The effects of sin tax on the profitability of SMME convenience stores in the Cape Metropole

Abstract

Small Micro Medium Enterprises (SMMEs) contribute significantly to the South African Gross Domestic Product (GDP) and play a critical role in job creation and poverty alleviation. Prior research shows that objectives relating to job creation and poverty alleviation are not successfully being met as approximately 75% of newly created South African SMMEs fail after operating for an average of 3 years – one of the worst failure rates in the world. This high failure rate is perceived to be attributed to a magnitude of economic factors e.g. shortage of skills, economic uncertainty, crime, legislation and taxation among others. Encapsulated within legislation and taxation is the burden of tax compliance and governmental regulation which diverts SMME leaders’ attention away from core business operations. In South Africa, sin tax (a mandatory form of excise taxation), is levied on products considered to be socially undesirable such as tobacco related products and plastic bags. At present time, the taxation levied on tobacco products is 45% per unit sold, while the taxation levied on plastic bags is 6 cents per plastic bag sold. The main objective of this study was to determine the effects of sin tax on SMME profitability. This research was exploratory in nature, and took the form of quantitative research. A total of 47 responses were obtained from SMME leaders of convenience SMME stores from where all data were analysed through means of descriptive statistics. Findings indicated that sin tax has a direct adverse effect on the profitability of convenience SMMEs stores within the Cape Metropole