Regulating Flexibility and Small Business: Revisiting the LRA and BCEA. A Response to Halton Cheadle’s Concept Paper

This paper is a response, from a business perspective, to Halton Cheadle’s concept paper titled ‘Regulating flexibility: Revisiting the LRA and the BCEA’ (DPRU Working Paper 06/109). This paper seeks to respond to each of the issues raised by Cheadle, and to his reflections on each. As previously noted, the paper has been drafted to present a business perspective. This brief presents its own difficulties. The business community in South Africa is a broad church, and encompasses manifold shades of opinion on the appropriate nature and extent of labour market regulation. Organised business, represented by national employer organisations, professional organisations and chambers of commerce, has been a party to the negotiations preceding the enactment of the legislation under review. In this sense, organised business is also a party to the broad agreements reached by the social partners on the conceptual underpinnings of the legislative reforms introduced in 1995.However, business is equally cognisant that the concept of regulated flexibility, as Cheadle observes, inherently recognises the diverse and dynamic nature of the labour market, and requires that regulatory frameworks should be capable of adaptation to meet the demands of changing circumstances. What this paper attempts primarily is a review of the existing legislative and regulatory package, questioning where necessary the appropriateness of the continued application of the limits and mechanisms that are intended to promote regulated flexibility, and reviewing the balance that the existing legislation seeks to achieve. The paper does not purport to present the mandated views of organised business or any other component of the business constituency, rather than to raise for discussion general and specific issues that might be relevant to the debate initiated by Cheadle’s paper. • Counting the Cost of Red Tape for Business in South Africa by SBP (2005); • Measurement of Value Added Tax Act and Regional Services Councils Act-induced Administrative Burdens for South African Small Businesses by Upstart Business Strategies (2004), commissioned by the Department of Trade and Industry (dti); and • SMME Facilitation Program (Report Version) by the South African Revenue Services (SARS) to be released in 2005. South African tax compliance costs cannot be judged in isolation. Available information on South African tax compliance costs and their impact on SMMEs are captured in the three reviewed studies. The SBP (2005) study estimates total regulatory compliance costs for formal firms in South Africa to have been approximately R79 billion in 2004, 6.5 per cent of GDP, and total tax compliance costs to have been roughly R20 billion in the same year. Due to the nature of the report, it makes no tax-specific recommendations and only focuses on broad regulatory compliance recommendations. The Upstart Business Strategies (2004) study focuses on two specific taxes, Value-Added Tax (VAT) and Regional Service Council Levies (not administered by SARS, but by regional service councils). The study employs Mistral®, a proprietary “bottom-up” technique to quantify tax compliance costs. The study finds that the average SMME spends approximately R6 027 on two compliance activities associated with VAT – recordkeeping and completion tax returns. The total VAT compliance cost for an average SMME is estimated to range between R6 000 and R8 000 annually. The recommendations of the study are of a broad practical nature and focused on reducing the time spent on specific tax compliance activities. It does not specify the how of its recommendations, for example, it suggests that the internal reliability of SARS logistics needs to be improved and that queing time spent at SARS needs to be reduced, but does not explain how these outcomes should be achieved. The SARS (2005) study does not generate its own empirical data. It reviews the empirical findings of the above two studies and findings of other studies broadly or specifically focused on SMMEs and the formal/informal economic divide. In addition, it draws on a number of qualitative insights gained during interaction with a range of individuals and organisations aware of small business concerns. A number of recommendations with regards to SARS structures (for example, creation of a Small Business Centre and Small Business help desks), SARS communication channels and SARS products (specifically VAT) are made. Rather than simply focusing on small “cosmetic” tax changes, what is required is intensive co-ordination of SMME policy across different government departments. The narrow focus of the reviewed studies, excluding the SARS report, strengthen the idea that relevant policy considerations do not extend beyond the implementation of technical changes to tax legislation. However, a strong case can be made for a number of other SMME policy-related issues to receive greater emphasis than tax compliance costs. Conclusions relative to tax compliance cost include the fact that a large component of tax compliance costs can be ascribed to firm-level inefficiencies. While a reduction in the tax compliance burden can help to create a more enabling environment for business, a special tax regime for small businesses might not be the best way to achieve lower compliance costs. Far more than simply tax changes will be required to unlock the South African SMME market.