Calls for big VAT changes in South Africa

South Africa’s VAT registration threshold has remained at R1 million for 16 years, which means that an increasing number of small businesses are forced to bear an unnecessary tax burden.

This is according to Charles de Wet, tax executive at ENSafrica, who explained on The Money Show with Stephen Grootes that this amount should have been changed relatively often.

He explained that the threshold for compulsory registration began at R150,000, increased to R300,000, and reached R1 million in 2009.

While it wasn’t expected to change every year, 2009 to 2025 is “a very long time”, considering that inflation has been at an average of over 5% for that period, he said.

Using that 5% inflation rate, a company earning R1 million in 2009 would be earning almost R2.3 million today.

In other words, many more companies are now registered for VAT than there should be if the law had kept pace with inflation.

Essentially, companies that are half of the previously required size are now forced to deal with this VAT burden.

De Wet pointed out that the tax rates for individuals and the threshold at which individuals under 65 begin to pay taxes have been adjusted every year.

The amount was R46,000 in 2009, and in 2025, it is sitting at R95,000, which is almost double what it was 16 years ago.

Interestingly, De Wet explained that the benefit the South African Revenue Service (SARS) gets from these extra taxes does not really outweigh the extra burden it gets in exchange.

Although the service industry may have some impact when businesses provide services to individuals who cannot claim deductions on their taxes, as these individuals are the final consumers, this impact is likely a very small part of the overall economy focused on goods.

“I don’t think it really has a revenue impact. What it does have, though, is a very big compliance burden for SARS,” De Wet said.

This compliance burden includes registrations, accepting returns, verifying letters, and fraud monitoring.

“So, you would think that SARS would want the threshold to be higher,” he said.

This threshold also makes it more difficult for small businesses to operate since they already have enough compliance requirements to deal with without including VAT into the mix, especially considering that there’s no real need for them to be in the VAT net, De Wet said.

Tebogo Khaas, Chairperson of Public Interest South Africa, echoed De Wet’s concerns on The Money Show, saying that the regulatory burden being imposed on small businesses and entrepreneurs is a real concern.

“There is a need to transform that compliance landscape,” Khaas said.

He explained that deep structural reforms are needed in South Africa’s tax compliance framework.

“Instead of adjusting thresholds in isolation, we need to reimagine the VAT compliance system by leveraging modern technology and future-proofing to address inefficiencies in the system that will help mitigate fraud and ensure equitable compliance across the board.”

Not only does this extra tax not have any real benefits for SARS or small businesses, but fixing the threshold would not be that difficult.

De Wet explained that typically, the National Treasury would ask the Finance Minister to include this change in his budget speech.

“One would have expected that it’s a relatively straightforward amendment to make, changing the number,” he said.

“It’s not difficult to do a calculation. I don’t think that there needs to be significant research work done in terms of getting to a reasonable number in the circumstances, but for some reason, it’s not something that is changed often.”

According to Khaas, the Ministry of Small Business Development has also been slow to implement this change.

“Certainly, we would have wished to hear more from the ministry insofar as vexing issues such as this one,” Khaas said.

Specifically, the country needs more proactive interventions that take advantage of the current technological environment to facilitate seamless compliance. “And that we don’t see in the department,” he added.

He added that the Department of Communications and Digital Technologies could also be involved in the matter, but efforts to contact both bodies have been met with silence.

This regulation is also noteworthy, considering how the government has previously expressed its desire to help small businesses in South Africa.

“We really have got a government that seems to be speaking with both sides of its mouth. It’s saying one thing but doing the other thing,” Khaas said.