Calls for major VAT change in South Africa
Finance Minister Enoch Godongwana has been called to change South Africa’s Value-Added Tax (VAT) registration threshold ahead of the Medium-term Budget Policy Statement (MTBPS) in November.
Business loan provider Lula noted that the current VAT threshold for small businesses has not changed in 16 years.
It has thus called on the government to support the small business sector by raising the VAT registration threshold.
In South Africa, businesses must register for VAT if their total value of taxable goods or services exceeds R1 million in a 12-month period, or is expected to exceed this amount.
As the current threshold has not been changed for over a decade, Lula said that the administrative burden stifles growth in the SME sector and the wider economy.
SMEs provide employment to about 60% of South Africa’s labour force, and total economic output accounts for roughly 35% of GDP.
However, the sector faces an increasingly tough environment, with outdated tax regulations adding to the compliance and administrative burdens.
The current mandatory VAT registration threshold of R1 million, which was established in 2009, would be closer to R2.1 million if it stayed in line with inflation.
It has been proposed that the threshold be pushed up to R3 million or even R4 million.
“We have long held the belief that raising the VAT threshold is a critical step for the government to lighten the burden on small businesses,” said Garth Rossiter, Chief Risk Officer at Lula.
“By easing the administrative and compliance requirements associated with VAT, small businesses are better equipped to thrive, which in turn stimulates economic growth and job creation, which our country so desperately needs.”
Rossiter said that the current threshold acts as a disincentive for entrepreneurs to grow their businesses above the R1 million mark, as they need to focus on complex administration instead of expansion.
Better for the whole economy
Rossiter added that strong economic evidence suggests that a healthier small business sector leads to improved tax collections in the long run.
This is via corporate income tax, PAYE from new jobs and general economic activity.
“We believe that the government making a bold statement by increasing this threshold from R1 million to R3 million would demonstrate real, tangible support for a sector that contributes around 40% of GDP and creates the majority of jobs.”
Lula said that the focus would move from collecting small amounts of VAT from many smaller businesses to creating an ecosystem that indirectly generates more tax contributions.
An increase to R4 million would allow an even larger number of small businesses to reinvest their time and resources into core operations, without the added pressure of VAT administration.
VAT administration often requires hiring expensive external accountants and managing complex cash flow issues.
Rossiter believes this move would unlock the growth potential of individual enterprises and indicate the government’s commitment to creating a more enabling business environment.
Running counter to calls for tax relief for businesses, Godongwana and National Treasury have instead been looking at ways to increase tax revenues in South Africa.
Amid South Africa’s economic environment, high debt burden and already high income tax levels, National Treasury tried to increase VAT by two percentage points at the start of the year to 17%.
The move was withdrawn after several National Budget delays and fierce opposition within the Government of National Unity.
However, it shows the pressure that the government is under to increase revenues.
Tax adjustments are not typically made in the MTBPS, but rather the National Treasury uses the so-called ‘mini budget’ to review changes made during the year and to signal potential changes for the next main budget.
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