Nompumelelo Magwaza
SHARES OF consumer-oriented companies and industrial heavyweights dropped yesterday as investors worried about the affect a possible tax increase will have on already strained consumer spending.
On Wednesday, Finance Minister Nhlanhla Nene signalled that government was contemplating a revamp in taxes to raise as much as R27 billion over the next two years. To some that meant possible increases in VAT and personal income tax could not be ruled out, according to economists.
The all share index fell by 1.2 percent at noon yesterday, before falling 0.2percent to close at 48 104.66 points. The bourse is down 8.8 percent since closing at a record high on July 29. Retailers, including Woolworths and Mr Price were among 108 decliners on the 165-member gauge, Bloomberg showed.
Not all analysts seemed to agree that the sell-off in consumer and industrial stocks was as a result of the medium-term budget policy statement, but a few said that tax increases, especially VAT, would have a devastating effect on consumers.
VAT, currently at 14 percent, is the second-largest revenue stream for the government, accounting for more than a quarter of total revenue. “While assessing South Africa’s tax regime, VAT appears an area which could be open for tax increases,” David Faulkner, an economist at HSBC, wrote in a note to clients last week. But he cautioned that “a higher VAT rate would be negative for growth and inflation”. His forecast is for a 1 percent increase.
Ron Klipin at Cratos Wealth said retail stock in particular was taking a beating on the basis of a possible VAT increase, or the top marginal tax rate. “Although the Treasury is trying to reduce expenditure it looks like the deficit was still too big.”
He believed that the gap was excessively large and the Treasury needed to get revenue from somewhere else. “Although the government is making a right decision in cutting expenditure, it might be too little, too late,” he added.
Chris Gilmour, an equity analyst at Absa Investment, believed that consumer companies were going to take some pain next year as about 60 percent of gross domestic product came from consumers.
He said a 1 percent VAT increase would be unpopular and could be a stumbling block for the 2016 local government election. He suggested the government consider increasing the tax on luxury goods.
Gilmour said the suggested wealth tax could affect high-income earners who might have to adjust their budgets, as well as retailers such as Woolworths, Truworths and others that serve high-end consumers. Pages 18, 20