Big VAT changes on the cards for South Africa

Calls to raise South Africa’s value-added tax (VAT) registration threshold, which has remained the same for the past 16 years, are increasing.

Amid these calls, Finance Minister Enoch Godongwana has confirmed that the National Treasury continues to review the thresholds to ensure they are appropriate.

In addition, the South African Revenue Service (SARS) has published a discussion paper reviewing the country’s VAT administrative framework to simplify and modernise the current system.

Godongwana outlined these developments in response to a recent Parliamentary question from ActionSA MP Alan Beesley.

Beesley asked the minister where the Treasury is considering increasing the compulsory VAT threshold for small businesses from the current R1 million to R2 million.

Currently, South African enterprises are required to register for VAT if their taxable supplies exceed R1 million in any consecutive 12-month period.

Beesley said the threshold has remained unchanged at R1 million since 2009, despite inflation eroding its real value.

ENSafrica tax executive Charles de Wet previously pointed out that, assuming South Africa’s inflation rate has averaged 5% since 2009, a company earning R1 million in 2009 would be earning almost R2.3 million today.

This means many more companies are now registered for VAT than there should be if the law had kept pace with inflation.

In his response, Godongwana explained that the question of an appropriate threshold for compulsory registration for VAT requires the “balancing of various policy concerns”.

On the one hand, he said the administrative benefits for businesses and tax administrations may justify a higher threshold.

However, on the other hand, a too high threshold could result in a large portion of businesses remaining outside the tax net, meaning they would then face a significant financial shock as they exceed the threshold. 

Godongwana said there is also an incentive for businesses to suppress sales to remain below the threshold.

“The process of adjusting thresholds should be considered holistically and could require further amendments,” he said.

Losing taxpayers

Godongwana referred to SARS’ 2024 Tax Statistics, which showed that, for the 2023/24 financial year, 53% of vendors had a turnover of R1 million or less.

This is below the mandatory VAT registration threshold, which, according to the minister, shows that many vendors register for VAT voluntarily.

In South Africa, an enterprise can choose to register voluntarily for VAT if the value of its taxable supplies is less than R1 million but has, under certain circumstances, exceeded R50,000 in the past period of 12 months.   

However, Godongwana said these voluntarily-registered vendors accounted for only 5.6% of domestic VAT payments, around R29.6 billion, and 5.3%, or around R18.5 billion, of VAT refunded. 

Similarly, he said the vendors in the turnover group between R1 million to R2 million had domestic VAT payments of R23 billion and VAT refunds amounting to R4.9 billion. 

“Therefore, vendors with an annual turnover below the R2 million threshold cumulatively represented a total domestic VAT payment of R52.6 billion and VAT refunds of R23.4 billion with a net VAT of R29.2 billion,” he said.

“Changing the threshold can have a significant impact on the tax base and tax revenue and need to be carefully considered.”

Godongwana further pointed out that if South Africa’s current threshold is compared to the most recent information available from the OECD for members with VAT systems, it is the 10th highest out of 38 countries. 

He said six members set their threshold at zero, and the unweighted average threshold is just over R700,000. 

“South Africa’s current threshold is thus competitive from an international perspective. This is equally true if a comparison is drawn with South Africa’s neighbouring states,” he said.

However, Godongwana said the National Treasury continues to review South Africa’s VAT thresholds to ensure that they are appropriate. 

In addition, he referred to the 2023 Budget Review, which noted that SARS intends to review the VAT administrative framework to simplify and modernise the current system, in consultation with all affected parties. 

“SARS has issued a discussion paper in this regard, and the first phase of the legislative amendments in support of the initiative has been included in this year’s draft legislation for public comment,” Godongwana said.

In this discussion paper, SARS points out many other issues with South Africa’s current VAT framework.

The taxman explains that, while VAT is the second-highest contributor to revenue collection for SARS, its modernisation has largely not progressed over the past decade.

SARS said VAT is the tax type with the least supply chain visibility from a self-assessment perspective. 

“This lack of supply chain visibility exposes the fiscus to revenue leakages, which is time-consuming to detect, and requires frequent audits and verifications, placing a burden on vendors and their business,” SARS said. 

“These frequent audits and verifications could potentially result in delaying the finalisation of a vendor’s VAT liability or VAT refund.”