Starting a new business is everyone’s dream. It brings unlimited opportunities and challenges as well, especially in transitional economies. Our country has undergone tremendous changes since the fall of centralized economic system till now. The role of SME in economic development and shortening transitional period is great. SME sector has evolved tremendously but many challenges lay ahead. In our paper we will give a presentation of the role of SME in economic reality in Albania and the region, its trend and challenges. Today SME face many challenges like decrease of demand from market destabilizations, poor infrastructure, poor access to credit, fiscal policy pressure etc….We will emphasize the role of fiscal policy in SME development. The role of fiscal policy should be considered more carefully in today’s global market, in short of perspective development. We believe that fiscal pressure has been a major reason of the set back in SME development. We will analyze Albanian fiscal evolution and its impact in SME development

Celo, Robert

Kociu, Lorenc

English

European Scientific Journal (European Scientific Institute)

European Scientific Journal              January edition vol. 8, No.1 ISSN: 1857 – 7881 (Print) e - ISSN 1857- 7431387UDC:334.722.012.64/.65:336.1(496.5)338.1:[334.722.012.64/.65:336.1(496.5)FISCAL PRESURE ON SME IN ALBANIA AND ITS IMPACTON ECONOMIC DEVELOPMENTRobert Celo, PhD candidateLorenc Kociu, Msc.“EqremCabej” University of Gjirokastra, AlbaniaAbstract:Starting a new business is everyone’s dream. It brings unlimited opportunities and challenges as well, especiallyin transitional economies. Our country has undergone tremendous changes since the fall of centralized economicsystem till now. The role of SME in economic development and shortening transitional period is great. SMEsector has evolved tremendously but many challenges lay ahead. In our paper we will give a presentation of therole of SME in economic reality in Albania and the region, its trend and challenges. Today SME face manychallenges like decrease of demand from market destabilizations, poor infrastructure, poor access to credit,fiscal policy pressure etc….We will emphasize the role of fiscal policy in SME development. The role of fiscalpolicy should be considered more carefully in today’s global market, in short of perspective development. Webelieve that fiscal pressure has been a major reason of the set back in SME development. We will analyzeAlbanian fiscal evolution and its impact in SME development.Keywords: SME, fiscal policy, global market, sustained economic growth, fiscal evolution.1. SME development, its characteristics and challengesSince ’90 Albanian governments have continuously undertaken structural reformsincluding reform of land, price liberalization, reform of privatization, financial reform and soon…. During this time almost all SME are privatized and the rest is on the way of privatizationin accordance with the government strategy of privatization. We mention here the privatizationin the telecommunication sector, banking, energy etc…. Through this process AlbanianEuropean Scientific Journal              January edition vol. 8, No.1 ISSN: 1857 – 7881 (Print) e - ISSN 1857- 7431388economy has responded fairly well. From 1992, economic growth has been about 7%, inflationrate has been under control between 2-4 %. Albania has good macroeconomic indicators withsatisfying growth rate of GDP. These activities made the private sector the major movingeconomic force of countries development. Private sector makes of 80% of country’s GDP.To further boost economic growth, recently Albania has undertaken several measurestoward European integration. Albania has signed the Small Business Act for Europe and isworking to fulfill its commitment in accordance with the European standards and practices. Inthis context its fiscal policy, aimed at lowering tax burden for businesses which till 2006 hasbeen an obstacle to business growth and development. Later on we will talk about this indetails.It’s been a difficult road to establish the market infrastructure and institution due torapid changes in global economy, lack of relevant culture, and the existence of great informaleconomy. Albanian government has built a strategy to fasten this process and help SMEdevelopment as a crucial factor in the sustainable economic growth of the country. The missionof this strategy is “to ensure sustained economic growth, high competition and productivitythrough dynamic development of enterprises, investment incentives, and better use of human,natural and financial resources.2. SME and transitionSustainable growth of SME is the cornerstone of Albania’s economy. Improvement ofgovernment policies in regards to both administrative and fiscal procedures, contributing inboth direct and indirect support of SME. The role of NGO as: Chamber of Commerce,government bodies and employment offices must grow. They need to strengthen the SMEbelieve in them, participate (membership), and collaborate.The fight on corruption and informal economy must intensify, by strengthening andmodernizing government institutions. All these steps will guarantee the SME developmenttrend and will bring the end of the economic transition area closer. SME