South Africa business owners have shown little interest in signing up to the new turnover tax system, which is intended to simplify tax administration for small firms.
While figures have not been officially confirmed, reports have suggested that the South African Revenue Service had received around 2,500 applications for inclusion in the alternative tax system by the April 30 deadline, far fewer than was expected when the scheme was rolled out earlier this year.
The idea behind the turnover tax is to dramatically reduce the paperwork burden on small firms – SARS itself has said that it costs small businesses an average of about ZAR7,000 (USD837) per year to ensure that tax returns are prepared correctly – while bringing more micro businesses out of the shadow economy and into the tax net.
Unlike the income tax system, which makes use of comprehensive inclusion rules and a reduction process that requires proof of expenses to be maintained, the turnover tax is calculated by applying a low set of tax rates (from 0 to 7%) to the turnover of the business. As a result, taxpayers need only submit two interim returns and a final return for assessment, as opposed to the average of 10 returns per year for provisional tax, income tax and value-added tax (VAT). Capital gains are taxed under this system by including 50% of the amounts received from the disposal of business assets in the turnover to be taxed.
To qualify for the turnover tax, applicants must have a taxable turnover of ZAR1m or less. However, the strengths of the new system may also be its weaknesses; while micro-businesses do not have to worry about accounting for expenses, the fact that they cannot deduct these from income means that a loss-making business still ends up paying tax.
Moreover, successful applicants are automatically de-registered from the VAT system, which could be a problem for those conducting business with the government and certain other entities which require VAT registration.
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