The lack of a clear definition as to what constitutes a Small or Medium Enterprise (SME) in Sri Lanka may be working to the benefit of larger enterprises seeking tax concessions, according to private research firm, Verite Research.

Previous criteria used to determine whether an enterprise fits into the SME category included the number of employees, where organizations with up-to 149 employees were considered medium scale enterprises, whilst the Task Force for the Development of the SME sector in Sri Lanka defined it as a LKR 50 million entity in 2002.

However with Budget 2013, the government changed the definition of SMEs by increasing the turnover limit of organizations from Rs. 300 million to Rs. 500 million, effectively expanding the upper limit of what constitutes an SME.

Amongst government incentives for the SME sector is a low 10% tax ceiling.

“In the absence of any other asserted definition, this proposal, in effect, changes the meaning of SMEs, and complicates economic analysis of and incentives to the sector.”

“The limit of Rs. 500 million in turnover (almost 10 million a week) could include organisations with a much larger employment base than 150, and asset holding well in excess of limits for defining SMEs. It is not clear therefore whether this change in policy is actually targeted to the SME sector or whether it is simply “marketed” as being to the SME sector, while in fact targeting to benefit larger enterprises,” the report stated.

The report went on to highlight other forms of assistance to SMEs such as favorable tax structures at customs to export-related products, income tax limits for selected services and local industries, expansion of micro finance schemes and legal aid in dispute resolution.

“Announcements of this nature are made in every budget, but without follow up analysis on implementation and effectiveness,” the report pointed out.

Whilst also noting significant measures of relief provided to the lower end of the SME bracket with the increase in revenue levels required for registration on VAT and NBT payments from Rs. 2.5 million per annum to Rs. 12 million per annum, Verite nevertheless cautioned that monetary policy has not been aligned with the needs of the SME sector, likely increasing the sector’s vulnerability over the medium-long term.

Increased government borrowings from domestic sources and the subsequent crowding for the private sector, along with the unpredictable trajectory of policy rates and credit supply were some of the issues raised by Verite as contributing to the sector’s increased vulnerability.

“The lack of stability (in supply outside of Colombo) and the high cost of state-controlled supply of electricity; and the limited skills and capacity of the available workforce remain core challenge for the SME sector, which are not being resolved by the budget or anticipated policy measures. In fact, the policies in the budget on encouraging greater out-migration of workers for skilled jobs could exacerbate this problem in the short term,” the report added.