IS SOUTH Africa's National Treasury getting more serious about entrepreneurship? The Minister of Finance Pravin Gordhan last week tabled a number of proposals in Parliament when he presented his Budget Speech. But will these attempts to help small businesses go far enough?
The National Treasury's proposals (contained in the Budget Review) to assist small businesses, include:
• Amendments (again) to the venture capital tax incentive which as of August last year had benefited just one small firm, since its launch in 2008 and despite amendments in 2011.
• Overhauling the turnover tax on micro businesses and the onerous Small Business Corporation (SBC) tax, including replacing the latter with an annual refundable tax compliance rebate in place of a graduated structure.
• Allowing grants given to small businesses to be tax-exempt.
• The introduction of tax relief to organisations involved in supporting small businesses through a dedicated tax provision.
The new proposals follow the completion in January by the National Treasury's tax review committee of a draft on its report on small and medium enterprises, which has yet to be released to the public.
Small Business Corporations (SBC) tax overhaul
In its report the committee concluded that the government's lower tax rates in SBC tax (introduced in 2001) are not effective, do little to support the objective of small business growth and do not address tax compliance costs.
Entities with an annual turnover of up to R20 million assessed as SBCs can qualify for a tax relief regime which provides for a graduated tax structure of zero percent, 21% and 28% .
Yet figures from the South African Revenue Service (Sars) show that in the 2012 tax year just 86 354 enterprises were taxed as “small business corporations” (SBCs) and that just 8 493 micro firms registered for “turnover tax for micro firms”.
What the Budget Review fails to mention is that the SBC is probably largely under subscribed because of a number of onerous rules that disqualify certain types of businesses and business owners from benefiting from the tax.
For example to qualify for the tax, business owners can’t have shares in more than one business, can’t derive more than 20% of their revenue from investments and the rendering of personal service and can’t be a personal service provider unless they employ three or more people.
Added to this over the years a number of business owners have taken Sars to court after being discounted from qualifying for SBC tax.
The tax review committee has recommended replacing the reduced tax rate regime with an annual refundable tax compliance rebate (subject to certain conditions).
This would be similar to the primary, secondary and tertiary rebates offered to individual taxpayers. Public consultations must still be held on the proposal.
According to a Business Day article a National Treasury spokesman, said the quantum of the rebates had not been determined, and none of the recommendations have yet been finalised.
The question now is whether such a rebate will mean fewer onerous rules than before and whether this will create more certainty for small businesses over which firms can quality and which can't. Surely opening the net wider - even given the risks of abuse - will do the country more good than harm.
The tax review committee has also proposed the scrapping of one of the most controversial requirements for those businesses that want to benefit from turnover tax on micro businesses (which provides for a special tax regime for firms with an annual turnover of up to R1m).
Many have pointed out that however generous, turnover tax has one serious drawback: that businesses pay tax regardless of whether they make a profit or not, whereas under ordinary income tax they would at least be guaranteed a zero tax rate in the event of a loss. Once signed up for turnover tax a business must stay in the system for at least three years.
The committee proposes doing away with the requirement for firms for businesses to opt in to the regime for three years and to move to requiring annual, rather than biannual, tax returns.
Added to this the committee also proposes that turnover up to R335 000 should not be taxed (a zero tax rate) and the maximum tax rate should be reduced from the current six percent to five percent.
That is good news, but will it mean more informal businesses will opt for the tax?
Since the tax form was launched in 2009 Sars has embarked on a serious marketing drive of the tax, but yet still fewer than 10 000 firms benefit from it.
The tax type was supposed to lure more informal businesses into the tax net, but perhaps many of those operating informally don't see any benefit to paying tax.
Brazil’s Micro Entrepreneur Law, introduced in 2009 to bring mainly street traders into the tax net, offers traders the chance of getting onto social welfare if they sign up.
Over 2.7-million Brazilians had signed up to the regime by August last year, according to Brazil’s Ipea statistics bureau, with 55% reporting higher sales after formalisation according to the country’s small business support agency Sebrae.
Perhaps if there were more clear benefits, coupled with help from the state in the form of easier finance and business support, on condition one signs up to turnover tax, one might begin to see more business owners from the informal sector subscribing to the tax.
Maybe tying this to the Department of Trade and Industry's new plan to launch incentives, in the form of grants, for the informal sector, may be part of the answer (see my previous blog entry for January 2014)?
Venture capital tax
The venture capital tax incentive aims to boost venture capital investments in small businesses by allowing individuals to make upfront tax deductions if they invest in venture capital companies, which in turn invest in certain kinds of small enterprises.
Gordhan proposed amendments to the National Treasury's venture capital tax incentive (under Section 12J of the Income Tax Act). These include:
• Making deductions permanent if investments are held for a certain period of time.
• Lifting the total asset limit for qualifying investee companies from R20m to R50m and from R300m to R500m for junior mining companies.
• Waiving capital gains tax on the sale of assets.
• Making the relief available to a greater number of forms of businesses.
The National Treasury seems to be listening to the many complaints made by those looking to set up venture capital companies - even though many of these were raised back in 2008 when the incentive was first introduced (in particular complaints about the waiving of capital gains tax and the proposal to make deductions permanent came up repeatedly).
Perhaps the treasury - concerned that the incentive will be abused by some - will be more prepared to take a gamble. After all if entrepreneurs can take risks to grow companies, perhaps so should government.
The problem is there aren't many in the National Treasury who have run businesses before, meaning the best are mainly skilled on how to draw up effective anti-avoidance measures - which end up shutting out most of those the tax was intended to benefit in the first place.
It's possible that many of the National Treasury's proposals (and its research into how to tax co-operatives) will take some time to come to fruition and will rely heavily on their ease of use for business owners.
Alone the R6.5bn over three years that Gordhan announced in his Budget Speech that the government aims to spend to help the sector - made up in loans and business support through the Small Enterprise Development Agency (Seda) and others - will not be enough.
What may be more important for the government is to get the basics right - to do more to fix the education system to improve the quality of education outcomes and lowering the cost of doing business.
This and the development by all South Africans of a mindset of doing-it-for oneself may go far further in the long-term than any kind of tax incentive, business support or loan.
Stephen Timm is currently in Sao Paulo, Brazil where he is studying Portuguese and gaining more insight into South Africa's fellow Brics member.
Stephen Timm is a