The effectiveness of tax incentives for small and medium sized entities in South Africa: An analysis of section 12E and Interpretation Note 9

Small and medium sized entities (SMEs) supposedly provide job creation, economic growth and poverty reduction, and tax incentives aimed at this sector should lead to inclusive economic growth. Section 12E of the South African Income Tax Act No. 58 of 1962 (the Act) offers accelerated depreciation allowances to SMEs. However, this allowance is not meeting its intended purpose. Through a doctrinal research approach, this study interrogated the aim of section 12E, its limited coverage, the definition of small and medium businesses in the Act, and the effectiveness of policies targeting SMEs. The allowance is not adequately targeting the correct small businesses and informal enterprises. Additionally, taxation compliance is a challenge for these businesses, and thus taxation allowances that are intended to support SMEs may be misused or incorrectly applied. This study also found that a refundable compliance rebate may be more equitable and offers a solution to existing compliance issues faced by SMEs.