Digitalisation can unlock further SME growth

Technology, particularly in the bedrock SME space, is the key to expanding the taxpayer base and boosting the economy.
Colin Timmis
By Colin Timmis, South Africa country manager, Xero
Johannesburg, 20 May 2022

The South African National Treasury has announced plans to make the country’s business environment more hospitable for growth in 2022. These changes, combined with the recent repeal of the State of Disaster regulations, put small businesses in a much stronger position to grow and accelerate the country’s economy.

This is significant because small businesses continue to be the bedrock of our economy, accounting for around 98% of all business activity and employing approximately 80% of the country’s workforce.

One key area of reform is a reduction in corporate tax, which is especially important as high taxes can cause businesses to move to the informal sector or cease operations. The corporate tax rate will be reduced from 28% to 27%.

While the reduction is welcome, outside factors alone are not enough to drive the country’s SMEs to success – they must also take advantage of the latest technology to drive their growth from within.

Increasing the tax base

Unfortunately, a significant tax gap still exists. Tax revenue collection for the fiscal year 2020-21 decreased by 7.8% over the previous financial year, and Small Business Corporation Tax was also down.

Similarly, the proportion of Corporate Income Tax in the overall tax revenue has dropped consistently from around 30% ten years ago to 16.4% in the latest figures.

To ensure everyone is contributing their fair share, paying taxes should be as easy as possible. That’s why the South African Revenue Service (SARS) is looking to speed up the digitalisation of the process, enabling businesses to pay taxes quickly, easily and on time.

As it stands, SARS is making great strides in this area, with eFiling accounting for 76.8% of all tax payments during the 2020-21 fiscal year.

Similarly, South African SMEs have cloud-based platforms at their disposal that enable them to easily prepare, store and submit their VAT returns to SARS, all from one location.

Filing taxes is just an example of the larger promise of technology. As most small businesses have learned over the past two years, technology can greatly reduce errors and bureaucracy, and empower owners with a clearer picture of their finances.

Two-thirds of key decision-makers in SMEs consider technology a greater asset now than before the pandemic.

Indeed, the “cost of compliance” regarding tax returns is now at an all-time low, and this is just the beginning.

The pandemic also accelerated the process of digitalisation. Hard lockdowns restricted the movement of workers around the country, so technology took over to ensure they could all stay connected.

In fact, two-thirds of key decision-makers in SMEs consider technology a greater asset now than before the pandemic. This is a positive sign, as businesses’ reliance on technology for a variety of company affairs sets the stage for greater compliance with the revenue services.

Open banking: Connecting SMEs and SARS

One important prerequisite for empowering SMEs to take control of their finances is open banking.

Unlike traditional banking, where the bank holds all ownership of a customer’s data, open banking means data can be shared across multiple financial institutions via application processing interfaces.

This gives small business owners and their accountants a broader insight into their company's finances, empowering them to make informed decisions and facilitate appropriate tax compliance.

The ease of moving data under open banking also makes it possible for SMEs to automate mundane tasks, such as tax filing, so that decision-makers can focus more on driving growth.

As well as automation and increased visibility, open banking gives businesses easier access to funds and enables them to both make and receive payments more quickly − functions that are essential for growing a business.

Closing the tax gap will be essential to South Africa’s economic growth and, to achieve this, tech adoption by SMEs must be a top priority. Proper tools are essential to accelerating business activity and stimulating economic growth.

Fortunately, small businesses are feeling optimistic. Xero’s latest research found that 87% of SME owners feel confident in their business’s ability to perform in 2022.

This success is, in many cases, attributable to the adoption of new software – 65% of decision-makers feel technology has become more important to their business since the pandemic began.

After the economic setbacks that have characterised the last two years, this optimism is a welcome change and a strong indicator of growth to come.