Are tax holidays what’s needed to rev the South African economy’s engine?
The majority of jobs in SA are being created by small and medium businesses, yet statistics show that many of these businesses fail within two to three years of starting up.
The usual suspects — red tape, stringent labour laws and lack of funding — are blamed. But it is also said that the country is not creative enough in its support of small businesses.
Veli Ntombela, head of tax at Sizwe Ntsaluba Gobodo, says neighbouring countries have introduced special concessions to attract foreign investors to set up business in their countries.
This include tax holidays for at least 10 and even up to 15 years. He says SA has a habit of throwing good money out to get bad money.
"We have to be creative," he said during a panel discussion on the tax gap because of the informal sector at the annual Tax Indaba in Sandton.
The recently released African Tax Outlook report, produced and published by the African Tax Administration Forum (ATAF), found that the informal sector in several of the 21 participating countries was growing due to high tax rates and transaction costs, complex legislation, and costly procedures for creating and registering a company.
Ntombela suggests the government consider giving tax breaks to small companies determined by the number of people the employ.
John Hanssen, senior manager of product oversight at the South African Revenue Service (SARS), says several initiatives have been introduced to lift the regulatory and tax burden of small businesses.
He says the issue of tax holidays is a policy matter and SARS cannot comment on policy.
However, he says, some of the concessions already introduced by SARS are not being taken up by companies — such as the turnover tax regime. The turnover tax system replaces income tax, VAT, provisional tax, capital gains tax and dividends tax for micro businesses with a qualifying annual turnover of R1m or less.
"A lot has been done, and a lot can still be done. Sometimes you also have to ask what more can be done," says Hanssen.
He is of the opinion that the small business corporation regime, where a company pays the 28% corporate income tax only if its taxable income exceeds R550,000, is a success. This concession amounts to a tax expense for the government of about R2.2bn.
Faith Ngwenya, tax executive at the South African Institute of Professionals Accountants (Saipa), questions the current threshold of R550,000 for a small company to start paying the same tax rate as a large corporation.
"If we really are serious as a country to see small businesses grow, we need to reconsider that. We have to be thinking out of the box."
Hanssen says SARS and National Treasury are "thinking out of the box", but it is a slow process.
Another initiative that was introduced last year was to cap the tax rate of small businesses at 15% if they operate in a special development zone.
"Slowly but surely things are being added on," he says.
Paul Gering, tax partner at PKF, says the government has given structural relief for the small and medium business sector. The fact that so few companies are using the relief remains problematic.
The ability of SARS to offer more, or to expand existing, tax relief is limited. "If we really want that sector to grow, then there needs to be something more to stimulate it. I think tax has done its bit."
The informal sector however, continues to remain outside the tax net. The African Tax Outlook report shows that the informal sector in 21 countries contributed to between 50% and 80% of the gross domestic product, and 60% of the employment.
Mary Baine, head of international taxation at ATAF, said revenue authorities acknowledged that the conduct of their officials contributed to small companies preferring to remain "incognito".
"Many countries realise the importance of keeping the tax system for small businesses as simple as possible, and some, especially in the eastern part of the continent, have achieved it," she said.