Manufacturing Incentives for entrepreneurs
It has long been said that employment will be created through small medium and micro enterprises. Given South Africa’s huge unemployment statistics, 38% if you include the disgruntled worker category, creating jobs has to be a national priority. Is it?
It is. But, talking about it is one thing; doing something about it is another. To create SMMEs you need entrepreneurs, with some education, a little experience, truckloads of passion, tenacity and self-motivation, and mentors who can provide guidance. Equally important is that these entrepreneurs need money to get their businesses up and running. So, an important question is what incentives exist for SMMEs, particularly in rural areas? To answer this question we take a look at what incentives government has put in place. Conversely, for you to take advantage of the government’s incentive programme, it is important that you understand the context and framework of the programme(s).
The Department of Trade and Industry (DTI) implemented its medium term strategic framework last year, for the period 2010 to 2013. It has amongst its various components the Empowerment and Enterprise Development Division (EEDD) that leads the way in the development of policies and strategies to create enabling environments for SMMEs. Within this entity various sub-programmes have been launched.
Enterprise Development Sub-programme
The purpose of this sub-programme is to grow and develop SMMEs, as well as co-operatives. Provision is made for the roll-out of transfer payments and incentives aimed at supporting cooperatives and SMMEs, so as to withstand the challenges of a contracting economy. The delivery and up-scaling of support, particularly to black-owned, rural and township SMMEs, as well as co-operative programmes, have been accelerated. These initiatives include entrepreneurship development, financial and non-financial support programmes.
Monitoring the business environment and undertaking regulatory reviews to ensure sustainable SMME development is also a key focus in this regard. The DTI is also working with other spheres of government and the private sector to ensure the effective co-ordination of SMME support services, including the establishment of an effective network of SMME support services. Provision is made under this sub-programme for the following additional sources of transfer payments and subsidies:
- The Small Enterprise Development Agency (SEDA), which provides non-financial business development and support services to small enterprises. The amounts payable are based on the approved business plan of the entity, and supporting memoranda of understanding (MoUs).
- The United Nations Industrial Development Organisation (UNIDO), which channels the South African contribution towards achieving sustainable global industrial development, particularly among small-scale industries. The amounts payable are based on the UN-based assessment scale.
Equity and Empowerment Sub-programme
This sub-programme seeks to implement Broad Based Black Economic Development (BBBEE) and women empowerment policies. BBBEE strives to ensure that the South African economy is restructured to be more inclusive and is designed to enable the meaningful participation of the majority of its citizens and further create capacity within the broader economic landscape, at all levels, through skills development, employment equity, socio-economic development, preferential procurement and enterprise development.
BBBEE should be implemented in an effective and sustainable manner, in order to unleash and harness the full potential of black people. In this regard, the DTI will ensure the integration and alignment of the BBBEE policy with the National Industrial Policy Framework as well as key legislative framework. It will further strengthen the Broad-Based legislation by creating a punitive dispensation to prevent circumvention of BBBEE. The DTI will also develop incentives to achieve the overall Empowerment objectives, including the provision of incentives to promote compliance with the BBBEE policy and legislative framework.
In order to promote the effective and efficient implementation of BBBEE, measures will be introduced to create a reporting framework and reliable database of BBBEE compliance. The DTI will also upscale and accelerate the delivery of programmes for the economic empowerment of women and the youth.
Provision is made under this programme for the following additional sources of transfer payments and subsidies:
- The National Empowerment Fund (NEF), which facilitates funding for B-BBEE transactions by providing innovative investment solutions for black people. The amounts payable are based on the approved business plans of the entity, andsupporting MoUs
- The South African Women Entrepreneurs’ Network (SAWEN), which supports and grows women entrepreneurship through networking facilities. The amounts payable are based on the approved business plans
- The Isivande Women’s Fund (IWF), which provides financial support to women entrepreneurs to grow their businesses. The amounts payable are basedon the approved projects
Enterprise investment programme
Within this context, and in recognising the important economic role, real and potential, played by the manufacturing sector, the South African government has prioritised this sector for interventions within the Accelerated and Shared Growth Initiative for South Africa (ASGI-SA).
Manufacturing investment programme
To this end, the Department of Trade and Industry has implemented the manufacturing investment programme (MIP), an investment incentive designed to stimulate investment growth, in line with the South African government’s National Industrial Policy Framework. The primary objective of the MIP is to stimulate investment within manufacturing.
The incentive programme’s intention is to enhance the sustainability of manufacturing investment projects by small enterprises and to support large-to-medium-sized investment projects in manufacturing that would otherwise not be established without the grant.
