VAT increases on the cards for South Africa
Finance Minister Enoch Godongwana is delivering the Medium-Term Budget Policy Statement (MTBPS) on Wednesday, 12 November, amid calls for changes to the Value-Added Tax (VAT) laws in the country.
Godongwana will deliver the delayed mid-term budget following several attempts to pass the initial budget amid outcry over a proposed VAT increase.
When it comes to hopes, SME services provider Lula has called for fiscal discipline and targeted relief for small businesses.
SMEs generate roughly 40% of South Africa’s GDP, but Lula wants the government to commit to investment and job creation, and to lower the costs of doing business.
“The greatest threat to SME growth right now is not a lack of resilience, but fiscal paralysis,” said Garth Rossiter, Lula’s Chief Risk Officer.
“Our businesses cannot commit capital for expansion and hiring when the government remains unable to offer a guaranteed, clear trajectory for electricity, logistics costs, and the national debt path.”
Rossiter said that three things are crucial for the SME community: infrastructure reform, digital-focused procurement and compliance and, most notably, structural tax relief to drive growth.
Lula has urged the Minister to resist broad-based tax increases, such as an increase in the VAT rate or adjustments to the fuel levy that exceed inflation.
Lula added that the MTBPS should signal the government’s intention to urgently adjust the VAT registration threshold, which has been stagnant at R1 million for 16 years.
It argues that this limit poses a significant administrative and financial barrier for small businesses seeking to grow.
“We have long held the belief that raising the VAT threshold from R1 million to a more contemporary level, such as R3 million, is a critical step for the government to lighten the burden on small businesses,” said Rossiter.
“By easing the administrative and compliance requirements associated with VAT, which often requires expensive external accounting, small businesses are better equipped to reinvest time and capital into core operations, stimulating economic growth and job creation.”
He added that the mini budget should signal to the private sector that the government is serious about clearing the obstacles to economic activity.
“Commitments made in the mini budget must translate into tangible improvements on the ground, such as more stable power, quicker movement of goods, and a lower overall compliance burden,” said Rossiter.
VAT rate increase likely
Although there is hope for a VAT registration increase, popular economist Dawie Roodt from Efficient Wealth also warned that a VAT rate increase to above 15% is becoming increasingly likely in South Africa.
Roodt said the government needs to raise revenues, but can only raise VAT as other taxes are at their maximum.
He also noted that cutting spending would be political suicide for the ANC. This means a VAT increase only a matter of time, despite widespread opposition to it.
Roodt noted VAT has steadily risen over the years, and history shows that nothing is as permanent as a temporary tax.
Amid the state’s deteriorating finances, he expects further increases in the near future. “I won’t be surprised if we see further increases in value-added tax,” he said.
“That’s the only remaining tax that can be increased to bring in significant amounts of money. The other taxes have been pretty much exhausted.”
He noted that South Africa’s corporate and personal income taxes have reached their limits and can’t withstand any more increases.
“We’re overdoing it on some of the other taxes already. Company tax at around 27% is just too high, we actually need to reduce it,” he said.
“And we can’t increase income taxes anymore, because very few people pay almost all the personal income tax in South Africa. We are already over the so-called Laffer Curve.”
The Laffer Curve shows that once taxes reach a certain threshold, further increases can actually reduce revenue as people stop working, find ways to evade taxes, or emigrate.
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