SMEs compliance cost — time is money

Excessive bureaucracy compounded by strict regulations have restricted SMEs progress


SMALL and medium enterprises (SMEs) play a significant role in Malaysian economy, making up a large proportion of the market. SMEs are typically defined as firms with sales turnover not exceeding RM20 million to RM50 million (depending on the industry) and can be classified into three groups — micro, small and medium.

With micro enterprises forming the majority, it leaves them significantly exposed to harsh regulations that make doing business in Malaysia strenuous. Contributing nearly 40% of our GDP, it is essential that the government addresses the over-excessive regulation and the high business costs that limit the potential of SMEs, to boost competition and spread economic prosperity to all.

It is firstly important to conceptualise the specific burdens that fall onto SMEs — excessive bureaucracy compounded by strict regulations have restricted their progress. Some examples include compliance costs, efficiency costs and over-regulation.

The former has the most significant impact on SMEs: These are the expenses, be it time or money, undertaken by firms to meet government regulation. Institute for Democracy and Economic Affairs (IDEAS) recently published a policy paper studying the compliance cost of SMEs in the Klang Valley area.

The paper found that the most burdensome regulations to comply with were labour laws, including minimum wage and work permits; land regulations, including billboard regulations; and tax compliance. IDEAS concluded that the most time consuming was corporate tax compliance, which required 44 days of staff time.

Four specific regulations cost the most in terms of ringgit and time spent to comply with the regulations. (See table)

The impact of tax compliance costs has a more substantial incidence on SMEs as they are unable to benefit from economies of scale. Firms are subjected to numerous forms of taxation, and this becomes tedious as they are required to file annual tax returns, keep documentation and implement the scheduler monthly tax deduction scheme.

As a result, business costs become inflated, and this is particularly significant as many citizens’ earning incomes of the bottom 40% (B40) are employed by SMEs.

By making business operations more accessible, those in the B40 can be helped too. IDEAS estimates that individual B40 households have the potential to increase their total gross worth to over RM350,000 by establishing a micro business in Malaysia.

We need to make this path to wealth via entrepreneurship as easy as possible. This potential rise in entrepreneurship can directly help to improve their standard of living by creating more job opportunities and establishing a long-term source of income.

Hence, it is evident that promoting a simpler form of doing business can have substantial positive spillover effects, taking a step in addressing our nation’s income disparity.

So how exactly can we create a simplified process of doing business in Malaysia for SMEs?

Firstly, increase the transparency of procedures. Malaysia scores very poorly on openness indicators.

“Data sharing is a huge problem,” according to the World Bank’s lead public sector specialist Rajni Bajpai.

“The government does not share a lot of data, even within its own departments or with the citizens” and this poor government-citizen communication proves to exacerbate the tedious regulatory process.

This can be illustrated through the Federation of Malaysia Manufacturers’ claim that compliance costs for SMEs have risen due to a lack of clarity in understanding the new Sales and Services Tax regime. Despite the longstanding existence of the self-assessment system, aimed at easing the procedure, the issue of tax compliance still remains. To better inform SMEs of potential changes, the government should seek to utilise information and communications technology, and social media for more effective outreach, as supported by Bank Negara Malaysia. This way, greater awareness can be raised to SMEs direct from a trustworthy source.

We can turn to New Zealand for further inspiration. Comparatively, they rank first in the World Bank’s Doing Business 2019 report, and it is clear why: With regards to starting a business, it takes 0.5 day — juxtaposes that against Malaysia’s 14 days and it’s shocking. Where do we go wrong?

We need to merge our registration procedures. Especially with tax registration, New Zealand enables company registration and Good and Services Tax registration to happen simultaneously through the Companies Commission of Malaysia. Whereas in Malaysia, they are split into separate entities through different agencies. To concurrently register for separate items would reduce compliance costs and start-up times, encouraging more firms to enter the market. Although Malaysia has progressed up nine spots to 15th place in the Doing Business report, we still have more to do.

Admittedly, the government has been following through on their manifesto promise of “reforming our economic structure” to increase productivity for SMEs and other businesses. The National Entrepreneur and SME Development Council implemented the SME development programme to focus on eight broad sectors with a target to boost SME’s GDP to 41% by 2020.

It aims to improve the technological standing of SMEs and help them better integrate into the supply chain.

Another initiative is the Industry4WRD national policy, which is directed to help SMEs ride the wave of the Industrial Revolution 4.0. Prime Minister Tun Dr Mahathir Mohamad said the “potential for growth is limitless, but it all boils down to knowledge on (the) application”.

So far, it seems Pakatan Harapan (PH) is establishing a long-term plan for SMEs, but more significant immediate action is needed. More can definitely be done vis-à-vis simplifying regulatory frameworks to lower compliance costs. A recent survey found that 74% of SMEs, after a year with the PH government, either experienced no or negative impacts to their businesses, but still remain hopeful for the future.

We need to take more steps in alleviating their biggest burden — procedures from start to finish need to be shortened and costs taken to comply reduced. Through increased transparency and structural reform, we can establish a friendly entrepreneurial environment where business doing is made easier and more efficient, encouraging growth within our nation.

SMEs form the backbone of Malaysian economy, so regulations should be allowed to the extent of promoting a more contestable market, in favour of SMEs. Compliance cost is one of the obstacles that prevent SMEs to grow even larger. Indeed time is money, we all need to work together to reduce the time taken for business owners to comply with business regulations.

Zara Hamzah Sendut is a research intern at IDEAS.