Red tape discourages business investment
Hardly anyone would disagree that small businesses are at the very core of the wealth-creation process of any country. Similarly, most people agree that running a business should be about producing goods and services that are demanded by the public and not about filling in returns for government departments, micro managing the various issues to comply with business legislation or following seemingly endless procedures to obtain business-related permits.
The war against red tape has often been declared in the past, especially at times when job creation becomes a top economic and political priority. A few battles against unnecessary administrative costs have at times been declared as having been won. But, then, new costs that make small businesses see red in economic tough times when they have to struggle to survive creep in again.
The Management Efficiency Unit report on the effect of red tape on small businesses has apparently proven that the war against unnecessary bureaucracy still needs to be won.
The report notes that “the private sector incurs €116 million a year in administrative costs arising from laws and procedures”. Not surprisingly, complying with the value added tax legislation is the primary element behind this cost.
Cutting bureaucracy in this area would probably lead to fewer controls to ensure that the tax due on sales and services is in fact charged, collected and passed on to the VAT Department.
Some economists argue that tax evasion is easier, and, therefore, more prevalent, among small businesses than in larger companies.
With Malta’s black economy estimated to be one of the biggest in the EU, one can understand the Minister of Finance’s zeal to ensure that, as much as possible, all tax due is collected to support the government’s expenditure in vital public services like health, education and social welfare. In the months leading to an election, few politicians are prepared to insist on the enforcement of fiscal morality to support the welfare state whose benefits many may be taking for granted.
Undoubtedly, fiscal controls should be automated as much as possible through the proper use of ICT.
True, a root and branch reform of the system to reduce bureaucracy could lead to further tax evasion but there are a number of causes of administrative costs that can be tackled.
The Chamber for Small and Medium Enterprises – GRTU could certainly point at a number of administrative procedures that are far too complex. Many such systems can be made more sensible through a proper business process re-engineering exercise. It is encouraging that, according to the MEU report, some progress has been made by reducing €8.5 million a year in administrative costs incurred by businesses. More needs to be done to accelerate this process to ensure that only essential controls are kept in place to protect consumers and ensure fiscal compliance.
Small businesses’ administrative costs are eventually passed on to consumers. Yet, even so, SMEs in this country pay a high price for unnecessary bureaucracy as consumers often decide to buy their goods and services from foreign providers that sell online and are not subjected to so many administrative burdens. This discourages investment that is so vital for economic growth and job creation.
The war against excessive red tape will never be won completely because every government has an obligation to ensure that fiscal compliance is enforced through proper controls. But there are many areas where the life of SMEs can be made easier through reduced bureaucracy.