RANDS AND SENSE:
Section 2J of the Income Tax Act was legislated in 2009. It was adopted as a policy instrument to meet a specific economic objective: job creation and, by extension, an increased tax base. It is 10 years later, and the government is reviewing this policy decision, sighting “abuses” by the industry. On the other end, the industry is perplexed, asking the government to point out those abuses, and they simply can’t.
The reason for this misunderstanding lies in the gap between the expectations of the state and what the industry has achieved through this policy instrument.
To simplify the issue, both departments in question, the SA Revenue Service (Sars) and the National Treasury, failed to align this policy instrument to our broader economic policy, which is embedded in the National Development Plan (NDP). Furthermore, the guidelines around deliverables are not indisputably specific. Hence there is room for a debate.
The NDP is an integral part of our economic policy and has several objectives, such as reduction of inequality, poverty and unemployment, to name a few. It is therefore logical to expect that any policy instrument adopted to meet economic objectives in this country will be as closely aligned to the NDP as possible.
Key performance indicators
S12J as a developmental tool was not only supposed to focus on job creation, but also on the quality and longevity of the jobs created. The only way to achieve this is to develop key performance indicators (KPIs) and have them in place as part of the criteria for participating in the industry.
The KPIs must be linked to monetary values, therefore be measurable. As a simple example, the government should have given decisive indications of how many jobs it expected each 12J venture capital company (VCC) to create for every R1million it raised in investment. Furthermore, on the quality and longevity of the jobs, it should have insisted that a certain number of the jobs created should enable the job seeker to at least enter a tax bracket.
South Africa is one of the most unequal societies in the world, therefore the transformation agenda was supposed to be one of the most critical aspects of S12J.
Lack of Empowerment
The 12J venture capital industry, like most industries in South Africa, should comply and be subjected to broad-based black economic empowerment (B-BBEE) laws. In other words, enterprises that invest in black-owned 12J VCCs should be able to score B-BBEE points. Most companies, individuals and trusts that have the means to invest in 12J VCCs are white-owned, because, unfortunately, the colour of capital is still predominantly white in this country. Naturally, they invest in white-owned and managed VCCs because there’s no incentive for investing in a black-owned and managed 12J VCCs. This makes it very difficult for black-owned 12J VCCs to compete, and it creates an automatic barrier to entry for black participants. This explains why only less than 10% of the 12J VCC industry is black.
Our government failed black business by not adding a condition to the criteria stipulated in the guidelines that states that a certain percentage of each 12J VCC fund should be invested in black-owned businesses. Black businesses were robbed of an opportunity to benefit from this policy instrument.
If things are left as they are, the probability of this changing is unlikely. This goes back to my point made earlier, of linking the 12J VCC industry to B-BBEE laws of the country.
Finally, the 12J Income Tax Act accommodates largely highly capital-intensive industries, which is another automatic barrier to entry for most black business.
I’ll use the tourism industry as an example. To establish a business in the tourism sector you must own or have access to land in a prime location for business, health or leisure. Unfortunately, the majority of black people in this country do not have access to this kind or any land for that matter. Then one must have the resources to develop it and market it, up to point where it’s profitable.
The other industries that are accommodated by the 12J legislation share similar characteristics in terms of the participation of black people. My recommendation on this point would be to open it up to industries that are less capital intensive, and, by extension, have more participation by black business.
Dialogue and engagement
The intention that resulted in the founding of the S12J VCC industry was and is still good. Over the past 10 years I believe the industry and the government have learnt valuable lessons. It is only through meaningful dialogue and engagement that an amicable solution can be formulated, by both parties assuming a solution-driven perspective.
I do not believe the solution lies in enforcing a cap on the investment amount, but the deeper understanding of each side’s objectives. Rules that guide the industry need to be rewritten and a regulatory body needs to be established. Part of the mandate of this regulatory body should be to establish a points system. Instead of effecting a one-size-fits-all cap, 12J VCCs must be given the opportunity to earn the right to raise capital through this policy instrument, by attaching a certain level of well-defined responsibility to it. Based on a points system, it should be determined how much each 12J VCC can raise from each investor.
The more the 12J VCC aligns itself to the objectives of the NDP, the more it should be able to raise capital through this policy instrument, and vice versa.
Matshepo Skhosana is the chief executive and founder of Global Diaspora Capital, a 12J VCC.
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