF Group Business Investment
Climate Survey, July 2008, n881 Qn. 4. How
important a constraint on your business are the
following tax legal issues?
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Other General constraints to business growth
among SMEs Rwandas case
Percentage of businesses ranking each issue as a
major constraint
Services
Manufacturing
Tax rates and administration are major
constraints to business growth in Rwanda
Source PSF BICS Survey 2008, OTF Group Analysis.
Services n808, Manufacturing n59
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Recommendations

• African SMEs need a simplified and less costly
• Small Business Taxation (SBT) regime
• Need for increase of SME access to much needed
  infrastructure and technology
• Need for SMEs to be given incentives that would
  encourage them to focus and strive to formalize
• The actual tax costs should be reviewed to reduce
  the actual tax burden to SMEs to facilitate their
  growth/formalization.

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Recommendations continued

• There is also an urgent need for SME capacity
  building and training to enable them comply with
  formal business procedures
• Finally, it is evident that there is a
  significantly big information gap on the side of
  SMEs in regard to taxation in general.
  Sensitization will thus come in handy
• Need for easier access to finance by SMEs

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Thank you! Website www.psf.org.rw