Budget was a missed opportunity to support the struggling small business sector

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9 Apr 2025

Where are the incentives for the SMEs that are finally starting to find some traction, create jobs and create economic value? This is a question we are not seeing being answered in forums such as the Budget speech.

South African policy-makers are often quick to talk up their desire to support the entrepreneur economy and small businesses (SMEs), but the latest iteration of the Budget speech shows that we are still not grasping how to truly support this key sector of the economy.

After an initial proposal of a 2 percentage point increase in 2025, the contentious Value Added Tax (VAT) tax increase proposal was revised to a 0.5 percentage point increase this year, followed by a 0.5 percentage point increase next year. Against the backdrop of a low-growth economy, shrinking tax base, and diminishing household purchasing power, it’s no surprise that these proposals have met with pushback.

Before we look at the direct impact on the small business sector, it is worth highlighting that the most recent VAT increase appears to be a knee-jerk reaction to an income or revenue shortfall. The previous VAT increase that came into effect in 2018 was part of a multi-year consultative process that began in 2015 supported by three separate impact studies.

Despite a lot of talk about wanting to support the SME sector in South Africa, the abbreviation “SME” doesn’t appear in either of the tabled Budget speeches, and the only reference to small businesses is a single line which reads: “The cost of a 1.5GB data bundle has declined by 51 per cent, allowing individuals and small businesses to access more affordable data.”

If we look at VAT, specifically in the lower end of the small business sector — those earning less than R10-million per year — the impact is material on a couple of fronts.

In 2009, the VAT threshold was changed to R1-million — in other words, if your annual revenue was greater than R1-million, you needed to register with the South African Revenue Service (SARS). Adjusted for inflation, that R1-million today would be the equivalent of R2.2-million — and yet the VAT threshold hasn’t been increased to accommodate this.

Interesting statistic

Here is an interesting statistic. In 2009, SARS reported that there were 685,523 vendors, of which 72% were active (493,576). In the last financial year, vendors totalled 959,000 on 31 March 2024, of which 488,118 (50.9%) were active. Despite the “stealth” expansion of the VAT threshold, the number of VAT-paying SMEs has shrunk.

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We could take this one step further and point out that these statistics are an outcome despite the introduction of the Amended Broad-Based Black Economic Empowerment codes in 2013.

The current approach of trying to regulate to create economic activity is simply not working. Importantly, while the VAT Act does allow for a cash basis in certain cases, the majority of active VAT vendors operate on the invoice basis. This means VAT is not based on cashflow — it’s accrued when an invoice is issued or an expense is incurred.

In other words, if you are a business which generates R100,000 of revenue excluding VAT, you immediately have a tax obligation of 15% (R15,000) or 15.5% (R15,500) under the new proposal — irrespective of when you get paid. If you don’t have the cash to settle the tax obligation when it falls due, you are immediately levied a 10% penalty.

The natural reaction for SMEs is to try to stay out of the compliance net to the best of their ability. SARS in turn is being capacitated with an additional R4-billion to assist in tax collection and will respond by ramping up efforts to drive compliance.

Critical role

While the revenue services in South Africa play a critical role, there are concerns that the aggressive focus on revenue collection is creating a fractious environment, with SMEs and those who can already looking to offshore their operations. At the moment, an SME faces the same compliance burden as a large corporate but doesn’t have the same technical resources to respond when the taxman comes calling.

Where are the incentives for the SMEs that are finally starting to find some traction, create jobs and create economic value? These are the questions we are not seeing being answered in forums such as the Budget speech.

Ultimately, we need to create an environment where SMEs are seen as part of the solution, rather than being positioned as part of the problem. To do this, we need to move from rhetoric to a deep understanding of the ecosystem and how best to reimagine it. DM

Raindren Moodley is an Executive: Advisory Services at Ariston Global.

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Interesting statistic

Critical role