The World Bank has asked the government to mull over removing transaction costs imposed when registering companies, saying, the move will encourage small firms to register and go into the tax books to boost economic growth.
The call has come against a background of most small businesses not registering to avoid taxes as it brings additional costs on businesses and eats up on their profits among others.
However, by not registering with K2 000 for small businesses, these informal firms miss out on a variety of benefits ranging from bidding on government tenders, registering land and access to formal financial services.
The bank in its policy research working paper titled How Should the Government Bring Small Firms into the Formal System?’ released last week, argues that the primary barriers to registration of small businesses are mainly transaction costs and if government can take the bank’s recommendations on board, it can significantly reduce the number of unregistered firms currently pegged at 93 percent.
One of the recommendations is to make business registration virtually costless.
“Even without tax registration, we find the existing transaction costs of registering a business are enough to deter the average firm from registering their business. Yet when we offer our assistance, which brings the costs close to zero, a large majority (75 percent) of the firms registered their businesses,” the report reads in part.
The report has further recommended government to pair business registration with an information session at a commercial bank as benefits to the firms are evident.
“Firms open business bank accounts and increase their use of a range of formal financial services. This is associated with an average 20 percent increase in monthly sales and a 15 percent increase in monthly profits for the three years following the intervention,” it reads.
In an interview, Chamber for Small and Medium Business Associations recruitment chairperson Carolyn Gondwe concurred with the recommendations in the report saying most small businesses in the country are not registered because of the transaction fees involved.
She said the high tax rates in the country also hinder most small enterprises from registering.
“We pay high taxes to city councils and Malawi Revenue Authority (MRA) which reduces our profits. It is like we do businesses for government. This is killing small businesses,” Gondwe lamented.
Small enterprises registration in the country involves business registration at the Department of the Registrar’s General (DRG) to obtain a Business Registration Certificate (BRC); tax registration at the Malawian Revenue Authority (MRA) to obtain a Tax Payer Identification Number (TPIN); and registration at the local City Council (CC) to obtain a business license.