REGINALD PILLAY: It’s time for an entrepreneur tax incentive

While well intentioned, the Employment Tax Incentive (ETI) has been the subject of much abuse and has failed to materially change the employment landscape in SA. It might be time to rethink the ETI in the form of an Entrepreneur Tax Incentive.

The SA Revenue Service’s (Sars) ETI, applicable to salaries up to R6,499, aims to encourage employers to hire young work-seekers (aged 18-29). Implemented in January 2014, the idea was to reduce employers’ cost of hiring young people through a cost-sharing mechanism with the government. This allowed employers to lower the amount of pay-as-you-earn (PAYE) tax they paid while ensuring the wages received by employees remained unaffected. For example, employers registered for PAYE who employed a person earning R2,000 for the full month of February 2014 would receive a R1,000 reduction in their monthly PAYE liability.

Yet in 2014 the youth unemployment rate was 43.95% and in the second quarter of 2024 this figure came in at 45.5%. Not only has youth unemployment risen after a decade of the incentive being in place, but there has been abuse and manipulation. This resulted in Sars clamping down on organisations claiming the ETI in 2022 and tightening the definition of “employee” and whether work is actually being conducted. There are now more than 300 ETI-related cases in the tax courts and many people are spending large amounts defending their claims. What was supposed to be an incentive is rapidly turning into a burden on multiple fronts.

Further to this, the ETI bands have not kept pace with updates to the National Minimum Wage Act, reducing the attractiveness of the incentive. ​​​If we assume just 5% of the 16.9-million people who are employed are claiming the ETI, this translates to about R10.1bn in payroll rebates being generated.

We would argue that SA is spending too much time focused on “job creation” and “employment”, and that this R10bn could be put to far better work rewarding entrepreneurs. A similar argument could be extended to the Unemployment Insurance Fund (UIF), which imposes a statutory tax on business owners and then operates a multibillion-rand surplus that is ostensibly given to intermediaries to “create jobs”. Think of the enabling effect of getting these funds into the hands of entrepreneurs.

Sandton is often described as “the richest square mile in Africa”. As you drive through the suburb you pass the head offices of big insurance groups, law firms, luxury car dealerships and international hotel groups. These entities, with all their resources, are bound by a robust piece of legislation called The Companies Act. The problem is, so are small businesses that are just starting out.

Dealing with red tape has long been an issue for those wanting to establish small businesses in SA. In his state of the nation address earlier in the year President Cyril Ramaphosa highlighted a number of obstacles to investment, including mining rights, tourism operator licences, work permits and licensing in the energy sector. There are simply too many barriers for those who want to build businesses.   

Operation Vulindlela even has a red tape reduction programme. While this should be commended, we should also remember that this is an initiative being driven by entrenched “big business”, which are often to some degree beneficiaries of high regulatory costs.

There have been some attempts at innovation from Sars with the introduction of the small business corporation (SBC) and turnover tax thresholds, which attempted to reduce the tax burden on small business owners. The irony of this is that small business owners who establish multiple businesses lose their SBC status, whereas large corporates with the right tax and legal advice can establish subsidiaries, special purpose vehicles and the like, which allow for greater tax planning and efficiency.

This ultimately segues into the discussion of funding for entrepreneurs. Business owners are constantly looking to reduce their taxable profits so they naturally take money out of the business. When they go to the bank for a loan the traditional credit-scoring algorithms want cash and cash flow. There is a reason the trade finance gap in Africa is more than $100bn a year — the incentives for the entrepreneur and the funder aren’t aligned.

Businesses are often not funding-ready in terms of how they present their information to funding institutions. Larger businesses have the ability to access professionals to optimise their financial information to access funding, while small businesses don’t have this luxury given the cost of professional services. Funding to entrepreneurs needs to be made simpler. 

We have had a decade of the Employment Tax Incentive. Perhaps it is time we stop focusing on employment and rather look to incentivise entrepreneurship. 

• Pillay is group CEO at Ariston Global.