THE government’s planned tax holiday scheme will be up and running by the end of the month, says the Department of Trade and Industry (DTI). The regulations outlining the Act will be finalised by the end of the month and published in the government gazette.
The tax holiday scheme will, in essence, provide for a zero tax rate, ranging from two to six years, for manufacturing industries that meet the criteria laid out in the regulations. The overarching objective is promoting international competitiveness.
Three prominent related industrial development goals are targeted: priority industries, regional development and labour intensity. The scheme is limited to entities incorporated after October 1, whose sole business is the qualifying project, with assets exceeding R3-million.
The tax holiday will be heavily weighted in favour of labour-intensive firms. There is also a strong emphasis on regional and corridor development.
Some of the areas already identified are Vereeninging and Vanderbijlpark in Gauteng, Pietermaritzburg in KwaZulu-Natal, and the Middleburg/ Witbank region in Mpumalanga.
There is also a desire to tilt the system in favour of labour intensity above a predetermined benchmark.
Applications will be evaluated by the Regional Industrial Development Board, and for each incentive approved and certified, the qualifying company will enjoy tax- holiday status for two consecutive years, starting as soon as the company makes a taxable profit. New companies will also qualify for accelerated depreciation. The benefit must be claimed within 10 years.
Chief director of the regional industrial development programme, Johan Reinhardt, said the scheme must be seen within the broader context of the government’s supply-side initiatives.
These include an accelerated depreciation tax allowance, enabling existing manufacturers to expand in response to the challenge of globalisation. Both schemes are part of the Revenue Amendments Bill.
“We have already seen considerable interest in the scheme from investors,” says Reinhardt.
Deputy Finance Minister Gill Marcus told Parliament last month that a key component of the strategy was to move from demand-side intervention to supply-side support.
The tax holiday programme should be seen as a key element within a broad and coherent set of industrial development programmes aimed at growth, employment and redistribution, she said.
Ben van Rensburg, director of economic affairs at the South African Chamber of Business, said the tax holiday was being viewed very positively by local business. He feels it should achieve its aims of providing for investment and job creation.
The only concern that he feels needs to be addressed is the potential for abuse.
“The administration could be open to abuse. If the government needs to, then a couple of years down the line it could retract the whole scheme, which would lead to another round of uncertainty.”
The tax holiday system has been discussed with the Katz Commission, which is not, in principle, opposed to its implementation. It did, however insist on two critical conditions: first, that the list of priority industries and regional corridors to qualify be clearly established at the outset and not changed during the course of the implementation of the programme.
Second, that the tax holiday should not be open-ended, but have a pre-determined cut- off point.
Reinhardt didn’t feel there should be any cause for concern that the scheme could affect the current tax base. The spin-off effects, created by new capacity, will be more positive than any concern about the loss of a tax base.
Not an opinion shared by the Congress of South African Trade Unions (Cosatu). It feels the introduction of tax holidays incorrectly relies on tax incentives to channel private sector investment, at the same time undermining the state’s tax base.
It voiced concern that the tax holidays will result in a declining contribution to state revenue by business, shifting the tax burden on to the poor.
Cosatu feels the assumption that concessionary taxation will lead to increased levels of private sector investment is misplaced.
This assumption has not been proved in practice, particularly as other factors are likely to predetermine investment decisions – such as shortages of skilled management or labour, the lack of infrastructure or increased costs of imported equipment owing to the currency depreciation.