Tax exemptions provided for legalizing the undocumented income through investment in certain sectors could distort the equity in the market. Similarly, misuse of the tax holiday facility may cause bias against small enterprises operating in the same sector.

1. From entrepreneurs to pay workers
The legal environment and the SME sector
https://today.thefinancialexpress.com.bd/features-analysis/the-legal-environment-and-the-sme-sector-
1601647921
M S Siddiqui | October 03, 2020 00:00:00
Educational institutions in Bangladesh give a negative impression about
business and encourage students to do government jobs. The family and
society also have little respect for the business profession. Despite all
propaganda, a section of young people try to be entrepreneurs.
After a few attempts, most of those young people migrate as skilled
workers and a few of them succeed to be entrepreneurs. Such migration of
entrepreneurs and skilled workers which amounts to 'brain drain' is scant
in Bangladesh. There is no study on such a subject. However, some
indications about this are found in the case of Pakistan, as is seen from a
report published in the national daily Dawn (October 2004). It is plausible,
however, that self-employed/entrepreneurs in small and medium
enterprises (SMEs) in Bangladesh are perhaps compelled to change their
profession and take up other jobs (maybe, choose to become wage
labourers) because of the difficulties they face including those that
originate from high compliance costs in the SME sector. It is hoped that a
research will be carried out as part of this study and that will throw some
light on this issue.
SMEs in developing countries such as Bangladesh generally tend to do
business without having formal registration, license, and taxpayer's
identification number (TIN) and other formal documents. This type of
informal structure in which they do business often makes it difficult for
enterprises to enjoy the exemptions and incentives. In Bangladesh,

2. income tax regulations are generally found to be unfavourable for new
investments and for new entrepreneurs to launch business ventures.
Given the fact that the process of registration is complicated and the costs
involved in this process are high. New enterprises feel discouraged to
become formal and consequently, their complex rules and regulations are
one of the major constraints that discourage small businesses to become
formal. A simple tax system is generally considered to be conducive for
small businesses to flourish and compared to the one that has too many
special provisions. A number of studies have suggested making tax-
related rules and regulations simpler with a view to encouraging the entry
of more small firms into formal business.
The nature of the relationship between small and undocumented
enterprises/ self-employed with that of formal and registered enterprises in
the market determines the nature and the extent of the impact of tax
exemptions and concessions provided across various categories of
enterprises. Whilst well-structured tax expenditures try to balance the
growth and development of enterprises, unstructured tax expenditures
may restrain the growth of small enterprises particularly by infusing bias
towards particular categories of enterprises.
The new VAT law doesn't allow VAT Challan for credit of VAT for their
buyers. This means those who don't register under the VAT law and also
registered for the turnover tax shall remain out of the mainstream
business. The business house without tax registration is not eligible to
participate in the tender for government purchases. Businesses are not
allowed to open bank accounts without tax registration and remain out of
credit facilities from financial institutions.
Research in Indonesia has indicated that in applying for licenses and
fiscal concessions and in dealings with labour or taxation offices a large
cost is associated which becomes more complicated due to the prevailing
political economy with existing regulations.
Furthermore, the design of financial policies for various types of industries
determines the various dimensional impact on enterprises of various sizes
as has happened in the case of Korea. A cross-country study involving
4,000 firms of various types from 54 countries found the disproportionate
impact of the subsidy on small firms arising from lack of adequate
coverage. Investment incentives provided to new firms show an
unfavourable impact on small firms in the case of Thailand. The burden of
tax compliance cost originating from the prevalent financial, legal, and
regulatory framework was found to be higher in the case of SMEs in
Malaysia. The potential financial burden for informal SMEs who do not
enjoy VAT exemption appears to be higher for those SMEs who sell their
products at the same price compared to firms that are compliant.
There is a tendency among the firms to operate below the threshold level
in order to avoid taxes, if the firms feel that compliance will entail a higher
tax burden. A study by the SME Foundation on the various types of SMEs

3. in Bangladesh shows that the entrepreneurs consider the payment of
income tax and VAT as obstacles to running their business. The study
finds that 74.71 per cent and 88.23 per cent of entrepreneurs from small
and medium enterprises respectively under the light engineering sector
have considered the income tax payment as an impediment to their
business whereas in the case of large firms it has been only 50 per cent.
Given the limited scale of reliable information and lack of research on the
impact of tax exemptions and incentives on productivity, efficiency, and
profitability of SMEs of Bangladesh, it is rather difficult to draw any
conclusion in these regards.
Bias in tax expenditures may be revealed in a number of ways. Firstly, it
may occur because undocumented enterprises which do not have formal
registration and other related documents are not eligible for support.
Secondly, it may happen through exclusion of certain SME-oriented
sectors from the preference list, and thirdly this could happen because
some SMEs are excluded because these are located outside the
preferential areas, etc.
SMEs may indirectly get affected due to corrupt practices in tax and
expenditure-related activities. Weak monitoring and an enforcement
mechanism related to tax expenditures may adversely impact enterprises
which are not eligible for these benefits. Tax exemptions provided for
legalizing the undocumented income through investment in certain sectors
could distort the equity in the market. Similarly, misuse of the tax holiday
facility may cause bias against small enterprises operating in the same
sector. Fraudulent practices through the extension of tax exemptions
given in case of salaries of foreign technicians working in local firms
provide an undue advantage against those firms which do not employ such
employees. The practice of such illegal activities on a large scale may
distort the competition in the market which may disproportionately affect
the small and informal enterprises.
The writer is a Legal Economist.
mssiddiqui2035@gmail.com