Finance Minister Malusi Gigaba. PHOTO: Phando Jikelo / ANA
JOHANNESBURG - The Value Added Tax (VAT) rate has been increased by one percentage point to 15% and will generate much needed revenue of almost R23bn.

Finance Minister Malusi Gigaba said in his 2018 Budget Speech the increase was “unavoidable” in order to maintain the integrity of South Africa’s public finances.

He said personal income tax has been increased significantly in recent years, particularly in higher income bands, and the corporate income tax rate is high by international standards.

In contrast, the VAT rate has not been adjusted since 1993 and is low compared to some of the country’s peers.

“The current zero-rating of basic food items such a maize meal, brown bread, dried beans and rice will limit the impact on the poorest households,” he said.

Gigaba added that vulnerable households will also be compensated through an above average increase in social grants. 

The old age, disability and care dependency grants will increase by R90 to R1690 and by another R10 in October this year.

The child support grant will increase from R380 to R400 and to R410 in October, representing an increase of 6.6%.

An additional R2.6bn has been added to social grants since the Medium Term Budget Policy Statement in October to enable these changes, the minister announced.

“The VAT proposal will increase the cost of living for all households . . . the wealthiest 30% of households contribute 85% of VAT revenue,” National Treasury notes in the 2018 Budget Review.

Currently the VAT system includes 19 basic food items that are zero-rated. Government says it has explored implementing a luxury VAT to make the tax more progressive, but has decided against it.

“Reducing inequality is crucially important, but the VAT system is not the best instrument for achieving redistributive goals.”
Treasury also referred to the Katz Commission which argued that “the disadvantages of multiple VAT rates outweigh the possible redistributive gains available from this

The Davis Tax Committee found no global evidence that higher rates on luxury goods would meaningfully improve equity in the VAT system. 

The committee also warned that multiple rates add significantly to the complexity and administrative burden of the tax.

“Additional rates would require further enforcement and more SARS resources. Multiple VAT rate structures may also lead to legal uncertainty,” Treasury said in the review.