development trendplay an important role in both market oriented economies and transitional economies growth.As in other countries which passed from centralized economy to market oriented, Albania’seconomic policy makers ignored the importance of SME development, focusing more onprivatization of states assets. Albania’s weak institutions slowed down the SME developmentand so the economic development during transition.European Scientific Journal              January edition vol. 8, No.1 ISSN: 1857 – 7881 (Print) e - ISSN 1857- 7431389Albania is one of the transition countries, still struggling with the transition processdespite its major improvements done recently. The outcome is barriers to SME developmentand less contribution of them in speeding up the transition process. In our work we will try toexplain SME development in Albania and the role of government agents and other NGO, butwe are aware of the difficulties especially in measuring the exact level of SME and its effecton the economic development in Albania. According to OECD it’s practically impossible tomeasure SME and entrepreneur development and its effect to economy since there are nogenerally agreed indicators. Transition process is described as passing from centrally plannedtowards market oriented system. This transformation consists on institutional change, changeof state and private sector role, change from bureaucratic coordination into open economy.But, only developing a private sector is not enough to implement this transformation. In thebeginning of 1990 the idea that government should leave the economy and the market alone,was dominative. By doing so private sector would soon raise and take over and the marketwould adjust by itself (Smith’s invisible hand). This proved not to be successful in Albania.Later on, and precisely after 2000 it was understood that in order to have a successfultransformation and a strong, sustained SME development, macroeconomic reforms, stability,and strengthened institutions were needed.There exists barriers on SME development in market oriented economies, but in thetransitional economies this barriers are way higher and stiffer, making it very difficult fornew businesses to enter and grow within the market. If there are not taken proper actions,these barriers would result in economic slowdown or worst up to stagnate the transitionprocess.External Barriers to SME and entrepreneurship development in Albania’s transitioneconomy consist in many factors such as policy instability, unsteady tax legislation,inadequate accounting standards, and nontransparent implementation of laws and so on….Lack of state support in forms of business infrastructure, supporting services characterizestransition economy. Difficulties in financing have been and still are a major concern due toundeveloped financial market system in Albania.Inefficient banking system, high interest rates, strict collateral requirements make itdifficult for SME development in Albania. Despite the lowering figures, Corruption is a veryimportant negative aspect that deters SME and entrepreneurship development. These arederivatives of imperfect legal framework and less effective law application.European Scientific Journal              January edition vol. 8, No.1 ISSN: 1857 – 7881 (Print) e - ISSN 1857- 7431390Internal barriers are mostly related to lack of managerial skills and entrepreneurshipvalues. This is though normal to a country that comes from a centralized economy where theSME and entrepreneurship did not exist. Listed in a table view, are the internal and externalbarriers of SME.Types of Barriers Types of PoliciesExternal BarriersFinancial FrameworkIncentive programs through differentprograms in addition UNDP and MillenniumChallenge FundLegal Framework Improvement of LegislationTax reductionReducing number of licenses and the timeframe of acquiring themState Support NRC, ease of registering a businessIncreased transparency of actionsFighting corruptionInternal BarriersEntrepreneurs knowledge and managerialskillsConsulting, support services of NGOs,Strong and deep reforms undertaken during 2005-2010 generated unprecedentedeconomic growth, ranking Albania amongst the top list of developed countries. Reforms weremostly directed towards strengthening public finances, improving business environment, andupgrading infrastructures.Government of Albania took drastic measures to introduce and implement simplifyingtax and customs code, tax administration and enforcement, reducing the registration of abusiness from 38 days in 2007 in just 1 day, eliminating the frustrating process andcorruption.According to the report of 2008 Corruption Perceptions Index (CPI), among 180worldwide nations surveyed, Albania 85th, 2009 ranked 105th, and 2010 ranked 87th.European Scientific Journal              January edition vol. 8, No.1 ISSN: 1857 – 7881 (Print) e - ISSN 1857- 74313913. The fiscal changes in Albania and the SMEs (Small and Medium-Sized Enterprises)The SMEs in Albania are regulated by special law, which has occasionally beensubject of review and necessary changes to improve the environment in which SMEs operateand creation of necessary facilities.According to the law no. 8957, of 17.10.2002 “For Small and Medium-SizedEnterprises”, amended, there