53 percent of the respondents in a PSF commissioned report have mentioned tax as the most troublesome regulation
Tax rates and tax administration are the two major challenges affecting business growth in Rwanda according to a recent report covering 400 businesses in Rwanda.
The report from which a top executive of the Private Sector Foundation (PSF) quoted from at the on-going, Tax Dialogue Conference that opened on Wednesday at Serena Hotel in Kigali also said that business leaders cited difficulty in understanding the tax system and the time burden of filing taxes as major challenges.
According to the Rwanda Informal Sector Survey Report (FIAS) that was carried out in 2006, 53 percent of the respondents mentioned tax as the most troublesome regulation.
“Almost half of the Small and Medium Enterprises (SMEs) surveyed cited tax issues as key advantages to remaining informal. The key reason firms stay informal is to avoid paying taxes and social security,” Emmanuel Hategeka, the Chief Executive Officer (CEO) told delegates on Wednesday.
The tax dialogue meeting that has attracted delegates from all over Africa goes on until the 24th of April. The conference is focusing on how the SME sector is taxed within the different African countries.
Hategeka added that the key barrier for businesses to becoming formal is the financial burden of the tax system and the lack of information about costs and benefits of making the business formal.
“SMEs are run by illiterate and semi-literate owners and families. In Rwanda 87 percent of employees are primary leavers or no formal education. They also lack the capacity and financial power to hire expert employees hence resort to family labour to run the business,” Hategeka said. He noted that despite SMEs forming the biggest majority of the enterprises, they form a very narrow tax revenue base.
“Some revenue authorities like Zambia prefer to leave SMEs out of the general tax systems due to the nature and complexity involved in monitoring, evaluating and taxing them,” he said.
Hategeka observed that SMEs need a simplified and less costly tax regime to encourage small business to grow and formalise their businesses.
“SMEs need to be given incentives to encourage them to focus and strive. The actual tax costs should also be reviewed to reduce the actual tax burden to facilitate their growth.”
And according to PSF’s business census, over 90 percent of businesses are SMEs. The FIAS study also indicates that 0.3 percent of the tax payers contribute 48 percent of the tax revenue.
Other constraints to business growth among SMEs include, high transport costs, land, bureaucracy, policy uncertainty and the cost of value addition according to the recent (2008) PSF Business Investment and Climate Survey.