The number of registered businesses in Brazil leapt from 2.5 million to 11.6 million between 2007 and 2016 following the introduction of a special small business tax regime, charges the country's small business agency Sebrae.
Sebrae this week shared the results of a study that revealed that in December 2007 Brazil had 22.7 million business owners, 2.5 million (11%) of which were in the formal sector. By the end of last year the percentage of registered firms stood at 50% of the 26.1 million firms in the country.
Sebrae expects the number of small businesses to continue to climb and estimates that there will be 17.7 million registered firms by 2022 - or 63% of the expected 28 million firms.
The number of registered firms include a special category for one-man micro entrepreneurs (referred to as microempreendedores individuais) introduced in 2009 which account for the majority of these entities (see this post), to registered small and micro firms.
However the agency attributes much of the radical increase in formalisation to the onset of the small business tax regime Simples Nacional in 2007.
Sebrae President Guilherme Afif Domingos pointed out that the increase in formalisation has also had a direct impact on tax collections.
The federal tax contribution from the Simples Nacional tax regime has almost doubled between 2007 and 2016 – from 4.2% of all taxes, to 7.9%. In 2008 the tax collection from Simples stood at $41bn and this climbed to $73bn by 2016.
“I don’t know any other segment of the economy that has seen its participation in tax collection double. When Simples was created many people alleged that the government would lose a lot of tax. Today we have the proof that the more we simplify and reduce the tax burden the more formalisation and tax collection grows.”
Earlier this year Sebrae released figures that reveal how the Simples tax regime has helped to double the survival of firms subscribed to the tax form (see this post).
As the country begins to slowly emerge from an over two-year recession the agency is fighting to ensure that tax breaks remain in place for small businesses.
Yet the real work will be to simplify with more haste the country's byzantine bureaucracy, of which Brazil has barely begun to do (see this post). A bigger effort is needed.
Timm is a South African who writes on small business in emerging economies. Follow Small Business Insight on Twitter at @Smallbinsight and on Facebook.
It can take up to an average of 240 days to register a business in some states in India – or almost 10 times longer than the average calculated by the World Bank’s Doing Business report, a new survey by India’s strategic planning unit NITI Aayog has found.
The findings, released on Monday (28 August), suggest that while Prime Minister Narendra Modi claims to be making progress on cutting red tape for business, much of this has still be realised by Indian entrepreneurs.
The survey, which was carried out last year and is titled “Ease of Doing Business: An Enterprise Survey of Indian States” covers 3,276 manufacturing enterprises spread across India, including 141 early-stage firms.
In comparison the World Bank’s ‘Ease of Doing Business’ survey, which ranked India at 130 in 2017 and surveys experts (rather than firms) in just two cities of Delhi and Mumbai.
The NITI Aayog survey found the average time taken to set up business in India in 2016 was 118 days, with a wide variation across states, ranging from as low as 20 days to up to even 240 days.
“According to our survey, time taken to set up business is much longer on an average than that according to the World Bank’s ease of doing business survey,” NITI Aayog vice-chairman Arvind Panagariya (pictured above) is cited by Economic Times as saying.
The survey firms cited labour constraints, difficulties in scaling up and the shortage of information needed to grow.
Easier for new firms
The surtvey further found that on average, only about 20% of start-ups reported using single window facilities introduced by state governments for setting up a business.
Single window systems have been introduced in many states in recent years. This system was part of the checklist of 98 reforms agreed upon by state governments under the “Make in India” initiative in 2014.
In fact for all the changes that the government proclaims to be making only 38% of the enterprises surveyed said that the regulatory environment for setting up a business had improved. Another 38% said it had stayed the same while 21% said it had worsened.
However the survey found that Indian enterprises found obtaining construction permits, was better than the survey results of the World Bank’s ease of doing business report.
High growth states foster start-ups
With the news emerging this week that India's economy slowed to 5.7% in the second quarter of this year, India must do more to cut red tape.
The survey found that in the 15 fastest growing states the share of young enterprises is higher than in the 14 low-growth states (26% in the former versus 22% in the latter).
The survey’s authors say the higher number of young firms in high-growth states could be due to regulations and processes being relatively easier in recent years for starting a business in these states.
For example in high growth states it takes 18 fewer days on average to get construction permit compared to low-growth states and 10 fewer days on average for getting labour approvals .
In the words of the great poet Henry David Thoreau, “Our life is frittered away by detail. Simplify, simplify, simplify!" This should be India's new clarion call.
Timm is a South African who writes on small business in emerging economies. Follow Small Business Insight on Twitter at @Smallbinsight and on Facebook.
Entrepreneurs in Argentina will be able to register a new simplified form of company online within 24 hours from September 1.
