CCP analysis on SME sector: ‘Complex regulatory regime pushes up cost of doing business’

ISLAMABAD: The Competition Commission of Pakistan (CCP) has declared that the complex regulatory regime has created a regulatory burden for small and medium enterprises (SMEs) and increased their cost of doing business.

According to an analysis of the CCP on the SME sector, the general sales tax (GST) revealed the complexity of the tax system in Pakistan. It has demarcated the country into five competing tax jurisdictions, creating high compliance costs for businesses. Businesses operating across the country need to submit 60 tax returns annually and sales tax refunds take an average time of 18 months.

The tax base is split into goods and services, with the power to tax them separately vested with the federal and provincial governments, respectively. The base is further broken down geographically, as each province has the power to tax services supplied within its jurisdiction and levy its own tax rates on these services.

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This fragmentation has led to inter-provincial and federal-provincial jurisdictional conflicts, resulting in double taxation, exporting of taxes to other provinces, tax evasion, and consequently extremely high costs of compliance for businesses, especially SMEs with a small capital base, whose clientele is located nationally.

To sum up, strengthening the credit guarantee system and availability of funding will determine the financing to SMEs by the FIs. Rather than ‘moral persuasion’ as indicated in the said policy to be adopted by SBP to encourage banks to lend in the sector, the credit guarantee system needs to be strengthened, and in the absence of guaranteed credit, even achieving the indicative targets set by the SBP may not be achieved.

In 2019, Pakistan ranked 108th out of 190 countries on the World Bank Ease of Doing Business Index. In comparison, India ranked 62nd, Malaysia 12th, U.A.E 16th, and South Korea 5th.162 The Ease of Doing Business Index is based on ten factors: starting a business, dealing with permits, getting electricity, registering property, availability of credit, protecting minority investors, payment of taxes, trading across borders, contract enforcement, and resolving insolvency.163 There are at least 12 different categories of general regulatory layers that are applicable to all firms doing business in Pakistan (and four additional administrative processes for foreign companies).

Administration and implementation of business regulations are based on cumbersome processes with inconsistent implementation and enforcement. A total of 50 laws and numerous secondary regulations are enforced by over 40 national and subnational agencies and departments through various NOCs, permits, and licenses in regulating the manufacturing sector.

The multiplicity of regulations, and their fragmentation across different levels of government, together with their ad hoc and mostly manual administration, exposes the system to rent-seeking behaviour, which has served as a major deterrent to private investment in the country.

In recent years, the government has taken steps to simplify, automate and integrate regulatory processes across the federal and provincial authorities under the Better Business Regulation, the CCP added.

Copyright Business Recorder, 2023