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.
Small businesses in India are in a state of confusion following the implementation on Saturday (July 1) of a groundbreaking new Goods and Services Tax (GST).
The tax form is intended to bring together and simplify the multitude of taxes that each of the country’s 29 states charge consumers and producers, and in so doing lower India's cost of doing business, but the structure is complicated – it includes four tax bands.
Businesses must file 37 forms a year (three monthly and one annually - see here) - though firms with sales of less than two million rupees ($30,800) are exempt from charging GST.
Despite media reports of some small businesses shutting shop temporarily, the finance ministry said the first two days after the rollout of GST had passed “without any major problems being reported”.
In addition India’s revenue secretary Hasmukh Adhia (pictured above) said today that in the case of retailers, such firms will have to just file one return form as the two other forms will be auto populated.
Adhia explained last week that the multiple rates were decided upon because India has a mix of rich and poor. "In our country, where there are different strata of society to be looked after, it's not possible to have an ideal GST," he said.
Since the launch of the GST portal on June 25, 223,000 firms have joined the tax system.
Previously India taxed producers rather than both producers and sellers. Tax applied only to firms with sales of 15 million rupees. With the GST threshold set at 2 million rupees millions of firms will fall into the tax net for the first time.
An agent from Crisil SME Ratings in May said the lower tax burden under GST will reduce the cost of raw materials and logistics, while increasing for those in the services sector.
But the tax is bad news for small firms hesitating to shift into the formal economy. (India has cancelled the registration of more than 100,000 companies which were "in violation of laws", Prime Minister Narendra Modi said on Saturday)
In addition India's Financial Express says India’s top rate of 28% makes it the country with highest GST rate going past Argentina that levies 27% tax on goods and services.
Ultimately GST is likely to reduce red tape and improve India's competitiveness, while increasing the tax base needed for India to fund the rollout out things such as better education and more infrastructure.
While some small business associations have called for subsidies to allow small firms to weather the changes, Indian authorities should rather look to help move more Indian SMEs onto the internet and provide better tax help. In the end there's no gain without pain.
Timm is a South African who writes on small business. Click here to sign up for the monthly Small Business Insight newsletter.
Small and micro enterprises that opt for a special tax dispensation in Brazil are more than twice as likely to survive their first two years than that don’t opt for the dispensation, a new study reveals.
The study, by Brazil’s small business agency Sebrae, reveals that 83% of small and micro firms that started in 2012 and subscribed to Simples tax, survived in their first two years in business – compared to 38% of those that paid ordinary business tax (by presumed profit or real profit).
As of the middle of last year about 10.9 million businesses were now subscribed to Simples, which was introduced in 2006 (although it had been running in another form since 1996) and offers various lower tax rates according to a firm’s turnover.
It also reduces the tax burden that firms face (which can takes firms an average of 2,083 hours a year according to the World Bank) as it brings together eight tax types. Firms only need complete one tax form a month, instead of eight for those outside of Simples.
Currently the government provides a long list of those kinds of firms that can take advantage of the tax form. Sebrae is fighting to expand the tax types to more forms of small businesses.
The research also revealed that between 2012 and 2016 the number of firms opting for Simples has grown by 64% - from 7.1 million to 11.6 million.
The growth has mostly been driven by the registration of those signing up for Microempreendedor Individual, a registration form for two-man firms, which alone grew 150% during this period.
Brazil is slowly recovering from its worst ever recession, which has dragged on since 2015. Last year senators scaled back a plan by Sebrae to increase the threshold under which firms can benefit from Simples (see this earlier post).
Sebrae had wanted senators to vote to increase the annual revenue threshold under which firms can benefit from the tax, to 7.2 million reals ($2.2m) from its current 3.6 million.
However senators instead voted to increase the threshold by smaller amount, to 4.6 million reals after concern that offering too generous tax cuts could rob the fiscus of much needed revenue.
The latest amendments were to come into effect in the middle of this year, but have been pushed back to 2018, by the Senate.
'Biggest programme in world'
On Tuesday Sebrae president Guilherme Afif Domingos (pictured above) told a senate committee that Simples has helped incentivise businesses to register and has generated employment.
In addition he said over the last 10 years Simples has grown 10 times faster than the growth in all federal taxes collected.
“It can be considered as the biggest programme in the world for the social and economic inclusion,” he said, adding that in the last 10 years small and micro firms have created 10.7 million jobs while large and medium-sized firms have closed over a million jobs.
Simples is a laudable effort. Yet it perhaps demonstrates more than ever the gargantuan tax system that continues to bedevil entrepreneurs who operate there. Much more work lies ahead for Brazil in reducing the weight of centuries of unnecessary bureaucracy.
Timm is a South African who writes on small business in emerging economies. For more view this Sebrae presentation (in Portuguese). Follow Small Business Insight on Twitter at @Smallbinsight and on Facebook.
India’s small businesses, many hamstrung after the government removed 86% of cash in circulation last year, were this week handed some relief, with a cut in tax rates.
While India's corporate tax rate of 30% remains unchanged, Finance minister Arun Jaitley (pictured here) revealed in his budget speech yesterday that firms with an annual revenue of under 500 million rupees ($7.4m) will be subject to a 25% tax rate from April 1.
Such firms make up 96% of the 694,000 companies that filed tax returns in the 2015/16 tax year, says Jaitley. He estimates that the state will forego about 72 billion rupees ($1.1bn) in revenue per year through the reduced tax rate.
The state has also cut the rate for presumptive tax for firms with a turnover of up to 20 million rupees ($300,000) - from 8% to 6%.
Start-ups get boost
In addition the government has increased a tax holiday given to start-ups (defined as innovative firms of less than five years old and annual sales of up to $3.6m) from any three years in a five year period, to any three years in seven years.
Yet to gain access to the tax holiday firms have to get approval from the Department of Industrial Policy and Promotion. To do so they need to get an incubator or appropriate body to vouch for the firm.
Just a third of the 1,425 start-ups that have sought certification have had it approved in the year since Start-Up India was launched, shows a recent status report of the initiative.
Added to this, only eight start-ups accessed the start-up tax rebate in 2016 out of 111 applications received, according to the report (see this post on the initiative's progress).
Still a little high
India's effective corporate tax rate has been gradually falling over the last decade and a half (see the graph, above), although it's still among the highest in the world.
An OECD study of 2014 tax rates of member countries (mostly rich countries) as well as G20 countries (India, Turkey, Argentina and South Africa) found that the average small business tax rate came to 18.7% (against 29.1% for the average ordinary corporate tax rate).
The real problem however seems to be India's personal income tax collections.
A report last year by the income tax department revealed that just one percent of all Indians paid tax in the 2012/13 tax year. Despite this the number of tax payers has risen 25% between 2011/12 and 2014/15.
Growing the number of tax payers further might just give authorities the room they need to continue to lower the tax rate for small firms.
Timm is a South African who writes on small business. He visited India before the start-up boom, in 2010. Follow Small Business Insight on Twitter at @Smallbinsight.
Stephen Timm is a