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Small enterprise: The canary in the coal mine of a toxic business environment

Does government see small formal enterprises as an asset or a burden? Their demise suggests it is at least indifferent to their plight.

While much lip service is paid to creating conducive conditions for small enterprise in South Africa, government ignores the reality that small firms are disappearing at an alarming rate. It’s the canary in the coal mine of a toxic business environment: these smaller entities die off first before the toxic conditions become lethal for larger businesses.

Big government favours big business (for tax income) or big labour (watering its socialist roots to ensure working class loyalties). Small business cannot fulfil either of these roles. The demise of small formal enterprises in South Africa, as recorded in South African Revenue Service (Sars) data, is indicative of utter indifference by government to the plight of small enterprise.

Based on Sars data on value-added tax (Vat) covering the years 2007/8 to 2017/18, the devastation on micro and small businesses with a turnover of R1 million or less is evident. The number of Vat vendors in this bracket declined by 49% from 300 299 in 2007/8 to 154 559 in 2017/18.

A sector under considerable strain

One could argue that the loss of 145 740 small enterprises was due to enterprise incompetence and inefficiency. However, the decline in Vat vendors across all turnover categories for this period was 17%, indicating that small businesses were under far more strain than medium and large enterprises.

Vat data when viewed from a turnover perspective:

* Small enterprises in the turnover below R1 million category saw a 57% decline in turnover, from R91.7 billion to R52.3 billion.

* Vat vendors in the turnover category of R1 million to R30 million registered an increase of 39% in turnover, from R1 071.4 billion to R1 487.9 billion

* Vat vendors with turnover above R30 million registered an increase of 105% in turnover, from R5 740.1 billion to R11 767.8 billion.

Government’s vested interest

Concerning the net Vat position (offsetting the Vat collected against Vat refunds), it becomes clear why government has a vested interest in getting rid of as many small formal enterprises as possible.

In 2007/8 Sars had to pay the 300 299 Vat vendors with a turnover below R1 million an average of R6 740 in refunds. This situation has deteriorated by 171%, to an average of R18 250 refund per Vat vendor in this category in 2017/18.

Were these businesses not in operation, by not having the net Vat refunds for small Vat vendors, Sars would have collected R2.82 billion more in 2017/18. That is almost double the budget of R1.488 billion for the Department of Small Business Development.

Government therefore benefits from the demise of formal small businesses: the lower the number of small businesses registered for Vat, the less it needs to shell out in Vat refunds.

The Vat data underlines Sars data on Company Income Tax (CIT), which shows the dismal state of the private sector. CIT data showed that if all the companies in South Africa submitted a single, joint amalgamated financial statement for tax purposes, government would not have collected a cent in CIT for the tax years 2014 to 2016. During those years the assessed joint losses of all companies surpassed joint taxable income by R445 billion.

Precarious position

The CIT data also underlines the precarious position of small formal enterprise, with less than 1% of companies paying 85% of all company tax and the 19.7% of companies with taxable turnover below R1 million responsible for a mere 3.2% of CIT in 2016.

The Department of Small Business Development is tasked with “leading an integrated approach” to promote and develop small businesses and cooperatives “through a focus on economic and legislative drivers that stimulate entrepreneurship to contribute to radical socioeconomic transformation”. Part of that radical economic transformation is the mass establishment of black businesses, which is also a central plank in President Cyril Ramaphosa’s New Deal. Despite the fact that this approach was tested and tried with minimal effect during his time as deputy president, Ramaphosa seems unaware of the dismal failure of that approach.

What is the real strategy?

This raises the question: Is the real strategy one of turning a blind eye to the conditions that undermine the viability of existing small businesses in order to open opportunities for state-created black businesses, knowing full well that the main sources of tax income from companies through CIT and Vat vendor income would not be harmed?

If so, the radical transformation of the small business component of the enterprise world could be achieved through a slash-and-burn approach rather than by growing the overall economy.

And this makes one recall the chilling words of Ramaphosa in March 2016, when he said he was “hell-bent” on achieving radical economic transformation:

“For far too long, this economy has been managed by white people. That must come to an end. Those who don’t like this idea – tough for you. That is how we are proceeding.”

This is a shortened version of an article that first appeared here

Johannes Wessels is director of the Enterprise Observatory of SA. 

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COMMENTS   16

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déjà vu. Let’s steal their land and fill it with comrades
Let’s close their businesses and fill them with comrades
Good luck Cyril. Those farmers and small business owners have years of experience behind them.
Replace them with incompetent cadres and the result is inevitable.
The economic statistics within the next decade is going to make interesting reading.

At this stage , I think we need all South Africans. After 25 years of democracy, should race play a role?

