Granting “absolute” tax exemption to help micro, small and medium enterprises (MSMEs) could become a disincentive that would hinder the sector’s growth in the long run, according to local economists.
On Monday Deputy Speaker Romero S. Quimbo of Marikina City told the BusinessMirror that MSMEs do not require additional funds but tax exemptions.
EagleWatch Senior Fellow Alvin Ang said granting an absolute tax exemption to MSMEs is similar to the move of the government to grant minimum-wage exemptions to firms that have less than 10 employees.
“I do not favor exempting small businesses from paying taxes because it will become an incentive to remain small,” Ang told the BusinessMirror. “This is similar to the policy of exempting firms with less than 10 employees from complying to the minimum-wage law. These firms never had an incentive to grow.”
Former Tariff Commissioner George N. Manzano said, however, that absolute tax exemption, in general, is good for MSMEs, especially for the micro enterprises.
Tax exemption, Manzano added, becomes a disincentive, especially for firms “at the border” of becoming a large firm. This also requires a huge adjustment when MSMEs eventually graduate to a tax regime from a no-tax system.
University of Asia and the Pacific School of Economics Dean Cid L. Terosa, for his part, said tax exemptions can also be abused, especially when the implementing rules and regulations are not followed to the letter.
“We need to help them [MSMEs] help themselves without affecting the welfare of other sectors,” Terosa said.
Economists, however, welcomed the proposal of President Duterte to roll out a P50-billion support fund for MSMEs. However, Terosa said this must be financed through means other than increasing or introducing new taxes.
Terosa said one of the ways by which this can be done is through concessional-loan financing from the country’s official development assistance.
Ang said there is also a need to assess the growth potential and the specific products that MSMEs receiving the assistance will manufacture, or the services they can provide.
“MSMEs receiving the assistance must have a clear business plan. If these firms are only involved in trading or the provision of basic services, they should not be given funding. The government should evaluate these firms’ long-term potential,” Ang said.
Manzano also said that, while the additional funding can help address the current lack of access to financing for MSMEs, the government must put in place a mechanism that will encourage repayment.
He explained that MSMEs involved in agriculture production or services often have low repayment for the low-interest loans they obtained through government-owned institutions or programs.
Manzano said the government can also consider helping them with capacity building, particularly in accounting and finance. He said this is one of the reasons MSMEs are not considered “bankable” by financial institutions. “Some may not have good accounting records [that] prevent the market from catering to them.”
The lack of funds usually sends MSMEs to the doorsteps of loan sharks, who lend them funds at a high cost. In a 2016 working paper, the Asian Development Bank Institute (ADBI) said the interest can often reach 20 percent.
In the country, the ADBI said this is known as “5-6 financing”, which means that, for every $5 borrowed over a one-week period, borrowers need to pay $6. The $1 interest rate is equivalent to an interest rate of 20 percent.
This informal financing scheme also requires borrowers to pay on a daily basis, which means it is an additional burden, especially for small businesses that do not earn a lot of profits.