Shaheen Tahir - To manage a business, one has to follow certain legal and regulatory requirements. Given the plethora of laws, rules and regulations, lack of awareness and understanding about the potential benefits amongst business community and above all the language barrier, make out a good case for majority of the entrepreneur to stay away from voluntary compliance and do business under the fear of unknown.
This makes out a good case for a handful of representatives of some regulatory agencies/departments to exploit the businesses and extort money to avoid compliance to laws. As a result, businesses, in particular SMEs end up paying more money to these extortionists than they would have paid for compliance to the laws. At the end of the day, these businesses, however, remain vulnerable to the penal actions by the regulatory agencies for non-compliance of the relevant laws.
Here the question arises; is there a value for small businesses to comply with laws voluntarily? If yes, then the next logical question would be; do small businesses know such value?
Let us first discuss the value proposition for SMEs in compliance to the laws, rules and or regulations in three different legal subject. Firstly, take an example of an SME engaged in production of food items. To start its production facility, the SME will have to get a license under the Punjab Food Authority Act, 2011 if it was to operate in Punjab and under the Pure Food Ordinance, 1960 if it was to operate in other provinces. These laws not only prescribe prior licensing necessities but also specify certain requirements relating to quality, hygiene and safety to be followed by a manufacturer of products throughout the production process. In case of non-compliance by the SME, it may have to face serious consequences including closure of business premises, payment of fine, the penalty of imprisonment etc. There are other incidental losses that such a business may have to bear including loss of reputation which may further result in loss of sales and revenues. Now consider for a moment if a business can afford to have its production facility closed or its reputation tarnished simply for non-compliance to certain regulatory requirements?
In another instance where an SME is engaged in manufacturing and or selling goods or providing services that are sales taxable. The SME opts not to get itself registered with the sales tax department and continues to do business while making underhand payments to the departmental officials for not registering. A day comes when the official getting payments stands transferred and the new official refuses to deal with the SME or an independent monitoring team of the department makes a surprise visit to the business premises of the SME and get hold of all the record which may prove requirement of registration and payment of sales tax by the SME. Such an eventuality may result in loss of revenues, clients and reputation of the SME apart from liability to pay a substantial amount of the sales tax.
Consider one more scenario where an SME is required to register itself with the provincial labour departments under different legislative instruments such as Provincial Employees Social Security Ordinance, The Factories Act, or under the Employees Old Age Institution Act. The SME, however, tend to avoid registration even though called upon by the departmental officials to do so. Without knowing that no fee is required to be paid for registration under these laws, the SME stays away from registration while also making underhand payments to the departmental officials for non-registration. However, one fine morning, the SME owner gets court notice consequent to a case filed by a worker for his non-insurance under the Social Security or EoBI Law or non-provision of requisite amenities in the Factory under the Factories Act. This non-compliance may result in imposition of penalties of fine and or even imprisonment of the SME owner which may lead to similar consequences for the SME as discussed in other two situations listed above.
No serious entrepreneur would, indeed, afford to get its business premises sealed, loss of revenues, tarnishing of its brand reputation or payment of fines and or going be hand the bar. The value proposition in complying the laws is thus, indeed, there. A well compliant SME would have a greater peace of mind to focus on its growth strategy as against the non-compliant which remains vulnerable to irreparable losses enumerated above.
There is another way of exploring the value in fulfilling the legal obligations by an SME. Look at the first example of complying with food laws, for instance. The laws require safety and quality to be ensured by food operators while preparing and selling food items. Ensuring quality and safety would, invariably, mean disclosure of information as to the ingredients, the manufacturing and expiry dates, the packaging etc in case of packaged food as per the standards and guidelines of the relevant department. There may be some cost associated with this compliance that could potentially refrain an SME from acting upon the legal requirements. But then think for a moment, what value this compliance may bring in for an SME? A product that is hygienically packed with complete disclosure of ingredients and clearly stated shelf life gets greater consumer confidence, fetches better price, receives enhanced demand and establishes brand value to the exclusion of non-compliant SMEs. Isn’t it so?
