
The Davis Tax Committee has released an interim report addressing the taxation of the small business sector. The report is available on www.treasury.gov.za
The committee was established by the previous minister of finance, Pravin Gordhan, in July 2013 under chairman judge Dennis Davis. The brief of the DTC is to enquire and make recommendations regarding South Africa’s tax system with particular emphasis on achieving the goals of the national development plan.
The DTC will continue its work reporting to South Africa’s newly appointed minister of finance, Nhlanhla Nene.
In achieving the 2030 objectives the NDP places high expectations on growth of the small and medium enterprises. Within the SME sector the NDP recognises subsistence, lifestyle and entrepreneurial business.
The DTC report makes the important point that it is not the task of Sars to build the SME sector. To do so would exceed the mandate contained in the Sars act. Growth within the SME sector should be facilitated by the department of trade and industry or the new ministry of small business.
Although tax compliance burden is a substantial issue, it is by no means the only issue. There is no silver bullet tax package that will address all theses issues.
The report refrains from recommending a blanket tax exemption to small business as it would undermine the objectives of the new tax administration act and potentially result in substantial abuse.
The DTC has recognised that subsistence businesses, being businesses with turnover of less than R1 million per annum, have little growth potential and little prospect of making meaningful contribution to South Africa’s tax collections.
Accordingly the DTC recommends that the turnover tax system be retained , the benefits extended and the system simplified. In this way the tax system will require the minimum interference with subsistence business, although they will be required to register for tax.
No special tax rules are proposed for lifestyle business.
Analysis conducted by the DTC found that the current small business corporation ‘SBC’ tax regime, established on 2000, is not achieving its objectives. The tax benefits of R1,3 billion per annum are currently being claimed by a small number of niche profitable businesses irrespective of need or tax compliance costs. Accordingly the DTC has recommended that the tax regime be reconsidered and replaced with a tax compliance rebate.
The rebate would be paid to all qualifying SBC’s on submission of annual tax returns. This will result in all tax compliant SBC’s receiving a subsidy towards their tax compliance costs, irrespective of their profits or losses.
Many of the tax problems of small business relate to compliance with the VAT act. The report has declined to recommend that the compulsory VAT registration threshold be raised above the current level of R1 million per annum. It is also recommended that the cash basis of reporting VAT be addressed by the subcommittee of the DTC currently investigating the VAT system.
The current tax package designed to provide a tax incentive for investors in small business is simply not working as it is far from ideal and extremely complicated. Furthermore reservations were expressed as to whether a tax incentive will result in further finance becoming available to investors in small businesses. No definite recommendations are made and the matter remains subject to investigation by national treasury.
The DTC supports the employment tax incentive. However the report points out that there are severe deficiencies within the ETI system that make the benefits inaccessible to the SME sector.
The DTC has requested comment on the report and will make further recommendations in due course.