Tax review could relieve small businesses
Practitioners say taking the pressure off entrepreneurs is vital,
THE small business sector in SA is in dire straits because there are not enough entrepreneurs to create sustainable, innovative businesses. A tax review was set in motion in February by President Jacob Zuma and Finance Minister Pravin Gordhan to try plug the gap by investigating the effect of tax on employment, growth and development.
While there are many contributing factors to this malaise — poor education, bad management — the investigation can be a step in the right direction if it leads to practical incentives that grow the sector.
The Global Entrepreneurship Monitor 2012 annual survey found that only 14% of South Africans intended to open a business in the next three years, well below the average of 27% for peer countries.
Only 7% were involved in earlystage entrepreneurial activity, compared with 9% in 2011 — the average in similar countries is 14%. The reported success rate for the government’s incubator initiatives was not more than one job per business.
The new Tax Administration Act last year gave the South African Revenue Service (SARS) powers to search and seize, in some cases without warrants.
Tax review committee head Dennis Davis is concerned about the potential effect of the new act on small business in transaction costs and levels of complexity. Hence it is hardly surprising that this will form one of the committee’s first areas of investigation.
The enormous powers given to SARS are already causing problems. One small businessman was nearly wiped out when his VAT tax claim was rejected and SARS sent inspectors to attach his assets when he failed to pay the alternate amount requested. Documents seen by Business Day show how a VAT claim the businessman made appears to have been reversed, with no reason given. The businessman says he got lucky as SARS inspectors went to his old address, and thus failed to get to his assets before his case could be reviewed.
Another businessman says every year he has to submit about 45 statutory documents and forms. “I feel that the art of entrepreneurship is being oppressed by red tape and administration,” he says.
“We don’t focus adequately on investing in viable operations to better our economy,” says South African Institute of Tax Practitioners (Sait) CEO Stiaan Klue. He wants to see a dedicated ministry for small business to promote this vital, job-creating sector. Director of tax at Cliffe Dekker Hofmeyr Johan van der Walt says recent changes in Canada to protect taxpayers who lodge complaints with the tax ombudsman from harsh treatment down the line, may help inform the debate in SA.
The Tax Administration Act of 2011 sets out the powers and duties of the tax ombudsman, due to be appointed any day now. The Canadian Tax Ombud was appointed in 2008, and the Canadian Revenue Authority last month addressed what it called a taxpayer’s potential “fear of reprisal”. The intention is to give Canadian taxpayers comfort that invoking a taxpayer right or lodging a complaint with the ombudsman would not result in harsh treatment.
The head of tax technical policy at Sait, Prof Sharon Smulders, wrote the report on behalf of tax professionals in SA, to Judge Davis this week. The letter, seen by Business Day, highlights that future tax incentives should focus on job creation as the primary objective. A turnover limit of R50m is being called for from the current R20m, while rebates should also be considered for businesses employing younger workers, while it proposes R0-250,000 taxable income should be taxed at 0% and then up to 5% at 7%. Any amount over R1m should be taxed at 28%, it says.
Sait says small businesses should not be required to register for VAT as they currently have to, and a payment basis would be preferable. This would mean companies only pay over VAT when a customer has paid. “The current system puts the small business under severe cash flow pressure, and in certain cases leads to the closure of many small businesses,” reads the letter.
It wants the VAT threshold lifted from R1m to R2m.
It also calls for the skills development levy threshold — which is used to fund education and training and is allowed as a deduction for income tax, which is levied at 1% of remuneration — to be R1m.
Another submission is to allow a small business to be covered under the Workmen’s Compensation Act without contribution if the wage bill is under R1m.
Sait, which is the biggest organised group of tax professionals in the country, also wants tax education improved.