Raising the roof: Various measures could support the growth of SMEs

New measures aimed at lowering the tax burden for small and medium-sized enterprises (SMEs) should incentivise private operators to expand, but businesses may still face challenges in obtaining the credit they need. In January 2014 the government announced it would submit a plan to parliament to amend regulations on the payment of value-added tax (VAT) by SMEs. Under the proposal, companies with revenues of less than $29,000 would be exempt from VAT. At present, the exemption ceiling is set at $5800, a level put in place when the existing tax law was enacted 15 years ago and left unchanged since. Around half of Mongolia’s 60,000-plus SMEs will not have to submit VAT returns once the amended legislation comes into effect. The proposed amendment is not as extensive as one put forward by parliamentary deputies in 2013, which called for raising the minimum income level to $116,000.

Rebate

The draft legislation also contains an amendment that would establish a 90% rebate on income tax for businesses with revenues of under $875,000, which would also help SMEs. This amendment, unlike that on VAT, excludes firms in certain sectors, including minerals, petroleum product imports, oil exports and communications, as well as the production and distribution of alcoholic beverages and cigarettes.

SMEs represent a large and growing segment of the economy. According to the Ministry of Labour, of the 90,000 businesses registered in Mongolia, more than two-thirds are classified as SMEs. They generate 20% of Mongolia’s GDP and provide employment to almost 750,000 people, representing 70% of the workforce.

Obstacles

As in many emerging markets, one of the barriers to growth for smaller businesses in Mongolia is access to credit. Paul Sullivan, professor of economics at the US National Defence University, wrote in local media, “It is very hard, especially for the micro enterprises, to get credit to expand their businesses or to carry them through the production to trade cycles.”

International agencies and the government have already taken some steps to address this issue, and SME funding to Mongolia has increased in the past several years. The World Bank, the German Development Bank and the Japan International Cooperation Agency have established a series of pass-through loan programmes that have provided long-term, low-interest funds to banks, which in turn can make loans to SMEs. The government has also set up an SME fund that provides loans to banks at below-market rates, which can then be used to extend credit to local businesses.

Further Steps

Randolph Koppa, the president of the Trade and Development Bank, said more could be done. “The biggest challenge is the need for more long-term, low-cost funding. Extending these programmes will help banks expand their portfolios of SME loans,” he told OBG. There are other areas in which the growth of SMEs can be supported, Peter Markey, a partner at Ernst & Young, told OBG. “SMEs can be incentivised through government subsidies, direct grants, less bureaucracy and, more importantly, a good education system. Education should encourage people to be entrepreneurial while developing the necessary technical and business skills,” he said. Combined with tax breaks and better financing, efforts to build human capital could help diversify Mongolia’s economic base beyond the mining sector, and ensure more inclusive growth.