What budget 2019 means for tech startups in South Africa

Finance Minister Tito Mboweni yesterday presented the 2019 Budget, but what does it mean for the country’s tech startups?

In his budget speech (opens as a PDF) yesterday Mboweni sketched a picture of a South Africa struggling with failing state-owned enterprises, ballooning debt and continued low growth, but remained optimistic that the ship could be turned around.

“It will not be easy. There are no quick fixes. But our nation is ready for renewal. We are ready to plant the seeds of our future,” he said.

In his budget speech Finance Minister Tito Mboweni said the country needs to free entrepreneurs from stifling regulations

What then are some of things from the Budget that will influence tech entrepreneurs in South Africa? Ventureburn takes a look.

Local market will struggle to grow: If you’re a startup that serves the local SA market, things are going to be tough. Mboweni announced that economic growth for 2019 will be lower than what was forecast in October last year, down from 1.7% to 1.5%. Growth is expected to increase to 2.1% in 2021. This is just above SA’s population growth of 1.5%, according to Statistics SA’s mid-year population estimates for 2018. In other words South Africans last year (when the country is estimated to have grown by 0.7%) were poorer than they were the year before. The National Development Plan (NDP) calls for growth of 5.4% a year and lowering of unemployment to 12% by 2030 (currently it’s at almost 30%). Things are therefore only going to get more difficult.

Tax increases likely in near future: Tax revenue hasn’t been that great. For the 2018/19 fiscal year The Treasury is now expecting a shortfall of R42.8-billion, which means the government will need to increase its borrowing. Tax increases are likely in the near future (Personal income taxes will effectively increase in 2019/20, as the SA Revenue Service won’t be adjusting the various tax brackets to cater for inflation). Last year’s shortfall is as a result of a weaker economic outlook and an increase in Value Added Tax (VAT) refunds and problems with tax administration. In 2017 the SA Revenue Service (Sars) introduced a top tax bracket of 45%, while last year it raised the VAT rate to 15%, from 14% where it had stood for years. Company Tax still stands at 28%. Certain small businesses can benefit from a lower Small Business Corporation Tax. For firms with an annual revenue of no more than R1-million, there is also Turnover Tax for Micro Business (paid on revenue not profit). See Sars’ tax guide here.

Will the government cut red tape?: Startups and small businesses continue to complain about how red tape holds them back. Labour regulations remain entrepreneur’s top concern, according to a report released by advocacy body Simodisa last month (see this story). Many business owners will then be heartened by Mboweni’s words in his budget speech that “We need to free our entrepreneurs from stifling regulations and complicated taxes”. Let’s not forget that this is the same Mboweni that as labour minister in former president Nelson Mandela’s cabinet introduced the CCMA and labour laws (the Labour Relations Act among others and strengthening of the dreaded bargaining council system) that continue to frustrate employers. Don’t expect much to change.

Power crisis will likely continue: Startups better prepare for more power cuts, while the state tries to rescue ailing Eskom. It plans to plough R23-million a year over the next three years in the state-owned entity, but this could run to R150-billion in aid to the entity, over the next 10 years. In addition, President Cyril Ramaphosa announced in his State of the Nation Address earlier this year that the entity would be split into three companies.

Tech platforms and solutions can help government: The public sector in South Africa is bloated. The government in the Budget Review said it is looking at merging or closing provincial entities with duplicated functions and reducing non essential admin personnel to help contain costs. Bright tech entrepreneurs that can design platforms and apps that can help the government to improve the performance of frontline staff (those that deal with community members at health clinics or social grants offices among others) might have a key role to play. But that’s only if the government crafts contracts that make it easy for small startups to take part. Those from townships or affected communities that know service delivery problems all too well, should be encouraged to come up with innovative solutions to these. In this the tech hubs that the government plans to roll out in townships is a good thing (see below).

Business incubation: Mboweni said R481.6-million will be allocated to the Small Enterprise Development Agency (Seda) over the next three years to expand its small business incubation programme (R152.2-million for 2019/20, R160.2-million for 2020/21 and R169-million for 2021/22). It’s not clear if some of this amount will go to fund the setting up of township tech hubs, that President Cyril Ramaphosa revealed in his State of the Nation Address earlier this month (see this story). Seda already has over 50 incubators spread out across the country, including a number that support tech startups. The troubled Gazelles programme has been allocated R95.6-million over the next three years (see this story). See a list of the various Seda incubators here.

Funding for job-creating projects: The National Treasury’s Jobs Fund, which was launched in 2011 will get a further allocation from the fiscus. The fund involves the state co-investing with private-sector organisations and companies in job-creating projects (including those that support small businesses and tech startups). Mboweni said the fund has so far disbursed R4.6-billion in grant funding, and created well over 200 000 jobs since inception. The allocation to this fund will rise over the next three years to R1.1-billion. It might be a great way for startups to tap funding. See a list of the projects that support small businesses here.

Section 12J VC tax incentive overhaul: South Africa’s venture capital (VC) tax incentive allows investors that invest in accredited VC companies that then invest in small businesses, to make a tax deduction of 100% in the year that the investment was made. To date the SA Revenue Service (Sars) has approved over 120 such funds (find the list here). Very few invest in tech startups and too many are keen on things like property or mundane things such as solar PVRs and office rental equipment companies. The Budget Review notes that last year changes were made to the venture capital company tax regime to prevent abuse of various aspects of the system (see this story). Says the Budget Review: “It has come to government’s attention that some taxpayers are attempting to undermine other aspects of the regime to benefit from excessive tax deductions. It is proposed that these rules be reviewed to prevent this abuse.” The question is whether this will get Section 12J VC funds to invest in what the country arguably really needs — more job creating firms, black-owned small businesses and innovative startups (see this opinion piece). The incentive is due to expire in June 2021. The National Treasury will evaluate the incentive in line with its objectives during the 2019/20 fiscal year. The Budget Reviews notes that over 80% of the tax expenditure accrues to taxpayers who have a taxable income before the venture capital company deduction of more than R1-million.

Go here for Sars’ simple tax guide for 2019. Read the budget speech here and the Budget Review here (all open as PDFs)

Featured image: Finance Minister Tito Mboweni by GovernmentZA via Flickr (CC BY-ND 2.0, cropped)