Lula has renewed its call for Finance Minister Enoch Godongwana to raise the value added tax registration threshold for businesses in the upcoming 2026 National Budget, arguing that the current limit is outdated and economically restrictive.
Key Takeaways
- VAT Threshold Reform Could Unlock SME Growth: Raising the compulsory VAT registration limit from R1 million to R3 million may remove a major psychological and administrative barrier that currently discourages small businesses from expanding.
- Infrastructure Certainty Is As Critical As Tax Reform: Stable energy, water and municipal services are essential for SME productivity, and long term infrastructure planning is necessary to support sustainable private sector growth.
- A Business Friendly 2026 Budget Could Strengthen Investor Confidence: Clear policy direction, predictable regulation and structural reforms may do more to stimulate employment and economic expansion than short term election year spending measures.
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Call to Raise VAT Threshold Gains Momentum as SMEs Face Inflation-Eroded Limits
The small business funder has formally requested that the compulsory VAT registration threshold be increased from R1 million to R3 million, stating that such a move would release much needed liquidity into the small and medium sized enterprise sector and improve cash flow resilience.
Lula has previously highlighted that small and medium sized enterprises contribute approximately 40 percent of South Africa’s gross domestic product, underscoring their central role in economic expansion and employment creation.
The VAT registration threshold has remained fixed at R1 million for 16 years, with no adjustment since 2009 despite inflation and structural shifts in the economy. R1 million in 2009 is equivalent to roughly R2.2 million today when adjusted for inflation, indicating that the real threshold has effectively declined over time.
Business owners approaching the VAT threshold should regularly review turnover projections and inflation adjusted revenue targets to avoid unintended compliance pressure.
Garth Rossiter, Chief Risk Officer at Lula, has described the R1 million VAT threshold as a “glass ceiling” that actively discourages small business expansion and strategic scaling.
The R1 Million Ceiling and Growth Disincentives
Rossiter has explained that the static threshold creates a behavioural barrier, where business owners become reluctant to exceed the R1 million turnover mark due to the additional compliance, reporting and administrative burden associated with VAT registration.
This dynamic is emerging despite what many analysts describe as a comparatively favourable economic backdrop, with growth forecasts improving modestly, inflation stabilising within target ranges and business confidence showing gradual recovery.
Rossiter has stated that the current threshold effectively forces many small business operators to make a difficult decision between pursuing expansion and preserving administrative sustainability.
He has observed a pattern in which enterprises intentionally limit output in order to remain beneath the R1 million ceiling.
Examples cited include:
- A psychology practice electing to consult four days per week instead of five to prevent turnover from exceeding the threshold
- A specialised dry cleaning company declining additional contracts in order to avoid compulsory VAT registration
According to Rossiter, these examples reflect a broader trend in which the compliance costs and cash flow implications of VAT registration are perceived as outweighing the marginal gains from incremental revenue growth.
South Africa’s VAT system requires registered vendors to submit regular returns, typically every two months, and maintain detailed input and output tax records, which can impose significant administrative demands on smaller enterprises without dedicated finance teams.
Rossiter has therefore proposed that increasing the threshold to R3 million could immediately unlock dormant productivity across thousands of SMEs by removing the psychological and administrative barrier to scaling.
Lula has further argued that the long term fiscal gains associated with higher corporate tax collections, increased profitability and expanded employment would ultimately surpass any short term decline in VAT receipts.
The organisation maintains that as businesses grow more confidently beyond the R1 million turnover mark, they are more likely to:
- Increase staffing levels
- Invest in capital equipment
- Expand into new markets
- Generate higher taxable profits
VAT Threshold in Real Terms
The erosion of the VAT threshold’s real value can be illustrated as follows:
| Year | Nominal VAT Threshold | Inflation-Adjusted Equivalent Today |
|---|---|---|
| 2009 | R1 000 000 | ± R2 200 000 |
| 2026 | R1 000 000 | R1 000 000 |
This table demonstrates that while the nominal threshold has remained unchanged, its effective purchasing power has declined substantially over time.
Policymakers often review tax thresholds periodically to prevent so-called “bracket creep”, where inflation pushes taxpayers into higher obligations without real income growth. SMEs argue that a similar principle should apply to VAT registration limits.
Beyond Tax Reform: Infrastructure and Policy Certainty
Rossiter has confirmed that, beyond adjustments to tax thresholds, the 2026 Budget must also signal a decisive shift towards long term infrastructure stability and regulatory predictability.
For many small and medium sized enterprises, the most significant barriers to growth are not limited to taxation, but instead relate to unreliable delivery of essential services and inconsistent infrastructure performance.
SMEs should conduct an infrastructure risk audit by assessing exposure to power outages, water disruptions and municipal service delays, and consider contingency measures such as backup power, water storage or diversified supplier networks to reduce operational vulnerability.
Infrastructure Certainty and Energy Security Key to a Business-Friendly 2026 Budget
Rossiter has emphasised that government’s role is to establish a conducive and predictable operating environment that enables the private sector to generate employment and expand productive capacity.
Following the submission of a formal proposal in late 2025, Lula received confirmation that the matter would be considered as part of deliberations in the 2026 Budget cycle.
Rossiter has described the forthcoming Budget as a critical opportunity for the state to demonstrate that it is committed to dismantling structural obstacles to economic activity.
He has cautioned that in an election year, policy priorities often gravitate towards short term expenditure initiatives and quick relief measures rather than comprehensive reform.
However, the SME sector, according to Rossiter, requires a transition away from reactive crisis management towards a coherent, long term economic strategy grounded in stability and forward planning.
He has acknowledged that emergency interventions may occasionally be necessary, but has argued that such measures do not constitute a sustainable growth framework.
Instead, he has called for a clearly articulated multi year plan for energy and water infrastructure expansion, with measurable milestones and accountability mechanisms that businesses can rely upon when making investment decisions.
Energy Constraints And The Digital Economy
President Cyril Ramaphosa recently announced that R50 billion would be directed towards digital infrastructure development, including the construction of 55 data centres.
Lula has pointed out that while digital expansion is essential for competitiveness, there is an inherent contradiction in advancing data centre capacity without simultaneously securing sufficient and reliable energy supply.
Data centres are energy intensive facilities that require uninterrupted electricity to maintain servers, cooling systems and connectivity infrastructure.
Rossiter has therefore argued that protecting the R50 billion digital investment requires parallel expansion of generation capacity, strengthened grid performance and transparent implementation timelines.
Modern hyperscale data centres can consume as much electricity as a medium sized town, making energy planning a central consideration in digital infrastructure policy.
He has added that preventing further load shedding episodes is critical not only for protecting capital investments but also for sustaining investor confidence and broader economic momentum.
Rossiter has concluded that a business friendly budget framework represents the most durable method of cultivating pro government sentiment, reinforcing policy credibility and strengthening both domestic and international investor confidence.
SMEs preparing for potential policy changes in the 2026 Budget may benefit from scenario planning, including turnover modelling under different VAT thresholds and assessing the cost benefit of voluntary VAT registration versus remaining below a revised compulsory limit.
Conclusion
The proposal to raise the VAT registration threshold forms part of a broader call for structural reform aimed at unlocking SME growth, strengthening productivity and restoring long term economic confidence. While adjusting the threshold from R1 million to R3 million could ease administrative pressure and encourage expansion, sustainable progress will ultimately depend on credible infrastructure delivery, reliable energy supply and a predictable regulatory framework. The 2026 Budget therefore represents a pivotal opportunity for government to move beyond short term measures and set out a coherent strategy that supports small businesses, protects investment and drives inclusive economic growth.
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