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Contribution of small and medium enterprise to the economic development of Rwanda

par Valens NYANDWI
Universite Nationale du Rwanda - Licence 2013

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2.10.2. Policy objective 3: Put in place mechanisms for SMEs to access appropriate business financing

Financial institutions perceive SMEs as high risk and are therefore inflexible in terms of collateral accepted and repayment terms. This is compounded by the fact that most small borrowers lack experience and understanding of financial organizations and do not have the necessary skills to make successful applications.

In addition, most financial products from commercial banks are not suitable to the agricultural sector, where most SMEs currently operate, and existing regulations limit the total funds available for lending. The policy recommends working with private commercial banks to strengthen their SME lending windows and knowledge of SME's in general.

Despite this, there are funds available for SMEs to assist in lending. Currently there are four credit lines and four guarantee funds created by Government for which SMEs are eligible. These include funds for export promotion, agricultural development and SME development. They are managed by two different entities: the National Bank of Rwanda and the Rwandan Development Bank (BRD). However, this poses two problems: firstly the complexity of having a number of different funds managed by different entities; and secondly the issue of «conflict of interest», when the facility is managed by an institution that is the biggest recipient of the fund itself (i.e. currently BRD).

2.10.3 Policy objective 4: Simplify the fiscal and regulatory framework for SMEs growth

The promotion of a legal and regulatory framework, that supports the development of SMEs, is key to both promoting and formalizing the sector. Current Rwandan investment and tax policy is structured toward the promotion of large enterprises and also fails to take advantage of the huge tax potential of an SME base that is willing to comply with simplified procedures and tax rates that stimulate rather than stifle entrepreneurial thinking.

In Rwanda both the high rate of taxation and the complexity of the tax code are major burdens to SMEs. Businesses in Rwanda must currently pay under a minimum of seven separate tax regimes, meaning not only is taxation high, but the World Bank estimate 3% of Rwanda's GDP is spent on compliance issues (Red Tape Study, 2008). This goes beyond taxation to include environmental regulations, EAC and international quality and safety standards required for export and Rwandan government health protocols. Many SMEs in Rwanda are shut down due to failure to comply with environmental or health regulations, even though they cannot afford to comply or do not understand the regulations themselves.

The Government recognizes the need to simplify the complex systems and to reduce the rate of tax in order to encourage unregistered businesses to enter the tax system. In line with this, a move towards a Flat Tax regime in Rwanda is currently being discussed. The aim of a FT will be to reduce the administrative burden on all economic agents, expand the available tax base through formalization and thus increase revenue generation.

Experience in other countries has shown that lowering taxes can actually increase tax revenue by improving tax compliance and increasing the tax base. The South African Revenue Service has increased its revenue by an average of 17% a year while continuously introducing incentives such as the consolidated turnover tax, to reduce taxes for individual SMEs.

The implementation of a flat tax encompassing income, VAT, employment and profit taxes is already in the process of being studied and developed. Special attention is being paid to the possible impact on SMEs, particularly around the proposed removal of all exemptions, incentives and special conditions. A flat tax should maximize government tax revenue collection while keeping rates low enough to allow tax payers an acceptable return for their effort and entrepreneurship. It is assumed that the flat tax will be introduced for all businesses in Rwanda.

v Strategies

A number of key strategies are required in order to achieve this policy objective:

» Simplify tax procedures for SMEs filing returns by reducing the number of payments to two per year and the number of taxes to be paid to one single authority as opposed to the current situation.

»Undertake a publicity campaign to inform SMEs of the new FT regime and benefits of formally registering as a tax payer.

» Sensitize SMEs to new regulations to increase formalization.

» Adopt a non-retroactive payment policy for newly formally registered SMEs

»Introduce a reward scheme for registered SMEs that induce un-registered SMEs to register for tax purposes and Work with regulatory agencies to simplify and streamline regulations for SMEs, making them SME friendly.

» Provide financial support through the SME development fund to assist existing viable SMEs that face closure for non-compliance.

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