How bureaucrats are killing small business
14 November 2014
Posted by: Author: Nazmeera Moola
Author: Nazmeera Moola (Investec Asset Management)
Simplifying tax regulations and company registration procedures for small businesses would help the quest for job creation a great deal
SA spends a lot of time talking about the need to support entrepreneurship. Small businesses have been responsible for the majority of private-sector job creation in the past two decades. In his post-election May 2014 cabinet rejig, President Jacob Zuma created the ministry of small business development.
In an address in late September, small business development minister Lindiwe Zulu pointed out that "the recognition of the importance of small and medium enterprises came at the right time, because the economy is struggling and we need to upscale on SMMEs"..
She went on to discuss her plans to support small business, which "will focus on educating business owners and entrepreneurs, giving them access to information on potential markets and connecting them with sources of financing as well as support structures". There would also be more pressure on government departments to procure from small businesses.
These are all excellent intentions. However, they do not address the fundamental problem: increasing government bureaucracy that makes it ever more difficult for small businesses to function.
SA’s increasing regulatory burden on SMEs has become a pet peeve of mine, second only to the pathetic education system. The World Bank’s 2015 Doing Business index was published two weeks ago. It points out that the survey aims to shed light on "how easy or difficult it is for a local entrepreneur to open and run a small to medium-size business when complying with relevant regulations".
The latest survey (2014) shows SA slipped from 37th to 43rd out of the 189 economies surveyed. Of the 10 major categories, the main decline was in "access to credit", which fell 22 places. However, there was also deterioration in "starting a business", "registering property" and "resolving insolvency". All three are critical for small businesses.
In the SA report, a graph was included of the ranking in each of the 10 categories in 2010, 2014 and 2015. It stayed broadly stable in seven of them, deteriorated a bit in "starting a business", fell notably in "registering property" and plunged in "trading across borders".
For a small, open economy far away from its suppliers and customers, this is a major problem. SA ranks 100th in the world in this category, due mainly to cumbersome bureaucratic documentation requirements and onerous customs procedures.
Therefore minister Zulu would be far more useful to small businesses if she focused on two areas. First, convince her colleagues in the Department of Trade and Industry (dti) that cumbersome regulation, however well intentioned, will strangle small businesses and thus job growth. Every piece of regulation that the dti produces should be vetted by a panel of experts who understand small businesses. There are plenty of retired small business owners who could provide real-world insights often sorely lacking when regulations are compiled.
The second area Zulu should focus on is the SA Revenue Service (SARS). A July 2013 research paper from the University of Pretoria found "SARS has only partially addressed the complexity of the tax law, the lack of software to assist small businesses with their record-keeping and the compliance burden associated with provisional tax".
This tied in with an older EY survey of accountants and bookkeepers who service SMEs. It found "penalties and interest incorrectly raised by SARS is the most burdensome aspect of this tax. In such cases, small businesses invariably have to incur the additional costs of a tax practitioner to ensure the matter is resolved."
Singapore tops the survey, followed by many developed economies. However, South Korea ranks fifth, Malaysia 18th, Thailand 26th and Mauritius 28th. Simplifying tax regulations and company registration procedures for SA small businesses would help a great deal.
This article first appeared on rdm.co.za.