LIST OF ACRONYMS AND ABBREVIATIONS
CHAPTER 3: SMEs IN THE ZIMBABWEAN CONTEXT
3.6 SME CHALLENGES IN ZIMBABWE
3.6.6 The legal and regulatory environment
Some government laws, regulations and policies tend to stifle SME growth and development (Dawson & Simalenga,1994, cited in Mhazo et al., 2012; Nyanga et al., 2013). Such statutory instruments are not supportive enough to effect positive changes on SMEs. Government laws, regulations and the taxation system are so hostile that they actually hamper the growth of SMEs (Klapper et al., 2006, cited in Munyanyi, 2013; Nyanga et al., 2013; Karedza et al., 2014).
It is a requirement of the law (Income Tax Act (Chapter 24:06); Finance Act (Chapter 23:04)) that all businesses in Zimbabwe, including SMEs, pay tax (Maseko, 2014). Tax constitutes part of the government revenue that is important for the infrastructural and socio-economic development of the nation. Increasing unemployment and the closure of large companies have made the government turn to SMEs for tax revenue (Mangoro, 2007, cited in Maseko, 2014), as they constitute 90 % of all businesses in Zimbabwe (Goriwondo, 2011 & Ndoro, 2013, cited in Maunganidze, 2013).
High taxation has been cited as one of the challenges that stifle SME growth in Zimbabwe (Chipangura & Kaseke, 2012). An unfavourable tax environment forces SMEs to continue to remain small and invisible in the eyes of the central government. Once they become bigger and more formal, they become liable to pay tax, which increases business expenditure (Ishengoma & Kappel, 1997, cited in Chipangura & Kaseke, 2012). In Zimbabwe, there is no difference between the tax rate of SMEs and that of large companies (Kapoor et al., 1997;
Maseko, 2014). This discourages SMEs from registering and formalising their business operations. The Zimbabwe Revenue Authority (ZIMRA) moves around cities and towns, and around high-density and low-density suburbs, as well as rural areas, collecting tax from SMEs. These SMEs are already experiencing financial challenges; therefore, forcing them to
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pay tax pushes them deeper into a financial crisis, hence hampering their survival and growth potential (Zimbabwe Independent, 2015).
Payment of tax increases business costs (OECD, 2008, cited in Maseko, 2014). SMEs also have to pay tax to local authorities. Such taxes include stamp duties, property tax, business permits and licenses (Maseko, 2014). Increasing the tax burden reduces profitability and the development of SMEs is therefore stifled. SMEs also have the burden of keeping proper and adequate records of taxation.
The documentation required for a business to operate legally is administered centrally in Harare. This includes operating licenses, permits, registration documents, and also the registration of vehicles. There is no decentralisation of service provision in terms of documentation. If an SME is in the transport sector, for example, and needs a route permit for a taxi, a representative needs to go to Harare (Mloyi, 2011). Tender documents are found at the State Procurement Board (SPB) located in Harare. If an SME would like to supply a government ministry or department in Bulawayo, which is approximately 500 km from Harare, the only option is to go to Harare for documentation (Mloyi, 2011). Tender documents are also submitted in Harare. The centralisation of documentation in one city inconveniences SMEs, and is very expensive for them in terms of travel costs (Mloyi, 2011).
SMEs in other towns and cities therefore become discouraged from participating in government tender processes.
The procedure for the registration of businesses is a tedious process that is unnecessarily long and expensive. The process of registering a business in Zimbabwe takes approximately 106 days at a cost of US$780 (World Bank, 2014b). Table 24 below illustrates the registration procedure, the average time taken, and the costs involved in the registration of a business with up 50 workers.
In sub-Saharan Africa, on average, countries take about 46 days to complete the business registration process (Afribiz, 2010). Table 24 shows that Zimbabwean SMEs are confronted with many bureaucratic and legal obstacles in the registration of businesses. SMEs therefore become reluctant to formalise their businesses through registration. Such a scenario prevents them from enjoying government support and incentives. Therefore, the registration process is an obstacle to SME growth in Zimbabwe.
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TABLE 24. BUSINESS REGISTRATION PROCEDURE IN ZIMBABWE
Step Procedure
Number of days taken to complete
Cost
1 Reservation of company name with the Registrar
of Companies 7 US$5
2 Filing the memorandum and articles of
association with the Registrar of Companies 14 US$105 3 Register with ZIMRA for Income Tax, VAT &
PAYE 14 Free of
charge
4
Register with the National Social Security Authority for pension & Accident Prevention &
Compensation Scheme
Is done simultaneously with procedure 3
Free of charge
5 Register with the Manpower Development Fund 1 Free of charge
6 Obtaining a license application form from the City Health Department
1 (But is done simultaneously with procedure 5)
US$20
7 Advertisement of the application for a trade and
business license in a local newspaper 34 US$30
8
Submission of an application form for the issuance of a new license to the licensing office (in the local municipality)
34 US$30
9
The business premises are inspected by the licensing officers to establish if the premises are suitable for the intended use
1 day Free of
charge
10 A trading license is obtained after inspection 1 day Free of charge Source: WBG (2014: 1b)
The Environmental Management Act (Chapter 20:27) (2002) restricts the operations of SMEs in the mining sector, as mines have to comply with the Act in the protection of the environment. The Act protects the environment against environmental pollution and degradation. The requirements are so stringent that mining has become difficult for SMEs
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(Holder, 2013). The Environmental Management Agency (EMA), a government agency, imposes strict regulations that stifle the operations of SMEs (Chipangura & Kaseke, 2012;
Herald, 2013, cited in Maunganidze, 2013). It is a requirement of the Act that the mining SMEs submit an Environmental Impact Assessment Report prior to the commencement of the mining operations. In the report an SME has to state the impact of its operations on the environment and the surrounding communities, and how it may reduce the negative effects (Herald, 2012). An SME must have a plan to monitor and manage the effects of mining on the environment. The report must be approved by the EMA. This is time consuming and expensive for SMEs whose financial resources are limited.
When minerals are sold by SMEs, the government takes a substantial amount of the money.
When gold is sold, Fidelity Printers and Refiners takes 15 % of its selling price (Holder, 2013). The 15 % is made up of commission (6 %), royalty (7 %) and presumptive tax (2 %) (Holder, 2013). Fidelity Printers and Refiners is a company that is fully owned by the RBZ, which prints securities, and refines and buys gold from mining companies. The amount taken by them is too much, considering the fact that SMEs incur operational costs during the mining of gold. Therefore, this constitutes an additional cost for SMEs. Increasing costs reduces profitability for mining SMEs, and growth becomes difficult.
3.7 INSTITUTIONS, POLICIES AND STRATEGIES TO ADDRESS SME