It follows new regulations gazetted by the country's inspector general (IGJ) for the registration of simplified joint-stock company (SAS) on Thursday July 27.
The measure forms part of a number of others contained in Argentina’s new Entrepreneur Law approved by the senate in March.
The government hopes in time to allow 24-hour online registrations for all forms of companies.
The introduction of the SAS form will be the second business type that the country now allows for registering a business within one day, as the IGJ has since July 12 permitted a 24-hour online registration of a limited liability companies (SRLs).
Registration is through the IGJ’s website under the section for electronic registration.
Officials reported this week that registrations for SRLs have already climbed 50% since the introduction of the online measure.
The SRL differs from an SAS in that the SRL that requires the registration of least two partners. To register as an SAS requires only a single partner, with a minimum capital of two minimum wages, to receive a tax number and bank account in one day.
Among world's worst
Presently Argentina is one of the most difficult places to open a business. It is ranked by the World Bank at 157 out 190 countries when it comes to registering a business and takes on average 40 to 60 days to register a business.
However earlier this month the Inspector General of Justice, Sergio Brodsky (pictured above) said the changes will allow Argentina to climb the World Bank’s rankings, but only in next year’s report as the rankings are published in October and the study was conducted in May when the provision was not yet in force.
The measure is in line with a similar one enacted in neighbouring Chile in 2013, which allows for online registration in one day (see this earlier post).
In April statistics from Chile’s Ministry of Economy revealed that 72% of the 8,810 business registrations in Chile that month were performed online. The figure has climbed from just 29% of registrations in May 2013 when the measure was introduced.
Online registrations in Argentina could see similar growth. Under the new Entrepreneur Law the government has proposed the introduction of an incentive that allows investors to have 75% of any investment in an SAS company or SAS accredited investment fund tax-deductible for up to 10 percent of the investor’s annual profits.
Investors who choose to invest in less developed areas, with lower access to capital, will be able to deduct up to 85%.
Likely for this reason the government in March (when officials estimated the measure would be introduced within two months) projected that more than 40% of the new companies created this year will do so under the SAS form.
New Entrepreneurs Law
Argentina’s new Entrepreneurs Law also contains a number of other measures. These include:
The biggest threat however is the country's politics, which have long see-sawed between one extreme on the left, to another on the right. Yet if things are kept in check the world will once more be looking at Argentina with interest.
Timm is a South African who writes on small business. Click here to sign up for the monthly Small Business Insight newsletter.
When President Jacob Zuma in 2014 announced the setting up of a new small business department many South Africans felt that the government was at last serious about supporting small business. Yet now approaching its third year the Department of Small Business Development has little to show for itself.
In November 2016 during a parliamentary briefing the department came under fire from MPs who said it had done little in the way of supporting small businesses or improving co-ordination of small business support across departments, entities and municipalities.
The chair of the National Assembly’s small business committee, Ruth Bhengu even remarked at the time that there is “no problem at policy level, the problem is at implementation level”.
'Hamstrung by budget'
The department in its defence claims that it is hamstrung by a small budget (for example the National Treasury slashed a third off the department’s requested allocation from the fiscus for the 2015/16 year).
Yet if it is to get a bigger allocation from the fiscus it will have to prove that it can spend its existing allocation of about R1.4 billion ($106m) a year wisely. In its 2015/16 annual report the department itself notes that it had failed to implement eight planned programmes for that financial year.
Little progress against red tape
Among these was a provincial red-tape reduction study which the department had to defer to the following financial year. Despite this it was able to carry out workshops with 81
municipalities on guidelines to reduce red tape.
Yet holding workshops alone don’t amount to tackling red tape if the actual laws are not removed or made easier for businesses to adhere to these through the use of technology, better trained public servants or streamlined procedures.
Small Business Minister Lindiwe Zulu’s initial pledge that she would look at how to reduce red tape for small businesses particularly labour laws has seemingly come to nought.
Red tape in some respects is worsening. Since the department’s inception the time it takes to register a business has increased (even as online registrations have grown) – from 19 days in 2014 to 46 days in 2016, according to the World Bank.
New labour laws (see this earlier post) require firms to convert temporary workers into permanent staff after three months (although firms with fewer than 10 employees and start-ups are exempt from these).
A national minimum wage planned to take effect in May 2018 will hit small firms the hardest. An advisory panel’s proposal to allow firms with fewer than 10 employees a one-year period to phase in the new minimum wage looks to have been dropped by government, labour and business (see this post).
To combat red tape the department could do more to publicise the use of regulatory impact assessments (RIAs) among government departments when new legislation is considered. RIAs are useful mechanisms in ensuring that any new legislation doesn’t end up killing small businesses, but far too few government departments make use of them.