The programme provides investment support to both local- and foreign-owned entities, by offering an investment grant of up to 30% of the value of qualifying investment costs in machinery, equipment, commercial vehicles, land and buildings, required for establishing a new production facility; expanding an existing production facility; or upgrading production capability in an existing clothing and textile production facility. The applicable investment grant is as follows:
- Investment projects of R5 million (m) and below may qualify for an investment grant equal to 30% of their total qualifying investment cost, payable over a three (3) year period.
- Investment projects of above R5m may qualify for an investment grant of between 15% and 30% of their qualifying investment costs, calculated on a regressive scale (as detailed in Section 10.5), and payable over a period of two (2) years. This investment grant cannot exceed R30m.
- Foreign investment projects may qualify for an additional grant for the cost of transporting their qualifying machinery and equipment to South Africa. The additional grant is the lower of 15% of the value of qualifying imported machinery and equipment or the actual transport costs of relocating qualifying new machinery and equipment from abroad to a maximum of R10m.
In all cases, grant payment is subject to the approved project achieving the stipulated performance requirements of investment and employment creation as specified.
The MIP incentive is offered in conjunction with other instruments already available through the provisions of the Income Tax Act, No. 58 of 1962, which the government is implementing to stimulate investment, including the accelerated depreciation on investment assets; graduated tax rates applicable to small enterprises; and tax incentives applicable to research and development capital expenditure. This programme is effective 20 July 2014.
Industrial Policy Action Plan II
As announced in February this year, the South African government has set aside an additional R3.6-billion for the DTI to partly support the second version of its Industrial Policy Action Plan (Ipap2), which runs through to March 31, 2013.
In his inaugural Budget address to Parliament, Finance Minister Pravin Gordhan said that the additional allocation would be used primarily to support investment and production in the automotive components and clothing and textile industries.
The new allocation comprised R1,75-billion for the new Clothing and Textile Production Incentive, between 2010/11 and 2012/13, and a R2,6-billion allocation to the Automotive Production and Development Programme (APDP), over the same period.
The Clothing and Textile Production Incentive would be allocated R600 million in 2011/12 and R750 million in R750 million in 2012/13, while the APDP would receive R916,8-billion in 2011/12, and just over R1-billion in 2012/13. The overall allocations for industrial incentives are R3.3 billion in the 2011/12 fiscal year and R3.7 billion in 2012/13 fiscal year.
This is to be divided across the automotive and clothing schemes, as well as: the Business Process Outsourcing Incentive, the Small and Medium Enterprise Development Programme, the Film and Television Production Incentive, the Small and Medium Manufacturing Development Programme, the Staple Food Fortification Programme, Industrial Development Zones, the Enterprises Investment Programme, as well as some other far smaller schemes.
The implication that the DTI will need to seek off-Budget resources for the balance of the Ipap2 proposals, including for the plan’s aspiration to kick-start so-called “green industries”, as outlined in President Jacob Zuma‘s February 11, 2010, State of the Nation address.
In addition, there is little clarity about what specific support measures could be put in place for other so-called high-impact sectors such as capital and transport goods, chemicals, forest products and the creation of industrialisation opportunities around the R846-billion, three-year public infrastructure programme.
In fact, Gordhan hinted to the fact that part of the financial fillip could come from the “well capitalised” Industrial Development Corporation (IDC), which he said would continue to play a role in implementing Ipap2.
However, unlike the Development Bank of Southern Africa’s focus on the municipal level, which received a R15.2-billion guarantee to enable it to extend capital to poorer municipalities for infrastructure projects, the IDC received no new support from the national Treasury.
Despite the uncertainty surrounding the financial resources for Ipap2, Gordhan gave prominence to the issue of industrial policy in his speech identifying it as one of seven components of the country’s so-called “new growth path”. These elements included:
- A concerted effort to reduce joblessness among young people.
- Support for labour-intensive industries through industrial policy interventions, skills development, public employment programmes and a rural development strategy.
- Sustaining high levels of public and private investment and raising our savings level.
- Improving the performance and effectiveness of the State, especially the provision of quality education and training at all levels.
- Reforms to increase inclusion and participation in the labour market, alongside efforts to improve competition in product markets.
- Keeping inflation low, striving for a stable and competitive exchange rate, and providing a buffer against global volatility.
- Raising productivity and competitiveness, opening up the economy to investment and trade opportunities that can boost exports.
“Turning an economy around and achieving the kind of transformation required to draw in the millions of unemployed people into the economy is not an easy task. It will take time and forward looking policies that are effectively implemented,” Gordhan said, adding that the proposed Ipap2 was crucial to making the economy more labour absorbing and dynamic.
