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.
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.