Zafar Iqbal
In a bid to underscore the significance of small and medium-sized enterprises (SMEs), the deputy governor of the State Bank of Pakistan (SBP) emphasized the government’s commitment to facilitating access to finance for such businesses. During a recent summit focusing on digital-based financing solutions for SMEs, the deputy governor highlighted the central bank’s dedication to enhancing ease of finance access as a top priority, underscoring the potential of SMEs to significantly contribute to the country’s economy.
While acknowledging the vital role played by SMEs in the country’s economy, it is crucial to recognize that the limited impact of recent initiatives aimed at incentivizing the banking sector to offer financing schemes for SMEs poses a significant challenge. Despite the government’s efforts, the banking sector’s ability to expand financing options for SMEs remains restricted. However, the potential of SMEs to significantly contribute to the country’s economy cannot be overlooked.
A critical issue that impedes SMEs from accessing financial support is their predominance in the informal economy, rendering them unable to fulfill essential banking prerequisites for credit evaluation. As a result, these businesses are unable to benefit from any financing programs initiated by banks or the government. Therefore, it is imperative for the government to encourage SMEs to transition to the formal sector. This transition will not only enable them to access financial support but also improve their credibility, facilitate business expansion, and contribute to the formalization of the economy, thereby addressing this fundamental issue.
The obstacles preventing SMEs from entering the documented economy are not solely related to tax implications but are also linked to various business regulations. For example, the Industrial Relations Ordinance (IRO) mandates compliance with complex and costly legal formalities related to labor laws, social security laws, and EOBI-related regulations for businesses employing more than 10 individuals. This threshold presents a formidable barrier to many SMEs that exceed the employee limit but lack the financial capacity to satisfy the ordinance’s rigorous requirements.
Furthermore, the misalignment between the government’s definition of SMEs and the laws regulating businesses perpetuates the challenges faced by these enterprises. The government should consider revising the IRO’s delineations to align with the SBP’s classification of small and medium-sized enterprises, thereby streamlining regulations and fostering a conducive environment for SMEs to thrive.
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In addition to regulatory barriers, the complex and burdensome tax structure also poses a significant challenge for SMEs, deterring them from transitioning to the formal economy. The current income tax framework’s intricate withholding tax regime, characterized by multiple tax rates at various transaction stages, exerts a considerable financial strain on SMEs with limited resources. Consequently, overhauling this tax system is paramount to alleviate the financial burden on SMEs and facilitate their transition to the formal economy.
In conclusion, aligning business regulations with industry classifications, addressing the complexities of the tax regime, and fostering a supportive environment for SMEs to transition to the formal economy are pivotal steps for the government to prioritize. Creating a supportive environment is not just a need, but a necessity. These measures will not only enhance SMEs’ access to financial resources but also unleash their full potential, thereby contributing to the overall economic growth and prosperity of the country.
