• Tuesday, June 18, 2024
businessday logo

BusinessDay

How corruption stifles SMEs growth, increases business cost

Entrepreneurs seek new funding model for African SMEs

Transactional corruption is a major constraint to the competitiveness, growth and expansion of Small and Medium Enterprises (SMEs) in Nigeria, according to a report by the Lagos Chamber of Commerce and Industry (LCCI) and the Centre for International Enterprise (CIPE).

According to the report, corruption increases SMEs’ cost of doing business and threatens their ability to contribute to the growth of the Nigerian economy.

MSMEs contribute 50 percent to Nigeria’s GDP and account for 86.3 percent of jobs (59.6million jobs in 2017), according to a report by the National Bureau of Statistics (NBS) and the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN).

But despite this potential, SMEs operators in Africa’s biggest economy are being limited by the cost and time it takes for them to procure services from the Federal Inland Revenue Service (FIRS), the report stated.

The FIRS is the agency responsible for assessing, collecting and accounting for tax and other revenues accruing to the Federal Government of Nigeria.

The study employed a sample size of 500 SMEs in three cities; Lagos, Aba and Kano. The choice of these areas was informed by their commercial and business importance in the Nigerian economy.

Despite the amendments of the Finance Act 2020 and Finance Act 2021 to make it easier and cheaper for SMEs to comply with the tax laws, the report shows corruption by FIRS officials as a major constraint with a negative impact on their businesses.

Read also: Flex Finance partners with Wema Bank to launch digital tools for SMEs

“About 71.3 percent of the sampled SMEs have paid a bribe to FIRS officials at least once recently. This has implications for the ease of doing business as the cost of doing business will be increasingly high while profit and competitiveness of SMEs will be eroded,” the report stated.

Also, about 61 percent of the SMEs believe transactional corruption in dealings with the FIRS increases their cost of doing business by 5 percent-10 percent.

According to the report, Nigeria’s low tax revenue to GDP ratio can be attributed to corruption and weak institutional effectiveness.

With less than 8percent revenue-to-GDP ratio and 115th position in the global ranking, Nigeria has the lowest revenues in the world, according to the World Bank.

Corporate Income Tax which has been the highest source of tax revenue for the government, declined 13 percent to N1.41 trillion in 2020 compared to 2019.

The report further revealed that most of the SMEs are ignorant of requirements and processes needed when engaging with FIRS and some officials take advantage of this insufficiently transparent process.

From the report, SMEs attested to making unreceipted payments which contribute significant burdens to their business operations.

Precisely, 60 percent of the SMEs claim they pay an amount different from the amount learnt before service while 28 percent of SMEs claim they pay the same amount.

SMEs pay various amounts to officials as informal/unreceipted payments. Almost 50 percent of the SMEs pay N1,000-N50, 000 while 13.1 percent pay N51, 000- N100, 000.

Another 4.7 percent pay N101, 000-N150, 000. While the minimum ever paid as informal payment is N1000, the maximum amount is N3,000,000.

However, despite the presence of Redress Mechanisms (GRMs)/Complaints Mechanisms (CMs), a system through which they can make reports, very few SMEs are aware.

Only 4.0 percent of SMEs are aware of the GRMs/CMs and are seldomly used for fear of reprisals and frustrations from FIRS officials.

“Many also believe they will not get redress and there will be repercussions and backlash on them if they complain.

Hence, a lot of the SMEs use intermediaries who are current staff, former staff and recommended consultants who are in established third party intermediary networks and these intermediaries navigate the process in manners that prevent knowledge, institutionalization and utilization of GRMs/CMs,” the report stated.

The report recommended that the FIRS need to educate members of the business community (especially SMEs) for effective and transparent engagement with the agency.

The report stated that the awareness can be created and publicized across various social media platforms. Online platforms should be improved upon to make them seamless and user-friendly, effective and reliant. Organizing workshops and symposia for SMEs will also help in this regard.

Also, whistleblowing policy should be instituted by the leadership of the agency to discourage intermediaries and ensure staff performs only designated functions. Whistleblowers should be rewarded and protected while errant staff should be publicly sanctioned to serve as deterrents.

“Grievance Redress Mechanisms/Complaints Mechanisms should be instituted and popularized so that more SMEs can become conversant with them and use them. The concept of GRM must as a matter of necessity be publicised and complaints must be followed through in depersonalized manners without backlash on SMEs. This will instil public confidence in the GRM,” the authors noted.

Following the findings from the research, the FIRS has implemented the first recommendation from the research and launched an online platform called Taxpro Max. The platform is dedicated to filing returns and payment of taxes in naira, an attempt to limit human-to-human interaction and eliminate corruption.