“The more the state “plans” the more difficult planning becomes for the individual.” – August von Hayek

This socialist government has more plans than their collective IQ’s. Before they can implement one plan, they come up with the next plan. They cannot even bring order to their own party, yet they plan to bring order to the economy. They fail to organise themselves, but they make laws to organise the rest of society. After 25 years of ANC rule, the entire economy is a reflection of Luthuli house, run down, dilapidated and in disarray.

We need less of government. No intervention by ignorant and criminal socialist fools. Let the entrepreneurs do the planning. Whenever a politician comes up with a plan for the economy he should stand trial for sabotage.

Then there are the Omissions of Inquiry.

All of which consume more of the dwindling tax take.

The writer’s analysis has a fatal flaw. The compulsory registration threshold for VAT was increased from R300 000 to R1 million in 2018 (http://www.treasury.gov.za/documents/national%20budget/2008/review/chap4.pdf). Is it then surprising that micro businesses that had to pay in VAT left the VAT system and only those that were entitled to refunds remained?

Sorry, the increase was in *2008* as set out in the link, not 2018. I see DogEatDog is one of the businesses that left the VAT so we now have some anecdotal evidence that the expected result has materialised.

The average nett flow of VAT for the enterprises with a turnover of R1 million or less, was R6 740 in 2007/8 (that is the refunds exceeded the VAT collected by SARS by that amount per enterprise). It increased to R18 250 in 23017/18 per VAT vendor in that turnover category. The figures in the blog on the EOSA website (the link is on Moneyweb) indicates clearly this situation.

And concerning CIT: look at https://www.moneyweb.co.za/moneyweb-opinion/sa-enterprise-sector-critically-ill/

The disappearance as VAT vendors (therefore formal enterprises) in the turnover category of R1 million and below is not based on anecdotal evidence: it is in the hard statistics of the SARS data base.

You seem to be missing the point that some of the VAT vendors in the turnover category of R1 million and below have “disappeared” because they are no longer required to be registered for VAT *not* because they have gone out of business.

The 2008 Budget Review explicitly states “Threshold for compulsory VAT registration increased to assist small businesses” on page 67. Those businesses that would get refunds would be more likely to stay in the VAT system while those – like DogEatGog – that do not see a benefit of being registered would deregister and save themselves the administrative burden of being in the system. That natural selection process would explain the decrease in total number of vendors and their total turnover, as well as the increase in average refund those remaining in the VAT system enjoy.

Your analysis ignores all of this and treats all businesses that are no longer in the VAT system as having “died off”.

Funnily, by gouging small business, the net result is:

Higher unemployment
Less economic transformation
More informal business (off SARS radar)
Less government revenue

But yeah you know..all fun and games until you run out of taxpayer money in socialist dreamland.

Also people deregister for VAT if it is too burdensome to adminster. My CC was VAT registered in 2008, but now is not because it is a lot of admin for no real benefit.

So my CC is one of the ‘lost enterprises’ but it still exists.

Another 9 wasted years with this one?

Yip, Allan, the sun she comes up, the sun she goes down! There is no yesterday or tomorrow for this ANC Government and their voters. Only today, to feed at the trough! It’s like there is no capacity to remember yesterday’s mistakes, learn from them, and plan for tomorrow !!!

The inability to understand consequences is mind boggling!!!!

This analysis fails in that it presumes that small businesses only pay VAT. Take a business with R1m turnover pa which makes R100 000 pa profit and has a salary bill 30% of its turnover, of which 50% is above the PAYE threshold.

The following annual tax calculations are simple:

R28 000 paid in CIT
R27 000 paid in PAYE by its employees (at the minimum 18% rate)
R46 960 paid in VAT on cost of sales, assuming an effective VAT rate of 10% after claims.

Such a company is worth R101 960 pa to the government. But assume it makes a taxable loss of R100 000 pa instead of a profit. Taxable CIT losses cannot be offset against other tax types, so the company is still worth R73 960 pa to the government.

Government may score its notional R6 740 in VAT refunds by letting such a company die, but the amount it loses in other tax types is an order of magnitude greater. Now look at the SARS revenue collection undershoot and do the math.

And then consider that the government now has to pay UIF and social grants to the newly (and likely permanently) unemployed workers, which is an annual bill per person far in excess of the notional average VAT refund.

Making the economic and regulatory environment friendly to small business is an investment worth making. Unfortunately, ‘logic’ is lost on the average hyaena.

Simple, the kleptocadres can’t loot a small business, hence they have no relevance to their planning. End of discussion

HEH HEH the dancing idiot and his mates in dubai have brought this on,
eat as much as you can at the trough before the swill disappears.
all in the name of AMANDLA but actually only pigging out on WHITE CAPITALISM ,without paying CR at Lonmin
we are f#@$%

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