Tax trouble for South Africa’s biggest employer

South Africa’s proposed 2 percentage point VAT increase could have a devastating impact on the country’s Small and Medium Enterprises (SMEs), which are already struggling to stay afloat. They are the country’s biggest source of employment. 

This was explained by Garth Rossiter, Chief Risk Officer at SME services provider Lula, who said many wonder what tax announcements to expect in the postponed budget speech.

Small business owners will be especially concerned as they wait to hear whether the proposed VAT rate hike—from 15% to 17%—will become a reality.

“Never before has a Budget Speech been delayed in this manner, and it is clear that we can expect intense negotiations between now and 12 March to find agreement on the final makeup of a Budget,” Rossiter said.

“One of the sticking points that reportedly led to Treasury’s decision to postpone the delivery was a suggested increase of the VAT rate.” 

“Small business owners are now worried whether this hike would place even more pressure on their already tight bottom lines if it were to be confirmed.”

According to the Banking Association of South Africa (BASA), SMEs make up an estimated 91% of formalised businesses in South Africa. 

They employ about 60% of the labour force and have a total economic output that accounts for roughly 34% of the GDP.

Despite being such a large part of the country’s economy, many of South Africa’s small and medium-sized businesses struggle financially.

“Our statistics show how the turnover of small businesses over the past year has already dropped by 50%,” Rossiter said.

“The extra burden of an increased VAT rate is the last thing that the SME sector could afford.”

The VAT rate increase was part of the government’s strategy to boost revenue, fund public sector wages, and enhance infrastructure development. 

In recent days, there has also been talk of a possible “wealth tax” as public sentiment increasingly opposes an increase in the VAT rate.

“While the VAT hike was expected to generate an additional R58 billion for the National Treasury, it also presents several challenges for small businesses that should not be underestimated,” Rossiter added.

According to Rossiter, planning for a possible increase in the VAT rate means a business owner needs to understand the implications they hold for small businesses. 

He explained that the implications could be significant for small businesses. 

Increased operational costs will put pressure on profit margins, especially for those that cannot easily pass the higher costs of goods and services onto consumers. 

Business owners will also need to reconsider their pricing strategies – choosing between absorbing the VAT increase, which could reduce profits, or passing it on to customers, which might impact competitiveness and customer retention. 

Clear and transparent communication about price adjustments will be essential to maintaining customer trust.

Additionally, cash flow management will become even more critical, as the VAT increase may strain businesses with tight margins. 

Ensuring they can meet their VAT obligations without compromising other financial commitments will require careful planning. 

Compliance and administrative burdens will also rise as businesses must update their accounting systems, invoicing, and billing processes to reflect the new VAT rate. 

This could involve staff training and potential investment in updated software to maintain accurate financial records.

Rossiter advised that small business owners consider several strategies to navigate the challenges posed by the VAT increase.     

First, they should review and adjust their pricing by conducting a thorough analysis of how the increase will impact profit margins. Market conditions and competitor responses should be considered when making pricing decisions to remain competitive.

Enhancing efficiency is another crucial step, as businesses can look for ways to streamline operations and cut unnecessary costs to offset the impact of rising expenses. 

Seeking professional advice from tax advisors or financial experts can also help business owners fully understand the implications of the VAT increase and develop a solid strategy for managing the transition.

Finally, clear communication with customers is essential. Keeping them informed about any price adjustments due to the VAT increase can help maintain trust and loyalty, ensuring a smoother transition for both businesses and their customers.

The Budget Speech on 12 March will have a significant impact on small business owners, whatever tax plans are announced, Rossiter said, adding that the speech will be eagerly watched and scrutinised by the sector.

“SMEs will be particularly interested to see if their tax contributions will be pumped back into infrastructure investments that are sorely needed.”

“The money must be used in a constructive manner that builds the economy such as capital expenditure and healthcare, instead of footing a growing public sector wage bill.”

The speech is an opportunity for the Treasury to show how it will fund reliable energy, transport, security, and water, Rossiter said. 

“Doing this creates an environment in which the private sector and SMEs can excel and create the kind of jobs and economic growth South Africa desperately needs.”