South Africa’s VAT registration threshold of R1m is internationally competitive, including when compared with its neighbouring states, finance minister Enoch Godongwana says.
The threshold has not been changed since 2009, when it came into force, and there have been calls for it to be raised to reflect current economic realities.
ActionSA MP Alan Beesley asked Godongwana in a written parliamentary question whether the National Treasury is considering an increase in the threshold for small businesses to R2m considering that inflation has eroded its real value.
He said that raising the threshold would relieve thousands of small firms from VAT obligations, lower compliance costs, encourage business growth and formalisation, and reduce the administrative burden on the South African Revenue Service (Sars) from low-yield vendors.
Godongwana replied that National Treasury continues to review the VAT thresholds to ensure that they are appropriate in a South African context. Sars has also embarked on a VAT modernisation project involving e-invoicing and digital reporting.
But the minister cautioned that changing the threshold could have a significant impact on the tax base and tax revenue, and needs to be carefully considered.
He noted that the R1m threshold is the 10th-highest out of the 38 member countries of the Organisation for Economic Co-operation and Development (OECD). Six members have 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,” Godongwana said.
“The question of an appropriate threshold for compulsory registration for VAT requires the balancing of various policy concerns. For example, administrative benefits for businesses and tax administrations are often advanced to justify a higher threshold.
“On the other hand, too high a threshold may result in a large portion of businesses remaining outside of the tax net, where they would then face a significant financial shock as they go above the threshold. There is also an incentive for businesses to suppress sales to remain below the threshold.”
Godongwana said the process of adjusting thresholds should be considered holistically and could require further amendments. He pointed out that the VAT compulsory registration threshold increased to R1m in 2008 (when the law was passed) as a packaged approach, together with the implementation of an elective presumptive turnover tax system for very small businesses with a turnover up to R1m a year.
The turnover tax system is aimed at simplifying tax compliance for small businesses by replacing income tax, VAT, provisional tax and capital gains tax.
Godongwana noted that according to the Sars 2024 Tax Statistics publication, for the 2023/24 financial year, 53% of vendors had a turnover of R1m or less, which is below the mandatory VAT registration threshold, illustrating that many vendors register for VAT on a voluntary basis. However, these vendors accounted for only 5.6% (R29.6bn) of domestic VAT payments and 5.3% (R18.5bn) of VAT refunded.
Vendors in the R1m-R2m turnover group had domestic VAT payments of R23bn and refunds amounting to R4.9bn.
“Therefore, vendors with an annual turnover below the R2m threshold cumulatively represented a total domestic VAT payment of R52.6bn and VAT refunds of R23.4bn with a net VAT of R29.2bn.”
According to Tax Statistics 2024, net VAT collections in 2023/24 amounted to R447.6bn after refunds of R342.9bn, with domestic VAT contributing R525.4bn.
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