Rwanda could soon join a select group of African countries that implemented a startup Act, which the government hopes will spur the development of the country's tech-based services industry.
To realize the development, the government hired the Innovation for Policy Foundation (i4Policy), a firm that has been central to the development of other startup Acts including in Tunisia and Senegal.
Startup Acts are legal frameworks that require participation from all industry stakeholders within the entrepreneurial cycle. In terms of benefits, the legislation incentivizes all the parties involved in the life cycle of a startup from investors, entrepreneurs, and the startup itself.
For instance, in Tunisia's startup Act, one can take a year off their job to pursue a startup venture while still receiving payment from their job. This mitigates the risk of losing one's source of livelihood if the startup fails. The startup co-founders are also eligible for a startup grant that helps them cover their living expenses.
Other incentives cover licensing, liquidation, and taxes, among others.
In Senegal, the startup Act supports governance frameworks including legal frameworks.
Italy was the first country to pass a startup law in 2012. Other countries followed suit to spur the development of innovation.
In Rwanda, the government launched a Policy Hackathon in May which brought together key local founders and investors to ensure the Rwanda Startup Act is informed by their experiences building and growing businesses.
Rwanda's technology sector has been growing steadily, from being the first country in the world to transport blood using tiny unmanned aerial vehicles and building broadband infrastructure, to attracting leading firms such as Swedish co-working space and Investment fund Norrsken Foundation.
The deliberate efforts to promote information and communication technologies and other startup initiatives put Rwanda on a positive trajectory recognized internationally.
Feedback from the industry - consultations with stakeholders - on proposed incentives include:
Zero-rated PAYE increased to Rwf1 million
This reduces the cost to startups of employing talent, meaning that PAYE is charged at 0 percent for a portion of salary less than Rwf1 million. According to the draft Act, this protects employees earning more than Rwf1 million.
The Act presents a promising avenue for fostering growth within the country's burgeoning startup ecosystem, particularly through the provision of tax incentives to eligible startups.
Angelo Igitego, the CEO and Founder of Karisimbi Technology Solutions, believes that most players in the industry are burdened by Pay As You Earn salary tax.
He said: "It is advisable to focus on specific taxes that place a disproportionate burden on startups and recommend targeted reductions or exemptions. One such tax warranting attention is the monthly Pay-As-You-Earn (PAYE) salary tax which constitutes approximately 30 percent of an employee's monthly earnings."
For instance, Igitego pointed out that a startup with a net payroll of Rwf3 million must allocate an additional approximate sum of Rwf900,000, once a month, to meet PAYE obligations.
"By exempting this Rwf900,000, startups could potentially allocate resources toward employing additional personnel, thereby mitigating unemployment."
Accelerated depreciation (100% per year)
Using accelerated depreciation allows startups to fully account for expenditure on research and development as well as asset acquisition, which in the long run reduces corporate income tax (CIT) obligations.
By using accelerated depreciation, an asset with a tax basis may now be written off more quickly. By doing this, a business's taxable income can be reduced, and businesses can use those tax savings to invest back into their business.
VAT, and CIT taxes exempted
The New Times understands that the startup Act proposes to, among others, exempt players in the ecosystem from paying value added tax, and corporate income tax to limit administrative costs and increase working capital.
If eventually approved, industry players would be exempted from paying both taxes for a period of five years.
Credit guarantee scheme
This provides more access to credit and attracts investments.
Rwanda's startup ecosystem has in the recent past seen an upward trajectory for the number of players and investments registered. However, progress does not come without its own set of hindrances.
Apart from the several managerial and regulatory challenges, one of the biggest problems faced by startups is easy access to early-stage debt to finance their capital requirements. Traditional lending institutions such as commercial banks rely on the same old mandate to facilitate funding for startups.
Prerequisites such as promising credit history, established reputation, and, the most "burdensome," requirement of collateral, are expectations that most startups, by default, cannot cater to.
With the practical implications of such challenges hampering startups in raising debt, there has been a requirement to facilitate this process for budding startups looking for growth and expansion.
Intellectual property support
This, according to the Act, provides technical support to acquiring trademarks and patents, in order to support startups to monetize their innovations and to serve national welfare.
Intellectual property rights such as patents, trademarks, and copyrights can provide legal protection for these innovations, preventing others from copying or imitating them without permission. This helps startups maintain their market position and generate revenue from their ideas.
Seed innovation fund
Provides more working capital, easier to attract investments.
To attract talent and promote growth.
Leave for the creation of startups
Encourage startup creation by minimizing risks for an individual founder in case the startup fails.
Exemption from the payment of tax on shares
Exemption of all taxes chargeable on shares owned by its founders and its employees for the whole duration of the startup certificate.