Prof Matthew Lester expands on new Davis Tax Committee report focusing on SME’s

A very large portion of the South African economic sector is informal, if small businesses don’t fall into the ‘informal’ category then it is likely that they will fit into the category of small to medium sized enterprises (SME). From a current economic standpoint, the country desperately needs SME’s to spring up in true entrepreneurial fashion to bolster growth and job creation. When looking at the variables that affect entrepreneurs as they begin their journey, one very relevant aspect of the decision that they make to start a business is the incentive that there is for it in light of the cost of compliance. The Davis Tax Committee has been called on by the Minister of Finance to submit a report on this very topic – formalising the SME sector from a tax perspective and incentivising small business to register with SARS. Unpacking all of the details of the recommendation made by the Commission is Professor Matthew Lester, who focuses particularly on the needs of SME’s and how the report looks to address these needs. – LF

ALEC HOGG:  Well, South Africa’s favourite tax advisor, Professor Matthew Lester from the Rhodes Business School is also a member of the Davis Tax Committee, not to be confused Matthew, with the Commission.  Just explain briefly, what the difference is.

PROF MATTHEW LESTER:  Well, we had old commissions: we had the Margo Commission in the 80’s.  We had the Tax Commission in the 90’s.  These are public commissions and they write reports to be considered by the public and National Treasury etcetera.  The Davis Committee is a committee appointed by the Minister of Finance to report to the Minister of Finance, specifically.  It doesn’t overrule any legislative process.  It’s purely a way of saying ‘these are the issues.  This is what you should be considering’ and to provide some guidance, so we’re not exactly writing law here.

ALEC HOGG:  You give input to the Minister of Finance whom presumably, if he wants you there – he’s going to listen.  You’ve brought out an interim report now for the SME sector.  What are the highlights?

PROF MATTHEW LESTER:  Well, there are two big highlights.  The one is the issue of subsistence business.  We have millions of South Africans who conduct small little trades and they’re doing that in whatever way, by supporting themselves and providing service to other South Africans.  We found that there’s no revenue potential from these business.  They formalise the tax environment and the tax system must, as far as it possibly can, keep out of their way.  They can’t not be registered for tax, because that’s going to undermine the whole tax system.  What we’re proposing is that the turnover tax system, – which we already have and not many people have registered for – be extended, so that we can really take the minimum amount of tax possible from the subsistence business sector and that they are not in any material way, encumbered by tax compliance, having to set up companies, and submit annual tax returns etcetera. 

They will do a simple declaration once per year, and SARS will concentrate on liaising with them to make sure that they can keep up with that.  That’s the first part.  The second part is the entrepreneurial business, which is where we’re hoping from the NDP that we will get massive growth.  Obviously, these SME’s need help, but we have to first distinguish between ‘do they need tax help or do they need other forms of assistance’, for example finance facilities etcetera.  We found that tax is an issue in small business, but it’s by no means the major or only issue.

GUGULETHU MFUPHI:  Matthew, are there any provisions regarding incentives to encourage SME’s and entrepreneurs to follow?

PROF MATTHEW LESTER:  SME’s currently get an incentive that reduces their tax bill, but only if they have a tax liability.  That’s been there since 2000.  There’s no incentive to keep [inaudible 03:22] SME for its enormous costs of compliance.  What we have at the moment is [inaudible 03:28] SME’s that fall in this category.  They get tax benefits approaching R100,000.00 per year and that’s not necessarily driving anything.  These are mainly privileged SME’s.  It’s a complicated system.  What we suggested, is take away their tax incentive but use that resource differently, to create a refundable tax credit that any qualifying SME effectively gets a cash subsidy to help towards its costs of compliance with the tax system, rather than a system that is rewarding a business based on its success.

ALEC HOGG:  What about VAT, though?  As a small business, that’s the one that causes most of the problems.

PROF MATTHEW LESTER:  Well, I wouldn’t say it causes most of the problems.  There’s distress in various areas of the tax area – VAT – and we have to dissect them, and find out what is a suitable solution for each one.

ALEC HOGG:  But when did you last go and stand in a queue at SARS and try to register for VAT?  It sounds great on the surface but Matthew, its days of trying to get that done.  I know.  I’m going through the process.

PROF MATTHEW LESTER:  I can quite agree with you.  The issue on VAT is covered in the report.  I’ve been talking mainly about income tax at this stage.  The VAT subcommittee of the Davis Committee is addressing these issues at the moment and there will be a separate VAT report issued later this year, where they’re going to try to look and see what can be done about the VAT system.  This report that we just issued now is looking particularly at income tax incentives and income tax compliance costs, in giving them the tax returns of small business.  On VAT, we have made very limited recommendations in this report.

ALEC HOGG:  But we can look forward to those in the future.  Matthew Lester is a Professor at the Rhodes Business School.  It’s a couple of steps forward – and a big leap though, when you finally get the VAT tax compliance aligned with economic realities.  It’s interesting to hear that we are moving in the right direction.

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