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The importance, significance, and effectiveness of tax incentives in achieving the policy-makers’ intended objectives generally divide opinions about this discussion, but nevertheless, they are widely applied by many countries across the world (OECD 2007: 3; James 2013: 3; Zolt 2014: 3). Tax incentives may take different forms (as seen in par 3.3, chapter 4, and chapter 5) and governments normally implement each incentive with a different objective to be achieved. There are also costs (both direct and indirect) involved with the implementation of tax incentive policies and these have the potential to erode the little benefits that would have been realised by an incentive program (Bird 2008: 11 - 12). This explains why James (2013: 3) warns that governments must balance their likely costs and potential benefits when choosing tax incentive policies. The arguments as put forward below point to the importance of tax incentives.

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Tax incentives encourage investment in certain sectors and geographic areas (UNCTAD 2000: 12). When a need arises to boost investments in a certain sector or geographic area that could have been identified for some reason such as lack of development of an area, the government may implement tax incentives to lure businesses to invest there and contribute towards the development and rejuvenation of such an area (OECD 2007: 7). A government’s objectives for implementing such tax incentives may include support for rural development, building industrial centres away from major cities, reducing environmental hazards, reducing over-urbanisation of one area and reducing over-concentration of population in certain areas (UNCTAD 2000: 12). The IDZ and SEZ allowances, such as those available in South Africa (par 3.3), are good examples in this regard. Barbour (2005: 4) warns that the use of tax incentives as a way of attracting investments in particular areas could be seen as compensating for inadequacies in the investment regime.

Tax incentives that are targeted at a certain activity could contribute to performance enhancement within that particular activity. Tax incentives could be targeted towards different economic activities such as export promotion, manufacturing, job creation, skills training, and infrastructure development, among others (UNCTAD 2000: 13). Policy-makers could implement targeted tax incentives to a selected activity with a view of boosting or improving the performance of that particular activity in the country. Investment incentives which are targeted at export-oriented production could be more effective than most other forms because of the high levels of the mobility of such investments. A tax incentive program that is well targeted could be very successful in attracting specific projects or specific types of investors (Zolt 2014: 15).

Furthermore, Barbour (2005: 7) argues that tax incentives could be used to compensate for government-created obstacles in the business environment. He explains that a tax incentive regime could easily be used to counterbalance government failures (such as low skills base in the country, high regulatory compliance costs, among others) than to engage the inadequacies. Calitz, Wallace, and Burrows (2013: 7) agree with Barbour regarding the use of tax incentive policies

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by governments to compensate for inadequacies in the investment environment. Legislators may find it easier to implement tax incentives because they have control over them rather than to tackle the actual challenges that discourage investors. In addition, alternative measures such as subsidies may involve direct expenditure and attract more public scrutiny because of the related costs hence incentives become an easier political tool to be deployed (Calitz et al 2013: 7).

Tax incentives can play a role in the transfer of know-how and technology from the developed world to less developed countries (Zolt2014: 14). Babatunde (2012: 1) concurs that, in the process of tax incentives attracting FDI, technology comes along with it and as a result, technical progress increases in the host country. Easson and Zolt (2002: 18) postulate that tax incentives could be useful in promoting activities such as R&D. They explain that countries may attract technologically advanced investments through providing incentives for carrying out R&D, thereby acquiring technologically advanced equipment and targeting incentives in technologically advanced sectors.

In addition, the Nathan-MSI Group (2004: 7-19) identified that tax incentives contribute to the drive towards employment promotion. They indicated that all countries in the Southern African Development Community considered employment as a genuine goal of tax incentives. The IMF et al added that tax incentives lead to a social benefit in the society in terms of new jobs being created as a result of high investments and hence reducing unemployment (IMF et al 2015: 10). In line with the above sources, Jordaan (2012: 7) is also of the opinion that incentives contribute to employment promotion. This is as a result of the economy-wide benefits of greater employment such as skills transfer which might not have been taken into account by individual business entities.

The greater good of many of the spill-over effects of tax incentives contribute to economic development (IMF et al 2015: 8) and generally benefits the small businesses in the country. Most tax incentives are designed to attract investments either in a certain region or sector (Zolt 2014: 11; Calitz et al 2013: 3). The arrival of mega investment projects in an area would normally lead to better road

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infrastructure, population growth in the area, and employment opportunities. It would also lead to better housing facilities, a supply of water, electricity and telephone services, all of which would contribute to making the small business environment more favourable (Calitz et al 2013: 3). Small businesses feed off large corporates or big projects and in certain instances, small businesses partner with the larger corporates on some projects (Schaeffer 2015: 15 -18). The benefits of a small business partnership with a large corporate can be seen to be mutual. Schaeffer (2015: 25) identified scenarios in which start-up businesses contributed to the innovative potential of large entities such as Siemens, IBM, and Air France. All these could be seen as indirect benefits of tax incentives to small businesses.

Well-targeted tax incentives can be used to simplify tax legislation for small businesses, hence making it easier for them to achieve the required levels of compliance. The turnover tax regime in South Africa simplified the taxation of micro- businesses in such a way that the tax payable is calculated based on annual taxable turnover and no deductions are considered (SARS 2016: 14). The presumptive taxation scheme of India also simplified the taxation of small businesses to all qualifying businesses to pay tax at preferential rates. Under the presumptive taxation scheme, qualifying entities pay tax at 8 per cent of gross receipts or 6 per cent on total turnover received through digital means (without involving cash). No deductions are considered and books of accounts are not required unless when providing a professional service (Section 44AD, 44ADA & 44AE of Act No. 43 of 1961 of the ITA- India). This simplification of the tax code, which is a result of tax incentives, is considered to help small businesses to comply with tax regulations while cutting costs on professional accountants and bookkeepers.

Despite their rationale being well documented, tax incentives remain a controversial matter and their effectiveness divides opinions among renowned economists, scholars, and reputable organisations. It is for this reason that this study has attempted to delve deeper into the controversial and uncertain world of tax incentives (Bird 2008: 9 - 10; Calitz et al 2013: 2), although not to determine the effectiveness or ineffectiveness. This study discusses the small business tax incentives in South Africa and points to possible gaps and areas of concern within these tax relief

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measures. Several studies agree that if well designed and meticulously implemented, tax incentives could possess the potential to achieve the intended objectives (Klemm 2009: 5; Zolt 2014: 9; IMF et al 2015: 3). Given that the design of tax incentives is a policy issue and tax policies differ from one country to another, the study also sought to compare South Africa’s small business tax incentives with those in Australia, India, and the United Kingdom. An investor will also consider the possible advantages and disadvantages before making the decision to invest in a certain area or sector.