The South African government's R20-billion tax incentive for industrial projects was formally launched by Trade and Industry Minister Dr Rob Davies on Monday, closing an incentive gap for large manufacturing projects that has existed since the conclusion of the Strategic Industrial Projects (SIP) scheme more than five years ago – applications for the SIP tax allowance closed on July 31, 2005.

The scheme, which was finalised jointly by the Department of Trade and Industry, the National Treasury and the South African Revenue Service in July, has already received four applications. Three of the applications relate to projects in the chemicals sector and one is for a cement-related project.

Davies reported that the scheme, which fell under section 12i of the Income Tax Act, was now "open for business" and that an adjudication committee, involving officials from all three government units, would be established in "the very near future".

He stressed that it was aligned to aspirations contained within the industrial policy action plan (Ipap) to support investments into productive manufacturing capacity and would complement the other 13 incentives schemes available to South African businesses and investors.

The Ipap, which is in its second version, aims to facilitate the creation of more productive manufacturing assets and encourage investors to pursue labour-absorbing projects in a range of sectors, including agroindustry, automotive, clothing and textile, capital and transport equipment, chemicals and plastics, as well as forest products.

PRODUCTIVE SECTORS IN FOCUS

"We are well aware that we need to work to improve capital investment in the manufacturing sector," Davies said, noting that, despite the increase in credit extension ahead of the financial crisis and South Africa's 2009 recession, only a minor and declining proportion of this had been directed toward productive investments. In fact, only 5,2% of private credit extension in 2008 was channelled into fixed investments in productive sectors.

He said that government would seek to address this problem through tax incentives and grants, as well as through "a major exercise to restructure the Industrial Development Corporation" along the lines of Brazil's giant development finance institution, BNDES (Banco Nacional de Desenvolvimento Economico e Social).

As a result of the scheme, government would forgo R5,6-billion in taxes and extend R20-billion in tax allowances.

The scheme was, thus, also reflective of government's stated objective of scaling up the value of incentives available to manufacturing investors, replacing the SIP, under which some R3-billion in tax was foregone and R10-billion in allowances granted.

Through the SIP, a total of 41 manufacturing projects, with a total investment value of R13-billion, were supported. Twenty of these were chemicals related, ten where in the metals sector, while six projects were situated in the paper and pulp environment. A total of 6 600 direct jobs were created in the process.

12i tax allowance programme manager Moeketsi Marumo said that capacity was being put in place to ensure a six-week turnaround from application to decision.

Greenfield projects would receive priority, but the scheme, which would operate until December 31, 2015, would also be open for expansionary projects. Investors in greenfield and brownfield projects involving capital of more than R200-million, but less than R1,6-billion, can can apply for a tax allowance equal to between 35% and 55% of a project's value.

"Preferred" greenfield projects could receive a taxable deduction of up to R900-million, while other qualifying greenfield projects could receive up to R550-million in tax holidays.

In the case of a preferred brownfield project, the allowance is capped at R550-million, while other qualifying expansions can earn up to R350-million in tax breaks.

An additional training allowance of R36 000 an employee may be deducted from taxable income. The maximum total additional training allowance is R20-million in the case of a qualifying project and R30-million in the case of a preferred project.

Projects would be deemed 'preferred' or 'qualifying' based on a ten point evaluation methodology, covering issues such as innovation, geographical location, energy efficiency, procurement from small businesses, upstream and downstream linkages, skills development and black economic empowerment. To receive preferred status a project would need to achieve at least eight points.

It would be administered by The Enterprise Organisation, whose acting deputy director-general Tsepiso Makgothi said that capacity was being developed to meet the turnaround targets. This administrative capacity would fall to about five senior individuals, who would be guided by the adjudication committee.

Chief director for incentive administration Francisca Strauss added that, despite the modest size of the team, the turnaround targets could be achieved. But she added that the process could be materially streamlined through preapplication contact between project developers and the department.