is given the definition of what is called small enterprise andmedium enterprise. Small Enterprises are called those enterprises which employ fewer than50 employees and have a business figure or annual total balance sheet less than 50 millionslek. Medium Enterprises are called those enterprises which employ from 50 to 250employees, have a business figure or annual total balance sheet by 50 millions to 250 millionslek.According to the above definitions in the group of SMEs enters a large number ofbusinesses, which are regulated under the category they belong. According to INSTAT(Institute of Statistics) data at the end of 2010 were 100,687 enterprises registered and active(Table 1). Only during 2010 were created 16,290 new enterprises, so despite the economic-financial crisis that is happening, the number of businesses categorized in groups of SMEshas been growing by 19% compared to 2009. If we calculate the average enterprises createdduring 2006-2010 (12.040) and compare it with the average of the period 2001-2005 (7.334)we have an 80% increase of the growth rate per year. This is a clear indicator of the successof fiscal reforms taken after 2006, despite the economic crises that have accompanied theworld economy and its bad impact on our economy. About 91 % of enterprises have 1-4employees. The SMEs sector in Albania provides about 64% of GDP (Gross DomesticProduct), and the employment of about 66% of employees in the private sector, creatingstability for the country’s economy.European Scientific Journal              January edition vol. 8, No.1 ISSN: 1857 – 7881 (Print) e - ISSN 1857- 7431392Table 1: Active enterprises by year of creation and size, 2010Year of creation TotalBy number of employees1-4 5-9 10- 49 50+Total 100,687 91,566 4,778 3,500 8432010 16,290 15,498 621 159 122009 12,158 11,501 416 190 512008 13,988 13,216 519 220 332007 8,636 7,795 412 385 442006 9,137 8,527 334 232 44÷2005 40,478 35,029 2,476 2,314 659The structural separation of SMEs presented by the following table, separatingbusinesses in (1) the group goods’ producers and (2) services’ producers (Table 2). In thefirst group about 62 % of the enterprises operating in the industry, about 27% operate in thefield of construction and about 11% operate in the field of agriculture and fisheries (Graph1).While in the second group about 53% of enterprises operating in the area of trade,18% operate in the area of hotels & restaurants, 12% operate in the area of transport &communication and 17% operate in other areas of services (Graph 2).European Scientific Journal              January edition vol. 8, No.1 ISSN: 1857 – 7881 (Print) e - ISSN 1857- 7431393Table 2: Active enterprises by economic activity and size, 2010Economic Activity TotalBy number of employees1-4 5-9 10-49 50+Altogether 100,687 91,566 4,778 3,500 843Producers of goods 15,911 12,087 1,786 1,637 401Agriculture & Fishing 1,702 1,591 57 43 11Industry 9,964 8,051 878 752 283Construction 4,245 2,445 851 842 107Producers of services 84,776 79,479 2,992 1,863 442Trade 44,709 42,699 1,307 629 74Hotels, Coffee,Restaurants 15,674 14,829 698 131 16Transport &Communication 10,361 9,931 222 166 42Other Services 14,032 12,020 765 937 310Graph 1.Producers of goods11%62%27%   Agriculture & Fishing   Industry   ConstructionEuropean Scientific Journal              January edition vol. 8, No.1 ISSN: 1857 – 7881 (Print) e - ISSN 1857- 7431394Graph 2.Producers of servicesThe following chart shows the trend of creating new enterprises from 2008 to 2010,divided in 3-month periods. The number of enterprises that take part in the group of theSMEs has increased from year to year, as for the first time, it has been facilitated theestablishment of a business. Pursuant to Law no.9723, of 3.5.2007 “On the NationalRegistration Center (NRC)” business does not have to wait for a long period of time to berecorded in the fiscal authorities and obtain a VAT number  and many other bureaucracies,but for a period of 1 day a business is recorded and can start its normal activity. Also, in theoffices of NRC can be performed actions regarding capital increase or reduction, withdrawalof a partner, adding new partners, closure of business and many other actions. This servicehas created a great business respiration, primarily because it reduces much time and themultiple bureaucracies, and secondly reduces corruption significantly, especially with the taxauthorities.As seen from the graph 3, in the first 3-month period of the year 2008 the graph totalsthe highest point. During 2010 there is an increase of the number of new enterprisescomparing it with 2009, which is indicated by the chart below.53%18%12%17%    Trade   Hotels, Coffe,Restaurants   Transport &Communication   Other ServicesEuropean Scientific Journal              January edition vol. 8, No.1 ISSN: 1857 – 7881 (Print) e - ISSN 1857- 7431395Graph 3.New Enterprises according to 3-months periodsAccording to the Albanian fiscal legislation, businesses that take part in the group ofSMEs are categorized in:(1) Businesses subject to local tax on small business and not subject to VAT with a businessfigure up to 5 millionslek,(2) Businesses subject to VAT and local tax on small business with a business figure from 5millions to 8 