A Bomb Planted Under IEs

The authorities are against small businesses.

Small business in Belarus suffers a severe crisis. For half a year, the number of its active subjects has decreased by more than 4 thousand; 12 860 individual entrepreneurs have stopped their activity. Interaction between the business and the authorities has come to nothing at the behest of officials. Against this background, the government is preparing a new Tax Code. The business community does not expect anything good from it, says naviny.by.

According to Belstat, 142,7 thousand legal entities and 274,3 thousand individual entrepreneurs (IE)

were operating in the country as of July 1. Since early 2021, the number of legal entities has decreased by 0.4%, while individual entrepreneurs have grown by 1.3%.

Trying to optimise itself, business is shrinking

However, experts caution that the increasing number of IEs does not indicate a good business climate in the country. Business is not developing; it is simply drifting from larger organisational forms of legal entities into smaller individual entrepreneurship.

Furthermore, the increase in the number of individual entrepreneurs is mostly driven by a lack of jobs in the public sector. People have to register as individual entrepreneurs to support themselves and their families. The employment issue is especially acute in the regions. Entrepreneurship there is the only way to make a living.

The general state of the Belarusian business, particularly over the past six months, is "stagnant at best," said the director of Minsk Capital Union of Entrepreneurs and Employers (MCUEE), Viktar Marhelau.

"Business is shrinking. Since this year, we have had a decrease in numbers on all fronts," he said.

The director of the business union names the reduction of domestic demand and, consequently, trade turnover, the decline in the standard of living of the population, and the lack of access to decent lending as one of the most important reasons.

"The banks have a grip on the money supply, and it is difficult to get a loan even at 25 per cent per annum. This is not for transparent business. Such a loan is valid only for very speculative deals," said Marhelau. He says small businesses are being optimized. To survive, entrepreneurs tend to look for ways to save money, so they shut down micro-businesses and register as individual entrepreneurs.

The coronavirus, which has hit the tourism, service, catering and hospitality industries hard, has also had an impact.

In addition, the consumer market is monopolising trade, which is hurting the conditions for small businesses.

Here and there, the receipt of payments from abroad rings the alarm. However, Marhelau adds that this problem, which appeared after the introduction of European sanctions, is mainly typical for medium-sized businesses and has not yet "accumulated a critical mass".

How much money does the "entrepreneurial offshore" bring to the budget

Given the budget deficit, the Belarusian authorities are looking for additional sources to replenish the treasury, including tougher taxes for business.

It happens regularly. Meanwhile, entrepreneurs constantly hear disparaging and sometimes insulting remarks.

On 22 July, Aliaksandr Lukashenka, during a meeting with the government, demanded to put things in order regarding individual entrepreneurs. "We will soon have 12 million individual entrepreneurs! We don't have that many people! We have created a huge offshore, where people pay nothing, and all individual entrepreneurs - from journalists to officials," said Lukashenka.

Skipping the "inaccuracy" about the number of individual entrepreneurs (12 million in the country with a population of 9.3 million), it is worth noting that the contribution of individual entrepreneurs to the economy is not so small - for example, in 2020, they paid 628 million rubles to the budget, and the share of individual entrepreneurs in GDP was 3.1%. The share of small and medium-sized enterprises is more than a quarter of the GDP - 26.4% (small business - 16%, medium-sized - 7.3%).

The sales of products and services provided by small and medium-sized enterprises reached 158 billion rubles last year, which is 42.2% of the total.

According to Viktar Marhelau, the constant revision of activities and intimidation of entrepreneurs by new taxes only reinforces the negative trends of a gradual winding down of business activity in the country.

"The deterioration of the work of individual entrepreneurs is a weak point; this process strongly hinders the development of entrepreneurship in our country," he says.

"There is a serious concern that businesses will be broken."

However, Marhelau agrees that the overall model of entrepreneurship needs improvement and revision.

"For example, a hairdresser in our country can be self-employed, or an individual entrepreneur, or work within a legal entity like an LLC. These are completely different forms of taxation and state regulation. Or the same specialist in flat finishing: one takes a patent for three kopecks and earns several thousand dollars a month. No changes create unfair competition, which market participants note. Yes, there are issues, but they need solutions only in cooperation with business," the head of the union stressed.

He believes the worst problem is that the preparation of all proposals concerning the work and taxation of entrepreneurs is done by officials only.

"Amendments to the Tax Code and a number of other regulations are being prepared now, and since officials are not familiar with the specifics, there is a serious fear that these businesses will suffer," suggested Marhelau.

As an example, he cited the proposal of the State Control Committee to introduce a 13 per cent tax on individual entrepreneurs for cash withdrawals from their accounts in excess of the established limit. In March, the National Bank did not support this initiative, but there is no guarantee that officials will abandon it. They may introduce the tax from the new year.

"This will cause a serious collapse in this market, and I would not expect IEs to switch to micro-enterprises. At best, 10% will change their form of ownership for this reason. This is a bomb that is being planted under the individual entrepreneur," said the director of the business union.

However, he believes: "The problem can be solved, but only in co-operation with the business community".

The authorities' contact with the business community has been lost

According to Marhelau, Belarusian business associations have repeatedly asked officials to invite them into the discussion of the new conditions for business.

"We have been promised, but it does not develop. Time is running out. Traditionally, the end of August is the time to form the Tax Code. But no crucial changes appear. To all appearances, the work has already been done, and the result of it will be negative for IEs. In addition, I think a serious deterioration of the situation awaits the IEs already from 2022 rather than from 2023 as the Minister for Taxes and Levies promised".

A great concern is also caused by the level of interaction between the state authorities and business associations, which, according to Marhelau, "is rapidly declining and approaching zero".

"It is not the associations' fault that they do not want to work: the tendency to reduce cooperation has been observed for several years. We are invited only to agree on some minor or fragmentary issues. One can say the uninterrupted interaction between business and the authorities has been lost," summed up Viktar Marhelau.