Little monitoring, research
Another serious flaw in the government’s assistance for small business is that the state carries out very little monitoring of its own programmes and next to no research on the sector. This was highlighted by a 2015 review of the department’s programmes (see post)
The department doesn’t publish any detailed reports on the impact that its programmes have made (although the department noted last year that a review is currently under way of two of its programmes).
Nor does it carry out much research on the sector. South Africa, unlike other emerging economies like India, Malaysia or Brazil, doesn’t run a regular census or survey on the on the small business sector.
Without consistent research and evaluation and monitoring of programmes, it is easy to understand why programmes are simply started and run without too much consideration for the impact they have on new firm creation, creating sustainable jobs and encouraging more innovation and exports.
No voice of small business
The department has also done little to address the voice of small business – which is often drowned out by big business or absent because business owners are so busy trying to keep their businesses afloat.
A national small business advisory council – set up in 2006 by the Minister of Trade and Industry – could help, but few small businesses even know it exists.
Even if they did, there is no way to access its minutes, and so they can’t participate in debates on the sector or hold the government to account on what it is doing to support the sector. This renders the entire council a waste of tax payers’ money.
A new council has not been announced despite the small business ministry having issued a call for nominations went out in August 2015. The council instead needs a remodelling to encourage openness and participation – or it should simply be done away with.
Then there’s the department’s Small Enterprise Development Agency (Seda) which has never made much of an impressive impact.
For one the agency’s budget of R750 million ($56m) is miniscule when compared to that of similar agencies in Chile or Brazil (their agencies have a budget three and 17 times larger than Seda’s, respectively (see this post).
Seda also helps few businesses (just less than 11,000 in 2015/16, compared to for example Brazil’s Sebrae which in 2014 assisted 2.2 million businesses or one in five businesses in the country (see this and this post).
Seda might be able to improve its impact if it made use of better business advisors and mentors. Shamefully many of its business advisors have never run a business before.
Seda’s new head said in August last year that efforts were being made to improve the skills of its internal business advisors and the quality of its mentors (see this post)
Added to this though Seda is steadily growing its incubator network, the bulk of its incubators are aimed at supporting fairly unsophisticated firms, rather than supporting entrepreneurs that develop more innovative ideas or those that would be able to have a bigger impact on employment.
Little focus on job creators
This support for run-of-the-mill businesses seems to be inherent in the government’s small business support over the years.
Much of the department’s focus for example is on supporting informal businesses – through business skills training offered to informal traders and attempts to partner with municipalities to develop better trading infrastructure in townships.
Yet the department appears to be doing little to assist the real job-creating firms – start-ups with innovative ideas.
The one exception is the launch last year of Seda’s Gazelle programme (see this post), an attempt to help 120 high-growth businesses to grow over three years by helping them source finance and business support. It’s a gamble which might just come off if the private sector is roped in sufficiently.
Rare victory with set-asides
Despite its challenges however the department has scored one important victory for small businesses – in getting the National Treasury to draft regulations that call for state departments and entities to get winning bidders to outsource 30% of the value of contracts to small businesses.
The regulations are expected to take effect from April 1 this year. But the measure will not be compulsory for state entities to carry out. This may dampen its impact (see here).
Ultimately the department’s central challenge is the way it is configured. Small business support is spread across a wide range of departments at provincial and national level and is also located at the level of municipalities.
All this amounts to about R15.5 billion ($1.2bn) in support to small businesses, according to DA MP Toby Chance, who sits on the small business committee.
Better co-ordination would therefore help. Yet more effective than just another line ministry might be a small business function in The Presidency or a high-profile committee headed by the president and staffed by heads of agencies and private-sector organisations that assist SMEs (similar to Malaysia’s National SME Development Council).
Importantly, if it is to make more of a radical impact the department and the government as a whole should be more bold and step out with more aggressive instruments that incentivise funding and support from the private sector.
The Treasury’s Jobs Funds, the R&D tax incentive, 12J venture capital tax incentive, Technology Innovation Agency’s seed fund and the use of the BEE codes’ supplier and enterprise development to get big companies to help and buy from more black suppliers show that the state is onto something.
In the end the best way for any government to help small businesses is to strip away as much red tape as possible, hire better and more accountable public servants and incentivise the private sector – big firms and organisations – to ratchet up support to small businesses.
Getting this right could result in real radical economic transformation.
*For more on the Department of Small Business Development's plans for this year see this recent post.
Timm is a South African who writes on small business. This opinion piece was included in the 2017 Global Entrepreneurship Monitor (GEM) report for South Africa (find it here). Click here to sign up for the monthly Small Business Insight newsletter.
Stephen Timm is a