New measures announced by the Mongolian government aimed at lowering the?tax?burden for small and medium-sized enterprises (SMEs) should serve as an incentive for?private sectoroperators to expand, but businesses may still face challenges in obtaining the credit they need to sustain growth.

unnamedIn mid-January, the government announced it would submit a plan to parliament to amend tax regulations regarding 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 for?VAT payments?is set at $5800, a level put in place when the existing?tax lawwas enacted 15 years ago and left unchanged since. According to estimates, around half of Mongolia?s more than 60,000 SMEs will be excused from submitting VAT returns once the amended legislation comes into effect.

Though likely to benefit most SMEs, the proposed amendment is not as extensive as one put forward by some parliamentary deputies last year, which called for raising the minimum income level to $116,000.

The draft legislation also contains an amendment that would establish a 90%?rebate?on?income taxes?for businesses with revenues of less than $875,000, another measure that would help SMEs. This amendment, unlike that on VAT, excludes companies operating in certain sectors, including minerals, petroleum products imports, oil exports and communications, as well as the production and distribution of alcoholic beverages and cigarettes.

Mongolia?s SMEs represent a large and growing segment of the?economy. According to data provided by the?Ministry of Labour?at the end of November, of the just over 90,000 businesses registered in Mongolia, more than two thirds are classified as SMEs. Small companies generate around 20% of Mongolia?s GDP and provide employment to almost 750,000 people, representing 70% of the national workforce.

 

Obstacles to growth

 

As is the case in many?emerging markets, one of the barriers to growth for smaller businesses in Mongolia is access to credit. In an opinion piece published in the local media, Paul Sullivan, professor of economics at the US National Defence University, wrote, ?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.

However, in an interview with OBG,?Randolph?Koppa, the president of the Trade &?Development Bank, said more could be done. ?The biggest challenge is the need for more long-term, low-cost funding, either from the government or international sources. Extending these programmes will help banks expand their portfolios of SME loans.?

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, through a good education system. Education should encourage people to be entrepreneurial and take business risks while developing at the same time the necessary technical and business oriented 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.

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