When Finance Minister Enoch Godongwana delivers his Mid Term Budget Policy Statement in Parliament (in November) he has an ideal opportunity to make a bold announcement that will drive the growth of the SME sector. The current VAT threshold for small businesses has not changed in 16 years, which makes now the perfect opportunity to announce a long overdue increase.
SME services provider Lula is calling on Government to make a statement of support for the small business sector by raising the Value-Added Tax (VAT) registration threshold. With the current threshold unchanged for more than a decade, the administrative burden on small businesses is stifling growth and hindering the sector’s immense potential as a key driver of South Africa’s economic recovery.
The SME sector is widely acknowledged as the engine of the South African economy. According to recent data from sources like the National Empowerment Fund and World Bank reports, SMEs contribute an estimated 34% to 57% of the nation’s GDP and are responsible for a significant majority of its employment.
Despite this, they face an increasingly challenging environment, with outdated tax regulations adding to their compliance and administrative burdens. The current mandatory VAT registration threshold of R1 million, which has not been adjusted since 2009, would be closer to R2.1 million if it had kept pace with inflation.
Garth Rossiter, Chief Risk Officer at Lula, emphasised the urgency of the matter.
“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 Rossiter. “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 added that the current threshold can act as a disincentive for entrepreneurs to grow their businesses beyond the R1 million mark, diverting their energy from innovation and expansion to complex tax administration.
“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 through increased corporate income tax, PAYE from new jobs and general economic activity,” Rossiter noted.
“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. The focus would shift from collecting small amounts of VAT from a large number of struggling businesses to fostering a robust ecosystem that generates more significant tax contributions indirectly. It is a long-term investment in the nation’s economic vitality and these sort of bold moves are the ones that will drive our competitiveness on a global scale.”
The proposed increase to R3 million would allow a greater number of small businesses to reinvest their time and resources into core operations, without the added pressure of VAT administration, which often requires hiring expensive external accountants and managing complex cash flow issues.
Rossiter believes this move would not only unlock the growth potential of individual enterprises but also serve as a powerful signal to the market that the government is committed to creating a more enabling business environment.
