Tax re­form

Finweek English Edition - - COVER STORY -

1 TA­part from the pure ad­min­is­tra­tive bur­den, how­ever, lo­cal SMEs are not given the tax re­lief and in­cen­tives that would see them through the diff icult start-up phase and ul­ti­mately grow the busi­ness into a sus­tain­able and prof­itable en­tity. Ac­cord­ing to Mike An­der­son, founder of the Na­tional Small Busi­ness Cham­ber ( NSBC), around 80% of start-ups shut down within the f irst 1 000 days be­cause of tax-re­lated chal­lenges cou­pled with high bank charges. “Tax is a ma­jor is­sue for the ma­jor­ity of small busi­nesses that we work with,” says An­der­son. “It is in­cred­i­bly com­pli­cated and hard for new busi­ness own­ers to get right.”

In the NSBC 2012 Small Busi­ness Sur­vey, VAT reg­is­tra­tion, tax ex­emp­tions, cross-bor­der trade as well as im­port and he cur­rent tax struc­ture and re­quire­ments for SMEs and start-ups rep­re­sents a mas­sive hur­dle to sim­ply just open­ing for busi­ness – and is al­most al­ways listed as a ma­jor chal­lenge for the sec­tor. “The prob­lem for small busi­nesses, and es­pe­cially start-ups, is that not only is the tax leg­is­la­tion com­plex to read and un­der­stand, but oper­a­tionally it is also dif­fi­cult to get reg­is­tered for cer­tain taxes – such as VAT,” ex­plains Sharon Smul­ders, Head of Tax Tech­ni­cal & Tax Re­search at the SA In­sti­tute of Tax Prac­ti­tion­ers (SAIT). Smul­ders says that there have been cases where it takes months be­fore a small busi­ness can reg­is­ter for VAT, and then once it is reg­is­tered, it is hit by penal­ties and in­ter­est on late pay­ment/in­cor­rect VAT treat­ment. “A small-busi­ness owner does not have time to fo­cus on tax (un­der­stand­ably so) and thus needs to get the as­sis­tance of a tax prac­ti­tioner that could be costly for a startup or small busi­ness,” she adds. ex­port taxes were cited as the most im­por­tant le­gal is­sues for SMEs. Government did in­tro­duce some mea­sures to ad­dress tax chal­lenges in its lat­est Bud­get, such as rais­ing the cor­po­rate tax turnover thresh­old from R14m to R20m, but many were dis­ap­pointed by the scope of the pro­posed re­forms.

“It would have been good if the thresh­old for the small busi­ness cor­po­ra­tion (SBC) regime was in­creased to R50m align­ing with the dti’s pro­posed change to the BBEEE cat­e­gories of ex­empt mi­cro en­ter­prises and qual­i­fy­ing small busi­nesses,” says Smul­ders. “This would not only have stream­lined the def­i­ni­tion of small busi­nesses to some ex­tent, but would also have in­creased the num­ber of small busi­nesses that could ac­cess this tax regime.”

She adds: “A lot more re­search needs to be done on the in­cen­tives cur­rently avail­able to small busi­nesses as their ef­fec­tive­ness in some cases is doubt­ful.” An­der­son sug­gests that new busi­nesses with a turnover of un­der R35m should be ex­empt from all tax un­til they reach a cer­tain thresh­old.

We could also look abroad for ex­am­ples of ways to in­cen­tivise our SMEs. Many coun­tries, in­clud­ing BRICS mem­bers such as Brazil and In­dia, have ef­fec­tive small-busi­ness in­cen­tives in place. Sin­ga­pore has a tax ex­emp­tion scheme for all new start-ups (that meet cer­tain cri­te­ria) that ex­empts ap­prox­i­mately R1.4m of the nor­mal charge­able in­come of th­ese com­pa­nies for the first three con­sec­u­tive years of as­sess­ment. “We need to start al­low­ing small busi­nesses to pros­per – and when they do, ev­ery­body wins,” An­der­son adds. Given the in­te­gral role that SMEs play in the coun­try’s eco­nomic devel­op­ment, some have pro­posed the idea of es­tab­lish­ing a ded­i­cated min­istry for the small-busi­ness sec­tor. “It is ba­si­cally a no-brainer for our Government to in­vest money and cre­ate a ded­i­cated, co­or­di­nated ap­proach to pro­mote and sup­port the small busi­ness sec­tor,” says Sti­aan Klue, chief ex­ec­u­tive of SAIT. “Cur­rently three min­istries are broadly re­spon­si­ble for SMEs in South Africa: fi­nance, eco­nomic devel­op­ment, and trade & in­dus­try. This is typ­i­cal of our sys­tem in South Africa – we rid­dle sys­tems with red tape, hence stif ling small busi­nesses.” He adds: “The sys­tem will def­i­nitely be more ef­fec­tive if it is cen­tralised in a ded­i­cated min­istry, re­port­ing di­rectly to the pres­i­dent.”

While such a min­istry sounds promis­ing on pa­per, there are many who are scep­ti­cal whether such a de­part­ment would have any im­pact. “There has been quite a lot of talk around this, and while in the­ory it seems like an ex­cel­lent idea, it can only work if it is apo­lit­i­cal, has a hard­nosed busi­ness agenda and is pre­pared to f ight some tough bat­tles (of­ten with its own mem­bers) to cre­ate a truly en­abling en­vi­ron­ment for busi­ness,” says Res­sel. “As an ex­am­ple, how will SARS feel if the dti in­sists that for an SME to suc­ceed, it needs to be ex­cused from all taxes for the first five years of its ex­is­tence? I am not en­tirely sure if such a body could func­tion

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