Call for VAT threshold increase to boost South Africa's SME sector

As Finance Minister Enoch Godongwana prepares to deliver the Mid Term Budget Policy Statement in Parliament this November, a significant opportunity rises for the South African government to take bold action in the support of small businesses.

With the Value-Added Tax (VAT) registration threshold for Small and Medium Enterprises (SMEs) remaining unchanged for 16 years, experts argue that an increase is long overdue.

The SME sector is often heralded as the backbone of South Africa's economy, with reports indicating that these enterprises contribute between 34% to 57% to the nation's Gross Domestic Product (GDP), and are responsible for generating a significant proportion of employment opportunities.

Despite their pivotal role, the outdated VAT threshold has contributed to an environment that stifles innovation and growth within this critical sector.

Lula, a prominent SME services provider, has made the case for a substantial increase in the VAT registration threshold, currently set at R1 million, aligning it with what it would be today had it kept pace with inflation – close to R2.1 million. Garth Rossiter, Chief Risk Officer at Lula, emphasised the pressing need for change, stating, “Raising the VAT threshold is a critical step for the government to lighten the burden on small businesses.”

Rossiter explained that the existing threshold creates a disincentive for entrepreneurs to scale their operations beyond the R1 million mark, pulling their focus away from growth and innovation and instead towards complex tax compliance issues.

This administrative burden, he argues, not only limits individual business potential but also hampers broader economic recovery efforts.

“While it's difficult to quantify the exact impact, there is strong economic evidence to suggest that a healthier small business sector leads to higher overall tax collections in the long run,” Rossiter added. He highlighted that an increase in the threshold from R1 million to R3 million would not only relieve the pressure on these enterprises but also encourage increased contributions to corporate tax revenue and other forms of taxation from new job creation.

Furthermore, the proposed adjustment would allow a greater number of small businesses to focus on their core operations without the additional pressure of VAT administration.

Many SMEs are often forced to hire costly accountants or dedicate their time to managing intricate cash flow issues related to VAT compliance.

“This move would unlock the growth potential of individual enterprises while signalling to the market that the government is committed to cultivating a more enabling business environment,” Rossiter concluded. Such measures, he believes, would reflect a long-term investment into the nation’s economic vitality and enhance South Africa’s competitiveness on a global stage.

With critical moments ahead in policymaking, the call to raise the VAT threshold serves as a crucial reminder of the role small businesses play in the economic fabric of South Africa.

As the government seeks to recover from the challenges of recent years, bold moves in fiscal policy could be paramount to unleashing the full potential of the SME sector.

BUSINESS REPORT