Tax incentives for small businesses
In addition Gordhan, in his budget speech earlier this year, announced various tax incentives for businesses, particularly small and micro enterprises, as well as plans to overhaul two failed tax incentives in a bid to make them more attractive to businesses.
The turnover tax for micro enterprises with an annual turnover of up to R1-million will be adjusted so that tax will be payable only if turnover exceeds R150 000 a year. This will take effect from March 1. The rate structure will also be reviewed by the National Treasury.
Micro enterprises that register for Value-added Tax (VAT) will no longer be barred from registering for turnover tax. This takes effect from 1 March 2012.
Scrapping secondary tax on companies
A dividends tax will take effect on 1 April 2012, replacing the secondary tax on companies. The National Treasury believes that doing away with secondary tax on companies will correct the impression that a tax on dividends is another tax on businesses, as the new tax will be a tax on individuals and non-resident shareholders, rather than on the business itself.
The learnership tax incentive, designed to support youth employment, will expire in September 2011, but Gordhan said the government proposed to extend this for a further five years, subject to an analysis of its effectiveness with all stakeholders.
The government also proposes to streamline the current research and development tax incentive by introducing an approval process by the Department of Science and Technology before a taxpayer can claim the incentive, with the aim of limiting opportunities for retrospective reclassification of spending.
Venture capital tax overhaul
Another incentive to be overhauled would be the venture capital tax incentive, which was introduced into the Income Tax Act in 2009, but had seen a “poor response” from those looking to set up venture capital companies.
“The approach will be refined so as to facilitate greater access to equity finance by small and medium businesses and junior mining companies,” Gordhan said.
He said consideration would also be given to expanding such incentives for labour-intensive projects in Industrial Development Zones (IDZs).
Section 12i Income Tax Allowance Incentive
Introduced to Support Greenfield and Brownfield Investment Projects
The 12i Tax Incentive is designed to support Greenfield investments (i.e. new industrial projects that utilise only new and unused manufacturing assets), as well as Brownfield investments (i.e. expansions or upgrades of existing industrial projects).
The objectives of the new incentive programme are to support investment in manufacturing assets, to improve the productivity of the South African manufacturing sector and to train personnel, improve labour productivity and the skills profile of the labour force.
The incentive offers:
- R900 million in the case of any Greenfield project with a preferred status;
- R550 million in the case of any other Greenfield project;
- R550 million in the case of any Brownfield project with a preferred status;
- R350 million in the case of any other Brownfield project;
- An additional training allowance of R36 000 per employee may be deducted from taxable income; and
- A maximum total additional training allowance per project, amounting to R20 million, in the case of a qualifying project, and R30 million in the case of a preferred project.
According to the point system, an Industrial Policy project will achieve ‘qualifying status’ if it achieves at least five (5) of the total 10 points, and a ‘preferred status’ if it achieves at least eight (8) of the total 10 points. The investment must be a Greenfield project (new project), a Brownfield project (expansion or upgrade) or be classified under ‘Major Division 3: Manufacturing’. The project should upgrade an industry within South Africa (via an innovative process, cleaner production technology or improved energy efficiency), provide general business linkages within South Africa, acquire goods and services from small, medium and micro-sized enterprises (SMMEs), create direct employment within South Africa, provide skills development in South Africa and, in the case of a Greenfield project, be located within an Industrial Development Zone (IDZ).
For further information, you can contact the following organisations.
SEDA National Office
Physical Address: The DTI Campus, Block G, 77 Meintjies Street, Sunnyside, Pretoria
Postal Address: P.O Box 56714, Arcadia, 0007
Tel: +27 12 441 1000
Web address: http://www.seda.org.za
The United Nations Industrial Development Organisation
Tel: +27 12 354 8052
Web address: http://www.un.org.za/agencies/
The National Empowerment Fund
Physical address: West Block, 187 Rivonia Road Morningside, 2057
Postal address: P.O. Box 31, Melrose Arch, Melrose North, 2076
Tel: (011) 305 – 8000
Web address: http://www.nefcorp.co.za/
South African Women Entrepreneurs’ Network
Mr Thabo Nkalane
Cell: 082 537 4424
In speaking about manufacturing incentives, Business Partner’s Roger Hickley, area manager for the East Rand, says that a number of businesses have taken advantage of the incentives offered by government.
“However, government does not distinguish between urban and rural applicants. They are all regarded equally,” he said.
“With these companies, their applications for grants went smoothly because they employed specialist consultants to prepare and submit their applications. So, it is strongly advised that anyone wishing to take up an incentive do so via one of these consultants. The DTI can provide a list of recommended consultants,” Hickley continued.
“The cost of a consultant varies. Some charge a fixed percentage of the money raised while others charge a negotiated percentage, which nonetheless is well worth the fee,“ he concluded.