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Cap for employment tax incentive abandoned

After concerns were raised about the possible negative impact the cap would have.

Concerns about the potentially negative impact of a monetary cap on the employment tax incentive available to employers have been heeded.

The incentive aims to stimulate employment for young people between 18 and 29 years and has supported about 646 000 youth jobs in 2014-’15. This represents 5.7% of all the individuals in the tax base.

In the second batch of the Taxation Laws Amendment Bill, National Treasury introduced an annual cap of R20 million on the claim allowed to each employer participating in the employment tax incentive (ETI).

During the standing committee on finance’s parliamentary hearings, a “compelling case” was made that the proposed cap would come at the cost of “higher levels of potential employment”. 

After a recommendation by Finance Minister Pravin Gordhan the committee has reverted to the original design of the ETI and removed the cap. 

Treasury has said the aim with the cap was to improve the targeting of the incentive to smaller companies and to contain the monetary loss to the fiscus.

The estimated tax revenue that will be forgone due to the removal of the proposed cap will be R628 million in 2017 and R665 million in 2018.

In terms of the incentive, employers get a monthly incentive – depending on the salary offered – for two years. The incentive has also been extended until the end of February 2019.

Government has forgone tax revenue of R6.06 billion from the start of the incentive in January 2014 until February this year.

Going forward Sars and treasury will monitor the affordability of the programme. “Should cost-containment of this program be required, the imposition of a cap will be reviewed,” the committee says in its report.

Treasury has indicated that one in ten of the jobs supported by the employment tax incentive (ETI) would not have existed without it.

An impact study done for treasury also showed “significant positive impacts” on employment growth of between 2.4 and 15.9 percentage points in 2014-‘15.

Tanya Cohen, Business Unity SA’s representative on the Nedlac ETI task team, earlier said if one considers the 2014-’15 statistics 92,000 jobs would have been excluded from the scheme if there was a cap.

Cohen says research is inconclusive about the impact of a cap. “It would therefore be irresponsible to impose the cap based on the limited evidence available. Every youth job that can be supported is critical.”

Business Unity SA said in its presentation to the standing committee the cap would unintendedly penalise firms that are leveraging the incentive to create youth jobs in conjunction with skills development.

Erika de Villiers, head of tax policy at the South African Institute of Tax Professionals, says the abandoning of the R20 million cap will be a relief for large employers.

“Some groups of companies would have been adversely affected simply because they had chosen to operate through separate divisions.”

A company which pays young employees between R2 000 and R4 000 per month will be eligible for a R1 000 tax incentive per employee.

This means that only 1 666 jobs will be supported (R1 000 x 12 x 1 666= R19.9million).

An increase of the R20 million cap was also considered, however it was found that it would affect only a handful of companies who are claiming and would therefore be ineffectual.

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