Eligibility Criteria Relaxed for SME Classification

KARACHI (June 05 2006): The Federal Government has decided to relax eligibility criteria for small enterprises to enjoy most of the facilities and concessions normally available to businesses by raising the minimum employment bar from 50 to 100, it is reliably learnt.

At present, to be eligible, a small manufacturer must have 50 or less employees, inclusive of the owner and his or her family. The limit will be raised to 100 from July 1, 2006.

The aim of this relaxation is to minimise fragmentation of units and instead encourage consolidation in the vendor industry which is the lifeline in textiles and auto sectors.

Pakistan does not have a single definition of small and medium enterprises. Various government agencies, eg State Bank of Pakistan, Provincial Labour Departments, Federal Bureau of Statistics etc, use their own definitions. The Central Board of Revenue charges a lower rate of 20 percent of income tax if a company has a paid-up capital and reserves of Rs 200 million and has not been split to take advantage of a lower rate.

The Provincial Labour Department imposes Social Security and Education Cess on units with 10 or more employees. At present, the fiscal, labour and commercial regulations do not provide for a focus on SMEs that is in line with their specific needs.

The proposed SME Policy 2006 drafted by the Industries Ministry classifies manufacturers as small business if the assets (excluding land and buildings) is worth less than Rs 30 million and annual sales less than Rs 100 million. In service and trade sectors the assets criterion is Rs 20 million. The proposed employment criterion for manufacturing and services is less than 50 persons and for trade less than 20 persons. These limits have been enhanced to 100 and 50 persons, respectively.

For medium size business the employment criterion in manufacturing and service sector will be raised from 100 to 250 persons and in trading from 50 to 100. The assets (excluding land and buildings) in medium manufacturing category has to be between Rs 30 to 100 million, while for services and trade Rs 20 to 50 million. Annual sales for medium category company has to be in the range of Rs 100 to 300 million.

It is proposed that small enterprises will enjoy zero registration fee. They can become eligible for Business Improvement Programme (BIP) and receive subsidised training for managerial, quality and technology upgrading. Small businesses will pay 25 percent of the training cost in the first year and then 10 percent in the subsequent two years. The sales tax levy for 5 years will be zero on output and the electricity tariff will be 50 percent of the industrial rates.

The income tax tariff will be reduced to zero if 15 percent of sales consist of exports, and if they continue to grow by 10 percent per annum the tax-free status can continue for 10 years.

The zero tax eligibility can be extended to 15 years if the investment is in designated high technology (pioneering) area.

Medium size businesses will have to pay a higher fee, ie 50 percent of the training cost for the first year and 25 percent for next two years. Electricity tariff for them will be 75 percent of the industrial tariff. Income tax relief will be the same as is for small business.

Banks provide only seven to eight percent of total funding requirements of SMEs. The State Bank of Pakistan has already issued special prudential regulations allowing clean facilities to SMEs, against personal guarantees up to Rs 3 million inclusive of funded requirement of Rs 2 million.

The government feels that past self-employment schemes, Youth Investment Promotion Society and yellow cab scheme had limited success and did not promote entrepreneurship amongst the educated youth. Therefore, a change in educational curricula is needed for creating awareness through inclusion of 'entrepreneurship courses' in all professional degrees. Technology and business incubators will be established in selected universities. And lastly, an identification of investment opportunities offered by SMEDA of backward and forward linkages of successful services and products.

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