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Government must walk its SME talk

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Government faces two key issues: severe and worsening unemployment on the one hand, and a growing gap between what the fiscus needs and the tax it can collect.
Taking decisive action to grow the SME sector has the potential to resolve, at least partially, both issues, writes Faith Ngwenya, technical executive at the South African Institute of Professional Accountants.
I often think that a country’s tax regime tells the real story about its fiscal health and its priorities. With the Davis Commission in full swing, and tax revenues under pressure as the economy slows and with no reduction in the calls on the fiscus, that story is not a particularly inspiring one at present.
Heightened political tension and the growing realisation that a large proportion of the tax money collected over the past two decades, as well as the multi-faceted economic transformation programme, have been “captured” have raised the stakes more than somewhat.
It’s against this backdrop that the forthcoming Tax Indaba will meet. It promises to be an interesting meeting, as stakeholders debate a way forward. One of the most pressing topics will be how to strike the right balance between helping SARS close the gap between what it needs to collect and what it can collect on the one hand, and how to stimulate the kind of economic growth that will produce the sustainable jobs we need to reduce poverty. I am looking forward to being part of a panel that will wrestle with this challenge.
The panel discussion is titled Small and Medium Businesses: Engine for Growth Versus the Tax Gap. It goes right to heart of the issue because, as researchers believe, SMEs account for up to “91% of formalised businesses, provide employment to about 60% of the labour force and total economic output accounts for roughly 34% of GDP”, to quote The Banking Association South Africa.
Government has recognised the importance of SMEs by creating a Ministry for Small Business, and putting several initiatives in place–but still our SME sector is not vigorous, and it’s not generating the jobs we need for a strong economy and a stable society. I increasingly feel that, as a country, we must stop fooling ourselves: everything is not alright and we need to take more decisive action to support SME growth. That’s the only way we will grow our GDP and create jobs–and incidentally bridge the tax gap that the fiscus currently faces.

First things first
One important principle we need to accept is that growth has to come first, and tax revenues will follow. This requires the fiscal authorities to take a longer-term view, sacrificing short-term tax revenue in order to expand the tax base sustainably. It often seems as though Government initiatives are not harmonised, and even seem to be pulling in different directions.
For example, Government has introduced the Small Business Corporate Tax rate that allows qualifying SMEs to be taxed at a lower rate than the 28 percent normally levied on companies. It has also initiated the Employment Tax Incentive (ETI) to encourage companies to employ young people in order to give them the vital work experience they need to integrate into the formal economy.
The lower tax rate for SMEs is obviously a good thing, and so is the ETI, but then one finds that the ETI only applies to very low wage earners and lasts for only 24 months. Isn’t that really incentivising companies to keep wages down? It certainly does not support the creation of long-term employment. Research shows that South Africa has one of the highest failure rates of small businesses.
If we truly want to help them succeed, and fast-track their ability to create jobs, then the fiscus must be prepared to sacrifice some tax revenue through mechanisms like the ETI over the medium term to ensure that we maximise the number of sustainable, higher wage jobs created. This will also culminate in a more stable, broader tax base.
Indeed, according to research by The Small Enterprise Development Agency (SEDA) in 2007, 75% of new SMEs fail in the first year, one of the highest rates in the world.
With an unemployment rate at its highest in 13 years, and the local economy in recession even as the global economy is starting to recover, I would argue that we need to take decisive, concerted action. Integrated, well-designed tax relief for small businesses is a vital ingredient of any plan to boost the economy, create sustainable jobs and ultimately close the tax gap.