Gordhan can ease woes by helping SMEs

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IOL pic feb25 pravin gordhan hand Independent Newspapers South African Finance Minister Pravin Gordhan. File picture: Ian Landsberg

Most owners of small and medium enterprises (SMEs) know what it is like to put a budget together under difficult circumstances. Many will be sparing a thought for Finance Minister Pravin Gordhan, who will announce the 2014/15 Budget tomorrow in the face of a yawning deficit, a falling rand, menacing inflation and sluggish growth.

However, the answer to much of these woes lies in the extent to which the minister spares a thought for SMEs in his Budget.

SMEs are responsible for about 60 percent of new jobs created annually, and have for a long time been the providers of more than 50 percent of formal jobs in South Africa. One of the surest ways for the finance minister to boost job creation and economic development is to deliver a small-business friendly Budget.

While there is no silver bullet, a Budget that includes a range of measures empowering SMEs to expand and employ more people will go a long way in supporting small business development.

The newly created youth wage subsidy, officially known as the employment tax incentive, should be boosted to make it more practical for business owners to employ young, first-time workers.

As it stands, the scheme provides benefits to businesses only if a new worker earns less than R6 000 a month. Maximum benefit from the scheme is derived if the worker earns only about R2 000 a month. These thresholds are so low that it arguably provides little incentive for young people to take up a job, and employers will struggle to find candidates.

Businesses in the knowledge economy that take the risk of employing first-time young workers at more realistic salaries are, therefore, largely overlooked by the youth wage subsidy. By increasing the thresholds, the scheme could really begin to boost youth employment.

The thresholds for the existing small business tax incentives are still too low. The most substantial tax break, small business company tax, allows business owners to pay a lower corporate tax on their first R350 000 worth of profit a year, but only businesses with turnovers of less than R14 million a year qualify.

By pushing up the turnover amount, as well as the profit threshold of the scheme, the tax break will provide a clear incentive for entrepreneurs to invest and expand rather than doing all they can to remain under the radar.

The current turnover scheme tax has the admirable intention of minimising the paper work and tax burden for informal micro businesses, but the take-up has been minimal. A bold expansion of the scheme, or some similar regime, can provide the fuel for a real entrepreneurial groundswell.

Something else that is needed in terms of small-business tax incentives is a substantial tax break for start-ups. For example, a minimal flat tax or turnover tax in the first five years of a business’s existence is needed, with a threshold higher than the current R1m a year.

The time is right for a substantial fund to finance the most risky of all businesses: start-ups. Several experiments with such funds have been done over the past two decades and it is time to go big – to the tune of at least R1 billion, provided the lessons learned thus far are taken into account.

The first thing that needs to be acknowledged for this particular fund to work is that commercial returns must not be expected. On the contrary, if a true start-up fund gets all of its capital back, it is doing brilliantly.

A more realistic benchmark is to try to get back in the region of 65 percent to 70 percent of the capital. From the government’s point of view, the money that is not recouped is not really lost, because it is spent into the economy.

The second aspect to consider is to implement a substantial mentorship and training programme that forms part of the fund so that the start-ups financed by the fund are properly incubated – a R1bn fund, for example, should have at least R300m available for incubation.

Private companies should also be allowed to bid against government agencies for the mandate to manage such a fund. A company such as Business Partners has a wealth of experience in start-up financing to contribute to the success of a flagship start-up fund.

The time for talking about rolling out infrastructure is over – large-scale implementation needs to happen. If the building of roads, bridges, dams, power stations and fibre-optic networks is done with clear set-asides for SME subcontractors, not only will the economic boost be substantial and long-lasting, but the economy will also be freed from the grip of electricity and broadband shortages.

If the SA Revenue Services could reduce red tape for businesses significantly, so can all other government agencies that add to the compliance burden of businesses, from the Department of Labour to municipalities.

Apart from a continued focus on reducing red tape, a network of one-stop shops where businesses can go to for all their compliance dealings will also help to free entrepreneurs to concentrate on growing the economy.

The government’s tax incentives for venture capital investments are complex, as the minimal take-up of the incentive shows. Simplification and strengthening of the scheme can make millions available for investment into local businesses.

With the weak rand, things are looking up for exporters. Now is the time for the government to boost the export sector by reducing duties on imported machinery and equipment and supporting efforts to develop overseas markets for local products.

* Nazeem Martin is the managing director of Business Partners, a specialist risk finance company for formal small and medium enterprises (SMEs) in South Africa.


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