millionslek,(3) Businesses subject to income tax and VAT with a business figure over 8 millionslek.So, it turns out that the group of SMEs includes a wide spectrum of business, and theirfiscal treatment varies depending on the category they belong to. Albanian governments havehad as a priority the development of SMEs and time after time this has been observed also inthe reduction of fiscal burdens on SMEs. Occasional fiscal changes have had a descendingtrend of fiscal burden, facilitating businesses and reducing the informal economy and taxevasion, concretely:(1) Income Tax during the period 2005-2006 was reduced by 23% to 20% and by2008 was reduced to 10%. This reduction of profit tax rate resulted in increased figure ofbusiness, reduction of the informal economy because businesses were encouraged to declaremore due to lower tax burden.(2) The simplified tax return, which means that businesses are subject to local tax  onsmall businesses, was reduced from 3% to 1.5% during the period 2005 to 2006. The tax rateamounted to realize the economic turnover of small business is considered personal incomeEuropean Scientific Journal              January edition vol. 8, No.1 ISSN: 1857 – 7881 (Print) e - ISSN 1857- 7431396and estimated a 10% tax on the difference between revenues and expenses for the trainingperiod. This change had a positive effect in the calculation of tax for small businesses, as theywere facilitated by high fiscal burden and subjectivity and to these businesses were given theopportunity to identify their costs. Albanian SME needs to put to better use this low taxsystem, using the increased profits to technological investments and competitive advantages.Fason’s sector for example: by lowering tax on profit and employer’s social contributionswill be more competitive in European and regional markets, being a tough competitor ofChina, as well.(3) Social insurance contribution paid by employer decreased from 29% to 20%during the period 2005 to 2006, then to 9 %, and from 2008 onwards was reduced by 5%to15% level. This significant reduction in the rate of social insurance that pays the employer,created more facilities to the business because it reduced significantly the obligation that hasthe employer to shed cash in the coffers of social insurance.All these changes in the fiscal package, in general, had positive effects on SMEs bycreating more breathing at this time of crisis that are going through the economies of allcountries, including Albania’s economy. So, the income tax rate was reduced for the mediumenterprises, was reduced the rate of contribution to social insurance, was decreased the excisefor domestic production (beer producers), while small enterprises were offered the possibilityof recognition of costs to calculate the taxable income, which was not allowed before the taxchanges above.4. ConclusionsOn this work it was concluded that the development of SMEs should be stronglysupported by easing fiscal policies. This is because the SMEs have a more active role in theeconomy of the country and specifically about 64% of GDP provided by SMEs, about 91% ofemployees are employed by SMEs.Fiscal burdens such as Income tax, social insurance, Tax on Small businesses havedropped, in order to facilitate the SME businesses. Specifically, profit tax is reduced by 23%in 2005 to 10%, so a reduction of 13%. Social Insurance paid by the employer from 29% in2005 decreased to 15%, a 14% decrease. The elimination of Simplified Profit Tax, which issubject to small businesses, changed the method of calculation of Tax on Small Business,European Scientific Journal              January edition vol. 8, No.1 ISSN: 1857 – 7881 (Print) e - ISSN 1857- 7431397which enabled small business to recognize expenses incurred during the fiscal period incalculating the taxable profit, which was not allowed until 2007.Promoting entrepreneurship culture through managerial improvement and trainings,encouraging creative entrepreneurship, workforce training etc....Development of the growing business, improvement of business climate, increase ofcompetition through innovation and technological development.Improvement of SME financing, through increase of access to credit, increase ofgovernment guarantee fund and its extension not only to exporting companies, increase offunds of microcredit and the strengthening of micro financing institutions.References:Law no. 8957, of 17.10.2002 “For Small and Medium Enterprises”, amended.Law no. 9723, of 3.5.2007 "On the National Registration Center"Law no. 8438, of 28.12.1998 “Income Tax”, amended.Decision of Ministers Council no. 1058, of 21.10.2009  “To determine the minimum limit ofVAT”.Albanian Government Business Strategy and Investments 2007-2013Joseph Alois Schumpeter “The Theory of Economic Development”, 1911www.albinvest.gov.alTransparency International 2011, http://www.enterprisesurveys.org

FISCAL PRESURE ON SME IN ALBANIA AND ITS IMPACT ON ECONOMIC DEVELOPMENT

European Scientific Journal, ESJ

https://eujournal.org/index.php/esj/article/download/4621/4417

FISCAL PRESURE ON SME IN ALBANIA AND ITS IMPACT ON ECONOMIC DEVELOPMENT

Abstract

Similar works

Full text

Available Versions

European Scientific Journal (European Scientific Institute)

European Scientific Journal, ESJ