“As a matter of policy, small and medium enterprises (SMEs) should not be regarded primarily as a tax source, but as an economic (and ultimately a tax) incubator for SA. Leadership is, however, required from the Davis Tax Committee (DTC) to propose the necessary reforms (as well as from National Treasury to implement these), both as regards SMEs as well as the further much anticipated upcoming reports which the DTC is expected to shortly start releasing”, says Albertus Marais, Senior Tax Consultant at Mazars.

The DTC released its first interim report for public comment, addressing the tax considerations of SMEs. The Committee proposes quite a few meaningful recommendations that it believes will go some way to assist SMEs. These include amendments to the Income Tax Act to cut requirements linked to provisional tax, as well as the introduction/expansion of tax incentives linked to the training of individuals, to name but a few.

The report, quite appropriately, places heavy emphasis on the compliance burden that SMEs carry in the SA tax environment. At p. 10:
“Of particular importance are the costs of staff time spent dealing with regulations and the cost of paying for outside consultants. The cost of regulation falls disproportionately on smaller firms, particularly with respect to tax costs. Smaller firms have similar levels of tax costs compared to the larger firms but these costs comprise a larger proportion of the total regulatory costs.”

The risk is however that the Report does not go far enough as, at the very outset, it appears to attach a very narrow definition to the term ‘SME’. The position of what the Report calls ‘the missing middle’ (or medium enterprises) may continue to be largely unaffected if SMEs are not defined (as its name suggests) to include all enterprises but the large. As a result, the DTC recommendations, although laudable, run the risk of falling short of what they seek to achieve: to encourage economic growth for SMEs rather than spend time, and other resources, on adhering to tax compliance requirements. These recommendations (as so many other tax regimes in SA), will have little effect if they do not extend to a big enough proportion of the taxpaying public, simply because of the very limited number of taxpayers that could potentially qualify.

Although, admittedly, blame cannot be laid at the feet of the DTC for this, it appears to be endemic in the SA fiscal policy framework that although National Treasury is able to come up with decent tax incentives, these regimes are so very often limited to the very few that they end up having very little impact. If the proposals recommended by the DTC (both to cut the administrative burden as well as to broaden existing regimes) are to have any lasting effect, they should be implemented on a broad base. Although this may lead to a short-term cost in the form of decreased tax collections, this is bound to come with the certainty that the correct reforms now will necessarily increase the tax base in the medium to long-term future: job creation, skills development and a broader future tax base at the immediate cost of decreased revenue collections. A big investment into a big proportion of the SA tax base is required now to ensure that future returns of equal proportion are achieved.

ENDS