The increase in the dividends withholding tax (DWT) from 15% to 20%, has resulted in a combined effective tax rate of 42,4% (up from 38,8%) for entrepreneurs who want to take cash out of their businesses and into their own hands. This is high by international standards, and may feel even higher if considered in light of the standard of service delivery received.
Has Gordhan put the final nail in the coffin for small and medium enterprises (SMEs)?
In the Budget Speech no mention was made of any further incentives to assist the South African SME sector. Possible incentives could have included amendments to the VAT registration threshold or small business corporation provisions. The effective tax rate of 42,4% will, most definitely, impact entrepreneurship in South Africa. Why take the risk of establishing a business if you will be taxed at such a high rate? It is safer for the individual to remain a salaried employee with a tax liability of between 18% and 41% with the added benefit of zero risk.
The DWT amendment, albeit small, will most definitely deter entrepreneurship. The South African government acknowledges that economic growth will only be reached by injecting capital and expertise into SMEs. By not providing additional incentives to SMEs and increasing the effective tax rate, a slowdown in the SME sector can be expected. A slowdown will further increase the unemployment rate, which currently stands at 26,6%.
In the US they have the American dream of owning a business and becoming successful through entrepreneurship. In South Africa it seems to be only a pipe dream.
