Some good news for SMEs in the 2023 Budget, but more nuanced incentives required

In December 2019 Eskom implemented Stage 6 load shedding for the first time. Something that was purely theoretical up to that point suddenly became a reality, with four-hour stretches of blackouts. This was mere months before most businesses had to lock their doors due to the global Covid-19 pandemic.

Since December 2022 the power utility has had to implement Stage 6, where it needs to shed 6 000 megawatts (MW) of power, almost continuously. This translates into around 18 instances of load shedding, or power rationing, every four days, for up to four-and-a-half hours at a time.

It’s safe to say that it has been a tough two years for the sector that many see as South Africa’s economic life force: small and medium-sized enterprises (SMEs).

According to the International Finance Corporation (IFC), small enterprises in the country employ between 50% and 60% of South Africa’s working population and contribute approximately 34% of the gross domestic product (GDP).

Naturally, business owners were hoping for some good news in both the State of the Nation Address (Sona) by President Cyril Ramaphosa and Finance Minister Enoch Godongwana’s Budget Speech in February.

“For a few years now, there hasn’t been much in Sona or the Budget Speech that I believe would make a business owner sit up and take notice,” says Colin Timmis, country manager for South Africa at Xero, a provider of accounting software and digital solutions.

“I do believe that the budget this year was different, because the measures and tax breaks around renewable energy were definitely a page-turner, in my opinion,” he says.

In a nutshell, Godongwana announced that from 1 March 2023, businesses will be able to reduce their taxable income by 125% of the cost of investment in renewable energy generation projects.

There are no thresholds for the size of the investment projects, but they must happen within the next two years to qualify. The incentive allows businesses to deduct the cost of any qualifying investments over a one- to three-year period.

Businesses can deduct 50% of the costs in the first year, 30% in the second and 20% in the third for qualifying investments in wind, concentrated solar, hydropower below 30MW, biomass, and photovoltaic (PV) projects above 1MW. Investors in PV projects below 1MW can deduct 100% of the cost in the first year.

An example by National Treasury points out that a renewable energy investment of R1 million would qualify for a deduction of R1.25 million.

“Using the current corporate tax rate, this deduction could reduce the corporate income tax liability of a company by R337 500 in the first year of operation,” Treasury said in its full Budget Review.

The document is worded broadly and indicates that all components of a renewable project for businesses could qualify.

For individual households, however, the tax incentive announced specifically stipulated that it applies only to solar panels, excluding a direct reference to inverters and batteries.

“Another announcement that could help alleviate the power crisis is that Eskom’s debt has been taken over by the government,” says Timmis. “What this does is create cash flow in the organisation to do other things, which will help, provided it is used for the right things.”

Bounce-back loan guarantee scheme

In addition, the government is reworking its bounce-back loan guarantee scheme. This will support renewable energy projects for small businesses and is an extension of the government’s initial guarantee scheme that was designed to help businesses recover from Covid-19.

It will be known as the Energy Bounce Back Scheme and will be launched in April 2023. The promise is that government will carry 20% of the loss of defaulted loans so that banks don’t carry the entire burden. Hopefully, this will encourage commercial banks to issue more loans for renewable energy projects.

Light at the end of the tunnel

In Timmis’s opinion, however, the real source of hope lies within the South African Revenue Service (Sars) itself.

“It recently did a survey and 75% of the respondents said they had trust and faith in Sars. It also showed that the revenues at Sars increased by 20%,” he says.

“Sars really is a shining light and is working hard to broaden the tax base to make sure that there is enough revenue for the country to overcome its challenges.”

Timmis highlights the level of technology used at Sars, the artificial intelligence and machine learning employed to ensure efficient revenue collection as a stark contrast to the failing systems at Eskom.

Differentiation needed

Timmis was hoping for more specific announcements in Sona or the Budget Speech that make a distinction in the type of SMEs that receive assistance from the government.

He argues that more emphasis needs to be placed on small- and medium-sized enterprises that employ people and will, ultimately, assist in helping the country overcome its unemployment crisis.

“You have to break the small- and medium-sized enterprise landscape down into the different parts and have incentives that are targeted specifically at these segments,” he says.

“I think that is what was missing from all the news coming from the government; we far too often just speak about SMEs in one breath. They are not all the same, especially in a country where the business environment is as fragmented as ours.”

Upcoming changes in the Businesses Act

The 2022 State of the Nation Address already announced that the government is reviewing the South Africa Businesses Act (Act 71 of 1991). Nothing has yet emerged in terms of draft legislation, but Timmis hopes that there will be some movement on this topic soon, which will be to the benefit of SMEs.

On 17 February 2023, the final National Integrated Small Enterprise Development Strategic Framework was gazetted. It once again referenced the review of the Businesses Act, and that the aim is to reduce red tape for small businesses that want to operate.

Timmis hopes that there will be swift implementation of the proposed changes to ease regulatory burdens for SMEs.

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