More difficult to register small business than limited company: Advocata

• Launches report on regulations to small business and Red Tape Project

By Darshana Abeysinghe

Advocata Institute hosted their latest event, ‘Red Tape Regulations that Stifle Small Business’ in Colombo last week. The objective of the Red Tape Project is to identify, study, and advocate for the removal of legal and regulatory barriers faced by businesses in Sri Lanka. As a first step towards the process, it launched a report on ‘Barriers to Micro and Small Enterprises in Sri Lanka’, and a website for entrepreneurs to submit views on red tape and government processes that need to be removed or simplified. 

The launch event also featured an engaging discussion featuring Dr. Sarath Rajapathirana of the Advocata Institute, Colombo Municipal Councilor Milinda Rajapaksha, and Good Market Co-Founder Achala Samaradiwakara.

Samaradiwakara provided a number of examples stemming from the Good Market on how many Sri Lankans are averse to registering a small business, due to concerns with time, process, and aversions to pay tax or other levies. She revealed that when presented with forms asking for business registrations, applicants to the Good Market would often fall away at that point, as they were not registered. It is only vendors who achieve good growth that tend to go into registrations later, she said. They have done away with the query now, and given applicants the option of answering or not. 

This observation was corroborated by Rajapaksha, who added that almost 90% of vendors in Colombo, including some of the larger establishments selling food and other items from mobile outlets in the city, are not registered. He revealed that most of the calls he receives at the CMC are to receive some favour without obtaining a registration, payment of levy or otherwise, away from the formal fold. As distressing as this is, he averred that if authorities were to launch action against such unregistered vendors immediately, this would result in significant revenue loss and unemployment for many, and thus it would be prudent to allow them to function until a more focused program of action is initiated in this respect. 

Rajapaksha also said that whilst the Police, PHIs and other institutions do conduct raids on such establishments and those not conforming to standards, lax regulations allow them to return to business within a short space of time. He remarked that the Colombo Municipal Council through its website has provided opportunity for residents and entrepreneurs to carry out many tasks with ease and efficiency through its online platform – including business registrations – but this was seldom put to use by the public.

Dr. Sarath Rajapathirana observed that small and medium entrepreneurs in most developing countries often shy away from paying tax and other levies. Whilst this does result in a significant amount of revenue loss to government, he felt rather than focus on driving them towards registration it would be time better spent to ensure they manufacture and adhere to accepted health safety and environmental standards which would result in broader benefits and savings to community. 

People should perhaps be encouraged and given more incentive to register their businesses, as this also opens up numerous opportunities for them such as funding, opined Rajapaksha. He added that whilst powers have been vested with Provincial Councils to facilitate registrations of sole-proprietorships, the people and process engaged there needs a push as bureaucrats can be rather slow. He observed that there are instances of too many hands in the process, as the state sector has grown large. 

Samaradiwakara also pointed out that many NGOs offer seed capital for people to start business, but there is very little effort to ensure that due process is followed during these efforts or adequate follow-up. As a result, there are hardly enough small businesses to count despite the numerous projects launched by countless NGOs in this sphere she points out. There is also a great need to provide education and training for people to identify and service potential new markets, to avoid everyone surging to open the traditional food or tailor shops, Samaradiwakara added. 

During the question and answer session, members of the audience also highlighted incidents where Grama Sevaka Officers and officials had requested for bribes during assessments and documentation during registrations in the periphery. Whilst bureaucracy and red tape are pertinent problems for small businesses to register and enter the formal fold, it was also evident that entrepreneurs too had to play their part in coming forward to register and follow due process, which also entails not offering bribes or resorting under the table manoeuvres. A ‘system change’ is definitely what Sri Lanka needs, and it is definitely what we hope we will get. Notwithstanding some of the observations and experiences of the above, hundreds of small business are registered and operated successfully and without problem. It is perhaps also a case of weeding out and instilling the right people, purpose and process to address the issue. 

The work on this project by Advocata was followed up by the #MystoryLK online competition, where Advocata asked micro and small entrepreneurs island wide to send in essays, in Sinhala, Tamil, and English, detailing barriers they faced in setting up their businesses and how they believed the system could change to reduce issues that faced. Advocata awarded the winners of the competition at the event. The competition was won by Madasamy Suventhiran. Second place was awarded to Vikum Rajapakse and third place to Elijah Hoole.

The report, ‘Barriers to Micro and Small Enterprises in Sri Lanka’ provides an understanding of the landscape of micro and small enterprises in the country, drawing from an island-wide survey. The survey highlights the various regulatory barriers that these enterprises face, ranging from issues of finance, registration, space and labour. The report focuses on addressing one of these barriers and proposes recommendations to streamline and rationalise the process of registration for sole proprietors and partnerships.