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Red tape; like a boa constrictor cuddling up to SA’s SMMEs

17 May 2021 Gareth Stokes

As the South African government obsesses over conjuring up black billionaires, business owners at the lower end of the small, medium and micro-enterprise (SMME) curve are struggling to make ends meet while navigating a sea of business and tax legislation. South Africa may be open for business; but the burden of compliance is making it near impossible for owners and directors of close corporations and companies to grow profitable and sustainable businesses. Many of these businesses are trading blissfully unaware of their non-compliance with countless laws and regulations. Business owners and directors would do well to remember that their pleas of ignorance will not lessen the crime.

SA’s taxi sectors dodges the taxation bullet

The extent of non-compliance with tax legislation is plain for all to see. One example is that of the local taxi industry following finance minister Tito Mboweni’s admission that the R90 billion per annum sector contributed only R5 million in income tax last year. Granted, the story has since been sensationalised by the local media; but there is no doubt that many cash-based businesses operating in the informal sector of the economy are failing to meet their income tax, PAYE and VAT dues, never mind complying with myriad other laws. Rampant non-compliance is not surprising given the cost in human resources and time to tick hundreds of checkboxes. 

For some context, let us consider the rules and regulations that a start-up company that opts for the Pty Limited legal structure must comply with. The business must be registered with the Companies and Intellectual Property Commission (CIPC) to which it must submit annual turnover reports and financial statements. Pty Limited firms are automatically registered with the South African Revenue Services (SARS), regardless of size; but must still register for different tax categories as appropriate. An SMME with a single director or handful of staff will most likely have to outsource its SARS compliance function due to the complexity of corporate income tax and VAT, not forgetting Customs and CGT. 

The administrative burden grows exponentially as the company employs more staff. Per the Department of Labour, the company must register its employees with the Compensation for Occupational Injuries and Diseases Act and the Unemployment Insurance Fund. SARS will require that these employees are registered for PAYE. And the Department of Higher Education demands a Skills Development Levy too. Tax and other regulatory authorities as well as various government departments require companies to report on their progress by submitting reports or returns on a monthly, bi-monthly, half-yearly or annual basis (as required) and often accompanied by a payment. They also preside over hundreds of industry-specific authorisation and licensing processes. 

Grow at your own peril

The handful of companies that manage to grow employee head counts despite the aforementioned administrative burdens enter a new world of hurt. As soon as a company employs more than 50 people or exceeds a certain annual turnover it must comply with the Department of Labour’s Employment Equity legislation, which requires annual submission of employee data to satisfy government that transformation targets are being met. This legislation is amended from time to time and will soon be more aggressively enforced. Non-compliance can land companies with significant fines and may, in the near future, see directors receiving jail sentences. 

The red tape does not end with the Department of Labour and SARS. SMMEs must also comply with local municipal by laws and industry-specific regulation. One of the ‘start your business’ blogs we encountered while researching this piece mentioned no fewer than 37 industry bodies that companies may have to register with. Membership of these bodies is often non-negotiable and usually introduces additional administrative and legislative burdens. And we have not even mentioned the requirement to negotiate with industry bargaining councils or trade unions. It is common knowledge that many small businesses have collapsed due to being unable to afford the multi-year wage agreements that these councils negotiate with large competitor firms. 

Adding the FSCA and PA to SARS and government

Firms in the financial services industry must satisfy two additional regulators. The Financial Sector Conduct Authority (FSCA) is concerned with market conduct issues while the Prudential Authority (PA) focuses on the financial stability of the sector. Each regulator publishes conduct standards in addition to dozens of sectoral laws which are closely monitored and enforced. The compliance teams at financial product providers such as banks and insurers and financial services providers (FSPs) have grown exponentially to keep up with the increasing administrative workload. 

The mining sector is another that requires teams of business, community, legal and political consultants to navigate. New entrants to the sector need licensing permission from the Department of Mineral Resource and Energy (DMRE), which can take many years to finalise. But the limitations introduced by overregulation and government’s tardy response to its own licensing requirements are easily forgotten when commodity prices surge, as presently. 

Economist Mike Schussler recently commented on LinkedIn that “South Africa’s mining sales crossed R75 billion for the month of March 2012; high commodity prices are very helpful for the country’s growth”. But he lamented the lack of reforms in the sector… One of his followers put things in context, with a punchy comment: “With a backlog of 235 mining rights; 2485 prospecting rights; 1644 mining permits; 248 section 11 applications and 724 renewal applications it is clear that the [sector’s contribution to the economy] could have been higher”. PS: The writer has not looked into this claimed backlog; but these challenges are widely documented. 

Investing into a political quagmire

Government’s ongoing investment drive is littered with contradictions. On the one hand we have our President, flanked by the connected and seemingly opportunistic captains of industry, enticing foreign investors to the country. On the other we have countless government departments doing their level best to make doing business in South Africa difficult, even impossible. The hindrances imposed by onerous licensing and ownership rules in the mining sector is just one example. 

There is also plenty of anecdotal evidence to support that international investors – and in many cases international firms already operating out of South Africa – are rethinking their long-term involvement in the country due to difficulties in meeting Broad-based Black Economic Empowerment (BB-BBE) and Employment Equity (EE) targets, among other local operating requirements. Firms that fail to comply with ownership or transformation targets face massive fines or even closure, regardless the reason for non-compliance. When pressed, we expect many to simply exit the South African market. 

At the same time as begging for new inward investment, the state continues bleeding billions of rand to corruption and various ill-thought business initiatives. The DTI ‘create a black billionaire industrialist’ programme bears mention at this point. This seems an impractical objective for a taxpayer-funded business initiative… Is there really a place in the 21st Century for government policy so narrowly focused on creating individual wealth?

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