The failure of South Africa’s National Treasury to remove constraints on economic activity in the country’s latest budget means other tax amendments are “insufficient” to kickstart small business growth and employment, according to investment management firm Sanlam.
An “Economic Overview for Business Owners” written by Arthur Kamp, investment economist at Sanlam, seen by Disrupt Africa notes that measures introduced by the National Treasury to support startups and small businesses include funding support through the Industrial Development Corporation and a more attractive turnover tax regime for qualifying micro businesses.
Yet Kamp argues that with small, micro and medium enterprises accounting for 55 per cent of employment in South Africa, the amendments made so far are insufficient in supporting the growth of such companies and therefore reducing unemployment, which stands at 26 per cent and almost 50 per cent among young people.
“Although the amendments to the turnover tax are welcome, a more fundamental change is required to align tax policy with the growth objective in South Africa through a meaningful shift towards indirect taxes relative to income tax. The latter, after all, is a disincentive to the willingness of economic agents to work, save and invest,” he said.
Kamp writes that “relatively small adjustments” have been made to qualifying small business corporation tax rates, and questions what happened to the National Treasury’s proposal to tax small businesses at a flat corporate tax rate of 28 per cent while offering an annual Refundable Compliance Rebate (RCR) of ZAR15,000 (US$1,230).
He said, over and above a “generally weak domestic economy”, startups and small businesses in South Africa are dealing with a lack of skilled personnel, supply constraints caused by infrastructure backlogs and inefficient product and labour markets, bureaucracy and a lack of funding.
“The latter is especially pertinent in a low real interest rate environment in which lenders are reticent to fund new and innovative, but ultimately more risky, investments,” he said.
Kamp drew attention to research by Laurence Harris from the University of London, who has argued that innovation is the driving force behind growth as entrepreneurs implement new ideas in production processes, which promote productivity.
He said South Africa is not short of innovative ideas, with the World Economic Forum’s Global Competitiveness Report for 2014/15 ranking the country 35th globally for capacity to innovate and 34th for the quality of its scientific research institutions.
“Admittedly, these are not top of the class outcomes, but they are significantly better than the country’s overall competitiveness ranking of 56th,” he said.
“However, the ideas generated by South Africa’s researchers need to see the light of day. The Department of Science and Technology has observed that the patenting rate in South Africa is relatively low. This implies that the country is not extracting the maximum possible benefit from its research efforts.”