In case of second example, what could be the value for an SME, in collection and payment of sales tax as well as filing of tax returns? Sales tax is a value added tax the burden whereof is ultimately transferred to the end consumer. All intermediaries from a sales tax registered manufacturer until the registered dealer/retailer collect the levied amount of sales tax from each buyer and deposit the same to the government treasury while passing on the incidence of tax to the consumer.
The SME may not be willing to get itself registered and pay the tax for the fear of getting itself under the radar of tax authorities and or increase in price of goods or services because of charging of sales tax. But there are some advantages that only a registered tax payer SME may have against an unregistered one. A registered tax payer can claim adjustment of all the input sales tax paid by it on its supplies while submitting its monthly return after charging the tax on its sales. Further, as per the rule, government departments can only procure goods and services from vendors who are sales tax registered. On the contrary, an unregistered SME will have to pay an additional tax @ 2 percent on the value of supplies.
Similarly, in the third scenario, a question may be raised as to what value could be there for an SME in making Social Security and EoBI contributions or ensuring occupational health and safety in respect of the employees? Considering the contribution as an additional cost burden only, the apparent answer will, of course, be in the negative. However, don’t you think that paying these contributions or providing healthy and safe work environment would help in more satisfied, willing and productive workforce? Surely, it is this workforce only that may lead to increased productivity of an enterprise.
There exists a greater opportunity cost for being compliant to law while doing business as against the one for non-compliance. Then what stops majority of the SMEs to remain non-compliant or work under the cover? This takes us to the second question as to whether SMEs know this value?
The complexity and number of laws, the technical language and manner in which they are structured and above all, very little effort by the regulators to educate their target audience keep SMEs as being ignorant of even the laws what to talk of knowing the underlying value to comply them. The knowledge as to what the relevant laws are, how do they affect SMEs and what value proposition they ordain for them has hardly been a subject of study, at least in Pakistan. The only focus of studies has been to identify the number of laws and find the impediments therein to the growth of SMEs. Such studies result in recommendations for reducing the number as well as simplification of laws to the benefit of SMEs. However, none of them has had tried to find out the underlying value for SMEs in complying the laws, as has been attempted in this article in the above manner, and the perception of SMEs about such value.
On the other hand, a reference to some major legislative instruments having bearing on the SMEs would bring forth the fact that barely any instrument takes into consideration the value proposition for compliance thereto. The only focus in all such instruments, like any other ordinary law, is to prescribe certain compliance requirements, the manner of doing them and then to stipulate the penalties for not doing. They are even silent about providing any obligation on the part of the relevant regulator to educate and or train the target audience on how to comply with the law. What is the solution then?
The matter can be addressed with short term and long term initiatives. In the short term, a stock of laws, rules and regulations affecting SMEs need to be taken. These laws should be reviewed to identify and spell out the immediate and long term effects of complying the prescribed legal requirements vis-à-vis growth of businesses. In the next phase, regulatory authorities must be made mindful of such positive outcomes of compliance and trained to work along with SME development organizations such as SMEDA, chambers of commerce& Industry and trade associations to spread the word. After all, the regulatory authorities have a vested interest in ensuring that their target audience understand and act upon the obligations prescribed by the relevant laws they are administering.
In the long term, relevant legislative instruments be modified to bring in the identified business growth prospects and or certain incentives in the respective legislation that may ensue by adhering to the legal requirements. These prospects and or incentives may include public recognition of top compliant businesses in print and electronic media, issue certifications to them as being legally compliant, giving them limited exemptions/credits in payment of duties and taxes, entitling them priorities at air ports, railway stations, public hospitals etc.
The writer works with SMEDA as Manager
Legal Services and can be accessed at
shaheen@smeda.org.pk
